Category Archives: Investing

Life Beyond the Ordinary

Think about your life and what you want to accomplish.  Have you acquiesced to a life of mediocrity?  Or are you busily crafting the perfect life for yourself?  It is a choice, after all.

Make the choice to live an extraordinary life.  Reject tradition and custom by questioning everything.  Always seek improvement.  Make a habit of optimization.  All easier said than done, right?

Where to start?  Don’t accept “that’s the way we have always done it”.  Push back.  Ask questions.  Is this the best way to accomplish something?  Has anyone tried to do it differently before?

 

Challenge traditions and beliefs

Throughout life, there always seems to be a traditional way of doing everything.  Most of the time the traditional way is far from optimal.  Break free of tradition and think for yourself.

Investing

The financial media wastes so much time and energy distracting you with stories about picking the right stocks or funds.  Then they will scare you with tales of financial doom and gloom.  Of course once the stock market soars for a while, you’ll start reading articles and hearing talking heads creating a sense of exuberance with all the good news.  Financial magazines are full of helpful articles to assist you in your hunt for the mythical ten bagger stock that will finally make you rich.

In the meantime, you’re being led around on a wild goose chase when you should be deploying your assets in a sensible manner.  Turn off the television, cancel the finance magazine subscriptions, ignore the pundits.  Put your investments in some really boring low cost index funds, check out all your investments with Personal Capital once per month, and be done with it.  It’s really as simple as that.

The financial media has to have content to wrap around their advertising, so they talk all day about the best stocks, which way the market is headed, or how the latest current event will undoubtedly cause the next huge bull/bear market.  Ignore the noise.  Focus on making money long term.

Career

The traditional path to success at work is throwing yourself at your employer’s mercy and working long, hard hours.  Stop for a minute and question whether you are getting compensated for all the hard work.  Maybe you are.  But perhaps your employer is treating you about the same way as your lazy coworkers.  Yeah, you might get a 4% raise when they get 3%, or you might get a $2,000 bonus while they get a $1,000 bonus.  Is it really worth it to work way more than 40 hours per week for a tiny reward?

Some think it will help them long term or make them immune to layoffs if they are the last one to leave the office every day.  Maybe.  Or you might get let go anyway.  The truth is that you are expendable and today might be your last day with your current employer.  Do a good job, but make sure your effort is rewarded.  If you aren’t feeling valued, seek somewhere that will reward you for your hard work.

I’m not suggesting that slacking off and surfing on Root of Good all day will make you wealthy long term (although it might!).  Just don’t think that being the hardest worker in the office will make you any happier (or necessarily any wealthier) than being the person that comes in, does their job well, and leaves at a reasonable time.  Stay balanced.  You’ll enjoy life a lot more if you have fun, engaging, and meaningful activities and relationships outside of your job.  It’s also good training for early retirement!

 

Housing

Buy the most house you can afford.  Great advice.  For suckers.  How about “buy the house you need if buying a house makes sense in your area”.  It might be cheaper and more convenient to rent.  Don’t get sucked into thinking a house is the best investment ever.  Investments are investments.  Houses are places to live.  Buy a place to live in, not an investment.  Houses have huge carrying costs like taxes, insurance, maintenance, utilities, and mortgage interest.

House values generally keep up with inflation, and in some areas the values have far outpaced inflation.  It’s really a gamble though.  Focus on what housing is – a place to live – and buy the house that will provide the best living environment for you.  If you plan on being there for a while, don’t focus exclusively on houses that will be appealing to the next buyer.  Buy what you want to live in now.  If the house is unappealing to buyers, the price should be discounted to reflect it.

In fact, you can save tons of money on housing by buying a rough gem and applying a little polish and TLC to turn it into a beautiful home.  Buyers are turned off by strange things like weird paint colors and interesting carpet patterns.  Even though both defects can be remedied for under $2,000!

 

Cars

Even the Governor pimps it in an affordable car

Even the Governor pimps it in an affordable car

This is an area where you can really defy expectations.  The common perception is that successful people drive really expensive cars.  I’m sure there are successful people driving nice cars, but given the abundance of cheap credit and easy lease terms, even broke people without jobs and zero assets can drive nice cars.  Lots of wealthy people drive older well maintained cars and get around just fine.  These boring, older cars aren’t particularly good at conveying how wealthy you are.  Who cares?  Drive a decent but older car and spend the money on something you value more (or you could always invest the savings!).  Make consumer decisions that lead to actually being wealthy instead of merely trying to appear wealthy to other non-wealthy people.  Emulate Warren Buffett.  He drives a modest seven year old Cadillac sedan.

There’s also a bias against minivans and Priuses in some circles.  They are unmanly.  In the case of the Prius, it’s what dirty liberal hippie tree-huggers drive.  Minivans and Priuses are really just large lumps of metal with power sources that transport you from point A to point B.  If you drive a lot each year, a Prius can save you money on gas while still offering ample internal space for hauling people and stuff.  The same goes for a minivan.  They are normally less expensive than comparable sized SUVs and often get better gas mileage.  If you routinely need to haul a lot of stuff or five or more people, the minivan is probably the best choice for the job.

If you’re a guy, you don’t even have to take a small notch off your man card if you drive a minivan or a Prius, since you’re making a smart choice instead of falling back on thoughtless stereotypes of what you should be driving.  If you really need to assert your man-dom you can always put some mud flaps decorated with scantily clad ladies on your efficient transportation choice.  Then everyone will know what’s up.

There are obviously legitimate reasons for purchasing expensive and powerful 4×4 SUVs and pick up trucks.  For example, you routinely haul large trailers, you’re a landscaper, or you spend lots of time on mountainous dirt roads or trucking across frozen arctic landscapes.  Otherwise those vehicles are overkill.

 

Retirement

Work hard for 40 years and retire at age 65.  Throw that rule of thumb in the trash!  How about replacing that rule with “save a significant proportion of your income while still living a nice life.  Then retire early”.  Not everyone enjoys an income high enough to save over half of it.  But the vast majority of people can accelerate their savings much more than they already do simply by challenging themselves to ignore the traditional ways of living life and thinking for themselves.  Be bold, be different.

Retiring early isn’t for everyone.  Maybe you never want to retire, but want to escape from your current stressful nine to five job and do something fun the rest of your life.  Go for it!  Put together a plan and save enough money to ensure a successful launch into the next phase of your life.  Don’t be scared of failure – the worst you can do is go back to your old career and pick up where you left off.

 

Think Differently

Imagine a world where everyone wanted to conform to the rules and never step foot outside of the box.  There are no colors, only black and white and different shades of grey.  Pretty boring place, huh?

It’s okay to think differently and revolutionize your life.  Think for yourself, slough off the chains of conformity, and make your own path in life.

 

Why not embark on your journey toward your perfect life right now?  Make it the most important thing you do today.  Having the perfect life can’t wait until tomorrow!

Running Out Of Money In Early Retirement

Panic washes over me.  The realization that I’m broke, penniless and destitute sinks in.  How will I provide for myself?  My family?  Where will I live?  I wake up in a cold sweat, heart pounding, pulse thumping in my ears.  Slowly, I return to wakefulness and I realize I was only having a nightmare.

But what if it really happened?  What if I woke up one day and realized my investment portfolio was depleted and I couldn’t feed my family?

Spending all the money in my investment accounts would definitely qualify as an “early retirement failure”.  This kind of failure is what some early retirement naysayers claim will happen if you quit working before age 65.  But is it really possible to suffer this kind of catastrophic early retirement failure?  

I don’t think so.  Here are five reasons why:

 

1. We only spend a tiny fraction of our total investment portfolio each year.

The standard rule of thumb for retirement spending is that you can spend 3% to 4% of your investments each year.  Flip this rule on its head and you see why I’m not too worried about spending it all.  Every year early retirees don’t spend 96% to 97% of their investment portfolios.

Put another way, since we spend only 3% of our portfolio each year, it would take us 33 years to deplete our portfolio (assuming zero investment returns for all 33 years).  We have a 33 YEAR emergency fund at our disposal.  

What if the unthinkable happens and our investments get cut in half overnight?  We still have adequate assets to last for 16 more years!  I don’t think we could live forever on a portfolio balance half its current size, but we will have plenty of time to adjust course and figure out our next steps.  We could wait and see what happens with the markets for a year or two, or wave the white flag and head back to work as soon as possible.

 

2. Dividends and Interest.

Part of our annual expenses are funded by dividends and interest.  Dividends can fluctuate year to year but are relatively stable.  Interest payments are very stable.  Our portfolio yields around 2.2% to 2.4% each year, which is just a little bit less than our annual spending.  We don’t really need big returns in the stock market to fund our annual expenses, as dividends and interest cover most of our annual spending.  In our taxable accounts alone, I expect around $8,000 per year in dividends and interest, which is enough to pay 25% of our $32,000 budgeted retirement expenses and enough to pay 33% of our “core” expenses of $24,000 per year.

 

3. Availability of other income sources

The core foundation of our early retirement financial plan is an adequately sized investment portfolio.  But it’s not the only source of income available to early retirees.  If we saw our investment balances dropping quickly, we could supplement our portfolio withdrawals with other sources of income.  Part time temporary jobs, self employment income, profits from hobbies, selling your stuff on ebay or craigslist, or doing odd jobs can all provide additional income streams while the investment portfolio continues to do the heavy financial lifting.

I suppose some would demand the forfeiture of your honorary early retiree badge if you were to accept the idea of “doing work in exchange for money” as a valid pursuit during retirement.  That’s a very binary view of life.  I’m okay with others placing themselves within artificial constraints.  Lucky for me and everyone else on the planet, we get to make our own rules in life.  Like how we define “retired”.  It can be pretty easy to earn money with a part time pursuit that you enjoy, just be sensitive when using the word “retired” around those that would seek revocation of your early retiree badge.

In a guest post here at Root of Good, Nick from Pretired.org laid out a case for rethinking retirement altogether.  That article might help frame your conceptual take on early retirement and the role of making money even though you are “retired”.

 

4. Flexibility With Annual Spending

Even though our retirement budget is $32,000 per year, we don’t have to spend $32,000 every year.  I intentionally added some wiggle room into our budget so that we could shrink our spending in years when our investments struggle to hold their value.  Vacations, gifts, entertainment, and dining out represent over 25% of our annual budget.  We could trim a few thousand dollars from these categories and still live a perfectly wonderful life.

 

5. Social Security

We are still three decades away from Social Security.  Under the current SS rules, we will be entitled to payments that can fund two thirds of our retirement budget.  Maybe Social Security will still exist when we become eligible, or maybe SS will be modified to our detriment.  I’m guessing it will still exist in some form.  I haven’t explicitly factored SS into our retirement budget, but knowing that there’s a good likelihood of receiving something 30 years from now provides an extra layer of financial security.

 

Minimizing Risk Of Early Retirement Failure

During our early retirement, we rely on our investment portfolio to generate our living expenses.  We also expect the investment portfolio to grow over time to keep up with inflation (at a minimum).  Even though we have a big fat investment portfolio, it doesn’t mean we can rest on our laurels and ignore our finances.

Here are some tricks anyone can use to keep early retirement finances on track:

1. Track spending.

Are your expenses trending up or down?  Are some categories growing disproportionately?  Do we need to trim expenses to keep within our budget?  The easiest way to automate expense tracking is with Personal Capital (review of Personal Capital).  Personal Capital does all the heavy lifting by automatically consolidating your purchases and bill payments from your credit cards, debit cards, and checking or savings accounts so you have a full view of your spending all in one place.  Automatically.  For free.  You can’t beat the price and level of effort required to get a complete view of all spending.

Personal Capital Expense Tracking

 

2. Manage investments.

In general, you don’t want to look at your investments on a daily basis.  The fluctuations will drive you insane and force you to make emotional (dumb) decisions.  Keep your eyes away from your investments and your hands off the “buy” and “sell” button at your brokerage firm.  Go out, live life, and have fun instead.

You do need to keep track of your investments and make sure you aren’t going broke.  Monthly or quarterly check-ups will do the job.  It’s infrequent enough that you won’t suffer much emotional pain if the portfolio value dips.  The last thing you want to do is sell when your investments are down.  Remember the “buy low, sell high” rule to getting rich in the stock market? Don’t do the opposite.

US Stock Allocations

In addition to tracking expenses, I also use Personal Capital to gather all my brokerage accounts, 401k, 457, IRA, and HSA holdings into one screen so I can quickly determine my total investment portfolio balance.  I love spreadsheets and have a number of them to do more detailed analysis, but I pull data from Personal Capital to populate my other investment management spreadsheets.

If you notice your portfolio has dropped 20%, don’t panic, but pay attention.  Your investments will most likely recover over the next couple of years.  But it may be time to consider a plan B to get some supplemental income flowing in order to take some pressure off your investment portfolio.

As part of your investment management, don’t forget to rebalance your portfolio.  Here’s how I do it.  While you are rebalancing, keep in mind tax implications from selling appreciated assets.  As you are rebalancing your investments, you can also sell appreciated assets to generate cash to fund the next quarter’s budgeted expenses.

 

3. Generate more income.  

I already touched on the possibility of other income streams.  If you have adequately saved and prepared for early retirement, you don’t have to focus too much energy on earning even more money.  Just be aware that the option to earn a buck is out there if your portfolio starts to get rough around the edges.  Think about your hobbies or interests and how you can make some cash doing what you love.

Getting some cash flow coming in the door can also help relieve the psychological fears of running out of money due to exhausting your investment portfolio.  In our situation, we plan on spending $32,000 per year which is around 3% of our investment portfolio.  If Mrs. Rootofgood and I make just $8,000 per year from part time pursuits, hobbies, or odd jobs, we will have enough to fund 25% of our annual spending, and bring our withdrawal rate closer to 2%.

$8,000 per year isn’t a big number.  It equates to $333 per person per month.  I happen to make more than that from Root of Good right now, but I could also make that much doing a ton of different things that are interesting or challenging (in limited quantities).  Fixing appliances, light handyman/construction tasks, yard work, dog walking, babysitting, tutoring, running errands, participating in focus groups, or ebay/craigslist selling could easily net $10-25 per hour.  To earn $333/month at that rate of pay, you would have to work 3 to 8 hours per week.  Not exactly hard work.  Maybe you don’t like doing any of those jobs I mentioned, but I bet you are sufficiently creative to come up with a few things you wouldn’t mind doing a few hours per week.

The concept of working during retirement may not be to your liking.  That’s okay, because you probably won’t need to work another minute if you don’t want to (assuming you’re only spending 3-4% of your investments each year).  The odds are strongly in your favor that your portfolio will rise enough over your lifetime that you’ll be just fine.  But if you are genuinely scared of running out of money when there’s a dip in the stock market, earning a little supplemental income is a great way to put your mind at ease and take a little stress off your hard working portfolio.

 

4. Adjust spending in hard times.

Getting in some supplemental income is great, but you can also keep your early retirement on track by trimming expenses when your portfolio takes a hit.  You’re already following tip #1 “Track Spending” and you have Personal Capital quietly capturing all your expenditures, right?

Find areas where you can cut back temporarily.  Skip the long overseas vacation this year and explore local tourist destinations in your own state or within driving distance.  Skip the luxury hotel and find a good lower tier hotel that has solid reviews.  Travel off season.

Argentina's Historic Military Officer's Club - the "Circulo Militar"

Argentina’s Historic Military Officer’s Club – the “Circulo Militar”

An even better way to cut vacation expenses is to figure out travel hacking.  Sign up for some credit cards and snag some free flights and hotel stays.  And get some cash back bonuses from credit cards.  We flew half way across the world to Argentina and Uruguay for free using frequent flyer miles from credit card sign up bonuses.  Once we arrived, we enjoyed the region’s low costs on restaurants, entertainment, local transportation, and hotels.

When you’re at home, skip some expensive restaurants and work on improving your cooking skills.  You can often replicate expensive entrees at home for a fraction of the price, and tweak the salt, oil, and butter to your tastes to make the dish a bit healthier.  And you save money.

There are also big expenses that can be postponed for a year or two if your investment portfolio is temporarily depressed.  Major home maintenance, replacing a car, and optional medical or dental procedures all fall into this category.  Eventually these big lumpy expenses will be a necessity, but there’s usually some flexibility with the timing.

 

Failing Early Retirement Due to Boredom

I haven’t seen any academic papers on the topic of “early retirement failure”, but I bet a common cause of returning to work isn’t financial, but rather mental.  Some people aren’t cut out to provide their own entertainment all day.  Think of prisoners serving a life sentence.  After decades of incarceration the inmates would have an extremely hard time adjusting to life outside the walls of their cell.

Maybe the office cubicle is the perfect environment for those who can’t handle the freedom of choosing what to do all day.  But that’s another topic for another day.  I’ll have to address the non-financial aspects of early retirement failure in a future post.

 

Don’t Fear Early Retirement

In this article I have explained why the risks of running out of money aren’t as dire as some fear.  We are humans, not mindless machines stuck in an endless loop of unbridled spending without any feedback from our own finances.  If an early retiree’s investment portfolio hits a speed bump, that retiree has a number of options before declaring their early retirement a complete failure and heading back to work full time out of financial necessity.  As outlined in the tips above, the early retiree would be wise to keep track of expenses and investments, and be ready to earn some supplemental income or trim expenses when their investment portfolio starts to wilt.

 

 

Do you fear running out of money during early retirement?

 

11 Tips to Finish the Year Strong

The year is coming to a close.  Time to get your financial house in order before we pop the bubbly and ring in the new year.

Here are some tips to optimize your finances before it’s too late:

1. Max out your 401k.

The 2015 IRS limit on 401k contributions is $18,000.  If you are 50 or over, you can contribute up to $24,000.   These limits are the same for 2016.  While working, we paid almost zero tax on a six figure income by maxing out deferred savings plans like the 401k.  You can save on taxes too!

 

2. Max out your IRA.

In 2015, you can contribute up to $5,500 if you are under 50, $6,500 if you’re age 50 or older.  These limits remain the same in 2016.  If you can’t quite make the contributions by December 31, you can make IRA contributions for 2015 as late as April 15, 2016.  But max out the IRA now so you don’t procrastinate!

 

3. Take advantage of tax breaks on 529 college savings accounts.

If you have kids and want to save for college, then don’t miss out on your 2013 tax savings.  Most states that have an income tax will allow a deduction for contributions to 529 college savings plans.  Every state has different rules governing how much you can deduct (ranging from $250 to an unlimited amount).  A few states, most notably California, Massachusetts, New Jersey, and Tennessee, don’t allow deductions of 529 contributions.  State by state rules for college savings deductions.  Where we live in North Carolina, the state income tax deduction for 529’s disappeared after 2013.  At least we saved $350 for our $5,000 contribution each year while the deduction was in effect!

 

4. Rebalance investments.

Take a look at your asset allocation and figure out whether you need to rebalance your investments.  I recently posted an article explaining what’s in my asset allocation and how I rebalance my portfolio.  If you are too lazy to read those valuable articles I wrote just for you, then at least consider spending 10 minutes to sign up for Personal Capital and it will do 90% of the work for you (review of Personal Capital).  As far as timing of rebalancing, you can choose to buy and sell investments before year end if you want any gains or losses to fall in the current tax year, or wait until January to push tax implications into next year.  Be strategic!

 

5. “Tax loss harvest” your investment account for a $3,000 tax write off.

If you aren’t currently tax loss harvesting your investments each year, you should start right now.  You can generate a $3,000 deduction every year that will save you $500-$1,000 in taxes each year (depending on your tax bracket and your state income tax situation).

What is “tax loss harvesting“?  The quick and dirty explanation: sell investments that have lost money during the year to generate a loss.  This loss is what you deduct on your taxes.  You can deduct up to $3,000 per year.  If you generate more than $3,000 in losses, you can carry over those losses to future years forever (until you use up those losses).

After you sell your losing investments, immediately buy back something similar to replace it.  That way you aren’t really changing your portfolio’s investments, but you still generate the money-saving loss (for tax purposes).  The IRS says you can’t buy a “substantially similar” replacement investment, but poorly defines what that means exactly.  Most have interpreted “substantially similar” as nearly identical.  In other words, a Vanguard 500 Index Investor Class mutual fund is substantially similar to the same fund in the Admiral Class since it holds the exact same thing (with slightly different expenses).  Instead, buy iShares’ similar 500 Index fund (ticker: IVV ) for example, and you can still own something very similar and take your tax loss without angering the IRS audit computers.  In this example, you can later flip back to the Vanguard fund you originally owned if you want (and possibly generate even more tax losses!).

 

6. Spend your Flexible Spending Account (FSA) funds.

If you participate in the healthcare Flexible Spending Account offered by your employer, don’t forget to spend all the funds in your account.  Historically, these funds have been “use it or lose it” each year.  If you didn’t incur reimbursable expenses by December 31, you forfeit remaining balances.  Most employers allow you to submit reimbursement requests for a couple months after the year ends, so make sure to get those receipts submitted ASAP!  A relatively new US Treasury rule allows up to a $500 balance in your FSA to be carried over to the next year.  Verify with your HR that this rule applies to your FSA account before you lose out.  Ways to deplete your FSA balance: preventative medical and dental visits, eye exams, glasses, and contacts, and any medical or dental treatments you have been putting off.

 

7. Use up vacation time.

This one is a little silly, but don’t forget your employer’s policy on vacation time, comp time, and holiday time.  Most employers let you roll over some unused vacation time, but usually there is a limit.  Why not take off a few extra days around the holidays if they are going to expire anyway?  Check your time off balances to see if any expire soon or will be forfeited at year end.  At one previous employer, my comp time expired after 12 months and I often forgot to keep track of this time.  I lost a few hours occasionally just because I didn’t keep track of it.  That’s almost like throwing money away, since leave time is part of your total compensation package.

 

8. Pregnant? Have the baby now.

This was Mrs. RootofGood’s suggestion, so hate mail can be directed at her.  I’m expecting (get it?!) that this tip won’t be helpful to the vast majority of you.  But for those that have a These things suck down milk and poop out tax deductionsbaby due around the end of the year AND have some control over the timing of their new arrival, pop it out before the clock strikes twelve on December 31.  I’m not advising calling up your OB right now and asking for a pre-emptive strike C-section on the 30th.  But if you are overdue and have to make a choice about inducing labor sooner or later, or you have to deliver by C-section anyway, ask your doctor if doing so on or before December 31 is healthy for all involved.  Just don’t tell them some guy on the internet advised you to do so.  If the baby makes its debut before January 1, you’ll qualify for a tax deduction and a tax credit for the current tax year.  That means $2,000 to $3,000 tax savings for most taxpayers.  This advice is doubly beneficial if you’re “lucky” enough to have twins on the way.  Oh, and congratulations!

 

9. Plan for your annual bonus.

Every company is different, but most employers tend to pay any bonuses around the end of the year or the first few months of the new year.  Think about what you want to do with the bonus.  Reasonable options might be: debt reduction, funding your IRA or 529, diverting a big chunk of it to a 401k, or funding a project at your house that might save you money long term (energy efficiency upgrades for example).  If you want to defer a lot of your bonus to your 401k to avoid a big tax bite, you may have to designate the additional withholding well before the bonus paycheck arrives.

There is no problem spending some of the bonus money frivolously, but you’ll grow much wealthier if you use it to fuel your net worth growth.

 

10. Donate junk to charity.  

Take a look around and see if you want to purge some possessions.  Nobody wants to be a hoarder.  It is financially and psychologically expensive.  Removing clutter from your house will make your domestic environment more enjoyable.  Craigslist or ebay anything really valuable.  Consider donating the rest of your stuff.  Lots of charities accept clothes, appliances, electronics, household goods, and sports equipment.  They convert your donated junk into good for the community.  If you itemize deductions, you can also benefit from donating stuff.  You get a tax deduction!  With a donation of $1,000 worth of stuff, a typical taxpayer will save $200-300.  That’s a win win win situation.  Just make sure to cart your stuff to the donation site by December 31 to lock in a tax deduction for the current tax year.

 

11. Donate cash to charity.

Consider donating to charity.  Find a cause that is near and dear to you.  One charity I particularly like is Wine to Water.  I met the founder, Doc Hendley, at an engineering conference in Raleigh a few years ago.  He was the keynote speaker at the conference.  After his speech, I had a chance to chat with him for 15 minutes or so.  We talked about his charity’s amazing work and about general philosophy on the most optimal way to improve the world.  The thing that impressed me the most was Mr. Hendley’s desire to maximize the efficiency of whatever charitable resources he can muster.

I’m probably getting ahead of myself a bit.  Let me tell you what they do.  They bring clean drinking water to some fairly depressed and impoverished communities in off the beaten path places like Uganda, Sudan, Cambodia, Peru, and Haiti.  I don’t mean they literally truck in clean drinking water to these communities.  That would be grossly inefficient.  Wine to Water provides the technical guidance and some basic financial resources to let the local community build a sustainable clean water supply.  Many times, they use local parts and local technicians to build a well or water filter.  The benefit of this approach is the long term functionality of the clean water source.  If the local community knows how to maintain the equipment and can acquire local parts to fix the well or filter, the odds of that particular clean water source surviving far into the future increase greatly.  They also get emergency family-sized water filters into crisis situations such as post-earthquake Haiti and war torn parts of Syria.  Mr. Hendley and his Wine to Water crew are very efficient at getting clean water to those who need it.  Like my other spending choices, I like my charity dollars to go as far as possible, and Wine to Water is a great organization that mirrors my thoughts on spending money efficiently.

I also have to give Wine to Water applause for not spamming me with follow up donation requests.  When I was chatting with Doc Hendley at that engineering conference a few years ago, I specifically mentioned how I don’t like some other charities we supported in the past.  We have received so many letters and other correspondence from one of these charities that I am certain they have spent more on marketing to me than the sum total of all we have donated to them.  After grabbing all the money in my wallet (only $40) and handing it over to Doc on the spot, I kindly asked Doc to not send me any additional solicitations for donations because it would be a waste of money.  Success!  These guys are smart, reliable and efficient.  The kind of organization I feel comfortable supporting and recommending to the 10,000 or so of you readers that will visit Root of Good this month.

Most of us in the developed world don’t think about clean drinking water very often.  It’s a fact of life for us.  Unfortunately, millions of people (mostly kids) die every year from totally preventable water-borne illnesses.  It’s the 21st century and kids are still dying from something as simple as severe dehydration caused by diarrhea.  What a shame.

 

Pro tip to maximize benefits of charitable giving: If you don’t itemize taxes every year, you might be able to “lump” all your charitable donations of cash and stuff into one tax year, then skip the next year.  Then repeat in the lumping in the following year.  We have lumped donations and other itemized deductions in this manner and squeezed out a few hundred extra dollars from the tax man every other year. 

I hope these tips help you finish the year on a strong financial note!  What else can you do to tighten up your finances before year end?

 

 

Investment Management Using Asset Allocation Targets

I use my asset allocation as a tool to manage my current and future investments.  I always aim to have a fixed percentage of my investments in each asset class.  In my previous post, I presented my asset allocation and target percentages for each asset class.

As the value of various asset classes rise and fall, I will buy or sell to keep the portfolio balanced to the target percentages.

Let’s take a look at how this works with an example.  If my large cap US funds depreciate to 9% of the entire portfolio (instead of the target 11%) while my developed international funds appreciate to 22% of the entire portfolio (instead of 20%), it is time to make some trades.  I need to sell 2% (or $20,000 in a $1 million portfolio) of the developed international funds and use the proceeds to buy 2% of the large cap US funds.

I have found the easiest way to track my asset allocation is with the free investment management tools at Personal Capital (review here).  I could use the built in Personal Capital asset allocation tool:

Asset Allocation Summary

 

It works really well, and gives you an immediate overview of all the asset classes in your portfolio.  Asset classes like US small cap value and emerging markets are reported separately within the US Stocks and International Stocks groupings.  The US stocks breakdown in my portfolio looks like this:

 

US Stock Allocations

 

Instead of using Personal Capital’s awesome built in asset allocation tools, I get a little nerdy.  I developed my own spreadsheet.  I simply copy all my investment holdings from Personal Capital and paste the holdings into my “portfolio analysis” spreadsheet.

Before Personal Capital, it was an arduous process to log in to multiple brokerage accounts, IRA’s, 401k’s, and health savings accounts for Mrs. RootofGood and myself.  All the far flung accounts presented their data in different formats, and it was a rather time consuming chore to download, copy, and paste the data into my portfolio analysis spreadsheet.  All those manual operations lend themselves to data entry errors as well.  Not a pretty picture.  I’m glad that Personal Capital consolidated all my accounts into one screen, because it makes this particular task (analyzing my asset allocation) incredibly easy and streamlined.

Here is how Personal Capital presents the holdings data:

Personal Capital holdings 11-17-2013

I have asked Personal Capital for a download function to get a CSV or XLS file of holdings data, but they don’t have the functionality yet.  In the meantime, I copy and paste the holdings data and it works for me (huge time saver).

After I dump the holdings data into my portfolio analysis spreadsheet, I can see my target asset allocation percentages and my current asset allocation percentages side by side.  I created a column that shows me the exact amount I need to add or subtract from a given asset class.

The graphic shows today’s current asset allocation in my portfolio with a hypothetical $1,000,000 portfolio value.  That gives us some nice round numbers to discuss.

Current Allocation

 

Overall, things look pretty good (given I haven’t touched my investments for 3 months).  I’m underweight on the US large cap allocation by 0.8% (10.2% currently versus 11.0% target) and overweight on the US large cap value allocation by 1.0% (12.0% currently versus 11.0% target).  I need to sell some US large cap value funds and buy some US large cap funds.  The US REITS are 0.4% underweight (5.6% currently versus 6.0% target).  The other asset classes don’t deviate more than 0.2% from their respective targets, so I probably won’t do anything to them right now.  Keep it lazy, folks.

What do I actually need to do to get all my holdings close to their target allocation percentages?  I’ll take a little shortcut and head straight to one account and do all the trading there.  Mrs. RootofGood’s awesome 401k has access to institutional share classes of Vanguard funds in the large cap, large cap value, and US REIT sectors.

I need to sell $10,000 of the Vanguard Value Index Fund – VIVIX (the large cap value fund) and then buy $7,000 of the Vanguard Total Stock Market Index Fund – VITSX (the large cap fund) and buy $3,000 of the Vanguard REIT Index Fund – VGSNX (the US REIT fund).

TIP: If you want to use these funds in your own asset allocation, find the equivalent funds in “Investor” or “Admiral” share classes.  These ticker symbols are for the “institutional” share class through Mrs. RootofGood’s 401k.  Unless you have a cool $5,000,000 per fund, you can’t get in as an individual investor.  Investor and Admiral class shares have a $3,000 and $10,000 minimum initial purchase.  In a future article I will provide you with mutual funds in each of the asset classes that I consider to be the best available.  

One of my investment goals is to keep the portfolio management simple.  That’s why I don’t feel compelled to get to my exact target asset allocation in every asset class.  If each asset class is within a few tenths of a percent of the target, that’s good enough for me.  Any more micromanagement and you’ll feel like you are picking fleas off a dog – a whole bunch of moving targets zigzagging all over and you’ll waste a lot of time chasing the little buggers without a lot to show for it at the end of the day.

That’s why I only bought $7,000 of the large cap and $3,000 of the US REIT.  I should have bought $8,000 of the large cap and $4,000 of the US REIT according to my analysis spreadsheet.  I chose not to bother with buying the exact amount since I would have to go to multiple accounts and complete additional transactions to reach the exact asset allocation targets.  Being just a small bit off (around 0.1%) is okay.

What if I held all of my large cap value allocation in my taxable account and I was sitting on $60,000 of capital gains?  Selling $10,000 of the large cap value fund would result in $5,000 of capital gains that might cost me a lot at tax time.  As a result, I want to avoid selling highly appreciated shares.

There is a different way I could get back to a balanced portfolio without selling anything.  I can simply direct new investments into the underweight asset classes.  In our case, Mrs. RootofGood is still working, and contributes around $2,000 per month into her 401k (employer match plus employee contribution).  She can direct her monthly 401k contributions into the funds that are most underweighted.  Since the large cap asset class is $8,000 below the target value and the US REIT asset class is $4,000 below the target value, she can direct 67% of monthly contributions to the large cap fund and 33% to the US REIT fund.  After six months, she will have contributed $8,000 to the large cap fund and $4,000 to the US REIT fund.

In this latter example, you may have noticed I didn’t do anything to reduce the large cap value’s overweighting of $10,000.  Time for a diet!  I’m going to starve the asset class by not feeding it more contributions.  With new contributions going elsewhere, the values in the other asset classes in the portfolio will rise, and the large cap value balance will remain about the same (barring big moves in the market).  By directing new investment purchases into the most underweight asset classes, it is possible to slowly bring the portfolio into balance.  It’s like steering a large ocean liner – you make small corrections on the rudder to keep on course.

And that’s how I balance my investment portfolio.  As you can see, after three months of ignoring my portfolio, it is still mostly balanced with just a few asset classes out of whack.  I don’t spend a lot of time managing my investments to a tight asset allocation target. I don’t think it increases investment returns to rebalance too often.  I think it’s pretty cool that the portfolio produces enough returns to fund our living in perpetuity, and I don’t have to spend hardly any time micromanaging the investments.

Emotion and market timing can be the investor’s biggest enemies.  Using a target asset allocation takes the emotion and thinking out of investing.  I recognize I’m no smarter than the thousands of computers and active traders at investment banks and hedge funds.  My investing goal is to keep my trading costs and investment management expenses to a minimum, and allow the investments to grow long term.

Figuring out what method of rebalancing works best for you might take a little time.  There are free tools out there like Personal Capital to pull investment data from your IRA’s, 401k’s, and brokerage accounts and consolidate it in one place.  Personal Capital’s built in asset allocation overview might be enough for you to manage your asset allocation and rebalance your portfolio.

In this post on my portfolio’s dividends, I included a chart that shows specific mutual funds and exchange traded funds (ETF’s) I hold in each of the asset classes in my asset allocation.

 

 

Do you have a similar (or better!) method of managing a passive index fund portfolio like mine?  What are your rebalancing rules or triggers?  

Snapshot of Root of Good’s Diversification and Asset Allocation

I have been a little lazy on the investment front during my three months in early retirement. I haven’t bought or sold anything in my portfolio. Not that it really matters, since you shouldn’t do a whole lot to your investments anyway.  I like to sit back, prop my feet up, and let my investments grow over time.  It’s a beautiful thing, really, watching your wealth grow.  It’s like a skyscraper shooting skyward or a young child metamorphosizing into an adult.

But forget cheeky children and soaring skyscrapers.  A better way to think of your investment portfolio is as an ant colony in your backyard.  I happen to have fire ants in my backyard.  They are very industrious (and painful) little creatures.  A single tiny ant can’t do very much work by itself.  But when there are thousands of ants working in concert, the colony tends to grow.  New baby ants are born.  The colony expands to provide more housing for the new arrivals.  Every few months I’ll spread poison ant bait on the yard in order to fight off the expansion of the ant colony.  The colony shrinks.  I get my yard back temporarily.  Then a few months later, I see the ant colony has regrown.

The ants are robust and continue to regrow their colony year after year because they spread out across my whole yard.  I try to kill them all, but I invariably miss an ant hill somewhere in my yard.  These ants are unconsciously performing geographic diversification across the entire world of my yard. The result of the diversification is survival.

 

The Way of the Ant: Diversification

Your investment portfolio is like an ant colony.  If your portfolio is diversified like mine, then you own shares of thousands of different companies all around the world.  Each individual company you own contributes very little to the portfolio performance.  But when you have an army of companies working away in your portfolio, the investment returns add up.  If one individual company suffers financial catastrophe and goes bankrupt, your portfolio will have a tiny amount of shares worth zero.  But, like the rest of the ants in the colony, the other shares keep working hard to grow the portfolio, oblivious to the demise of their fallen brethren.

Owning the stock of thousands of different companies is one method of diversification.  The performance of a single company won’t be noticeable in your overall investment returns.  Just by the force of sheer numbers, you can own dozens of companies that do really poorly, yet in a pool of thousands of companies, the impact of poor performance of a few will be muted.

Another way to diversify your portfolio is to buy companies from all over the world.  This strategy is similar to the ants’ strategy of building nests all over my yard.  Rain may ruin their nests in one area of the yard.  I’ll kill many nests with my ant bait in many other areas.  But some nests will always survive.

Across the entire world, economies tend to perform differently from year to year.

Photo by Sujin Jetkasettakorn, FreeDigitalPhotos.net

Photo by Sujin Jetkasettakorn, FreeDigitalPhotos.net

Sometimes Asian economies do really well.  Other times the European Union countries outperform.  Then other years the US economy performs the best.  If you spread your investments around the world, you don’t have to make a bet on one particular country or region.  The US stock market represents between one third and one half of the total publicly traded investments in the world.  Investing only in US companies means you are ignoring half to two thirds of the investing world and making a concentrated bet on the US of A.

I don’t want to go against the rest of the world and bet only on the US, so I have a significant share of my investments in developed countries and emerging markets around the world.

You can also diversify across different sizes of companies (“market cap” or market capitalization).  Some research has shown that stocks of small companies outperform stocks of large companies.  I buy into that research and I have certain parts of my portfolio devoted to small capitalization stocks.  

Value stocks, or those stocks that have low prices compared to their earnings or book value, have a similar tendency to outperform (as suggested by some research).  I subscribe to that theory, and have a tilt toward value stocks in my portfolio.

 

Asset Allocation

Some people have an investment strategy of buying whatever stocks or funds their friends tell them are awesome.  Or picking last year’s best performers.  Hey, good luck with that but it’s hard to call it an “investment” or a “strategy”.

I try to spread my investments around to a number of different asset classes.  I know some asset classes will do poorly in any given year, while others will far exceed “the market’s” average return.  Spreading investments across many different asset classes means I’m going to get different results than “the market”.  The S&P 500 index, a measure of the 500 biggest publicly traded companies in the US, might generate a 20% return this year, but I might only make 15% since I’m invested in a large variety of companies that aren’t in the S&P 500 index.  Or I might make 25%.  Who knows in advance?  No one.

Here is an overview of my equities asset allocation and what it would look like with a $1,000,000 investment portfolio (let’s pretend that’s exactly what I have):

Asset allocation overview

 

When you look at this asset allocation, you may notice that half the assets are US investments and half are international investments.  I also play favorites with value stocks and small cap stocks (both in the US investments and overseas investments).

Real estate (held through REIT’s) comprises 11% of the portfolio.  This is my only “alternative” investment – no commodities or gold here!

There are some relatively volatile asset classes in the portfolio – US and international real estate, emerging markets, and international small cap.  Each of those volatile asset classes represents 5-6% of the portfolio.  These volatile asset classes can drop way more than the broad market, so I didn’t want to take too much risk in any one area.  They also provide out-sized returns in some years.  These volatile asset classes tend to move independently from each other (to some extent), and can sometimes dampen drops in the broad market (if real estate continues to do well, for example).

 

Caveats

Before I close, I want to touch on a couple of subjects so my readers aren’t led astray.

My asset allocation is somewhat complex, with the aim to squeeze out maybe an extra one percent of return by taking on a little more risk.  I present my asset allocation here because readers often ask me “what does your investment portfolio look like?”.  Here it is!

If you are a beginning investor, you may want to keep it really simple and pick a target retirement date fund (check out Vanguard.com for options).  Or get a little more complex and mix a Total US Market fund with a Total International fund.  I’ll expand on portfolio suggestions for beginning investors in the future.

You may noticed that I have presented a 100% stock portfolio.  That’s almost what I own right now, with only 5% of my total portfolio in cash or bonds.  Since I’m recently retired, I need to increase my cash and bond allocation to probably 10% at a minimum.  My cash and bond holdings are so small that I omitted them from my summary of asset allocation.  In addition, I’ve never explicitly targeted a specific percentage for cash and bonds (other than zero percent) so my current target asset allocation is presented above.

If you are risk averse at all, you’ll want more cash and bonds in your portfolio than what I have.  It can be a bumpy ride at times with nearly 100% stocks in my portfolio.

 

In my next post, I’ll show you how I use my asset allocation to guide my investment decisions.  Here’s a quick preview of one tool I use.  I have found the easiest way to track my asset allocation is with Personal Capital  (review here).  A peek at the Personal Capital asset allocation tool:

Asset Allocation Summary

 

 

Readers: Thoughts?  Do you have an asset allocation?  If not, what is your investment strategy?  

 

Government Shutdown: Why It Doesn’t Matter

The Government has shut down.

Big scary news.  How can life as we know it continue?!

For the vast majority of Americans, life will go on as usual.  Your TV still works (even Big Bird on PBS!), your computer and internet still work.  You can cook dinner and savor the flavors as always.  Your evening stroll around the neighborhood is still possible.  Your car will start each morning as you drive on the roads that facilitate your daily commute.  You can drink beer in a bar or on your back porch.  Football will be played and spectated on Thursdays, Saturdays, and Sundays (have a beer while watching that, too).  Rock bands play on; we continue to play on Rock Band.

The mailman still waves “hi” as he slips unwanted junk mail into your mailbox.  The wind blows, the rain rains, the sun comes out and shines.  Sometimes you see a rainbow.

Autumn is in various stages of arrival across the US, and nothing has substantially changed compared to the pre-Shutdown days when the leaves were a little more green and still clung to the trees in some places.

 

October 1: The Shutdown happened.  Life Continued.

In the days leading up to October 1, 2013, I recall seeing headlines and reading blurbs about “OMGz the government is going to potentially shut down and how can we ever survive?!?!?”.  Since I don’t work any more, I’m not engaged in idle water cooler talk about current events (like The Shutdown).  Conversations typically turn to more meaningful topics.

I got so busy living life and relaxing, that I forgot to check whether our government shut down as scheduled at 12:01 a.m. on October 1st.  At some point mid-morning or maybe afternoon on October 1st, I suddenly remembered that the Government Shutdown was potentially going to happen, and I better tune in to see to whether I should prepare for mass riots and tear gas in the street, long bread lines, and a general Mad Max-esque survivalist landscape.  After all, I had to walk up the street to my children’s school at 2:45 p.m., and the last thing I needed was unnecessary delay if the world was, in fact, coming to an end.  So I buckled and succumbed to the urge to know.

Did the government actually shut down?  How can 535 of the smartest, wisest, most altruistic people in America, with the best interests of their constituents in mind, not reach an agreement that would allow the government to continue operating?  It was really unfathomable that no resolution could be reached, and the government would shut down.  But it did.  It shouldn’t be too surprising.  Shutdowns happen every five years on average (six other times in the last 30 years).fall

After finding out the disappointing news that we, the people, have apparently elected bickering five year olds who haven’t quite been socialized to the point of learning how to play nicely with each other, I realized it was time to head out on my afternoon walk to school to pick up my moderately well socialized children who occasionally play nice with each other.  The walk was uneventful, other than watching the cars go by, swirling leaves into the air, and seeing squirrels packing away acorns to snack on later during their long winter dormancy.

The squirrels are lucky, because they don’t live in a world of concern about government shutdowns and the impacts it will have on our daily lives.  They just pack the nuts away, hope for the best, and cozy up in their nests to wait the winter out.

We can learn something from the squirrel.  Emulate him.  Pack those acorns away, and you can sleep soundly without worrying what our crazy government does next, since you have your figurative stash of acorns in your den to aid in your survival during the difficult winter months.  Spring eventually arrives, as the end of the Government Shutdown must also.

If squirrels were like many of us humans, they would have a tiny smartphone sized TV blaring CNN (or Fox News if you like) 24-7 in their cozy little dens all winter.  Constantly watching and waiting to see what will happen next.  Which bishop or rook will make an attempt to take the knight or queen, only to have a few of their pawns sacrificed in the action?  Pawns are dispensable, right?

 

The Low Information Diet

I didn’t realize it that morning of October 1st or in the months preceding, but I have been slowly weaning myself off sensationalist media coverage and putting myself on a Low Information Diet.  The esteemed Mr. Money Mustache recently opined on the virtues of the Low Information Diet.  I’m with him.  Tune out, and get back to living life.  Most of the news is what I call infotainment.  It presents us with scary things that interest us.  Events that could theoretically happen to us, but are unlikely given the tiny percentage likelihood.

In his Low Information Diet blog post, Mr. Money Mustache commented:

The news also completely fucks up the layperson’s perception of risk. The very fact that bad events are rare these days, makes them newsworthy. A bicyclist hit by a car. A school shooting or an abduction. A terrorist attack. These things are so uncommon, it is best to ignore the possibility of them when planning your own life. But with a sample size of over 300 million people in the US and 7 billion worldwide, unusual tragedies happen daily, and they end up on the news nightly.

Out of 300 million people, about 299.99 million live uneventful lives on any given day.  For good reason, the media does not interview the 299.99 million people who woke up, peed in the toilet, went to school or work, came home, watched some TV, passed out on the couch, and are likely to repeat the same routine every day.

This type of coverage would be so boring that there would be about 299.99 million fewer TV viewers every day.  Advertisers would cease paying TV stations to sandwich a few minutes of “news” in between five minutes slugs of commercials advertising new cars, awesome fast food restaurants, and the best deals on life insurance.

Say What??  Who cares!

Say What?? Who cares!

TV executives are really smart, the mental prowess of some rivaling that of our most esteemed members of Congress.  They know sensationalist news gets eyeballs on the screen.  Advertisers, like human organ traffickers, are willing to pay top dollar for eyeballs.

The TV executives know that “Government Shutdown” sounds scary and intriguing and it is novel to most of us.  Coverage of disasters and catastrophes always results in high viewership.  The headlines will never tell you that the shutdown is temporary, and for the 99.85% of you Americans that are not furloughed federal employees, you can turn off the TV and go outside and play.  You won’t miss anything.  Eventually our government will resume normal operations.

So far, I have suffered only one very minor inconvenience since the shutdown.  I wanted to cite some up to date household income statistics.  The US Census provides statistics of this nature on their website.  Whoops!  The website is closed.  I had to use wikipedia instead, so there really wasn’t much inconvenience to me personally.

 

Real Impacts of the Government Shutdown

Since I haven’t been paying attention to the news, I had to seek out information on the numerous ways in which the government shutdown will affect everyday life.  The information was incredibly easy to find, and Google quickly introduced me to this CNN article that promised to reveal ten ways in which a government shutdown will affect your daily life.  This is the model of efficiency – I was able to save dozens of hours of time by not watching the news and avoiding news on the internet related to the Shutdown, yet when the need for information arose, I had access to that information within seconds.

The CNN list of ten impacts to your daily life really boils down to this:

  • Life as a resident of Washington, D.C. might suck soon.  Trash collection and other municipal services will eventually halt due to lack of funding, since the D.C. municipal budget is tied to the federal budget.  It’s pretty scary to think that 0.2% of our country’s residents will face a temporary interruption in municipal services.  For the other 99.8% of Americans, life will go on as usual.
  • Government loans or payments might be delayed or postponed.  Specifically, SBA small business loans, loans requiring federal approval such as FHA or VA mortgages, and veteran’s benefits payments.
  • Getting a gun might be delayed.  ATF may not process FFL permits promptly or at all during the shutdown.
  • Federal parks, museums, and zoos are closed.  Your vacation may be moderately screwed, although there are always other things to see where ever you are going.

The CNN article mentions things that won’t change:

  • Obamacare
  • US Postal Service delivery
  • Social Security payments
  • Tax collection
  • Treasury bond issuance
  • The military
  • Federal employee pay (in past closures, all feds received retroactive pay for furloughed periods)
  • Passport offices issuing or renewing passports (they are fee supported and are staying open).

I would wager CNN prepared a non-exhaustive list of impacts to our lives due to the shutdown.  I would also wager that 99% or more of us won’t see much impact beyond a temporary inconvenience.  Hey, sucks to be part of the 1% impacted, but that’s the way these disasters and catastrophes work.  Unfortunately, this disaster is completely man-made.

For federal workers or contractors who won’t be getting a paycheck for a while, the shutdown will be a more significant inconvenience.  For those workers who have no savings and no backup plan in the event of job loss, life will start sucking pretty quick.

The only advice I can provide to those workers is to learn from the shutdown.  Prepare for potential job loss, reduction in pay, or reduction in hours.  Spending less than what you make will help.  Keep an emergency fund for situations like this.  An emergency fund plus unemployment benefits can go a long way in removing financial stresses when the unexpected happens.

For everyone else, please proceed with your lives.  Turn off the TV and ignore the news headlines that read like a play by play summary of a tennis match (except the fate of our country is bouncing back and forth over the net).

The Government Shutdown will end eventually, and until then, there is no reason to waste excessive amounts of mental energy dwelling on what if’s and how much our elected officials suck.  Go read a good book, or pick up that project you keep putting off.  You won’t be missing anything.

 

Government Shutdown And Your Investments

Some investors think they have to constantly monitor news sources to make sure they are in the know before everyone else.  They think that instant access to news is critical to successfully implement their investment strategies.  There might be some institutional investors that are very slightly successful at incorporating real time news into their investing strategy.

For personal investors, they are deluding themselves into thinking they are pro traders by keeping on top of the news.  They feel that knowledge is power, and who doesn’t want power over their investment results?

Here we are, thirteen days into the shut down, and the stock markets are over 1% higher than they were on the day before the shutdown.  There is no way to know which way the stock market will go in the short term.  I accept that fact, and haven’t touched my investment portfolio for over a month.  I might lose a little bit on paper if this shutdown drags on.  Or I might miss out on a big run up in the market if I sell out.  There is no reason to waste excessive energy trying to figure out something that is unknowable.

 

So there you have it.  Time to do something more fun than worry!

 

Did I miss the mark here?  Anyone suffering big time from this shutdown?  What steps can you take to minimize future suffering if something similar happens again?

Simplest Way to Manage Investments, Spending, And Income: Personal Capital

I decided to take the plunge into the world of all-in-one personal finance and investing software.  Some folks use Quicken, Mint, or Wealthfront.  I looked at all of those, and tried some but they didn’t quite do what I wanted to do.  They were either too clunky, cumbersome and time consuming to use, or they didn’t get the investment management part done correctly.

Enter Personal Capital.  This is a slick web site that makes managing your finances and investments quicker, easier, and prettier.  All your credit cards, checking, banking, investments, 401k’s, IRA’s, and other accounts are in one place, conveniently summarized.

The online investment and personal finance tracking services at Personal Capital are totally free, no strings attached.  They also offer a financial advisory service for accounts over $25,000 in value, however they do charge a fee for the professional advisory services.  But you can use the investment and personal finance management engine free of charge forever.

 

My First Time Using Personal Capital

After putting in my username and password, Personal Capital got down to business by asking me to put in all my financial accounts.  In about 5 minutes I added:

  • Three accounts at investment firms (1 Vanguard and his and hers accounts at Fidelity).  This includes 2 brokerage accounts, 8 IRA’s, and 1 HSA
  • Two 401k accounts (his and hers) and a 457b account
  • 3 savings and 1 checking account at our credit union
  • A mortgage loan with a different credit union
  • College 529 savings accounts for our 3 kids
  • 3 credit card accounts

This process was amazingly easy to get all those accounts consolidated into one place.

To finish linking all of my accounts, I spent another 5 minutes verifying super secret security questions on a few accounts like what’s my dog’s favorite hobby and which tooth did my second grade bestie lose first.

I expected glitches when I was importing my accounts.  We have 25 different financial accounts spread across ten different companies or login ID’s.  Zero glitches.  Everything imported cleanly and accurately on the first try.  So far, Personal Capital is doing what it is supposed to – streamline my personal finances and investments.

I tweaked the descriptions of a few similar accounts like our his and hers Vanguard traditional IRA’s.  I added my name or Mrs. RootofGood’s name (so I can keep them straight).  Editing these descriptions and names is simple – click the little edit button, change your description, click save.  Done.

I deleted a few duplicate accounts where they appeared both on my Fidelity login and Mrs. RootofGood’s Fidelity login so that these accounts only show up once on Personal Capital‘s display.  Easy again.  This step is where I have had problems in the past with Money or Quicken – getting all the accounts to show up once, and only once (and one reason why I never used them).

I manually add in my cash balance pension fund, and another cash balance retirement account (an ESOP).  The ESOP account balance will have to be updated annually by me when I receive the statement from the plan sponsor.  That’s about the only manual update required since Personal Capital automatically pulls transactions and balances from your myriad financial accounts.

In about 20 minutes I have taken our household’s relatively complicated financial life (27accounts total) and displayed everything on one screen.  With pretty, interactive graphs and charts.

After getting all the accounts into Personal Capital, I wanted to play around and explore the different features and displays.  Income, spending, cash flow, cash balances, portfolio allocation, overview of investment fees – all easily accessible from the Personal Capital web page.  Before using Personal Capital, I had to manually go to all of my investment accounts and credit cards and download then copy/paste the transactions and balances into my own spreadsheets to check on what I was spending or manage my investment portfolio.

 

Income

My monthy income is right there, categorized and summarized in a colorful graph.  Before using Personal Capital, I always knew roughly what we had coming in each month, but this really puts it in perspective with exact numbers and categories.  I was surprised our investment income was over $2,500 for the month.  I never added it up before, and it is surprisingly large.   Now that I’m retired, Personal Capital is going to be a great tool to help me keep track of cash flow and available cash in my accounts.

Income Summary

Root of Good’s Personal Income. The “Deposits” included a large payout of my accrued vacation time (I wish that was what we earned each month!)

 

Expenses

Expenses are as cleanly presented as income.  No surprises here.  Our mortgage is the highest expense, and groceries are the next highest.  The childcare expense is gone now that I’m retired (which also makes me a stay at home dad).

Root of Good's Monthly Expense for September 2013

Root of Good’s Monthly Expense for September 2013

 

Investment Asset Allocation

The way my investment portfolio’s asset allocation is presented is probably the coolest part of Personal Capital.  I try to keep my US investments roughly equal to my international investments, and the graphic makes it easy to tell that I’m within a percent of hitting that goal.

Asset Allocation Summary

Root of Good’s Asset Allocation

 

You can drill down into any specific area in your asset allocation.  I wanted to take a detailed look at my US Stock allocation, to see whether I’m sticking with my goal of maintaining a tilt toward small cap and value investments.

US Stock Allocations

Root of Good’s US Stock Allocation

I’m doing pretty good.  The mid cap and small cap bands together are bigger than the large cap, which is what I want.  The value boxes on the left are bigger than the growth boxes on the right.  I’m on track.

I also took a peek at cash sitting around in my investment portfolio.  Looking at the summary made me realize I have been slightly negligent in investing my cash.  I try to stay fully invested.  I just discovered I have over $15,000 sitting in a money market account (ticker VMMXX) in my IRA from a recent retirement fund rollover.  I also discovered $1,407 sitting in the FDIC-Insured Deposit Sweep, which is our HSA’s cash account.  I thought I was pretty diligent in managing my investments, but staring at these cash balances sitting there earning nothing makes me realize I have a little work to do.  At least now I have a tool to draw attention to lazy cash sitting around!  Let’s get that money making more money!

Cash Summary

Quick look at cash in my investment portfolio. I just found $17,000 in cash sitting around in my portfolio doing nothing!

 

Personal Capital also has apps on Apple Itunes and Google Play Market (for Android).  The apps look awesome, but I haven’t tried them on a phone or tablet yet.

Give Personal Capital a shot and see how you like the look and feel.  I love the interface so far, and it will save me hours each month managing my personal finances and investments.

 

Let me know your experiences with Personal Capital if you try it out!  Anything I’m missing?

A Simple Way to Retire 15 Years Earlier

I wanted to further explain how low expenses lead to early retirement by taking a look at a case study.

Be a Super Saver

Let’s explore the lives of two fraternal twins, tragically torn apart at birth (not in the separating conjoined twins sense, but rather in the figurative sense).  To protect their true identities, I have carefully crafted cover identities.  Each sibling led similar lives.  They went to college, studied engineering and obtained good jobs right out of college at age 21 earning $60,000 per year.

The young man, Saver Sam, is a financially responsible individual.  He tithes each paycheck, piously placing 10% of each pay period’s payment into his 401k’s collection plate.  That amounts to $6,000 per year contributed to his 401k.  Not a bad way to go about saving for retirement.

Saver Sam’s fraternal twin Super Saver Samantha, sharing only 50% of her genetic makeup with Saver Sam, is a slightly more frugal individual.  She is a really good saver.  Some say she’s a super saver (hence her name).  To appease the retirement gods, Super Saver Sam sacrifices 30% of her hard earned paycheck on the alter of savings.  To be more exact, she puts $18,000 per year into her 401k and IRA.

Super Saver Overview

After taking out investment contributions, Saver Sam is left with $54,000 per year which he spends diligently.  Super Saver Samantha only has $42,000 left each year, which she gladly spends in a more frugal manner.

Sam and Samantha both envision retiring early, and both keep saving toward their goals.  Since Sam spends $54,000 per year, he must save around $1,543,000 to be able to withdraw $54,000 per year to cover his lifestyle (at a 3.5% withdrawal rate).  Samantha on the other hand, only needs $1,200,000 to fund her $42,000 per year spending habit.

Let’s take a look at when Sam and Samantha can reach their retirement goals.  Remember Samantha is saving more than Sam each year, so you expect her to save more money and reach her retirement goal sooner.

super saver lifetime investments

Sam does alright.  He is on track to meet his savings goal at age 59 with $1,548,339 in his investment portfolio.  Then Sam can retire and live happily ever after to a ripe old age.

Samantha does even better!  At the young age of 44, Super Saver Samantha passes the $1.2 million mark and grows her investment portfolio to almost $1.3 million!  She reached her retirement goal a full 15 years before Saver Sam will reach his goal.

Tropical Beach

Around age 46 or 47, Sam is cruising the internet, looking for his long lost twin sister.  Eventually he finds her online profile and the travel blog she started when she retired at 44.  What?  She spends a month or two each winter snorkeling and surfing in a low key (but warm) Latin American beachfront community, and lives a generally awesome life.  Without working ever again.  But that’s unpossible for someone her age!

Sam gets a little jealous at this point, but figures Samantha might be able to give him some tips to get to early retirement.  Sam and Samantha start comparing notes of their lifestyles over the last couple decades.  They found out they both lived comfortable middle class lifestyles in different parts of the US.  Sam and Samantha both have decent houses and good cars, but Samantha is just a little more savvy and manages to spend a little less.

Her mortgage and housing costs were around $400 less per month because she bought a slightly smaller house in a slightly less swanky neighborhood.  Compared to Saver Sam, Super Saver Samantha saves on average $300 per month (more some months, less other months) by buying reasonably priced sedans instead of the latest luxury models.  Samantha also keeps her cars for seven to ten years before replacing them with a new or new-ish car.  Sam lives it up and leases beautiful luxury cars and manages to score a new one every three years when the lease expires.

Samantha also managed to save an additional $300 per month in taxes by contributing $18,000 per year to her 401k and IRA instead of the $6,000 that Sam saved.  Add up Samantha’s savings each month: $400 on housing, $300 on cars, and $300 on taxes.  That’s $1,000 per month or $12,000 per year that Samantha managed to save without making burdensome sacrifices.  The payoff was retiring 15 years earlier than Sam.

This is Samantha’s tip to Sam.  To be a Super Saver, all Samantha had to give up was a little bit of house, and drive a slightly less new, less flashy car.  She didn’t have to reuse dryer sheets, rinse and re-use her ziplock bags, or make her own laundry detergent to retire at 44.  Super Saver Samantha simply selected a few areas to be a little frugal where she could have spent a bunch of money and made some smart choices early on to set her on the path to a very early retirement.

I hope you all enjoyed Saver Sam and Super Saver Samantha’s journeys to retirement!  Just remember, spending less means saving more, and needing a smaller investment portfolio to retire or be financially independent.

Are you on the path to beat Super Saver Samantha by retiring at age 44 or earlier?  Can you come close?

Low Expenses Lead To Early Retirement While Still Young

Saving and investing large amounts of money every year is a great way to get wealthy.  Every year your new investments add to your portfolio value, and the investments grow on their own over time.  Eventually you have a lot of money.

Growing your investment portfolio is only half of the secret to reaching financial independence.  The other half is keeping your expenses low.

 

Why Expenses Are Important

The lower your expenses, the less income you need each year to fund your lifestyle.  In our case, our income during retirement will come primarily from investments like bonds and equities.

If one spends $30,000 per year, then they will need a portfolio value of $750,000 to  $1,000,000 if they plan on spending 3% to 4% of their portfolio value each year.  The 3% to 4% is called a “Safe Withdrawal Rate” or SWR in the financial planning community.

 

Safe Withdrawal Rate

The Safe Withdrawal Rate is a general rule of thumb financial planners use to estimate how much an investor can withdraw from an investment portfolio each year without running out of money during the investor’s lifetime.  The rate is lower if you want to fund a longer retirement, since you must leave more money invested over time to ensure your portfolio doesn’t run out of money.

For a very early retiree in their 30’s or 40’s, a withdrawal rate around 3% to 3.5% is probably safe and will ensure the very early retiree has plenty of funds available during their lifetime.  Someone retiring at a traditional age in their late 50’s or 60’s might select a 4% withdrawal rate (or higher if they expect significant pension or Social Security payments).

The impact of a slightly different withdrawal rate can be huge.  Since I retired in my 30’s, I plan to use a withdrawal rate around 3%.  In practice, this means I can withdraw $30,000 from a one million dollar portfolio.  If I had a retirement budget of $75,000, I would need a $2,500,000 investment portfolio ($2,500,000 x 3% = $75,000).

Now let’s pretend I was 60 years old and planning on a more traditional retirement with social security starting in my late 60’s.  I could take a little more risk in the amount of my portfolio withdrawals, and I would be able to choose a higher withdrawal rate, like 4%.  To the casual observer, the difference between 3% and 4% seems tiny.  Only 1%, right?

In fact, the 1% difference means the 30-something early retiree must have a much larger investment portfolio than the 60 year old.  Let’s look at the numbers.

At a 4% withdrawal rate, a retiree only needs $750,000 in investments to withdraw $30,000 per year.  A $1,875,000 investment portfolio will produce $75,000 in annual withdrawals at a 4% withdrawal rate.

 

SWR

To summarize, the 30-something early retiree needs $1,000,000 to be able to withdraw $30,000 per year, whereas the 60 year old retiree only needs $750,000, or $250,000 less than the 30-something guy.

For higher withdrawals at $75,000 per year, the 30-something guy needs $2,500,000 whereas the 60 year old only needs $1,875,000.  The 60 year old, using a 4% withdrawal rate instead of a 3% withdrawal rate needs $625,000 less than the 30-something guy!  A seemingly small 1% change in the withdrawal rate led to a huge $625,000 difference in how much is required to fund retirement.  

I have to point out how withdrawing more money each year to fund annual expenses means a larger investment portfolio is required.  Take the 30-something early retiree.  At a miserly spending level of $30,000 per year, the 30-something needs “only” $1,000,000.  Choose the high life by spending a generous $75,000 per year, and the required investment portfolio value balloons to $2,500,000!

The 30-something early retiree would need an extra $1.5 million to fund the higher spending level!  For most people who aren’t rockstars or NBA point guards, saving a million dollars is hard enough.  Saving another $1.5 million could take many more years or decades, meaning retiring to a life of luxury is unlikely in one’s 30’s.

Many people won’t be comfortable living on a mere $30,000 or so per year, and as a result might find that work isn’t so bad and stick with it for many years to fund a more lavish retirement (and spend more along the path to retirement!).  That’s okay too, and a choice each person should make.  The point I am trying to illustrate is that the less you spend, the less you need to save in your investment portfolio to fund your early retirement.

Less Spending Leads To More Savings

At this point, I assume I have done my job of explaining how lower spending means you need less money to retire early.  Spending less money each year also means you can save more money!  It makes perfect sense when you think about it.  If you don’t spend all of your paycheck, you have to do something with what is left over.  Put it in your checking account.  Stuff a bunch of benjamins under your mattress.  Or you could be a responsible and boring savvy saver and put it in your IRA or 401k.  Quite often, boring people have large, exciting investment portfolios.  

In my next post, I review the story of a set of fraternal twins, separated at birth, but both prone to saving.  One twin is a Super Saver and manages to retire at a very early age.  Stay tuned!

Early Retirement at 33: An Overview

One of the most popular page at Root of Good is the “I Retired at 33!” page where I introduce myself and talk a little about Root of Good.

I assume that means people are interested in the story of how I retired at 33.  In this post, I’ll give a quick summary of how I managed to pull off retirement at a very early age.

 

Early Years

I started finding ways to make money at an early age. Buying candy in bulk and selling individual pieces for a quarter each at school.  A newspaper route.  Mowing the neighbor’s yard.  Tutoring kids after school.

During high school, I had a few different after school jobs, and found full time positions over the summers.

Of the money I earned, I saved a large proportion of it.  I was a self-made thousandaire before I even left high school!

College

College

I decided to go to the nearby state university.  It was a very good school for engineering, and very inexpensive ($3000 per year back in 1998).  My SAT scores could have gotten me into a more prestigious school somewhere else, but in hindsight the local state university was the best choice.

I took more than the normal 15 credit hours each semester and graduated in three years.  Not only did I save a year of tuition, I also made working and earning a (hopefully) good salary one year closer.

During my three years in undergraduate, I had a series of jobs that were interesting, paid well, and/or provided useful experience for my career – civil engineering.  I also managed to win 11 academic scholarships and a few research grants.

By the time I finished undergrad, I had a nice bit of savings accumulated.

I’m planning on using many of these same tactics to help my own three kids get through college without spending several hundred thousand dollars.

Instead of heading into the difficult job market of 2001, I went to law school.

Lucky for me, the law school was also in-state, which made tuition relatively affordable.  Around this time my wife and I bought a condo together where we lived during my law school days.

I worked a few summers at law firms and various governmental legal employers.  Eventually I figured out I didn’t really want to practice law for a living.  The hours sucked big time if you wanted to make the big six figure salaries!  I was all about making some money, but not at the expense of a life outside work.

At one of these summer jobs, there was very little actual work to do, so I decided to start my own business.  I ended up making over $30,000 in the next couple years with relatively little effort.

Figuring a Juris Doctor might come in handy one day (or at least look cool on my office wall), I finished up law school and immediately started a great job at an engineering consulting firm in Raleigh.

We tried (but failed) to sell our condo when we moved back to Raleigh, so we rented it out to some PhD students at the university.  A year or two later the California property boom sloshed some excess money our way when a nice couple from Santa Clara bought our condo sight unseen for a third more than we paid for it.  More money for our portfolio!

 

Optimal Spouse Selection

Mrs. RootofGood and I married right before I finished law school.  She is obviously perfect in every regard.  She also obviously reads this blog, so I have to say that.  Our similar outlooks on personal finances have been a huge wealth generator.

It may come as no surprise that we are both very frugal about virtually everything.  We agree on saving a large part of our incomes.  We take vacations off season because crowds are thinner and our wallets get fatter (er, less thin).  Our furniture might be uncharitably described as dorm room chic.  Our kids wear hand me downs alongside inexpensively purchased new clothes.  We live in a modest neighborhood and drive modest cars.

We made these frugal choices so that one day we can retire early and not have the stress and time demands from a regular job burdening our daily lives.  There is more to life. 

 

Work

Good Job With Benefits

I found a good job straight out of college that paid well and had a really good set of benefits like a low cost 401k plan with a nice 6% matching contribution and an Employee Stock Ownership Plan.

Mrs. RootofGood found a job at a great company with even better benefits, although the pay wasn’t the highest at first.  Her 401k plan was better than mine and had an even larger matching contribution!  The health insurance plans offered at her firm were excellent and almost free, even for family coverage.

During our careers, we both focused on expanding our skill sets and increasing our responsibilities in the hopes that our salaries would rise over time.  My salary jumped big time once I earned my Professional Engineer’s license.  Mrs. RootofGood earned a number of promotions and raises.

This is almost certainly un-American, but we dumped raises into investments instead of buying more crap.

 

Maxing Your Savings

As soon as we started working right after college, we immediately started contributing the maximum to our 401k’s and IRA’s.  It made our paychecks artificially tiny.  Puny.  But maxing out savings options is like putting your net worth on steroids.  There’s muscles popping out all over the place!

Eventually we had to seek out more places to stash money.  Enter the Health Savings Account, the 457, and after the kids were born, 529 college savings plans.  After filling up those accounts, brokerage accounts held the rest of our investment contributions each year.

 

Don’t Pay Taxes

That’s a typo.  Pay as little as possible!  Contributing to 401k’s, traditional IRA’s, health savings account, 457, and a 529 college savings account kept our taxable income low.  We also paid for child care through the Childcare Flexible Spending Account offered by Mrs. RootofGood’s employer.

Our tax strategies have been so successful that we ended up with a federal tax bill in 2012 of $600 in spite of gross earnings over $140,000.  I consider an average tax rate under 0.5% to be pretty good!  2013 is even better.  Our tax rate is 0.1% ($150 tax on $150,000 income).

We didn’t do anything sneaky or illegal.  In fact, I do our tax returns on paper and one of my rules of investing is to keep it simple enough so it doesn’t make our tax returns insanely difficult.

 

Home Sweet Home

A Permanent Starter Home

Right as I was finishing law school, we took our cash from student loans, summer jobs, and profits from business ventures and dumped them into a house (along with a small loan from my parents that helped us both out).

We investigated buying land and building a house, and eventually rejected that option as it would be very expensive to custom build a house compared to buying a “used” house.  Plots of land close to town were more expensive than whole houses (and the land underneath them!).

We bought the house thinking it would be a starter home.  Ten years later, and after ample fix ups, we are still here.  Now it is a permanent home, since it meets our needs well.  It still needs work, but what house doesn’t?

Houses can be expensive.  Of course, we weren’t silly enough to pay full price for the house!  The City put the house up for auction and we were the winning bidder at a price 20-30% below similar houses.  There was a little more research, due diligence, and risk taking on our part, but it has worked out well with no surprises.  Except the lake the City rebuilt for $2 million right behind our house soon after we moved in.  Somehow I concealed this awesome fact from Mrs. RootofGood.

We have been lucky to refinance the house more times than I can remember, pushing the mortgage rate down to 5%, 4%, 3%, 2.5%, and now 1.99% (for 3 more years until it is paid in full).  Each time we refinanced, we tended to make the loan term shorter to help pay off the house quicker.

 

Smart Investments

I started out investing with Edward Jones, a full service brokerage firm.  They “fully serviced” me by providing expensive investment products.  I’m lazy, so I stuck with them for a couple years and paid high fees.  Eventually Mrs. RootofGood’s compliance department gave me the kick in the butt I needed, and made me switch to an approved brokerage firm, so I had to leave Edward Jones.

Switching brokerage firms to Fidelity and Vanguard cut our investment costs and hidden fees (expense ratios) to almost nothing.  In addition, the online access was far superior at both firms.  Now I could manage and automate my investments from the comfort of my own couch.  In the middle of the night.

We have saved close to $40,000 on investment expenses by switching to a low cost provider like Vanguard and Fidelity.  That’s a year or two of living expenses!

The kids

 

Kids

Yeah, we had them.  Lots of them.  Three to be exact.

Recent really scary news reports indicate it costs like $300,000 to raise each kid.  I can’t figure out how they spend so much money on little creatures whose favorite things to play with are cardboard boxes and shiny pieces of plastic up until age 7 or so.  And that $300,000 figure didn’t even include college (which probably won’t cost more than $20,000-30,000 per child)!

The truth is, you don’t have to spend a ton of money on your kids, and they will still love you at least 94% as much as if you had spent $300,000 on them.

Moral of the story: don’t spend excessive money on them.  Spend time with them.

 

Know What You Spend, Budget If Necessary

Until four years ago I never closely tracked what we spent.  We have never had a budget.  “Save money on everything” is a reflex, and keeping expenses low comes automatically for us.  Apparently this is not true for everyone, so budgets could be a good thing if you have a spending problem.

I started out with a simple spreadsheet where I copy/paste all credit card and checking account transactions for each month.  The spreadsheet automatically summarizes the expenses for each quarter and each year.

Income Summary

Personal Capital looks beautiful!

 

I use Personal Capital to track all spending as well as all investments.  It provides a summary of all income, expenses, and investments in one screen.  Incredibly easy to set up and even easier to use.

This is a great tool for figuring out exactly where your money is going.  Knowing how you spend lets you determine whether you get value for your dollars, and where you might be able to focus efforts to reduce expenses further.

After I started tracking expenses in very fine detail, I realized we weren’t spending as much as I had assumed.  Core expenses were around $24,000 per year.  This meant we were even closer to early retirement (lower annual expenses = smaller investment portfolio required to fund those expenses).

Bahamas

Almost Free Vacations

We like to travel, but we don’t like to spend a lot of money.  This is one category of spending where we have paid very little over the years, yet enjoyed some pretty amazing vacations.  I have never sat down and figured out how many countries we have visited exactly.

Ok, a quick mental count says about ten, but all the Caribbean islands quickly blend together with their white sandy beaches and crystal clear blue water.

How did we save money?

We really enjoy going on cruises, too.  They aren’t always the absolute cheapest form of vacation but you can get a good taste of luxury for rock bottom prices if you can swing a cruise during the low season between September and February.

Fun times in the Bahamas on our January 2016 cruise.

Fun times in the Bahamas on our January 2016 cruise.

 

Weathering the Great Recession

Boy howdy, some people lost a freaking ton of money during that little economic blip called “The Great Recession”.  We lost a boat load too.  And then made it all back.  In fact, I switched up the investments to a more aggressive allocation in the middle of the 2008-2009 crash and it has paid off well (I’m retired after all).

It truly hurts to hear stories of people who lost half their investments in the Great Recession, then sold everything and stayed out of the market during the recovery in 2010-2013.  We basically did the exact opposite and piled money into risky investments during the 2008-2009 market crash.

Sure, it was a little scary seeing the market crash 7% in a day.  But I call those “buying opportunities”.  The money we were “losing” was long term investments, so why did I care if one day it went down 7%?  I care what these mutual funds will be worth in 10 or 20 years.

 

The PlanMake a Plan

We made an early retirement plan right after I started my post-college job.  We had all this money coming in the door.  Way more money than we had before.  I knew back then that this was a powerful force that, if harnessed, could lead to something big one day.

Over the years the plan changed and our ideal amount of investments changed numerous times.  These changes are unavoidable, since knowledge of finances and investments increases over time, and your interests and desires also change.  We kept fine tuning the plan as our investments and our family grew.

 

Embracing the Unknown

I would be lying if I said we have a 100% certain plan to be retired early forever and there is no chance we will ever have to work again.  There is always uncertainty.  The best you can do is plan for it, and understand that flexibility will get you a lot further in uncertain times than rigidly holding to a plan.  However, I don’t think we’ll ever run out of money in early retirement.

 

Securing Affordable Health Insurance In Early Retirement

Everyone (in the US at least) worries about finding and keeping affordable health insurance in retirement.  With the Affordable Care Act, those concerns are largely moot.

Our family obtained insurance coverage with $0 deductibles through the Healthcare.gov exchange for $125 per month.  Though heavily politicized, the Affordable Care Act is hugely beneficial for early retirees because it provides guaranteed issue health insurance for everyone.  Those with incomes under 400% of the poverty level will most likely qualify for tax subsidies to help pay for monthly insurance premiums.  In our case, because our income is much lower while retired, we qualify for subsidies over $900 per month.

 

Reaching Our Goals

Over the last six years the stock market produced a lot of wealth.  We went from having “lots of money” to having “enough”.  Having enough money to live comfortably for the indefinite future is a big deal.

After my job ended, I pulled out The Plan and quickly figured out we have “enough”.  Now my days are free and I can do (or not do) whatever I want.  Mrs. Root of Good tried (but failed) to retire in 2015.  She switched to part time work (for full time pay) and eventually joined me in early retirement in early 2016.  The last two years she worked, she had two paid summers off so we could travel to Canada for two and a half weeks and to Mexico for over seven weeks.

From the cruise ship

Accessing our 401k’s and IRA’s without penalty

We have approximately 70% of our investment portfolio in traditional 401k’s and IRA’s.  Withdrawals from these types of accounts usually incur a 10% early withdrawal penalty.  However, there are two methods that allow early retirees to withdraw significant sums from these tax deferred accounts without paying the 10% early withdrawal penalty.

The first is the “72t rule” that requires “substantially equal periodic payments” from the commencement of early withdrawals until age 59.5.  Not wanting to lock myself into a fixed series of withdrawals for the next 25 years, I chose to go a different route.

The second method of accessing tax deferred accounts without paying a 10% early withdrawal penalty is the Roth IRA Conversion Ladder.  Through this method, I am converting small parts of my traditional 401k and IRA accounts to Roth IRA each year.  After a five year waiting period, I’m able to withdraw those amounts converted penalty free.

 

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In a nutshell, this is the story of how I went from a thousandaire to a millionaire in about ten years.  The rest of our early retirement story continues to be written every day.

 

To keep informed of the latest posts at Root of Good, make sure to subscribe on Facebook, Twitter, or by email or RSS reader (in the column to the right).

 

If you want to find out more about any particular area of our lives or finances, please share with me below!  

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