Category: Investments

Is Vanguard Getting Too Big?

I hope everyone had a great weekend. Here at Ridinkulous HQ, it was Eurovision weekend, of course. We had some friends over so we could introduce the Eurovision madness to others. Maybe you’ve heard, but the Muppety man with the huge suit from Portugal won the contest. He was very good, but this year we were a Moldova house. After all, it featured the return of the Epic Sax Guy. They came in third place!

Then when the sun was shining (and Eurovision wasn’t on) I worked outside on a DIY lounge chair. During the warmer months, all I want to do is sit outside and read. Right now all we have is some patio table chairs. But I want to stretch my legs out, so I figured a lounge chair would increase my leisure comfort about 50%. But lounge chairs are expensive! So I found plans online and made that my new project. I had a lot of the wood on hand already, so it should be pretty cheap, and hopefully very comfy.

Now for the actual financial part of our post…

If you read any personal finance blogs, including this one, you know Vanguard pretty well. They are the dominant name when it comes to broadly-diversified low-cost investing.

They provide cheap, easy access to the stock market as a whole. It’s a no-brainer to use them, since we know that the average active investment mutual fund will underperform a passive investment fund, especially after accounting for the fees.

I had been hearing recently about how passive investing has really taken off. That even your average, middle class investor understands that this is the way to go. But it wasn’t until reading an article in the New York Times that I realized just how dominant Vanguard has become. (We shell out $7.50 a month for a Times online subscription, but it’s worth using one of your precious ten free articles a month on this)

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What Do You Do With Excess Cash?

For me, frugality is a never-ending game of optimization. I’m always looking for ways to either cut costs or get more out of my money. This leads us to do weird things like cancelling the newspaper, cancelling the cable, buying wood stove pellets instead of rabbit litter, and either riding a bike or taking a bus to work. (ed: Self hyper-linking skills are on fleek) The way I’ve forced myself into this position over the years is by promising to always increase our monthly savings as measured in Quicken.

Forced Savings

From the time Marge and I moved in together, our savings plan has basically been this: Force a certain amount of savings per month by using automated investing. Money disappears from our checking account before we even notice it was there, and it escapes to a investment vehicle where it goes to work for us. The investments happen on a weekly basis to maximize dollar-cost averaging.

We started this back in 2006. I arbitrarily picked $1,000 as a savings goal for the month. When it became clear that this was too easy a hurdle, I pushed it up to $1,500 a month. Once we hit that goal for three months in a row, we increased it $100. And we’ve followed that model ever since. The amount of monthly forced savings has increased $100 or more every three months.

Now we are at $4,000 a month. As you can tell, I’ve found this method to be really effective. Every few months, we have to optimize, because the money just isn’t there! The savings must be found.

To be honest, some of this is only short-term savings. Some of the savings are used as a DIY escrow account to pay for our property taxes and home insurance, or if we owe any income taxes at the end of the year. All other expenses flow through the monthly expenses and count against that $4,000 number.

And since months can be lopsided, I sometimes have to push expenses ahead a month or two in Quicken, or push income back, to make that average savings goal appear. Funny math, but you get the picture. Regardless, that monthly savings goal is being forced into savings using automatic investments either through our workplace retirement plans or Vanguard accounts every month. If there is a temporary cash shortfall, I keep $3,000 as a buffer in a savings account.

Then every once in a while, there’s a monkey wrench thrown into the works. We get three paychecks instead of two. A tax refund. Some unexpected income shows up and I’m at a loss of what to do with it. And we are having some of those days again. Oh, joyous days! Continue reading

Our 2016 Asset Allocation

It’s time for portfolio talk! Don’t you all love it when bloggers talk about their portfolio? Is the market up? Is it down? What’s your portfolio doing? “How’s your plutonium?” What, you don’t love the jibber-jabber about the current state of “the markets” or, god forbid, individual companies?

Me neither. We’re not supposed to be paying attention to this stuff, the ups and downs and whims of the market. When it comes to your investing, what is important is your asset allocation. That’s why Vanguard’s webcasts and podcasts so boring. The point of every discussion ends up being, “We recommend a long-term view based on your goals, and to not pay attention to short-term market movements.”

So what has our asset allocation looked like?

First, let’s take a look at what it used to look like, many years ago. I was looking through my old files for things to throw out and I found my original 457 Plan paperwork. Just for laughs (gags) here’s what my contributions looked like when I started my first real job:

Emerging Markets

Yes, that’s 25% in Emerging Markets! What was I thinking? I’ll tell you what I was thinking. One, that Emerging Markets had been on this insane hot streak for a few years, and two, that emerging markets by definition have nowhere to go but up, right?

Well, incredibly, Emerging Markets did go gangbusters for my first year of investing, with something like a 40% gain, and then spent the year after that losing the entire gain. Lesson learned! Emerging Markets are a nice thing to have as part of a diversified portfolio, but it shouldn’t be a main focus, because their charts look like a Richter scale during an earthquake.

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Re-Organizing Financial Priorities

I’ve basically stuck with a savings plan that’s worked for ten years.

  1. We have a set amount that we need to save every month. When we hit that goal for a few successive months, I increase it. I arbitrarily started at $1,000 when Marge and I moved in together in 2005. Right now we are at $3,500 a month.
  2. Force those savings by making automatic weekly investments that add up to the monthly savings goal into different Vanguard funds. Every day of the week, small investment amounts wave bye-bye to our checking account and get down to the dirty work of earning dividends and capital gains.
  3. Any excess over the goal goes to pay down debt.

I am re-thinking that second part for a few reasons. Formerly I’ve been doing weekly investments into retirement accounts, emergency savings, stocks and Lending Club so that I end up just maxing out our retirement savings contributions at the end of the year, and the amounts in the other accounts line up with our asset allocation. Here’s why I’m thinking of switching up that very precise system:

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Ranking The Retirement Accounts

So, you want to retire early. That’s great! It’s probably one of the best ideas you’ve ever had, so I commend you on that.

Saving up to retire early isn’t a goal shared by many people.  So you might be surprised to learn that, for the few people looking to go whole hog in saving for retirement, there is a shocking variety of accounts to choose from! Once you decide to start keeping your money instead of spending it, where the hell are you supposed put it? Under a mattress?

Today we solve that dilemma!

But first, there are a few Golden Rules to follow when it comes to investing your nest egg responsibly that I assume you have to know:

  1. Buy hugely diversified mutual funds instead of individual stocks. (Something like VTSAX, Vanguard Total Stock Market Fund, and its international cousin VGTSX)
  2. Make sure those mutual funds charge very low fees.

Diversifying between stocks and bonds, international and domestic, and small and large companies is simple and pretty fun*. But one area I found myself lacking knowledge in lately was the difference between retirement account choices. IRAs, 401(k)s, Roths, 457s, SIMPLEs,.. There are enough acronyms to fill a letter factory!

So I made a little summary for myself of the common options:

Account Max Contribution W/D Taxed As W/D Can Begin Penalty on Early W/D
Roth IRA $5,500 No Tax Immediate / 5 Yrs N/A
Traditional IRA $5,500 Ordinary Income Age 59 1/2, with exceptions 10%
457 Plan $18,000 Ordinary Income Whenever N/A
401(k) $18,000 Ordinary Income Age 59 1/2, with exceptions 10%
HSA $3,350 Ordinary, unless for Medical Whenever 20% under Age 65, on non-Med

How many do you have access to? Well, I can tell you right now that you have access to a Roth IRA. Because everyone does. The 457 Plan and 401(k) Plan are only available through your employer. The 457 Plan is optimal for early retirement planners because it lets you withdraw before age 59.5 for any reason, without a penalty.

As for the Traditional IRA, you have access to that, too, because everyone does. But there’s a hook, and it always messes with my head: You can invest post-tax dollars and take a tax deduction for that amount, essentially making them pre-tax dollars, but only if you do not have an employer-sponsored retirement plan.

If you have access to a retirement plan at work, your available deduction for a Traditional IRA starts getting phased-out when your income reaches $52k for individuals and $83k for couples. Oh, and did I mention the $5,500 limit covers your Roth and Traditional IRAs together? The Traditional IRA seems to have the most annoying rules to deal with, but we’ll leave that aside for now.

We had been doing most of our retirement investing in Roth IRAs as a way to guard against tax risk. Our income was taxed at 15%, and by saving in a Roth IRA, we wouldn’t have to pay taxes on that money again. We don’t know the future, but I would be willing to guess that tax rates will go up at some point. And who knows what the income brackets will look like? By investing post-tax money, you eliminate your risk that future tax rates will be sky-high.

But I realized recently that sometime in the past few years, we had entered the 25% tax bracket! So by investing mostly in a Roth, we were essentially gambling that our tax rate in the future would be more than 25%. At this point, I kind of doubt that, and here’s why:

You see, since we manage to live well on only about half of our income, then in the future, if we are only withdrawing that money which we need from our retirement accounts to live on, say $50,000 a year, we will be in the lower (15%) tax bracket.  Again, assuming all tax brackets and rates remain level.

So what was I supposed to do? Invest it all in my employer’s 457 plan, or Marge’s 401(k) plan? What about those fees! What’s the best option?? Where are the best returns??? I demand only the best retirement option!!! Continue reading

For The Love Of God, Don’t Max Out Your 401(k)!

Oh dear readers, as I mentioned last week we are going to Peru for a week and a half. Now is as good a time as any for a blog break. The next post probably won’t be until mid-April. SAD FACE! But it will be our first Ridinkulous Quarterly Expense Report! Exciting! In the meantime, I hope this topic gets your blood boiling like it did mine. I’m going to need the next few weeks to recuperate.

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“Max out your 401(k)!”

So goes the typical Early Retirement maxim. Save every penny and “make mine tax-deferred, please!” Sounds good in theory, but after some recent discoveries, I see the flaw in this advice. Sometimes, you really, really shouldn’t max out your 401(k)!

Marge was finally able to start contributing to her company’s 401(k) retirement plan recently. Through some absurd reasoning, common at many private companies, I believe, you have to work at least one year before you can put your own money into their retirement account. It’s nonsense how companies hold out on benefits! But I have to admit, once she was finally eligible, I was excited to look at our new investment options!

Ascensus (1)

Exciting Day!

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