Updated “About Me” and “My Money” Pages

Posted on March 20, 2018 // 9 Comments

beachy200We’re in the midst of an extended Spring Break vacation, so posting will be light for the next two weeks. I have some pre-written content scheduled, but the comment moderation may be delayed.

I also updated the “About Me” and “My Money” pages, as part of a greater overall plan to clean up the site and make it easier to navigate past content. I think the last time I did this was 2013. Thanks to those that cared enough to ask about it, and thank you even more for your patience. I have grand plans, but recently other priorities have won out.

Filed Under: Family, Goals //

NYT Financial Tuneup Day 6: Property Insurance

Posted on March 7, 2018 // 5 Comments

nyt_ftuDay 6 of the NY Times 7-Day Financial Tuneup is about insurance. Specifically, either homeowner’s or renter’s insurance to protect yourself against a large financial hit. (Sign up for your own personalized tune-up here.)

Do a home inventory. Basically, take a video of everything you’d want an insurance company to replace if your home was destroyed. Store the video somewhere safe, like the cloud or a flash drive in a secure location. You can use this video to both get appropriate insurance coverage and if you do end up filing an insurance claim. I’ve seen some apps that help you do this in detail, but I agree that a simple video is a reasonable solution.

Check your current policy. Find a copy of your insurance policy. Make sure you have enough coverage. Note the difference between a “replacement value” and “fair market value” policy.

Shop around with some competitors. The NYT recommends picking two of the major insurance companies (Geico, Progressive, Allstate, State Farm, etc.) and call them for an insurance quote armed with your home inventory list. If you are willing to try a start-up insurance company, I would throw in a free online Lemonade quote if you are in one of their 9 covered states – New York, California, Illinois, New Jersey, Rhode Island, Texas, Nevada, Ohio, and Georgia. If you get a quote that is too high, simply move on.

I also recommend doing a search for “[Your State] Department of Insurance” and look for a “Homeowner’s Insurance Guide” of some sort. Insurance companies are closely regulated on the state level and you can often find a list of sample premiums, a ranking based on complaints ratio, or other useful information. This can help you narrow down your initial search and save time. For example, here are some links for New York and California.

Call your current insurance company. Call your current insurance company and first, confirm that your policy coverage details. Then, ask if there’s any way to reduce your insurance rate. Mention a competing quote if you have one.

Financial Tuneup Recap (still in progress)

Filed Under: Goals, Insurance //

NYT Financial Tuneup Day 5: Your Credit Reports

Posted on March 6, 2018 // 3 Comments

nyt_ftuDay 5 of the NY Times 7-Day Financial Tuneup is about your credit reports. (Yes, I’ve been taking this at my own pace. Sign up for your own personalized tune-up here.) This one felt a bit basic, so I also recommended a bunch of additional sites that are hopefully also helpful. Let’s start with a summary of what the NYT says:

  1. Understand what your credit report means. Your credit report includes data on your credit card payment history, mortgages, student debt, new loan applications, and bankruptcies.
  2. Get a copy of your credit report. AnnualCreditReport.com is the official government-mandated site. You can get one of each of the three major bureaus (Experian, Equifax, and TransUnion) once every 12 months, so one tactic is to stagger them every 4 months.
  3. Check for errors. You can dispute errors using sample letters from the Consumer Financial Protection Bureau. Instructions are included for disputes with both the credit bureau and the lender.
  4. Improve your habits, if needed. Credit repair 101… Pay your bills on time. Keep card balances well below your credit limit.
    Hold off on opening new accounts for a while.
  5. Freeze your credit. The NYT says that it is “generally a good idea” to freeze your credit. You will have you unfreeze your credit next time you apply for a credit card, try to rent an apartment, apply for a mortgage or do anything else where a company may need your credit report. You may need to spend $5 to $10 each time as well.

More free consumer data reports. I would also add my Big List of Free Consumer Reports, Part 1 and Part 2 if you want a complete picture including things like rental history or insurance reports.

My take on credit freezes. Freezing your credit may be a reasonable step if you rarely do anything that would require a thaw. However, between my wife and I, we probably get 10 credit pulls a year. (Don’t worry, zero credit card debt, zero car loan, zero mortgage debt. Credit score is still good too.) Every time I apply for a new credit card or join a new credit union, I might would have to thaw and then re-freeze the bureau, and that’s if I already know ahead of time which one of the three I need to thaw. That adds up to both a lot of time and money.

I would add a free credit monitoring service instead. A timely example – just yesterday on March 5th I decided to apply for a new credit union membership at Sharonview Federal Credit Union. Some preliminary research indicated that they would probably pull a credit report (probably TransUnion), but I wasn’t sure. After making the application, I was notified right away by multiple free credit monitoring services that it was TransUnion (and only them). I’m writing this post on March 6th. If a credit freeze had blocked their check, I would have to manually ask them to check again, which would have delayed my application on a limited-time offer.

Here’s a screenshot of my free alert from CreditSesame.com:

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Here’s a screenshot of my free alert from CreditKarma.com:

nyt_ck_sharon

I think you’ll agree that the ability to receive a free alert within a day is a lot better than checking in at most once every 4 months. CreditSesame tracks TransUnion, and CreditKarma tracks both TransUnion and Equifax. There are other options and most are advertising-supported, so you’ll see ads for mortgages and credit cards on the site. There may also be some “premium” features they try to upsell you, but I’ve never had to pay a cent.

Financial Tuneup Recap (still in progress)

Filed Under: Credit Cards, Frugal Living, Goals //

NYT Financial Tuneup Day 4: Retirement

Posted on February 27, 2018 // Leave a Comment

nyt_ftuDay 4 of the NY Times 7-Day Financial Tuneup is about retirement. (Sign up for your own personalized tune-up here.) This assumes you are eligible for a 401(k) or similar retirement plan. The key action point is bumping up your retirement contribution rate by 1% and perhaps adjusting your asset allocation if necessary. Here’s a simple chart showing you why:

nyt_tuneup_ret1

If you’re making $50,000 annually and contributing 5 percent of your salary to your retirement account, assuming an annual return of 6 percent and a 3 percent annual salary increase, in 25 years, you will have about $198,000 in your retirement account. If you start to increase that percentage by 1 percentage point annually however, you will have over $550,000 in that same account in 25 years. By increasing the amount you save by 1 percentage point each year, you’ll save an extra $354,940 for retirement.

Increase Your Savings

  • Log into your retirement savings account. (Baby steps…)
  • Increase the amount of money taken out of your paycheck by 1 percentage point annually. Also check to see if you are taking full advantage of any company match.
  • Make it automatic. If you have the option, set it to automatically escalate in the future.

Rebalance Your Account

  • Log into your retirement savings account.
  • Determine how you should rebalance your account. What is your target asset allocation? Here’s mine but it’s probably more complicated than most people need. Consider a target-date fund, especially if it is a low-cost, passive version. Fidelity, Vanguard, and Schwab all have solid versions. I put my own mom in the Vanguard one.
  • Make it automatic. If you have the option, set it to automatically escalate in the future. My provider calls it “Auto-Increase”.
  • Rebalance your account. Basically, make sure your portfolio is still what you want it to be, as it may have shifted over time. You only need to do this once or twice a year, or you can set “bands” to rebalance when things get too out of whack.

Action, action, action. This move won’t make you save enough for retirement by itself, but it’s something tangible. If you are really going for financial freedom, you should use this as a platform to do even more. We have our 401k savings rate already set at 60% (max allowed by one provider) since we are working part-time (“semi-retired” sounds better!) with a lower income but still want get as close to the annual 401k limits as possible.

Financial Tuneup Recap (still in progress)

Filed Under: Frugal Living, Goals, Inspirational, Retirement //

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

Posted on February 22, 2018 // 5 Comments

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)

Filed Under: Credit Cards, Goals, Insurance //

NYT Financial Tuneup Day 2: Trim Your Budget

Posted on February 21, 2018 // 8 Comments

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)

Filed Under: Frugal Living, Goals, Inspirational //

NYT Financial Tuneup Day 1: Optimize Your Thinking

Posted on February 19, 2018 // 3 Comments

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)

Filed Under: Goals, Inspirational //

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

Posted on December 27, 2017 // 16 Comments

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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.

Filed Under: Goals, Investing, Retirement //

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

Posted on October 24, 2017 // 16 Comments

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.

Filed Under: Goals, Investing, Retirement //

Early Retirement Portfolio Asset Allocation, 2017 Third Quarter Update

Posted on October 23, 2017 // 22 Comments

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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%.

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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.

Filed Under: Goals, Investing, Retirement //

Early Retirement Portfolio Income, 2017 Q1 Update

Posted on April 19, 2017 // 11 Comments

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.

Filed Under: Goals, Investing, Retirement //

Early Retirement Portfolio Asset Allocation, 2017 First Quarter Update

Posted on April 18, 2017 // 4 Comments

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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

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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.

Filed Under: Goals, Investing, Retirement //
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