How Many People Save, Even Without High Incomes?

Posted on February 24, 2020 // 3 Comments

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”.

Filed Under: Frugal Living, Investing, Retirement //

Prudential Instagram Ads For Early Retirement

Posted on February 18, 2020 // 2 Comments

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?

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.

Filed Under: Retirement //

How Your Portfolio Accumulation and Withdrawal Years Are Different

Posted on January 21, 2020 // 15 Comments

The last 10 years of stock market returns have been pretty remarkable. If you invested $100,000 in the S&P 500 in the year 2000 and held it though the dot-com crash and financial crisis, you would be closing in on $300,000 today. However, if you retired in 2000 with a portfolio invested in the S&P 500 and used a 4% withdrawal rate (increasing each year by 3% for inflation), your nest egg would less than $50,000 and on a path to zero!

This stark difference between accumulation and withdrawal modes is illustrated by the chart above, taken from the Blackrock Blog post How to avoid “dollar cost ravaging” in retirement. “Dollar-cost ravaging” is also known as “sequence of return risk”, as explained in the this quote:

Investors have probably heard the term “dollar-cost-averaging,” where you make regularly timed investments to smooth out the risk of “buying high.” Retirees tend to do the opposite. Instead of putting money into their portfolio, they take it out with a regular cadence in the form of income. “Dollar-cost-ravaging” occurs when the market loses value while you’re taking withdrawals, especially in the early years of retirement. Because money is coming out rather than going in, it’s harder for the retiree to recover their losses when markets rebound. We even saw this during one of the most successful bull markets in our history over the past decade. The sequence of returns matters, and the biggest challenge is a bear market early in your retirement.

Unfortunately, there is no easy solution to this problem. This is what the article offers: “Striking the right balance to limit your losses in a declining market is just as important as capturing growth when the market is strong.” In other words, don’t hold too much in stocks, but also not too little. You can more easily weather a recession when you are still working and saving then when you are spending it down. I think more important advice is that you should be ready to withdraw less money out of your portfolio if the market tanks early on in your retirement withdrawal phase. Don’t follow a rigid withdrawal rule from some academic study into oblivion!

Filed Under: Investing, Retirement //

What If You Invested $10,000 Every Year For the Last 10 Years? 2010-2019

Posted on January 6, 2020 // 2 Comments

Now that you’re done reading articles about what happened in 2019, how about stepping back and taking in the longer view? Most successful savers invest money each year over a long period of time, these days often into a target-date fund (TDF). It may not get you doing silly things on a super-yacht, but this slow-and-steady behavior is a perfectly legitimate way to build wealth. Not everyone gets rich with IPOs or Bitcoin.

Investment benchmark. I chose the Vanguard Target Retirement 2045 Fund as this all-in-one fund is low-cost, highly diversified, and available both inside many employer retirement plans and anyone with an IRA. During the early accumulation phase, this fund holds 90% stocks (both US and international) and 10% bonds (investment-grade domestic and international). I think it’s a solid default choice in a world of mediocre, overpriced options.

Investment amount. For the last decade, the maximum allowable annual contribution to a Traditional or Roth IRA has been roughly $5,000 per person. The maximum allowable annual contribution for a 401k, 403b, or TSP plan has been over $10,000 per person. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark. Therefore, I’m going to use $10,000 as a benchmark amount. This round number also makes it easy to multiply the results as needed to match your own situation.

A decade of real-world savings. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years? You’d have put in $100,000 over time, but in more manageable increments. With the interactive tools at Morningstar and a Google spreadsheet, we get this:

Investing $10,000 every year for the last decade would have resulted in a total balance of $174,000. That breaks down to $100k in contributions + $74k investment growth.

Are you a dual-income household that can put away more? If you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year, you would have a total balance of $700,000! That breaks down to $400k in contributions + $300k investment growth.

Bonus: 15 years of real-world savings. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 15 years instead? (Now $150,000 total.) This is a self-centered inclusion as it has now been 20 years since I graduated college and 15 years since starting this blog. Here are the extended return numbers:

Investing $10,000 every year for the last decade and a half would have resulted in a total balance of $307,000. That breaks down to $150k in contributions + $157k investment growth. Your gains are now officially more than what you initially invested!

Are you a dual-income household that can put away more? If you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year, you would have a total balance of over $1,200,000! That breaks down to $600k in contributions + $620k investment growth.

Timing still matters, but not as much as you might think due to the dollar-cost averaging and longer time horizon. Yes, the last decade has been a great run for US stock markets. But Vanguard Target funds also own a lot of international stocks, which haven’t been nearly as hot and have maintained lower valuations. More importantly, you can’t control that part. You have much more control over how much you save. Here are my previous “saving for a decade” posts:

Work on improving your career skills (or start your own business), save a big chunk of your income, and then invest it in productive assets. Keep calm and repeat. Our path to financial freedom can be mostly explained by such behavior. The only “secret” here is consistency. We have maxed out both IRA and the 401k salary deferral limits nearly every year since 2004. No inheritances, no special access to a hedge fund. You can build serious wealth with something as accessible and boring as the Vanguard Target Retirement fund.

Filed Under: Investing, Retirement //

SECURE Act Highlights: Summary of Retirement Plan Changes

Posted on January 5, 2020 // 8 Comments

I try to ignore talk about pending legislation, but the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) has now been passed by Congress and signed into law by President Trump. Portions are effective as of January 1st, 2020. Instead of going into fine detail, I think this Practical Law article provides a concise summary of all the major points. This way, you can skim it and only dig further if it applies to your specific situation. Many of the points deal with employers, but here are the highlights that apply to workers:

Increased 401k eligibility for part-time employees.

The Act requires that 401(k) plans permit participation by long-term employees working more than 500 but less than 1,000 hours per year in three consecutive years. This provision is effective for plan years beginning after December 31, 2020.

Penalty-free withdrawals for birth of child or adoption.

A new distribution rule will allow participants to take a penalty-free withdrawal of up to $5,000 from a plan following the birth or legal adoption of a child. The distribution option applies to 401(k) plans, 403(b) plans, governmental 457(b) plans, and Individual Retirement Account (IRA). It does not apply to defined benefit plans.

Required minimum distributions now start at age 72.

Currently, required minimum distributions from a retirement plan or IRA must start once an individual turns age 70.5. Under the Act, this age is increased to age 72. The change is effective for distributions required to be made after December 31, 2019, with respect to individuals who turn 70.5 after December 31, 2019.

“Stretch” inherited IRAs eliminated, replaced with 10-year time limit.

For defined contribution plans and IRAs, where a participant dies before the distribution of their entire interest, the distributions must now be made by the end of the tenth calendar year following the participant’s death. The new requirement does not apply if the beneficiary is an eligible beneficiary (for example, a surviving spouse or minor child).

Added lifetime income (annuity) options to your 401k/403b/457b.

The Act permits participants in defined contribution plans, 403(b) plans, and governmental 457(b) plans to take a distribution of lifetime income investment in the form of an annuity if: The lifetime income investment is no longer authorized to be held as an investment option, OR The distribution is made as a direct rollover to a retirement plan, IRA, or annuity contract.

No longer a maximum age for contributions to a traditional IRA.

Previously, you could no longer make contributions to a traditional IRA for the year during which you reached age 70 1/2 or any later year. There is (still) no age restriction for Roth IRA contributions.

Filed Under: Retirement //

My Money Blog Portfolio Income Update – December 2019 (Q4)

Posted on December 26, 2019 // 3 Comments

dividendmono225

How do you turn a pile of money into income for the rest of your life? I have read hundreds of articles about this topic, and have found no ideal solution. Much of the advice applies to those aged 65+, but what about someone in their 40s with a much longer time horizon?

During the accumulation phase, I believe a 3% withdrawal rate remains a reasonable target for something retiring young (before age 50) and a 4% withdrawal rate is a reasonable target for one retiring at a more traditional age (closer to 65). If you are not close to retirement, your time is better spent focusing on your earning potential via better career moves, investing in your skillset, and/or look for entrepreneurial opportunities where you own equity in a business.

My crude and simple solution is to first build a portfolio designed for total return, and then spend the income. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Bond interest from high-quality IOUs are more reliable, but won’t rise as quickly.

As you’ll see below, my portfolio distributes about 2.5% in the form of dividends and interest. If we were to stop working, we would then take out another 0.5% by selling a few shares and then we’d have our 3%. Right now, we are both still employed and thus we withdraw less than 2.5%, so we don’t have to sell anything.

I track the “TTM Yield” or “12-Month Yield” from Morningstar, which 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. I prefer this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my investment portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 12/24/19) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.71% 0.43%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 1.95% 0.10%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.92% 0.73%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.71% 0.14%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.12% 0.19%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 2.23% 0.38%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 1.96% 0.33%
Totals 100% 2.30%

 

Here is a chart showing how this 12-month trailing income rate has varied over the last five years.

One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. I see it as a very conservative, valuation-based withdrawal rate metric due to our very long retirement horizon of 40+ years.

What’s not shown in the chart above is how the total income rises as the portfolio value rises. I have a chart of my portfolio income as well, but it mixes in my own contributions so it doesn’t present a clear picture.

In practical terms, I let all of my dividends and interest accumulate without automatic reinvestment. I treat this money as my “paycheck”. Then, as with my real paycheck, I can choose to either spend it or reinvest in more stocks and bonds.

The income from our portfolio lets us “work less and live more” now as I now fear running out of time more than running out of money. We use our nest egg to allow us to work less hours in a more flexible manner as parents of young children. We are very fortunate to be in this situation, although I’ve also been working towards this goal steadily for 15 years! Others may use their portfolio income to start a new business, travel around the world, sit on a beach, do charity or volunteer work, and so on.

Filed Under: Goals, Investing, Retirement //

MMB Portfolio Asset Allocation Update, December 2019 (Q4)

Posted on December 22, 2019 // 22 Comments

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Plenty of people will tell you what you should own, but I’d rather they just share what they actually own. Here’s my year-end portfolio update for Q4 2019, including all of our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a few side investments. Dividends tend to arrive on a quarterly basis, and this helps determine where to invest new cash to rebalance back towards our target asset allocation.

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 (free, my review) automatically logs into my accounts, adds up my balances, tracks my performance, and calculates my asset allocation. I still use my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation.

Here are my YTD performance and current asset allocation visually, per the “Allocation” and “Holdings” tabs of my Personal Capital account, respectively:

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

Bond Holdings
Vanguard Limited-Term Tax-Exempt (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury (VFITX, VFIUX)
Vanguard Inflation-Protected Securities (VIPSX, VAIPX)
Fidelity Inflation-Protected Bond Index (FIPDX)
iShares Barclays TIPS Bond (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the past will necessarily create superior future returns. I mainly make sure that I own 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 make a small bet that US Small Value and Emerging Markets will have higher future long-term returns (along with some higher volatility) than the more large and broad indexes, although I could be wrong.

While you could argue for various other asset classes, I believe that it is important to imagine an asset class doing poorly for a long time, with bad news constantly surrounding it, and only hold the ones where you still think you can maintain faith through those fearful times. I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin.

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

  • 33% US Treasury Bonds, intermediate
  • 33% High-Quality Municipal Bonds (taxable)
  • 33% US Treasury Inflation-Protected Bonds (tax-deferred)

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. I will use the dividends and interest to rebalance whenever possible in order to avoid taxable gains. I plan to only manually rebalance past that if the stock/bond ratio is still off by more than 5% (i.e. less than 62% stocks, greater than 72% stocks). With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. I know that US stock valuations are on the higher side, but this year of all-time US highs is another reminder that you still need to stay in the game. My forward expectations for US stock returns are muted, but I’m not selling a single share. International stocks have also hit an all-time high, but nobody really noticed because US stocks have still outperformed by a long shot this decade. I remain satisfied with my mix, knowing that I will own whatever successful businesses come out of the US, Europe, China, or wherever in the future.

On the bond side, my primary objective remains to hold high-quality bonds with a short-to-intermediate duration of under 5 years or so. This means US Treasuries, TIPS, or investment-grade municipal bonds. FDIC or NCUA-insured certificates would also fit in there. I don’t want to worry about my bonds. I then tweak the specific breakdown based on my tax-deferred space available, the tax-effective rates of muni bonds, and the real interest rates of TIPS. Right now, it is roughly 1/3rd Treasuries, 1/3 Muni bonds, and 1/3rd TIPS.

Performance numbers. According to Personal Capital, my portfolio went up +19% so far in 2019. I see that during the same period the S&P 500 has gone up +29%, Foreign Developed stocks up +21%, and the US Aggregate bond index was up about +10%.

An alternative benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund and 50% Vanguard LifeStrategy Moderate Growth Fund – one is 60/40 and the other is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +20.9% for 2019 YTD.

The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses. I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

Solo 401k vs. SEP IRA Contribution Limit Example For $50,000 Income

Posted on December 10, 2019 // 2 Comments

I use a Solo 401k plan because it lets you contribute the most tax-deferred money for a modest amount of self-employed income. At the end of each year, I can more clearly estimate my total income for 2019 and thus my maximum contribution limits. There are several online calculators out there (try Dinkytown or BCM Advisors), although I would cross-check your answers to make sure they agree. Your Solo 401k contribution has two components:

  • Employee salary deferral contribution. Employees may defer up to 100% of their compensation, up to $19,000 for the 2019 tax year ($25,000 for employees age 50 or older).
  • Employer profit sharing contribution. Employers may contribute up to 25% of compensation (sole proprietorships must make a special calculation), up to a combined total of $56,000 for the 2019 tax year ($62,000 if age 50 or older).

Here are some sample numbers if you are under age 50 with $50,000 in Schedule C income as an unincorporated sole proprietorship. The numbers are a bit tricky because you have to do things like take out half of the self-employment tax paid, etc. Let the calculator figure out the details, but you can still see that the Solo 401k (aka Individual 401k, aka Self-Employed 401k) offers a much higher contribution limit than a SEP IRA or SIMPLE IRA.

Here are some sample numbers if you are under age 50 had a $50,000 W-2 income from your S-Corporation. These numbers are a bit cleaner, as when you run payroll the employer side of payroll taxes are taken out of the employee paycheck.

Being able to defer up to 63% of your income ($31,500 out of $50,000) into tax-advantaged accounts is great for aggressive savers. In addition, both Traditional Pre-tax and Roth versions are allowed for the employee portion of contributions as long as your administrator supports it. Note that if you are already making employee contributions to a 401k-type plan from another job, you are still responsible for staying under the $19,000/$25,000 total cap across all your jobs. If you are consistently maxing out your 401k salary deferral in another job, then it may make more sense to stick with the SEP-IRA as it comes with less paperwork.

Filed Under: Entrepreneurial, Retirement, Self-Employment, Taxes //

S&P 500 Return Breakdown: Earnings, Valuations, Dividends (2015-2019)

Posted on October 6, 2019 // Leave a Comment

The financial news industry loves to provide constant updates of the S&P 500 along with endless guesses as to why it blipped up or down. I like reading about finance and it still drives me crazy! It just makes people focus on the short-term and think of the stock market like a roulette wheel. If you step back and take a longer-term view, here is a basic model for explaining the total return of the stock market:

Total Stock Returns = Earnings Growth + P/E Valuation Changes + Dividends

Here’s a quick common sense explanation:

Earnings growth. If your earnings stay the same, then all other things equal, one would expect the value of your company to stay the same as well. If earnings go up, again all other things equal, your company should be worth more, right?

Price-to-earnings ratio shows how much people are willing to pay as a multiple of earnings. When people are optimistic, the P/E ratio is high. When people are pessimistic, the P/E ratio is low. However, the overall ratio has some natural resistance points. A P/E of 10 means a 10% earning yield (ex. $100 share price and $10 of earnings per share). A P/E of 25 means a 4% earnings yield (ex. $100 share price and $4 of earnings per share).

Dividends. Cash money! In the long run, dividends tend to grow roughly at the same rate as earnings.

The WSJ Daily Shot used Bloomberg data to break down the performance of the S&P 500 total return by these components:

You can see that the dividend contribution has been pretty consistent at about 2% a year. Earnings have been going up the last 5 years, which is good news. Finally, we see that the P/E ratio has been a big part of the swings back and worth.

In The Little Book of Common Sense Investing, Jack Bogle called the changes in P/E ratio the “speculative return”, as opposed to something based on fundamentals. He made the following prediction about the future 10-year average return that book (originally published March 2007).

This was not meant to be an exact prediction. The main point was a warning that the future long-term returns were going to be lower than the historical returns of the last 25 years due to a lower dividend yield and somewhat elevated valuations. The annual return of Vanguard Total US Stock Market ETF (VTI) from March 2007 to March 2017 turned out to be 5.7%. According to the most recent quote (10/4/19), the average annual returns over the last 18 years has been 7%, last 15 years has been 9%, and the last 10 years has been 13%.

Bottom line. It can be educational to see the stock market return broken down into its parts: earnings growth, valuation change, and dividends. Much of the roller coaster performance we see every year is just the P/E ratio swinging back and forth. If you take a step back, you might find it easier to ignore the short-term volatility and focus on the long-term drivers of returns.

Filed Under: Investing, Retirement //

Breaking Down the Components of Financial Advice

Posted on October 1, 2019 // Leave a Comment

Vanguard has been relatively quiet after an SEC filing revealed their plans for a new digital-only advisory service called Vanguard Digital Advisor Services (VDAS). They have yet to send out any press releases or direct announcement about their new service. However, Vanguard is definitely working hard in the background on their advisory practices.

Earlier this month, they released a whitepaper called Assessing the Value of Advice based on their Vanguard Personal Advisor Services, which includes human advisors. They introduced a framework for measuring value via three components: portfolio, financial, and emotional.

Vanguard also published this short article Behind our passion for advice: Better outcomes for everyone that shows they want to impact the advice industry in the same way they forever changed the mutual fund industry.

Now more than ever, we see investors’ long-term success tied not only to the funds they use but also to the advice they receive. For more than 40 years, we’ve been champions in the mutual fund industry for accessibility, affordability, and alignment with clients’ interests. This has enabled investors to keep more of what they earn and to more easily reach their financial goals. We aim to do the same for financial advice.

This chart explores what a digital-only financial advisor can provide as compared to a human advisor:

With technology as our tailwind, opportunities abound to improve the ease of use, quality, and affordability of advice. Activities that once required time and effort from investors can now be automated and simplified. Rebalancing a portfolio, executing a tax-efficient spending strategy, or determining an optimal cash position can be done using algorithms and artificial intelligence. Technology has automated the common portfolio management tasks (the blue and the orange in the chart below). These core advice building blocks are more accurately and easily implemented than ever before, and technology allows us to provide them for less than 20 basis points. Even the most experienced and disciplined investor can benefit from advisory services at that price.

It certainly sounds like a description of Vanguard Digital Advisor Services (VDAS). I also hope they will more clearly define the added benefits of their Personal Advisor Services.

Filed Under: Investing, Retirement //

Yes, Health Insurance Costs Impacted My Early Retirement (FIRE) Plans

Posted on September 29, 2019 // 22 Comments

health

When the topic of early retirement comes up, a common question is “Are you concerned about health insurance?” I could be a cheerleader and say “nah no big deal”, but to be honest it has impacted my early retirement plans. Not only are the costs high today, but imagine how much higher they will get in the future if current trends continue.

The Kaiser Family Foundation (KFF) released the results of their annual Employer Health Benefits Survey, and the cost of family health coverage in the U.S. now tops $20,000 a year. This is more than a 50% jump from just 10 years ago:

Here’s another chart (same data set) from this Bloomberg article that goes farther back.

If you are single or a couple without kids, here’s a state-by-state map breakdown of the average monthly premium for the lowest Silver plan (per person):

The premium prices listed above don’t include deductibles and out-of-pocket expenses, which are rising as well and add up to another $2,000 per year on average:

Deductibles are rising even faster than premiums, meaning that patients are on the hook for more of their medical costs upfront. For a single person, the average deductible in 2019 was $1,396, up from $533 in 2009. A typical household with employer health coverage spends about $800 a year in out-of-pocket costs, not counting premiums, according to research from the Commonwealth Fund. At the high end of the range, those costs can top $5,000 a year.

Obviously, budgeting another $15,000 to $20,000+ in healthcare costs is going to be a huge factor to consider. Here are the ways that I have seen folks deal with this cost.

  1. Use an Affordable Care Act (ACA) plan and get a subsidy if your income (MAGI) is low enough to qualify. KFF has a very handy ACA subsidy calculator that will help you estimate this. If you live in California, The Finance Buff has some helpful information on the California Health Insurance subsidy. The annoying part is you never know if the rules will change on you down the road.
  2. Plan ahead with a job that offers health insurance benefits after you retire and before Medicare kicks in. You’ll probably have to hunker down with the same employer for a number of years.
  3. Save enough money (or create enough income) to pay for health insurance premiums.
  4. Find a part-time job that you both enjoy and offers health benefits. Employers know that health insurance is expensive, but you can negotiate benefits as part of your total compensation.
  5. Run a part-time side business that earns enough profit to cover health insurance costs. Look for potential group discounts or tax breaks that are available as a business instead of a consumer.
  6. If it works for your situation, try a high-deductible health plan (HDHP) and fund a Health Savings Account (HSA) due to the tax advantages.
  7. Join a direct primary care arrangement or health care sharing ministry that is exempt from ACA.
  8. Extend your current employer coverage for up to 18 months through COBRA (check cost).
  9. Move to a foreign country with reasonable and transparent cash pricing.
  10. Some people have bought short-term health insurance plans, but these are not ACA-compliant “full insurance”. Beware the limitations. Read the horror stories first.
  11. Here’s a person who gave up a promotion and quit her job to qualify for Medicaid.

Right now, we are covered by employer-sponsored health insurance, but for us it is a negotiated part of the total compensation. You can’t expect an employer to keep your same benefits package when you work less than full-time, but you can agree to take less salary in exchange for health insurance. At other times, we have bought health insurance directly. The most recent cost was around $1,600 a month for our family, very close to that $20,000 number. Even if we could qualify for a partial ACA subsidy, we would still be looking at around $10,000 a year in healthcare costs.

The difference with healthcare costs is that once you qualify for Medicare, your costs should hopefully be much less than that $20,000 a year price tag. According to BI, the national average cost for Medigap Plan F is $1,712 annually, or just under $150 a month.

So the amount you have to save to retire early depends on how many years you have until age 65. For us, that’s 25 years so that’s a big number and I don’t see how that doesn’t extend the time you need to be ready for retirement. Health insurance was definitely a factor in us going the more gradual semi-retired route.

Now imagine the overall impact that healthcare costs have on businesses, both big and small. Services and products cost more to make when every employee costs more to insure. I was able to take risks as an entrepreneur because my spouse had health insurance that covered both of us. If I had to keep my family covered with health insurance, I might still be working at MegaCorp. As Warren Buffett has said, “medical costs are the tapeworm of American economic competitiveness”. In the coming years, I wonder how both the healthcare and student loan situations will change, because the current trajectories are unsustainable.

Filed Under: Insurance, Retirement //

My Money Blog Portfolio Income and Withdrawal Rate – September 2019 (Q3)

Posted on September 17, 2019 // 8 Comments

dividendmono225One of the biggest problems in retirement planning is making sure a pile of money lasts throughout your retirement. I have read hundreds of articles about this topic, and there is no single solution. My imperfect (!) solution is to first build a portfolio designed for total return using assets that have enough faith in to hold through an extended downturn. I do not look for the highest income – no specialized ETFs, no high-dividend-only stocks, no high-yield bonds.

Then, only after that do I check out how much it distributes in dividends and interest. Dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. 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 track the “TTM Yield” or “12-Month Yield” from Morningstar, which 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. I prefer this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my investment portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 9/17/19) 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% 2.35% 0.12%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 3.05% 0.76%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.71% 0.14%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.29% 0.20%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 2.20% 0.37%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 2.12% 0.36%
Totals 100% 2.41%

 

Here is a chart showing how this 12-month trailing income rate has varied over the last five years.

One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a gloomy market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric. I see it as a very conservative, valuation-based withdrawal rate metric due to our very long retirement horizon of 40+ years.

In practical terms, I let all of my dividends and interest accumulate without automatic reinvestment. I treat this money as my “paycheck”. Then, as with my real paycheck, I can choose to either spend it or reinvest in more stocks and bonds. This number does not dictate how much we actually spend every year, but it gives me an idea of how comfortable I am with our withdrawal rate.

I am a proponent of aggressively saving, and then using the potential income that brings to improve your daily lifestyle. Instead of sitting on a beach, we used our nest egg to allow us to work less hours in a more flexible manner as parents of young children. Others may use it to start a new business, travel around the world, do charity or volunteer work, and so on. The income from our portfolio lets us “work less and live more” now as I now fear running out of time more than running out of money.

(If you’re still in the accumulation phase, you don’t really need to worry about this number. I believe a 3% withdrawal rate remains a reasonable target for something retiring young (before age 50) and a 4% withdrawal rate is a reasonable target for one retiring at a more traditional age (closer to 65). If you are young, instead focus on your earning potential via better career moves, investing in your skill set, and/or look for entrepreneurial opportunities where you own equity in a business.)

Filed Under: Goals, Investing, Retirement //
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