William Bernstein and Safe Withdrawal Rates

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A recurring theme in investing is that you start out learning the simple basics, then you feel like you can optimize things and spend a lot of effort trying to do so, and eventually you realize that simple is probably just fine. No matter how closely you mine the past, you can’t predict the future. As the Buffett quote goes, “If past history was all there was to the game, the richest people would be librarians.” That’s what came to mind when I read William Bernstein on safe withdrawal rates in retirement:

Even the most sophisticated retirement projections contain so much uncertainty that the entire process can be summarized as follows: Below the age of 65, a 2% spending rate is bulletproof, 3% is probably safe, and 4% is taking chances. Above 5%, you’re taking an increasingly serious risk of dying poor. (For each five years above 65, add perhaps half of a percentage point to those numbers.)

Source: The Ages of the Investor: A Critical Look at Life-cycle Investing.

Something to keep in mind when you become obsessed about getting from a 98% success rate to a 99% success rate on a simple retirement calculator from Vanguard or a fancy one like FIRECalc. (Not that I’ve done that, ever, of course…)

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The Role of Luck in Long-Term Investing, and When To Stop Playing The Game

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I am re-reading a series called “Investing for Adults” by William Bernstein. By “Investing for Adults”, Bernstein means that he assumes that you already know the basics of investing and that he can skip to more advanced insights. There are four parts:

A commonly-cited part of the first book The Ages of the Investor is the question “Once you have won the game, why keep playing?”. If you have enough money to buy a set of safe assets like inflation-adjusted annuities, delayed (and thus increased) Social Security payments, and a TIPS ladder to create enough income payments for life, you should seriously considering selling your risky assets and do exactly that. (This is referred to as a liability-matching portfolio, or LMP. You can keep investing any excess funds in risky assets, if you wish.)

A wrinkle to this plan is that you won’t know exactly when the stock market will help make that happen. Before you reach your “number”, you’ll most likely be buying stocks and hoping they grow in value. Let’s say you saved 20% of your salary and invested it in the S&P 500*. How long would it take you to “win the game”?

Historically, it could be as little at 19 years or as long as 37. That’s nearly a two-decade difference in retirement dates! Same savings rate, different outcomes.

This paradigm rests on too many faulty assumptions to list, but it still illustrates a valid point: You just don’t know when you’re going to achieve your LMP, and when you do, it’s best to act.

If, at any point, a bull market pushes your portfolio over the LMP “magic number” of 20 to 25 times your annual cash-flow needs beyond Social Security and pensions, you’ve won the investing game. Why keep playing? Start bailing.

If you don’t act, the market might drop and it could take years to get back to your number again. This is one of the reasons why some people should not be holding a lot of stocks as they near retirement. Some people might need the stock exposure because the upside is better than the downside (they don’t have enough money unless stocks do well, or longevity risk), but for others the downside is worse than the upside (they DO have enough money unless stocks do poorly, or unnecessary market risk).

I find the concept of a risk-free liability-matching portfolio (LMP) much harder to apply to early retirement, as it is nearly impossible to create a truly guaranteed inflation-adjusted lifetime income stream that far into the future. Inflation-adjusted annuities are rare, expensive, and you’re betting that the insurer also lasts for another 50+ years if you’re 40 years old now. Social Security is subject to political risk and may become subject to means-testing. TIPS currently have negative real yields across the entire curve, and only go out to 30 years. (As Bernstein explores in future books, you’ll also have to avoid wars, prolonged deflation, confiscation, and other “deep risk” events.)

* Here are the details behind the chart:

As a small thought experiment, I posited imaginary annual cohorts who began work on January 1 of each calendar year, and who then on each December 31 invested 20% of their annual salary in the real return series of the S&P 500. I then measured how long it took each annual cohort, starting with the one that began work in 1925, to reach a portfolio size of 20 years of salary (which constitutes 25 years of their living expenses, since presumably they were able to live on 80% of their salary). Figure 11 shows how long it took each cohort beginning work from 1925 to 1980 to reach that retirement goal.

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Vanguard Digital Advisor Services (VDAS) Review: Only Slightly More Expensive Than Target Date Fund

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Updated. Vanguard has increased the marketing and added some details about their new portfolio management service, Vanguard Digital Advisor Services (VDAS). Here is the new full PDF brochure. After reading through the entire brochure (again!), here are a few new things that I noticed:

Glide path is now more personalized. Instead of just having a single glide path for everything headed for retirement in the same year, VDAS will customize your asset allocation glide path depending on: your selected risk attitude, when you think you will retire, your assessed loss aversion (if any), marital status, if your portfolio has low or high single stock exposure, retirement savings rate, and expected retirement income.

Joint accounts with rights of survivorship are currently not allowed. This is expected to change in the future.

You may need to sell or move your existing investments first to enroll in VDAS. VDAS requires $3,000 specifically to be held in the Vanguard Federal Money Market Fund, which is their default cash sweep. In addition, your brokerage account can’t contain anything else. They want a clean slate of cash, and only then will they invest it for you. Most other robo-advisors don’t like to mix old assets either, but I expect that Vanguard will have a lot of potential customers with existing holdings. I was hoping they could somehow adjust for that.

Emergency savings goals. In the near future, you will be able to get guidance as to how much to set aside as emergency savings, and they’ll help manage that for you.

Here are the things I noted previously that still hold:

Key differences between the VDAS and VPAS:

  • Vanguard Personal Advisor Services (VPAS) – Both human and online communications. $50,000 minimum. 0.30% annual advisory fee (on top of ETF/fund expense ratios).
  • Vanguard Digital Advisor Services (VDAS). Online-only communication. $5,000 minimum for retail accounts ($5 minimum for 401k). Target 0.15% annual advisory fee (on top of ETF/fund expense ratios).

VDAS can work across multiple enrolled Vanguard accounts. (Eligible account types include: individual, joint accounts with rights of survivorship, traditional IRA, Roth IRA, 401(k), and Roth 401(k) accounts authorized by plan sponsors). If you have a Vanguard-managed 401k, you could then move your taxable and IRA balances over to Vanguard and have them manage everything together. Betterment and Wealthfront have a relatively tiny footprint in the 401k space. I suppose you could also just buy the same Target Retirement fund across all your accounts.

VDAS takes advantage of tax-efficient asset location, prioritizing tax-inefficient assets into IRAs and 401k plans. Wealthfront and Betterment will also do tax-efficient asset location, but again they are unlikely to manage your 401k so you’ll still have to do some work yourself. With an all-in-one Target Retirement fund, it’s the same everywhere and you can’t separate the stocks from the bonds.

VDAS will provide online financial planning tools where you enter your personal details to create a personalized, goal-based financial plan. Wealthfront, Betterment, and every other robo-advisor will do the same thing (using their own algorithms of course). These forward-looking charts are pretty to look at, but really it’s all just a big guess.

VDAS will only use these four Vanguard ETFs: Vanguard Total Stock Market ETF, Vanguard Total International Stock Market ETF, Vanguard Total Bond Market Index ETF, and Vanguard Total International Bond Index ETF. (401k accounts will be more flexible, working within the available investment options.) Retail accounts will not include any recommendations to purchase individual securities or bonds, CDs, options, derivatives, annuities, third-party mutual funds, closed-end funds, unit investment trusts, partnerships, or other non-Vanguard securities. When cash is recommended as part of the strategic asset allocation target (usually only for those close or in retirement), the Vanguard Prime Money Market Fund will be used.

That makes the basic ingredients of a VDAS portfolio the exact same as a Vanguard Target Retirement 20XX fund. It’s even possible that the asset allocation will be identical. However, it’s important to note for expense reasons (see below) that VDAS holds the cheapest ETF versions while the Target fund holds the most expensive Investor Shares.

VDAS is only about 0.05% more expensive than the equivalent Vanguard Retirement Fund. VDAS promises that the all-in fee (advisory + ETF expense ratios) will be 0.20% annually. Since the ETFs are only about 0.05%, that works out to a net advisory fee of 0.15%. Meanwhile, the all-in fee for the Vanguard Target Retirement fund currently varies from 0.15% to 0.12% because it holds the more expense Investor Shares of mutual funds. Vanguard has noted elsewhere that mutual funds are more expensive to maintain on their side, and so they charge more.

VDAS and VPAS both rebalance your portfolio within 5% bands. According to a previous article, VPAS checks your portfolio quarterly and then rebalances if a 5% threshold band is exceeded. According to this brochure, VDAS also rebalances only when an asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%. However, VDAS will check daily instead of quarterly. This isn’t a big deal to me, but an interesting difference to note. Rebalancing will be done in a tax-sensitive manner.

The Vanguard Target Retirement funds handle the rebalancing internally, and every other robo-advisor will have a similar rebalancing feature. Automated rebalancing is an important and sometime under-appreciated benefit of a managed portfolio over a DIY portfolio. Us DIY folks all think we’ll rebalance the same way without emotion, but sometimes… in times of stress… we don’t.

VDAS will only buy Vanguard ETFs, which means they won’t be doing any ETF tax-loss harvesting with similar pair of ETFs. (The legality of that practice has yet to be tested in court if its use becomes widespread.)

VDAS will not buy fractional shares of ETFs. A minor note, but an increasing number of brokers offer fractional shares, like M1 Finance. This can be helpful if you invest in smaller amounts, for example via dollar-cost-averaging with each paycheck.

Fee comparisons. The VDAS 0.15% advisory fee is very competitive. It’s cheaper than the base offerings of Betterment and Wealthfront of 0.25%. Schwab’s Intelligent Portfolios says it is “free” but from a cash drag perspective the effective fee is an estimated 0.12% (others estimate 0.20%). Betterment and Wealthfront have the head start in terms of technology and a modern design interface, but can Vanguard close the gap?

I was a bit surprised at how little VDAS costs more than a Vanguard Target Retirement fund. I have been a fan of Vanguard Target Retirement funds because they are basically a robo-advisor rolled into a simple mutual fund. But why are they still so expensive?

As DIY person, I would remind folks that you can always buy the exact same ETFs at any low-cost broker. A new broker M1 Finance offers free commissions, free rebalancing, and fractional shares. Now you have the same portfolio at an all-in cost of 0.05%.

Bottom line. Vanguard Digital Advisor Services is definitely going to make a dent in the robo-advisor field. The competition is far from over.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Morningstar Target Date Retirement Fund Rankings 2020: Not All The Same

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The default option inside many employer-sponsored retirement plans are Target Date Funds (TDFs), which adjust their portfolio holdings automatically over time based on a specific target retirement date. Morningstar just released their 2020 Target-Date fund report. You’ll need to provide your name and e-mail to download the free full report. There is a lot of in-depth analysis for industry insiders, although many individual investors are basically stuck with the one fund series that is available in their 401k/403b plan. Besides looking up your fund, here are a few broader takeaways.

Here is the average glide path across 53 different TDF series (taken from 2019 report). On average, most TDFs have an asset allocation close to 90% equity and 10% bonds in the early years, with the equity percentage dropping (and bond percentage rising) as time goes on. At the year of retirement, the average asset allocation is roughly 45% equity and 55% bonds.

Glide paths stick closer to the average across funds during the early accumulation years, but differ much more as you near retirement. Near-retirees take notice! The chart below shows the historical percentage difference in quarterly return between funds with the same target dates. (All the 2020 funds were compared, all the 2030 funds were compared, etc.) You can see that during the “COVID crash” in Q1 2020, the biggest difference in performance actually came from the funds meant for those in retirement.

Some TDFs maintain a higher equity allocation and keep lowering it gradually “through” the retirement date, while others decrease more sharply right up “to” the retirement date and then hold things steady. For a 2020 fund, this could mean a 15% difference in the amount of stocks being held in 2020 (ex. 45% stocks vs. 30% stocks). The situation actually flips a decade after retirement and the “through” funds end up holding less stocks on average.

The past performance of TDFs often hinges on recent stock market performance and which funds are holding the most stocks (or most domestic stocks). Both the “through” and “to” methods have their pros and cons, but one might fit your own preferences better. I personally think that people do respond differently to market drops after they stop working completely and have fully exhausted their “human capital”. (Once you can’t make any more money, you start to stare at your balance more often…) Perhaps the gradual “through” funds would work better for those that also stop working gradually, while the “to” funds would be better for those that stop work completely.

You can adjust your volatility level by picking a different date. You probably only have one TDF series as opposed to a wide menu. If it’s too stock-heavy for you, then just pick a retirement date that is earlier. If it holds too many bonds, then just pick a retirement date that is earlier. There is no rule that you have to pick your actual retirement year, or even any single one.

Gold or Silver-rated Target Date Funds. Morningstar changed up their ratings methodology in November 2019. A very detailed explanation and full rankings are in the report. Here are the gold/silver-rated funds and whether they are “through/to”:

  • Blackrock LifePath Index (To)
  • JPMorgan SmartRetirement Blend (To)
  • Fidelity Freedom Index (Through)
  • Fidelity Freedom (Through)
  • JPMorgan SmartRetirement (To)
  • State Street Target Retirement (Through)
  • Vanguard Target Retirement (Through)
  • American Funds Target Date Retirement (Through)
  • T. Rowe Price Retirement (Through)

All other things equal, I’d still prefer a passive index approach with rock-bottom costs, but I’m glad to see even the actively-managed TDFs have lower expense ratios now than before.

Some of these TDF series are not available to retail investors outside of a employer-sponsored retirement plan. The Vanguard Target Retirement fund series remains the most popular with a 37% market share as of March 2020, and is also available to retail investors with a $1,000 minimum investment.

Bottom line. Although we often don’t have much choice in the matter, the good news is that every year the average target date fund gets cheaper and more competitive. Any of the gold/silver fund series above are able to provide a simple all-in-one solution. Added together, these “top-rated” options make up 78% of all TDF assets. However, it is still important to understand how your fund’s asset allocation changes as it nears the target retirement year, and know that you can pick a different year to adjust your risk level. If your fund is one of the bottom-dwellers, you may want to use this report to bug the HR department.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Savings I Bonds May 2020 Interest Rate: 0.00% Fixed, 1.06% Inflation Rate

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sb_poster

Update May 2020. The fixed rate will be 0.00% for I bonds issued from May 1, 2020 through October 31st, 2020. The variable inflation-indexed rate for this 6-month period will be 1.06% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in between May 2020 and October 2020, you’ll get 1.06% for the first 6 months. See you again in mid-October for the next early prediction for November 2020.)

Original post 4/13/20:

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2020 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2020 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a May 2020 purchase.

New inflation rate prediction. September 2019 CPI-U was 256.759. March 2020 CPI-U was 258.115, for a semi-annual increase of 0.53%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 1.06%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in April 2020. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.20%. You will be guaranteed a total interest rate of 0.20 + 2.02 = 2.22% for the next 6 months. For the 6 months after that, the total rate will be 0.20 + 1.06 = 1.26%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2020 and sell on April 1, 2021, you’ll earn a ~1.55% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. Comparing with the best interest rates as of April 2020, you can see that this is lower than a current saving rate or 12-month CD.

Buying in May 2020. If you buy in May 2020, you will get 1.06% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS. In the past 6 months, the 5-year TIPS yield has dropped to a negative value! My best guess is that it will be 0.00%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (total bond rate has a minimum floor of 0%).

Buy now or wait? In the short-term, these I bond rates will definitely not beat a top 12-month CD rate if bought in April, and most likely won’t if bought in May either unless inflation skyrockets. Thus, if you just want to beat the current bank rates, I Bonds are not a good short-term buy right now.

If you intend to be a long-term holder, then another factor to consider is that the April fixed rate is 0.2% and that it will likely drop at least a little in May in my opinion. You may want to lock in that higher fixed rate now, which is higher than the real yield on TIPS right now.

Honestly, I am not too excited to buy either in April or May, but if I liked the long-term advantages of savings bonds (see below), I would consider buying now in April rather than May due to my guess of a higher fixed rate. You could also wait, as things might change again during the next update in mid-October.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

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2020 Berkshire Hathaway Annual Shareholder Meeting Video, Transcript, and Notes

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The 2020 Berkshire Hathaway Annual Shareholder Meeting was on May 2nd, 2020 and is now available as a recorded video on Yahoo Finance and a handy Rev.com transcription. As usual, I recommend listening or reading on your own, as my notes always differ slightly from what the business media chooses to highlight.

What makes Berkshire Hathaway (BRK) interesting to me is that it all started out as Buffett investing his own money alongside a few close family and friends. He’s always had nearly all of his own money in it. Even today, Berkshire is the main investment vehicle for many family members. People you run into at the store. People with whom you’ve shared a meal. This changes the types and amounts of risk you take.

And, now, I would never take real chances with money, of other people’s money under any circumstances. Both Charlie and I come from a background where we ran partnerships. I started mine in 1956 for really seven either actual family members or the equivalent. And Charlie did the same thing six years later. And we never, neither one of us, I think, I know I didn’t, and I’m virtually certain the same is true of Charlie, neither one of us ever had a single institution investment with us.

Buffett has stated that when he writes his annual letters, he imagines his sister reading them. That’s how I try to write as well, as an enthusiast making careful shares and recommendations to family. This overall sentiment helps you understand how BRK is run.

He started out with a familiar story of “betting on America”. This country has been though a lot, and it will recover again.

One of the scariest of scenarios, when you had a war with one group of States fighting another group of States, and it may have been tested again in the great depression, and it may be tested now to some degree, but in the end the answer is never bet against America, and that in my view is as true today as it was in 1789, and even was true during the civil war, and the depths of the depression.

In terms of investing, this means holding onto stocks for 20 or 30 years. But to survive the shocks during those times, you should never borrow money to invest in stocks, you need to have adequate reserves in 100% safe cash, and you need the proper psychological temperament.

The American tailwind is marvelous. American business represents, and it’s going to have interruptions, and you’re not going to foresee the interruption, and you don’t want to get yourself in a position where those interruptions can affect you either because you’re leveraged or because you’re psychologically unable to handle looking at a bunch of numbers.

You just don’t know what’s going to happen. You know, at least in my view, you know that America’s tailwind is not exhausted. You’re going to get a fine result if you own equities over a long period of time. And the idea that equities will not produce better results than the 30-year Treasury bond, which yields one and a quarter percent now, it’s taxable income. It’s the aim of the Federal Reserve to have 2% a year inflation. Equities are going to outperform that bond. They’re going to outperform Treasury bills. They’re going to outperform that money you’ve stuck under your mattress.

Simple, low-cost S&P 500 index fund for growth. Avoid the salespeople.

So find businesses. Get a cross section. And in my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do. And I’m not saying that that’s a conscious act on their part. Most good salespeople believe their own baloney. I mean, that’s part of being a good salesperson. And I’m sure I’ve done plenty of that in my life too, but it’s very human if you keep repeating something often enough.

100% backed-by-the-government cash for safety. For them, it means Treasury-backed bills. For individual investors, this extends to FDIC-insured savings accounts and certificates of deposit.

And that means we own nothing but treasury bills. I mean, we’ve never owned, we never buy commercial paper. We don’t count on bank lines and a few of our subsidiaries have them, but we basically want to be in a position to get through anything. And we hope that doesn’t happen but you can’t rule out the possibility anymore than in 1929 you could rule out the possibility that you know you would be waiting until 1955, or the end of 1954, to get even.

Ignore the two things above if you have credit card debt.

My general advice to people, I mean, we have an interest in credit cards. But I think people should avoid using credit cards as a piggy bank to be rated. I had a woman come to see me here not long ago, and she’d come on some money. Not very much, but it was a lot to her. She’s a friend of mine, and she said, “What should I do with it?” I said, “Well, what do you owe on your credit card?” She says, “Well, I owe X.” I said, “Well, what you should do…” I don’t know what interest rate she was paying, but I think I asked her and she knew. It was something like 18% or something. I said, “I don’t know how to make 18%.” I mean, if I, owed any money at 18% the first thing I do with any money I had would be to pay it off. It’s going to be way better than any investment idea I’ve got. That wasn’t what she wanted to hear.

Be safe with your finances at this time. You don’t sell your airline stocks at a multi-billion dollar loss if you think a V-shaped recovery is likely. Just because we are still recovering from one horrible event, doesn’t mean another might not happen.

I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

After listening to this entire Buffett talk and reading this Munger interview, the overall takeaway is definitely that of safety. They have been safe and will stay safe, no matter who complains about their cash levels. The world has changed, and just because something has a lower price today than in January, doesn’t automatically mean it is a better deal than in January.

Here is a NYT Dealbook article by Andrew Ross Sorkin, who has attended many shareholder meetings in person and also sensed a different tone this year.

You can find links to previous years’ Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts here.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. Thank you for your support.

(2020 update. The 2020 Berkshire Hathaway Annual Shareholder Meeting took place virtually with a Q&A session with Warren Buffett and Greg Abel (the likely next CEO). Right now it is available on replay at Yahoo Finance with the full transcript linked below.)

Berkshire Hathaway’s Annual Shareholder Meetings are held in Omaha, Nebraska every May. Although most of my portfolio is in a diversified mix of index funds, I also own individual shares of Berkshire Hathaway and respect the rational and practical advice given out by Warren Buffett and Charlie Munger.

I also like getting the information directly! I missed the live event again in 2019, but I plan catch up by first reading the WSJ liveblog, and then listening to the entire Q&A session via Yahoo Finance podcast at my own pace. Here are the many ways that you can catch up on past shareholder meetings.

Full Videos

  • Yahoo Finance Livestream. Yahoo Finance is the exclusive online host of the Berkshire Hathaway 2020 Annual Shareholders Meeting that occurred May 2nd, 2020. View the entire Q&A session in its entirety on demand.
  • CNBC Warren Buffett Archive. Footage of shareholder meetings from 1994-2019 In 2018, Berkshire gave CNBC a box of old VHS tapes (!) which were converted to digital videos so that everyone can view them for free. Additional material from CNBC including interviews, highlights, and short-form videos is also available.

Transcripts

Liveblogs

Podcasts

  • Yahoo Finance also makes the BRK meeting available as a podcast, so you can listen in parts during your commute or chores. I listened to the entire 2018 meeting in the car while driving, and I liked it much better than sitting in front a computer. 2019 is already uploaded. iTunes. Player.fm.

Books

This post is about the live shareholder meeting, and is separate from the 2019 annual shareholder letter (which are also great).

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Should I Roll Over My 401k into an IRA? How to Decide

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The WSJ article What to Do With a 401(k) When Leaving a Job did a good job summarizing the various things to consider when that time comes. Here is a chart showing what happens to the 401k and 403b plans held across Vanguard-sponsored employer plans:

Now, Vanguard-sponsored 401k plans are mostly from big employers and are highly likely to have both low-cost investment options and reasonable fees. I don’t know if these percentages apply to all 401k and 403b plans in general. I’ve seen some pretty bad ones with absurdly high fees, although that was several years ago. Here’s a summary of the right questions to ask:

Investment selection? Are the available investments better in your 401k or in your choice of IRA custodian? Some 401ks offer choices not available to retail investors. For example, access to mutual funds from Dimensional Fund Advisors (DFA). Or institutional shares of certain funds with low expense ratios. Or stable value funds with higher interest rates than retail bond funds. On the other side, you may be itching to buy something like real estate in a self-directed IRA. These days, both probably have some sort of all-in-one Target retirement fund, but is yours a low-cost option from Vanguard (Target Retirement) or Fidelity (Freedom Index)?

Account fees? Part of the total cost picture is the expense ratio of the funds inside, but you may also be subject to overall account management fees or maintenance fees. Some 401k plans have zero or minimal management fees. Other 401k plans have crazy-high fees on the order of 1.75% of assets annually. Nearly all of the major IRA providers now offer no annual fees and commission-free ETF trades.

Need Advice? Some 401k plans offer some level of included advice that you may value. Other people have their own personal advisor that would love to customize that IRA.

Age 55 Rule (Early withdrawal?). Starting in the year that you turn 55, you can make a withdrawal from your 401k without the 10% early withdrawal penalty. You will still owe income taxes for a pre-tax 401k withdrawal, just not 10% penalty. For IRAs, you would have to wait until age 59.5. Potential early retirees may value these 4.5 years of additional flexibility.

Asset protection needs? There is a lot of legal fine print here, but 401k plans in general appear to offer some of the highest levels of asset protection. IRAs do offer a certain level of asset protection as well, just not quite as high as a 401(k). The difference will probably not matter much for the vast majority of workers, but it may matter for high-income professionals with liability concerns like doctors.

Non-deductible / Backdoor IRA contributions? The article didn’t cover why I didn’t roll over my last 401k plan into an IRA when leaving the employer. My situation is admittedly somewhat uncommon, but not unheard of. Call it “finding-yeast-in-April-2020” uncommon.

Due to my higher income level at the time, I contributed to a non-deductible IRA each year and then converted that to a Roth IRA. (This is also known as a Backdoor Roth IRA.) However, when you do the conversion, if you have any other pre-tax “traditional” IRAs, your conversion must include the pre-tax IRA amount as well on a pro-rated basis. For example, if you had a $20,000 pre-tax deducted IRA and a $5,000 non-deductible IRA, and then decided to convert $5,000 into a Roth IRA it would be considered 80% from the pre-tax IRA and only 20% non-deductible. You’d have to pay taxes on the entire pre-tax IRA amount (contribution + gains) since you never paid taxes initially. By keeping my pre-tax 401k at the employer, I am able to take full tax advantage of all annual Backdoor Roth contributions. Thankfully, the old 401k was at Fidelity with solid investment options and no annual fees.

How much do you value simplicity? If you do a lot of job-hopping, then do you really want to juggle five old 401k accounts? Merging them all into one IRA can save you time and hassle. On top of keeping tabs on your investments and asset allocation, you’d have to do all the mundane things like keep all your contact info and beneficiaries up to date. I would worry also that my spouse would forget about an old 401k plan if I something happened to me.

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Couch Potato Portfolios: Simple, Cheap, and Diversified Still Works

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Scott Burns of the Dallas News is known for his “Couch Potato Portfolios”. These are literally the simplest, laziest, easiest portfolios that you will ever see. The Basic Couch Potato Portfolio is 50% Total US Stock and 50% Total US Bond funds/ETFs. The Margarita version is 1/3rd US Stocks, 1/3 International Stocks, and 1/3 Bonds. Can’t get much easier to remember than that! You may be surprised at how well they have performed despite their simplicity.

Indeed, Burns recently provided another update on his Couch Potato portfolios, this time for theoretical retirees from various periods including those who retired in the year 2000 to the end of March 2020 (emphasis mine):

In this scenario, you’d be:

– Retiring just as the Internet bust was starting.
– Getting run over by the 2008-09 financial crisis.
– And ending with the coronavirus crash through the end of March.

In spite of all that, you wouldn’t be broke.

Here is a chart of how a 65-year-old couple would have done if they retired in various years from 1989 to 2015 and went with a 4% withdrawal rate (adjusted annually for inflation).

These retirees may not be shopping for a yacht, but they are still hanging in there. Simple, cheap, and diversified does much of the heavy lifting required. I appreciate that he included the likelihood that one or both of the couple would survive until 2020 as well. You may be surprised by how long your portfolio might have to last, but we also have to balance the risk of running out of time with the risk of running out of money.

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Good Time to Convert Traditional IRAs to Roth IRAs?

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It might be a little painful, but it may be worthwhile to check on your pre-tax IRAs during this dip. If you have been thinking of converting your “Traditional” IRAs over to Roth IRAs, your shrunken gains will lead to a smaller tax bill now, while your (hopefully) future gains from this point onward will be tax-free after 5 years and age 59.5.

Roth IRAs have a few unique benefits like a lack of minimum required distributions, but the primary consideration regarding conversions is still whether you think your tax rate will be lower today or when you withdraw. This is outlined in greater detail in the WSJ article A Strategy for Taking Advantage of the Market Meltdown (paywall?). One interesting suggestion is to convert just enough money from a traditional IRA to make full use of your current income-tax bracket. Here are the 2020 IRS marginal tax brackets (source) – remember the left column is adjusted gross income so it comes after subtracting the standard deduction of $12,400 (single) and $24,800 (joint).

Depending on your income situation for 2020, you might have a good amount of room to convert and pay a 10%, 12%, or 22% rate. For example, a married couple could make up to $105,050 in gross income (before the standard deduction) and still be in the 12% bracket. You get the most tax-deferred benefit if you can pay for your tax bill with external funds as opposed to the IRA balance itself.

Backdoor Roth IRAs. In case you aren’t already aware, you can make a “backdoor” Roth IRA contribution even if you exceed the standard income limits on Roth IRA contributions. This is primarily because there are no longer any income limitations on Roth IRA conversions. There are some finer points that experts debate, but the general idea is that you first contribute to a non-deductible traditional IRA and then quickly convert that to a Roth IRA (ideally with no gains and thus tax owed). One catch is that if you already have other deductible pre-tax IRA balances, then these would mix together and you’d have to pay tax on a pro-rated basis.

Given the recent stock market drop, if you made non-deductible IRA contributions in the past few years, but your “Backdoor Roth” was complicated by also having some other pre-tax IRA balances mixed in (say, from a 401k rollover), then this might be a chance to convert everything over to a Roth IRA with much smaller tax consequences.

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How Many People Save, Even Without High Incomes?

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If you are living paycheck-to-paycheck, by definition you aren’t saving and buying any assets. The folks who do have assets, those assets keep growing and compounding away. Left alone, that gap just widens relentlessly. Meanwhile, building up assets from nothing can feel agonizingly slow in the beginning.

So if you don’t make at least six figures already, should you just give up? It’s not your fault, and you can’t do anything about it, so why bother? I worry that this is the underlying message of certain media articles. As a small antidote, check out this chart that shows the percentage of households with a positive savings rate, broken down by income quartiles.

The data is taken from a 2016 survey by the US Bureau of Labor Statistics. Source: Personal savings: A look at how Americans are saving by Deliotte Insights.

Let’s use real numbers to add some clarity:

  • A household in the 20th percentile earns about $24,000 per year. Yet, according this chart, ~30% of households that earn less than $24k manage to spend less than they earn.
  • The 2nd quintile (20th-40th percentile) household earns between roughly $24k and $45 per year. A little over 40% of these households manage to spend less than they earn.
  • The 3rd quintile (40th-60th percentile) household earns between roughly $45k and $75k per year. Close to 60% of these households manage to spend less than they earn.
  • Let’s skip to the 80th to 90th percentile, where households earn between ~$120,000 and $170,000 per year. This is between 5X and 7X the 20th percentile and more than double the middle quintile. Yet even here, only a little over 70% of households have a positive savings rate.

It should not be surprising that households with higher incomes have a higher savings rate. Of course it is easier to reach financial freedom if you have a higher income. That’s just a mathematical fact.

Nearly 30% of households that earn between ~$120,000 and $170,000 per year spend everything they earn and then some. A higher income does not guarantee that you are not living paycheck-to-paycheck. When you look beyond the broad averages, you start to see the ability of households to differ. Everyone with a low income is not spending the same. Everyone with a high income is not spending the same.

This supports the notion that your actions still matter. Use your money to invest in yourself, increasing your skills and the ability to find more rewarding work. You can prioritize your expenses. It won’t be easy, and yes there will be setbacks and roadblocks in your way. In fact, it’s probably better to expect that it won’t be easy. As we should tell our children, success is not a straight line. “More often, a meandering and unexpected path is what leads to success”.

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Prudential Instagram Ads For Early Retirement

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I had no idea @prudential existed until today (and this post is not sponsored by them in any way) but apparently they have a series of Instagram-specific ads targeting younger workers. They even have some that reference early
retirement. Do you think they hit the mark?

View this post on Instagram

Embracing the FIRE movement? 🔥

A post shared by Prudential (@prudential) on

Prudential Ad Image

While I found the ads amusing, the Prudential website itself still consists of the usual vanilla articles about retirement, annuities, and life insurance. So the products are the same old stuff, nothing new. I often wonder about the best way to help people to improve their financial situation. Will Fintech really make a difference? But I guess the first thing is to catch their attention.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.