Happy Holidays!

hatchetfish

If there’s life on other planets, ever wonder how bizarre it might be?

Certainly not as bizarre as these very real life-forms on this very strange world…

Earth -- this way sign

So: Is Earth’s Life Unique in the Universe?

As for us, we are off to Los Angeles for the holidays. We’ll visit some family and, after a year, I get to take a group of jlcollinsnh readers at Dreamworks up on their offer to visit and take an insider’s tour. Very exciting! Plus I’ll be doing my first ever reader meet-ups while out there. Then I’ll get to head back East by rail for my first ever transcontinental (LA-Boston) train trip.

But before all that I want to wish all my readers, regardless of where in the galaxy (or which galaxy for that matter) you may be:

A Joyous Holiday Season

and 

a Happy, Healthy and Prosperous New Year!

Until next year, here are some random cool things that have caught my eye….

Are you about to be engaged? Congratulations! Now read these before you buy the ring:

A Brilliant Illusion

Have you ever tried to sell a Diamond?

I wish I had.

On the other hand, I’m glad I’ll never take this walk on Christ the Redeemer. Yikes.

itchy feet

Itchy Feet and an interview with Malachi Rempen

Garden video

The Garden, a video

paris street art

Paris Street Art

house in cliff

40 Very Cool Places in the World — The number I’ve visited: O

oakleykansas

Flatlands

Growing Pennies  — The next time you are negotiating your salary, offer them this deal: One penny a day, doubled each day.

Stop putting your money in the mattress

How much is $100 worth in your state?

gargolyal

What’s up with Gargoyles?

mag on painting

Magazine covers superimposed on classic art

sculpture cloths pin

Scluptue vanishing

Sculpture tripping

And more cool sculptures 

two-ocean-creek-4[2]

Two Oceans Creek: The branch to the left ultimately drains into the Atlantic and to the right, the Pacific.

House in moat

flooding-houses

People having a worse day than you

Finally, we’ve all seen videos of stunts gone horribly wrong. Here’s ~5 minutes of how cool it is when they go right:

People are Awesome

OK, Halloween is past, but it’s not to soon to think about your pumpkin plans for next year:

pumpkin-carving-by-ray-villafane-studios-9

More cool carvings

 Vintage Cars from between the 1900s and 1920s (6)

Vintage cars from 1900-1920

Dumpster living

Dumpster Living

weirdest-buildings-35

Weird Buildings

Finally, I’ll leave you with these seriously cool photos:

Best pics-KHellouin_funbest pics-lake on cliffBest pics-scottish_blackface_sheep_3_900

Here’s More

Posted in Random cool things that catch my eye | 2 Responses

Micro-Lending with Kiva

Kiva woman

She looks like a good risk to me.

For the past few months I’ve had $1500 burning a hole in my pocket.

Back in August I was working on a project helping a friend with her business. I had forgotten we had agreed on a $1500 fee until, as I was headed to the airport, she pressed a check into my hand. Perhaps this is why I’ve considered it “found” money ever since.

As such, and not having any other plans for it, I set to figure out something interesting to do with it.

I considered squandering it on something absolutely frivolous. But this goes against my nature and so I lack imagination along these lines.

I considered buying something we want and/or need. But, truth be told, we don’t want or need much and we are more interested in getting rid of stuff than acquiring more.

I considered giving it away, but we have a funded system already in place for that.

I considered, this being the Christmas season, converting it into 75 twenty-dollar bills and handing them out at the local shelter or soup kitchen. That could be interesting and fun, but would likely land me on the local evening TV news. Bleech.

So I gradually forgot about it. Floating about in our checking account, it seemed destined for covering the most pedestrian of expenses.

Then a bit of fortunate serendipity brought an old post David had written last December on The New York Budget about his experience with Kiva and micro-finance lending.

Micro-finance lending is a concept I came across a few years back and it has always intrigued me.

microfinance-pyramid

In many parts of the world, one of the key obstacles to rising out of poverty is the lack of access to affordable capital. This makes it extraordinarily difficult to start and/or grow a business.

Those of us living in the developed world tend to think of the key to financial success as a job. Indeed, we have come to think of access to jobs as a right. But in the developing world, not only is there no such right, such jobs are few and far between. Livings are made not by paychecks, but by hustle. You buy a box and some polish and shine shoes. You buy a cow and sell milk, or a chicken and sell eggs.

Of course, this takes capital. But not much, and this is where Kiva comes in. Using Field Partners around the world, Kiva connects lenders with borrowers. Their website provides profiles of the people looking to borrow and the amount they need. As a lender, you can provide as much or as little of any given loan as you choose. It only takes $25 to start.

In the comments on David’s post, I asked if he was still enthusiastic about his participation with Kiva a year on. He confirmed that he was. I then turned to Charity Navigator: Kiva for a bit of due diligence. Very impressive scores:

  • Overall: 98.76 (out of 100) for a top rating of 4-stars
  • Financial: 98.26 (out of 100)
  • Accountability: 100 (out of 100)

The next step was a fun tour around the world looking at the profiles and in the process getting a brief and fascinating insight into many lives. When the dust settled, we had made 16 loans, two for $50 each that completed the fund raising for those borrowers and the rest in $100 chunks. Here’s a sample:

  • In Palestine: To Kahadejeh to help repair her tractor.
  • In Tanzania: To Beatrice to help her buy used clothing for resale.
  • In Mongolia: To Bayarsaikhan to help him buy two cows.
  • In Tajikistan: To Sitora to help her pay for tuition.
  • In Philippines: To Cirila for organic fertilizer to help restore the soil she farms.
  • In Sierra Leone: To Hawanatu to help her buy stock for her grocery store.
  • In Nigeria: To Philibus Maigemu so he can afford to store the maize he grows for better prices later.

As you can see, we were fairly eclectic in our choice of country, gender and loan need. But you can sort your own search however you please.

Now here’s what I think is really cool about all this. Since these are loans, the money gets paid back. Kiva maintains a status report of all your loans and their payment schedule. As payments are made you can choose to have your money returned or you can re-lend it. Your money can help make the world a better place over and over and over again. That’s our plan.

If you have a financial mind like I do, you are probably wondering about default rates and currency risk. Here you go:

  • Default rate: ~1.11%
  • Loss to currency exchange risk: ~0.09%

Plus, according to Charity Navigator, the IRS accepts donations to Kiva as tax-deductible. But, as Greg points out in the comments below, this refers to donations made to Kiva to cover their operating expenses and not any micro-loans you make thru the site.

So if you’ve got some extra dough burning a hole in you pocket, and you know you do, click on this Kiva link and sign up.

Yep, this is an affiliate link, but not for jlcollinsnh. I figure since David brought this all to my attention, he deserves the link. When you sign up he’ll get a $25 credit in his Kiva account, which he has pledged to promptly lend out. It will help him reach his goal of having a loan in every country they offer.

If it went to me, my imagination just might kick in and the next thing you know I’d be squandering it on…

ice ball molds japan-ice-565

…a nice $1800 set of Japanese Ice Ball Molds

Addendum 1:

Several concerns about Kiva have been raised in the comments below. There are basically four:

1. Does the money you lend actually go to the individuals you chose?

2. Why is 34% the average of fees and interest charged by Kiva’s Field Partners?

3. Is Kiva, and micro-lending, charity?

4. Given the high rates of inflation in many of the countries where money is lent, how is it that lenders typically see their dollar-based loans paid back in full in dollars?

In the comments below you’ll find some lively discussion regarding these, including responses from Kiva and my take.

Addendum 2: 

Also in the comments, with an excellent Executive Summary, reader Gerrald introduces us to a micro-lending alternative: Zidisha

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Updates:

Chautauqua in Ecuador February 7-14, 2015

We still have a few open spots so it’s not to late if you care to join us. Here’s the link to the registration page. But registration will close on December 20th, so if you plan to attend you’ll not want to put it off.

If you want to know more about what this is all about:

LA meet-ups: 

Looks like we’ll have two reader meet-ups and I’ll be visiting a group at Dreamworks:

  • Reader Meeting 1: Garden Grove lunch December 27, 2014
  • Reader Meeting 2: Glendale lunch January 3, 2015
  • Dreamworks: January 2, 2015

The Dreamworks event is private, but if you’d like to join either of the other two let me know and I’ll put you in touch with the organizers.

Hope to see you in Ecuador or California or someplace else down the road a piece!

Posted in Life, Money | 60 Responses

Chautauqua February 7-14, 2015: Escape from Winter

chautauqua-abilene-350

We’ve already missed this one in Abilene, 1929

Courtesy of Daily Yonder

If you have read this blog for long, or any of my Chautauqua posts, you know that for the last couple of years each Fall we have taken a small group to Ecuador for a week of adventure and conversation surrounding life, freedom, happiness and investing. We call it a Chautauqua, an old Native American word that Robert M. Pirsig, the author of  “Zen and the Art of Motorcycle Maintenance,”  translates loosely as

“…an old-time series of popular talks intended to edify and entertain, improve the mind and bring culture and enlightenment to the ears and thoughts of the hearer.”

Both times now we’ve attracted an incredibly diverse and fascinating group of people. Almost everyone has described it as one of the (if not the) best weeks of their lives. To give you a flavor of what goes on, here’s my recap of the last one: Lighting Strikes Again.

chau nick 1

Hacienda Cusin

Photo by Nick, Chautauqua alumni 2014

We all know that, in reading blogs like this one, we are walking the path less traveled and frequently not understood by those in our daily lives. But for this one week we get to be surrounded by others who “get it.” The fact we get to do this in a stunning beautiful country while staying  at Hacienda Cusin, a gorgeous old estate and monastery built in the Andes mountains in 1602, still leaves me a bit slack-jawed.

And this time I also get to escape, if only for a week, a bit of the sometimes brutal New Hampshire winter. WooHoo!

As before, we’ll have four speakers:

Cheryl Reed

Cheryl Reed is the owner and founder of Above the Clouds Retreats and one of the most relentlessly happy people I’ve ever met. Here’s a story:

The son of her farm worker borrows her truck and promptly rolls it. Her response to this very poor young man: “There are three responsible parties for this. You, who rolled the truck. I, for letting you take it. God, for permitting it to happen. You will pay a third of the cost (bartered in his labor as he had no money), I will pay for a third and I will see what I can do about getting the final third from God.”

This delivered with a smile, a wink and a laugh. Clearly, Cheryl is someone I can learn from. Maybe you can, too. Her talk is Following Your Bliss.

paula pant

Paula Pant is a journalist, globetrotter, entrepreneur, investor who has traveled to 32 countries. She’s her own boss and lives on her own terms, and she’s figured out how to live and work anytime, anywhere in the world. She writes the wonderful and wonderfully named blog Afford Anything

Her talk is Three Rebellious Roads to Financial IndependenceIf you’re ready, Paula can teach you how to shatter limits and maximize your life.

I’m proud to call her a friend.

tyler lewke

Tyler Lewke is new to me. So new, in fact, this is the only picture of him I could find. Here’s what Paula has to say about him:

“…a rebel who blogs at the crossroads between capitalism and spirituality. He’s a corporate CEO who believes that “loving kindness … creates profit.” He’s the offspring between a genius scientist and a hippie (literally and symbolically), he hasn’t had an employer since age 17, and he blogs daily about the intersection between “hard core capitalism” and “contemplative service to others.” Tyler will speak about finding sustainable happiness in work and life.”

OK, I’m intrigued! How about you? Looking forward to meeting and hanging out with you, Tyler!

JLC

Then, of course, there’s me.

Here at jlcollinsnh we discuss mostly why you need F-you money and how to grow yours. In our conversations, Cheryl and I agree that money for the sake of money is almost completely uninteresting. But it is a wonderful tool. Financial independence allows greater freedom and range in the pursuit of happiness. That’s why my topic at the Chautauqua will be How to Harness the World’s Most Powerful Wealth Building Tool.

So these are your speakers and hosts. But unlike many events, we won’t be just getting up, giving our talks and disappearing. We’ll be hanging out with you all week. This is part of what makes these Chautauquas so special for us and for the attendees.

You’ll also have a chance to select two of us for private one-on-one-sessions. Each will be an hour-long and you’ll have a chance to discuss whatever issues are most pressing for you. To have time for these is one key reason why we limit attendance. While we’ll try to accommodate everybody’s first and second choices, slots will be allocated on a first-come-first-served basis. So if you want me, or if you want to be sure not to get stuck with me, you’ll want to sign up early.

We’ll also be exploring a bit of Ecuador together. We’ll:

Speaking of giving back, as with every Chautauqua, a full 10% of all profits will go to the The Project One Corner.

You’ll also have free time to visit the famous Otavalo Market, horseback ride, tour a rose plantation, paraglide, hike the mountains or just chill out at the Hacienda.

For more insights check out Paula’s excellent post. I especially like her take on who should come and, importantly, who should NOT come.

And Tyler’s: Ready for Adventure?

If you decide you should, and I hope you do, here is the registration page.

As before, attendance is limited. In the past we’ve been able to accommodate 25 attendees. But because Hacienda Cusin is in demand we were unfortunately not able to secure as many rooms as before. This means we’ll only be able to accommodate ~15-20 attendees, depending on how many room-sharing couples sign up. So this will be an even more intimate gathering.

Notes:

Los Angeles

December 26 – January 4 I plan to be in Los Angeles. I’ve never done a “reader meet-up” before, but I think it would be great fun. Maybe a small group of us meet for lunch and hang out for awhile? If you are interested let me know and, of course, I’ll need a volunteer(s) to select a venue and organize it.

LA update: Looks like we’ll have two reader meet-ups and I’ll be visiting a group at Dreamworks:

Reader Meeting 1: Garden Grove lunch 12/27
Reader Meeting 2: Glendale lunch 1/3
Dreamworks: 1/2

T&N

If you read my post Tuft & Needle: A better path to sleep and have an interest, you’ll want to read the Addendum just added to it.

Posted in Chautauqua | 17 Responses

Stocks — Part XXVII: Why I Don’t Like Dollar Cost Averaging

pile of money

At some point in your life you may find yourself in the happy dilemma of having a large chunk of cash to invest. An inheritance perhaps, or maybe money from the sale of another asset. Whatever the source, investing it all at once will seem a scary thing as we discussed in Part XVIII.

If the market is in one of its raging bull phases and setting new records each day, it will seem wildly overpriced. If it is plunging, you’ll be afraid to invest not knowing how much further it will fall. You risk wringing your hands waiting for some clarity and, as you should know by now, that will never come.

The most commonly recommended solution is to “dollar cost average” (DCA)  your way slowly into the market. The idea being, should the market tank, you will have spared yourself some pain. I’m not a fan of this strategy and will explain why shortly, but first let’s look at exactly what dollar cost averaging is.

When you dollar cost average into an investment you take your chunk of money, divide it into equal parts and then invest those parts at specific times over an extended period.

Let’s suppose you have $120,000 and you want to invest in VTSAX, the total stock market index fund we’ve been discussing throughout this Series. Now having read this far in it, you know the market is volatile. It can and sometimes does plunge dramatically. And you know, therefore, this could happen the day after you invest your $120,000. While unlikely, that would make for a very miserable day indeed. So instead of investing all at once you decide to DCA and thus eliminate this risk. Here’s how it works.

First you select a time period over which to deploy your $120,000, let’s say the next 12 months. Then you divide your money by 12 and each month you invest $10,000. That way, if the market plunges right after your first investment you’ll have 11 more investing periods that might perform better. Sounds great, right?

This does eliminate the risk of investing all at once, but the problem is that it only works as long as the market drops and the average cost of your shares over the 12 month investing period remains on average below the cost of the shares the day you started. Should the market rise, you’ll come out behind. You are, basically, trading one risk (the market drops after you buy) with another (the market continues to rise while you DCA meaning you’ll pay more for your shares). So which risk is more likely?

Assuming you were paying attention while reading the earlier Series posts, you know that the market always goes up but it is a wild ride and no one can predict what it will do in any given day, week, month or year. The other thing to know is that it goes up more often than it goes down. Consider that between 1970 and 2013, the market was up 33 out of 43 years. That’s 77% of the time.

At this point you are probably beginning to see why I’m not a DCA fan, but let’s list the reasons anyway:

  1. By dollar cost averaging you are betting that the market will drop, saving yourself some pain. For any given year the odds of this happening are only ~23%.
  2. But the market is about 77% more likely to rise, in which case you will have spared yourself some gain. With each new invested portion you’ll be paying more for your shares.
  3. When you DCA you are basically saying the market is too high to invest all at once. In other words, you have strayed into the murky world of market timing. Which, as we’ve discussed before, is a loser’s game.
  4. DCA alters your asset allocation strategy. Suppose you had $100,000 and your allocation was 50% stocks, 25% bonds and 25% real estate equity in an investment house. Now you decide to sell the house, planning to invest the $25,000 from it into your stocks for a 75/25 stock/bond allocation. If you decide to DCA, your real allocation in the beginning is not your 75/25  target. It is 50/25/25: 50% stocks, 25% bonds and 25% in cash.  You are holding an outsized allocation of cash sitting on the sideline waiting to be deployed. That’s OK if that’s your allocation strategy. If it’s not you need to understand that, in choosing to DCA, you’ve changed your allocation in a deep and fundamental way.
  5. Unlike stocks, the cash you have waiting to invest is not earning dividends. For example, VTSAX pays ~2% in dividends.
  6. Your cash should earn some interest, but with rates being under 1% and inflation running at around 3%, each year your cash effectively loses ~2%. Combined with the dividends not collected (Point #5) that’s a 4% drag on your returns.
  7. When choosing to DCA, you must also chose the time horizon. Since the market tends to rise over time, if you chose a long horizon (say, over a year) you increase the risk of paying more for your shares while you are investing. If you chose a shorter period of time, you reduce the value of using DCA in the first place.
  8. Finally, once you reach the end of your DCA period and are fully invested, you run the same risk of the market plunging the day after you are done.

What to do instead?

 path middle-path1-1024x561

Well, if you’ve followed the strategies outlined in Part VI, you already know whether you are in the wealth accumulation or wealth preservation phase.

If you are in the wealth accumulation phase you are aggressively investing a large percentage of your income. In a sense, this regular investing from your monthly income is a form of unavoidable dollar cost averaging and it does serve to smooth the ride. The big difference is you’ll be doing it for many years or even decades to come.

But you are putting your money to work as soon as you get it in order to have it working for you as long as possible. I’d do the same with any lump sum that came my way.

If you are in the wealth preservation stage, you have an asset allocation that includes bonds to smooth the ride. In this case, invest your lump sum according to your allocation and let that allocation mitigate the risk.

If you are just too nervous to follow this advice and the thought of the market dropping shortly after you invest your money will keep you up at night, go ahead and DCA. It won’t be the end of the world.

But it will also mean that you’ve adjusted your investing to your psychology rather than the other way around.

Posted in Stock Investing Series | 43 Responses

Jack Bogle and the Presidential Medal of Freedom

jack-bogle

Jack Bogle 

Jack Bogle on why he started Vanguard

Above is a picture of Jack Bogle, the founder of Vanguard, the creator of the modern low-cost index fund and my personal hero. If you aspire to be wealthy and financially independent, he should be yours as well.

Before Mr. Bogle the financial industry was set up almost exclusively to enrich those selling financial products at the expense of the customers. It mostly still is.

Then Mr. Bogle came along and exposed industry stock-picking and advice as worthless at best, harmful at worst and always an expensive drag on the growth of your wealth. Not surprisingly, Wall Street howled in protest and vilified him relentlessly.

Mr. Bogle responded by creating the first S&P 500 index fund. The wails and gnashing of teeth continued even as Bogle’s new fund went on to prove his theories in the real world:

The best performance over time is achieved by buying and holding all stocks in a low-cost index fund. Stock picking, and the actively managed funds that employ it, are fated to fall behind, dragged down even further by their higher fees. So rare is the active manager who can actually outperform over time, the few that do become famous house-hold names:  Buffett, Lynch, Price.

As the years rolled on and the evidence piled ever higher, Mr. Bogle’s critics began to soften their voices; mostly I’d guess because they had begun to sound pretty silly. Other fund companies, realizing that their customers were becoming ever less willing to accept high fees for questionable performance, even began to offer their own index funds in an effort to keep them from walking out the door. Personally I’ve never believed their hearts were in it, and for that reason my money stays at Vanguard.

Almost everyday now I get an email or a comment on this blog thanking me for the investing information I provide, especially in the Stock Series. I’m deeply honored by this and such messages are deeply motivating. But everything here has it’s roots in the work Mr. Bogle has done and it is he who has provided the essential tools we need to most efficiently and quickly reach financial independence. If I’ve provided a flickering candle to light the way, his work has been a white-hot sun.

So, if you are one of the many readers who have written to me in thanks, or if you haven’t but have felt you’ve found benefit here, I ask you to join me in making possible a honor that my personal hero and our collective financial saint, Mr. Bogle, truly deserves:

Presidential Medal

The Presidential Medal of Freedom

The fact that Mr. Bogle is being considered for this honor was recently brought to my attention by my pal Gouri, who I met and got to know at this year’s Chautauqua.* If you want to join in this effort, Gouri’s email to me below tells you how:

As you probably know, Boglehead leaders submitted a letter nominating Bogle for the Presidential Medal of Freedom, one of the highest civilian honors:

http://www.bogleheads.org/blog/john-bogle-nomination-for-the-presidential-medal-of-freedom/

Given that Jack is 85, has had at least six heart attacks and one heart transplant, time is precious to have him receive the honor in his lifetime.

Please consider sending a personal card, letter, postcard or email via White House website, however simple or detailed, to President Obama to help nudge the cause forward:

The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Alternate address per http://topic-finder.com/finance/investing/general/37524-john-bogle-presidential-medal-of-freedom.html :

Executive Office of the President
The White House
ATTN: Executive Clerk’s Office
Washington, DC 20502

 Thank you, Gouri, for bringing this to my attention and thank you in advance to those of you who chose to help. I gather that the decision will be made in the next 30 days or so, so if you are going to do it, please do it now.

The truth is, my guess is that the unpretentious, clear-minded, straight shooting Jack Bogle doesn’t give a rat’s ass about receiving this award. If you click on the link below his photo above you’ll see the list of those he’s already received is extensive. But he deserves it nonetheless and his receiving it will send an important message to an industry that sorely needs to hear it and, perhaps, to those investors yet to see the light.

 

 

*Speaking of the Chautauqua, this seems a good place to share with you an advance notice that the next will be held February 7-14, 2015. I’ll be formally announcing it sometime later this month, but most of the details are already up on the Above the Clouds website. We plan for this one to be even smaller and more intimate than the last: 15 or 20 people.

We’ll have two new speakers and I’ll get to escape a bit of the NH winter. Depending on where you live, maybe you too!

Posted in Life, Money | 27 Responses

Tuft & Needle: A better path to sleep

 Mansion6

About a decade ago and roughly a mile from where I lived at the time there was a mansion on a hill. As I don’t much care about mansions I don’t recall many of the details. I do remember a huge pool in the center of the house with columns running along the sides and reaching up to the glass ceiling far above and the various courtyards that the sprawling building wrapped around. These I remember because they were where the party was held.

Hundreds of people attended this annual event. The man who owned the house invited all his friends, all his employes and, to avoid complaint, all the neighbors. That last was how we made the cut.

The fine liquors flowed and the food was wildly diverse. Both were relentlessly replenished and each courtyard held a different live band. Indeed, the best Blues I’ve ever heard was in one of those courtyards here in New Hampshire. And I grew up in Chicago.

It was the kind of party Gatsby would have thrown if Gatsby had had, you know, real money.

I got to know our host fairly well over the years. He made his money in many and various enterprises and unfortunately one of these involved buying and bulldozing the 150 acres of woods behind my house. This land had been logged by the earliest settlers who then tried to farm the rocky soil, building beautiful stone walls in their vain attempts to clear the fields. Eventually they gave up and the forest returned. When hiking it I was always trespassing, of course.

I enjoyed it mostly in late Fall, Winter and early Spring when the bugs were gone and the low, marshy spots were frozen. The dog and I would wander about, inspecting the old hunter’s blinds and the two shot-up derelict cars from the 1940s. It was hilly terrain and there was a lovely little pond tucked into a ravine. Chunks of granite stuck up out of the ground here and there and a couple of these made fine spots to sit, rest and enjoy a cigar. Only once did I ever see anyone else back there.

By the time his crews had finished, the hills were leveled, the pond drained, the derelict cars hauled off and not even the granite outcroppings remained. I couldn’t identify a single landmark I’d once known. In their place was a nice flat suburban subdivision with winding roads named after his daughters and million-dollar houses on the rise.

But his real money was made selling mattresses. He owned a chain of retail stores for that purpose. Because I knew him, I got to know just how incredibly profitable selling “discount” mattresses is. Because he tore down “my” forest, when I needed one I bought from his competitor. I still paid too much.

I paid too much partially because his competitor enjoyed the same handsome markups and partially because I bought a high quality mattress. This quality assessment I based on the fact that it was expensive and fancy.

I was willing to pay for expensive and fancy because I don’t sleep well. Most folks chalk this up to the likelihood that I have a bad conscience. Could be.

Unfortunately, the expensive and fancy new mattress did nothing for my conscience or my insomnia. In fact, we had it replaced three times.

Each time they sent out a Mattress Inspector. Did you know there were such things as Mattress Inspectors? I didn’t.

Anyway, each time the inspector came to our home, took careful measurements, sent in his report and shortly thereafter we received a new mattress. Seems it would have been cheaper just to send out the replacements without the inspector but then, what do I know?

This was all very odd as presumably the inspector found the mattress defective and yet each replacement was exactly the same. Finally we gave up and just chose to live with it, looking forward to the time when we could justify replacing it. Hopefully with a better choice.

As it happens, earlier this year I was planning to do just that. Not a task I was looking forward to. Then, in the summer, I received an email from Daehee Park.

T&N founders on bed

Mr. Park and his partner John-Thomas Marino

Operating this blog I get lots of emails trying to entice me into featuring some product or another so as to pawn it off you. It takes me about 3 seconds to hit the delete button. I was a breathe away from doing the same with Mr. Park’s.

But something made me pause. I read it more carefully and decided to respond. Among other things I said:

“So my first question is, do you really read my blog and has it really helped in launching your business? I’d ask that you take a moment to tell me how and what you like about it, just so I know this isn’t a spam email.”

I figured this would chase him away. But instead I got a reply that said in part:

“I originally came across your blog through a link/comment over at Mr. Money Mustache.

“Following your advice, especially the Stock Series, I got my personal savings plan in order while bootstrapping Tuft & Needle. I opened a Roth IRA for the first time and set up a 401k plan for the company. I took your portfolio advice and selected the recommended low-cost Vanguard funds (mainly VTSAX). It was tough getting it going while committing resources to a startup, but I’m glad I developed the ritual and habit early on.

“My favorite and most useful post, which I also refer our team members to is this one: http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/

Then, being the astute businessman he clearly is, he went on to tell me a bit more about his company:

“Back in 2012, my co-founder JT and I left the software technology industry in Silicon Valley and launched Tuft & Needle with $6,000 of our own savings. We’ve grown quite a bit since then. We’re now 15 team members and we did over $1MM in sales in the first quarter of 2014.

“…we are trying to a) cut out the middleman markups and b) put the customer experience first.”

It didn’t take long for me to start thinking of these guys as the Republic Wireless of the mattress space. That is, a way to buy a better mattress at a lower cost and not have to do business with the guy who ripped up “my” forest. Not that I’m one to hold a grudge.

So I began my due diligence. Anyone who reads this blog knows I value simplicity and here the T&N folks score big.

You chose what thickness you want (5″ or 10″) and you chose what size you need. That’s it. You’re done.

I also value, well, value. Depending on size, your T&N mattress will cost you between $250 and $750. That’s right. You can’t pay more than $750 even for their biggest, thickest king size mattress. Shipping is, as it always should be in my opinion, free.

Didn’t take long before my personal order was in: 10″ Queen. $600. To put that price in perspective, my same-sized fancy mattress from the “discount” store in 2007 cost $1299.

It arrived, as promised, on the appointed day. When I got home I expected to find a large rectangle waiting to be unpacked. Instead it was a more compact, but still large, cylinder. That’s interesting, I thought.

This cylinder was tightly wrapped in plastic and as I carefully cut this away the mattress, which had been very tightly rolled and bound, began to inflate. “Inflate” is really the wrong word. It wasn’t actually being pumped up with air or anything. But that’s what it looked like. That, or some monster breaking free of it’s bonds.

Mmmm, I thought, this can’t be good; as much fun as it is to watch.

I don’t like air mattresses and I couldn’t get the whole inflate concept out of my head. But I shouldn’t have worried.

In short order it expanded (ah, that’s the better word) to it’s full size and has proved comfortably firm. And, importantly, when I move or my wife does, the movement isn’t transferred across to the other person.

I’ll let you go to their very cool website for the details of how these mattresses are made and why they perform so well. But I will say one of the best things is that these guys aren’t just middle-men. They custom manufacture their products to their own specifications.

T&N crafting_0065

 So, we’ve been sleeping on our T&N mattress for a couple of months now and we remain thoroughly impressed. I doubt we’ll need another for many years to come, but when we do this is where we’ll return.

Ok, let’s see. What else?  Well…

…They offer a 30 day trial and a 7-year warranty. I can’t speak to either of those because there is no way I’m letting them have mine back. But I do like the attitude reflected in what they say about it:

“Contact us if you’d like to make a return so that we may begin our hassle-free process for a full refund.”

…They don’t pick up and dispose of your old mattress. This initially concerned me but at their suggestion we contacted The Salvation Army and the problem was solved easily enough and in a way that benefited somebody else.

…They don’t sell box springs. But we already had ours. Plus, if I were buying a bed frame again I’d get a platform style. It’s that whole simplicity ethic again. Box springs really are silly extra things.

That’s about it.

So if you need a mattress, and I can’t imagine you’ve read this far if you don’t, this is the place I use.

I like the company. I like their product,  I like their prices,  I like their service, I like their style, I like their business ethic and approach and I like them.

That’s why Tuft & Needle is only the third company ever, along with Betterment and Republic Wireless, I’ve accepted as an affiliate. For me each is a big step and one I’m slow to take.


If you click on the ad directly above, it will take you to that really cool website I mentioned earlier. There you’ll find lots more information and you can begin your own due diligence.

Then, if you decide to buy (and by way of full disclosure) this blog will earn a small commission. Your price is the same regardless.

Oh, in case you’re wondering, as nice as it is, my new T&N mattress has not cured my insomnia. But, I’m a whole lot more comfortable now staring thru the darkness at the ceiling.

 

 

Addendum, November 21, 2014: 

T&N recently announced a new version of their mattress incorporating a new type of foam. Responding to a question about their recent price increase (I’ve now updated the prices in the post) in the comments below, Evan Maridou explains:

Evan here from Tuft & Needle. I head up our customer experience and operations teams.

Thanks for raising this concern. We’re all about transparency as a company so here we go! I apologize in advance as this is an incredible amount of information. We just want to be as honest as possible and give you all of the details (something we should have been more proactive about in the first place.)

This past Tuesday, we started shipping a new version of our mattress. We’ve been working over the past year to develop a new type of foam. For years, the industry has had the same three options in foam: Memory Foam, Latex Foam and Poly Foam.

Before Tuesday, we used poly foam. All three have their pros and cons. And for years, mattress companies have tried to layer them on top of each other to realize the benefits of each. It honestly just doesn’t work.

While we used our poly foam, we heard a few complaints from customers. Not many, but they kept us awake at night none the less. So we set out to address these.

The new foam we’ve created is truly unique. We partnered with some of the best manufacturers in the United States and created it from scratch. We’re not big fans of gimmicky names but I can tell you that we are the only place that offers this new formulation.

The biggest innovation in the foam is that it is more comfortable for more people. If you have our current foam and find it comfortable, this foam wouldn’t feel like much of an improvement. But for anyone in the past who has returned our foam for being too firm or too soft, we’ve devised a way to provide different levels of comfort to different individuals. We’re now able to set the firmness for individuals of any weight, independent of each other.

The new foam also has a new technology we call localized bounce. Memory foam is great in that you won’t feel your partner moving around. The downside is that it feels like quick sand when you try to roll over. Our new foam is both responsive and pressure relieving. It’s like that old commercial where someone would put a wine glass on the bed and drop a bowling bowl on the other-side and the glass wouldn’t move. The only problem was the bowling bowl wouldn’t bounce. On our foam, it will.

The final innovation is better pressure relief. Again, for owners of our current foam who find it comfortable, they’re not missing out by not owning the new foam. But for the customers who chose to return their mattresses for being too firm, they would likely find our new foam to be extremely comfortable.

There are only two downsides to this foam. It’s heavier and it costs A LOT more to make. The heavier piece doesn’t have an impact on the consumer, except that the box it ships in is slightly heavier to lift when you first move it in. After that, it won’t have any impact on comfort. It’s also no heavier than a traditional mattress. It is heavier than our previous version though.

We’re using this foam on the top 30% of the mattress. Using it all the way through would cost way too much and does absolutely nothing for comfort (The same way a box spring has little to no impact on comfort level). Just how much more expensive is this new foam? It’s three times the cost of the old foam we were using.

The good news is that foam is only part of the cost of our mattress, and in this case, only 30%, of part of that cost, has increased in price by 3x. This is where you saw price increases of up to 25%

John Lynch also made a good point that our King Size mattress price increased more than the rest, up to 25%. The reason for this is the increase in weight was most profound on our king size mattress. FedEx (and UPS) charge us based on three factors when shipping a mattress. How much it weighs, how much space (cubic volume) it occupies and how far it travels. The king size mattresses now cost more to ship than our old king size mattresses. And the increase in price related to shipping was much more expensive for the King size mattresses than the rest.

All of this is a long way of saying that our price increase only reflects our increased cost for making this new product.

Some people might argue that this is still our fault for not setting our prices with enough cushion in the first place to handle increasing costs of manufacturing. Or that if we were developing this product over the course of the year, we could have slowly introduced price increases over time.

We whole-heartedly disagree. One of our core values as a company is to charge fair and transparent pricing. It would be completely unfair (in our opinion) to charge our customers a higher price before this new product arrived. We wanted to ensure that only those individuals who got our new foam, paid a higher price.

So to address your specific concerns, we’ve operated our company with the same margin since we started. It’s modest and is enough to cover our costs, pay our employees competitive wages, manufacture in America and continue to innovative on our product.

Our goal was never to create the cheapest product. It was to create a product of superior value. We’re not blind to the fact that this was a significant price increase. That being said, our goal from day one has been to make the best mattress in the world, at a fair price. We truly believe that this new version is a major step in reaching that goal.

We back all of this up with our 30 day return policy. You can return the mattress for any reason at absolutely no cost to you. No questions asked.

Next week, we will also be announcing that we are increasing our warranty to 10 years. This will apply to new as well as existing customers. We stand behind the quality of our mattress and are always looking for ways to increase the value we provide to consumers.

I hope this helps provide some clarity on why we chose to increase our prices. We really do appreciate your feedback and if we’re putting ourselves in your shoes, we agree these price increases are a bit shocking. We apologize for not being more in front of this and explaining all of this reasoning to our customers in the first place. With the information available, your conclusions were fair and warranted.

If you have any other questions, we’re always standing by. You can email myself or our cofounders and we’d be happy to discuss it in more detail. [email protected][email protected]or [email protected].

I said it before but I want to re-iterate that we’re grateful for your feedback. Our customers have called us out before (why are your products $299 and not $300) and we’re only better because of it.

Cheers!

Posted in Stuff I recommend | 54 Responses

Nightmare on Wall Street: Will the Blood Bath Continue?

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Nightmare on the Wall (Street)

Courtesy of jflaxman

The headline for today’s (Saturday, Oct 18th) post I ripped off from a major financial media outlet. I’m so ashamed.

It was the actual headline from a piece they put up this past week to describe the market action on Wall Street. They should be even more ashamed.

Yikes! Nightmares and Blood Baths. Oh, my.

So what actually happened? Well, let’s see.

The market, as measured by the S&P 500, stood at ~1908 at the opening bell on Monday October 13th. This was already down ~100 points, or 5% from it’s all time high of ~2008 a couple of weeks back.

By Wednesday it had dropped to ~1823, triggering the “Blood Bath” headline and many more like it. That was another 4.5% drop, bringing the total loss from that all-time high to ~9.2%. Not quite the 10% that defines a market “correction” — a common and healthy event.

Also not quite enough to make it worth my trouble to rebalance my allocation and pick up some now cheaper shares. Even if I had been quick enough to do so.

And quick you’d have needed to be. Thursday and Friday brought the S&P back up to ~1887, trimming the loss from the all-time high to a meager 6%. Oh, well. Maybe next week.

So what to make of such a headline?

Well, perhaps the author has never actually seen a financial nightmare or blood bath and so mistook this week’s little blip for one. Or maybe the dramatic Halloween themed phrasing was simply too sweet to resist. Or maybe it is no more than the media’s relentless need for attention; a scary new costume to wear for the day.

But if the financial media is in such a tizzy over this not quite correction, imagine the panic if we get a real one. Or a Bear (-20%). Or an actual market crash of 40%+. With “nightmare” and “blood bath” already used up, it’s gonna be tough to write headlines for those.

Of course it is all too silly. Sensible people know we’ll all be dead of Ebola before the month’s end.

Meanwhile, here at jlcollinsnh.com we had an actual nightmare. After getting steadily more and more glitchy over the last several weeks, the blog crashed and burned. I won’t bore you with details, but the issues were major and tough to resolve.

Fortunately, I had gotten an excellent response to my Help Wanted post. As it happens, I was in conversation with my new personal hero, Lucas, when the blog fully ground to a halt. He jumped in and after two days of almost non-stop effort the site is back and the issues mostly resolved.

My apologies if you tried to log on this week and found it either completely down or painfully slow. It should be all better now with just a couple of formatting issues yet to be repaired.

If you tried to leave a comment this week, please check to see if it made it through. One of the issues was the blog got slammed with a huge volume of spam. We were dumping it overboard by the bucket full and buried in the tens of thousands might have been yours. Please post it again.

Also, if you’ve posted a question bear with me. Not having access to the blog for the better part of the week, and all the time this has taken, has me behind. But I’ll get there.

The really cool thing to come out of this has been the chance to connect with some great people, like Lucas, who so value what happens here they stepped up to volunteer their help and ideas. More than I can possibly use.

My thanks to those of you who have already helped and to those still standing by, ready and able. It has been an honor to connect with each of you and a relief to know you have my back.

In addition to the technical support needed to solve these immediate issues, I now have access to still more cool ideas and the talent to implement them.

One change you’ll already notice is the ads that had been in the right hand column are gone. The banner ad at the top and the square ad imbedded in some posts, like this one, are from Google Adsense. I have no control over what companies and products appear. But if you choose to click on them and poke around on their sites, this blog earns a few bucks to keep the lights on.

The other source of light-keeping-on revenue around here are the affiliate partners. These are companies and products I do choose. You can tell which ones, because I write a full post about them describing why I endorse them. But this is tough. There is very little out there I think enough of to recommend to you.

So far, I’ve only found two: Betterment and Republic Wireless. If you click on the links in those posts, and then chose to buy from or do business with those companies, the blog earns a commission.

I’m excited that I have finally found a third and hope to have a post up about them shortly. You won’t believe what the product is, but I’m already very happily using it myself.

Oh, and if you are wondering why I don’t have an affiliate relationship with Vanguard, it is simply because they don’t have them. Maybe someday…

In addition to the changes with the ads, shortly you’ll be seeing some new features in that column. There might even be a new theme and design in the works. Plus I’ve got a folder full of post ideas waiting for me to make the time. So stick around and keep a sharp eye.

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While Wall Street is having self-induced nightmares and the blog has gone thru some real ones, Mrs. jlcollinsnh and I have been out and about enjoying the New Hampshire Fall.

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I hope the world and life is as beautiful where you are!

Update –Monday October 20: The market closed today at 1904, down 4 points from where it stood at the beginning of last week — the week of nightmares and bloodbaths. That’s down .002%. You can’t make this stuff up.

Update 2 — Revenue spike: Since putting up this post I’ve noticed a spike in ad revenue. This is odd because, as I mentioned above, the Skyscraper ad that used to appear in the sidebar has been eliminated. I did this for a cleaner look and I fully expected, and was prepared to accept, a drop in revenue as a result. The only conclusion is that some of you have chosen to support the blog by clicking into the remaining ads. To those who have, I thank you!

Update –Friday October 31: Today the market closed at a record 2018, just 12 trading days since dropping to the low of 1823 that triggered the Bloodbath headline. Happy Halloween!

Posted in Money | 39 Responses

Help Wanted

help-wanted-pony-express

Pony Express

When I launched this blog back in the good old days, I barely knew what a blog was. I had heard the term but I had never actually seen one. I joke that the first blog post I ever read was the first post I ever wrote. If it is funny it is because it is true.

In that Spring of 2011 I was writing some letters to my daughter concerning a few financial things I thought she should know but that she wasn’t yet ready or willing to hear. These were my insurance against the possibility that should I not be around if and when the time came, she’d still be able to access what I had to say.

I shared these with a business friend who suggested other friends and family members might find them useful. He suggested the blog and pointed me to WordPress. This is why it is titled jlcollinsnh.com; I wanted these people to know it was me. I never dreamed it would have a broader audience. For that matter, I had no idea there were other financial blogs out there, most with clever and descriptive names.

After about a year, thanks in large part to this guest post Mr. MM asked me to write, the readership here began to explode. The blog now has an international audience and generates ~100,000 pages views a month from ~35,000 unique visitors. I’m told this is pretty good.

I’m not sure about that, but what I do know is that keeping it up and running has become increasingly more expensive and complex. Last Spring, for instance, it crashed and burned – finally going off-line completely. By imposing on the generosity of my blogging friends and Mrs. jlcollinsnh, who is far more temperamentally suited than I in dealing with this stuff, we finally realized we needed a more robust hosting service, picked one and got the site migrated.

Mainly because we really didn’t know what we were doing or how to do it, it was a bloody nightmare. It felt like God telling me my blogging days had run their course, and I very nearly shut the doors. But cooler heads prevailed.

I’m glad they did. Almost every day I get emails or comments from readers telling me how valuable the information here has been for them. The praise is almost embarrassing, but I’d be lying if I didn’t also admit to it being very gratifying. Motivating, too. Perhaps more than anything I’ve ever done, with this blog I have the feeling of contributing in a positive way.

The blog has also introduced me to many new and fascinating friends and their ideas. It has allowed me to help create cool new events like the Chautauquas and to attend cool events created by others like FinCon.

So I have reason to want to continue with it. But the problems have not gone away and the expenses are growing.

Over the past week the blog has again begun to have some operating issues and, at the suggestion of Synthesis (my new host since last Spring), I just updated to their more powerful (and costly) service. However, there are still snags and they have given me a list of plugin changes, upgrades and deletions they suggest. Plus WordPress is nagging me to upgrade to 4.0.

I’m very reluctant to take these steps because, in the past, one change leads to something else not working creating a snowball effect that has me sitting on the window ledge. I’m clearly going to need help.

Who better to ask than the smartest people in the world: The readers of this blog.

help-wanted $10

If you have the technical expertise and believe in the mission of this blog (and that last is very important to me), please read on. Here’s what I think I need:

1. Technical WordPress support. Keeping the blog updated and the plugins current and optimal.

2. Design help. Making the blog as appealing, simple, useful and easy to read and navigate as possible.

3. Technical interface with Synthesis, either directly or helping me understand how to work with them effectively.

4. Help to better monetize the blog. As I mentioned, the costs of operating it are rising. While I’ve added Adsense and have a couple of affiliate programs with Betterment and Republic Wireless, I don’t really understand how these things work and how they might work better for me. Or if there are other options that might work better still.

This is further complicated by the fact there are many ways to monetize that don’t serve my readers and which I am therefore unwilling to adopt. Here the reader will always come first and anyone wanting to help in this regard should be on board with this ethic.

5. Other important stuff I’m not experienced enough to know I need.

I don’t expect, or even want, only one person to do all this.

In addition to technical expertise I’m looking for people who sweat the details, take the time to understand what is being asked and who are great communicators. People who respond promptly, are dead reliable and who do what they say they will when they say they will. It’s a lot to ask for the little tasks this blog needs, but that’s why I’m only interested in people who deeply understand and value what I’m trying to do here.

If you think you’d like to help, send me an email: [email protected]

In it tell me who you are, what you can do, how I can know you can do it, why you want to, why I can trust you and why we’ll have fun working together. Also, how working with you would work. Be sure the subject line reads: Help Wanted: name of what you can help with

Thanks!

 

Addendum: Forum

Another thing I’d like to do is to create a forum here, like that on MMM but smaller and more focused. I’d see it taking the place of Ask JLCollins and as a way for readers to interact and help each-other. I’d join in as needed and as I had time.

But I’d need someone who knows how to create such a thing and volunteer moderators.  Any takers? If so, shoot me an email to address in the post with — Help Wanted: Forum — in the subject line.

Posted in business, Life | 43 Responses

Chautauqua 2014: Lightning strikes again!

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Well, this was a rare delight.

Photo courtesy of Kate

Last year’s Chautauqua was so much fun, attracted such cool people and was just so damn epic it seemed unlikely to repeat. But it did, and this year we got coffee! Let’s start with that. Read More »

Posted in Chautauqua | 43 Responses

Stocks — Part XXVI: Pulling the 4%

Money working cartoon

Courtesy of Fritz Cartoons

At some point, if you have been following the Simple Path to Wealth described in these posts, you will be able to chose to have your assets pay the bills rather than your labor.

How quickly you reach this point will have much to do with your saving rate and how much cash flow you require. In any event, your assets will have reached the point where by providing ~4% they can cover all your financial needs. Or said another way, your assets now equal 25-times your annual spending.

Having left your employment, you will have rolled any employer based retirement plans, such as a 401k, into your IRA, and the investments themselves, will be split between stocks and bonds held in the allocation that best matches your personal risk profile. Ideally, these will be in Vanguard’s low-cost index funds: VTSAX for the stocks and VBTLX for the bonds.

As we discussed in The 401k, 403(b), IRA and Roth Buckets post, these two funds will be in your tax-advantaged and ordinary (taxable) buckets. By this time you will have pared these down to just three: IRA, Roth IRA and taxable. My suggestion — and personal portfolio — is to hold them as follows:

  • VBTLX in the IRA, as it is tax-inefficient.
  • VTSAX in the Roth IRA, because this is the last money I would spend and the money most likely to be left to my heirs. Roths are an attractive asset leave upon your death and, since this is my most long-term money, the growth prospects of VTSAX make it the preferred investment here.
  • VTSAX also goes into the taxable account as of the two funds, it is the more tax-efficient.
  • VTSAX is also held in our regular IRAs, as even it can benefit from tax-deferral.

As you can see, if you are single, you will actually have four fund accounts. VBTLX in your IRA and VTSAX held in all three places: Roth, IRA and taxable. If you are married, your allocation might look something like ours.

I hold:

  • VTSAX in my Roth and in my regular IRA.
  • Our entire bond allocation in VBTLX in my regular IRA.

My wife holds: VTSAX in her Roth and in her regular IRA.

Jointly we hold: VTSAX in our taxable account and minimal cash for spending needs in our savings and checking accounts.

So together we have two Roths, two IRAs and one taxable account. Across these we have one investment in VBTLX and five in VTSAX. Our allocation is 75/25, VTSAX/VBTLX.

It is also very possible that, even if you’ve embraced this Simple Path, you still have other investments. If these are in your tax-advantaged accounts you’ve likely rolled them tax-free into Vanguard. But if they are in taxable accounts, the prospect of a hefty capital gains tax might have persuaded you to hold on to them. When I retired, we also had some of these “cats and dogs”, mostly in the form of individual stocks I had yet to break the habit of playing with.

At this point the discussion risks becoming a bit complex. There is almost an endless array of ways you might withdraw the ~4% you’ll be spending from your investments. So, let’s start with the mechanics of how this works and then I’ll share with you some guiding principles and exactly what we are doing and why. From there you should have the tools you need to form your own strategies.

Mechanics

If you hold your assets with Vanguard, or any similar firm, the mechanics of withdrawing your money could not be easier. With a phone call or a few clicks online, you can instruct them to:

  • Transfer a set amount of money from any of your investments on whatever schedule you chose: Weekly, monthly, quarterly or annually.
  • Transfer any capital gains distributions and/or dividends and interest as they are paid.
  • You can log on their website and transfer money with a few clicks anytime.
  • Or any combination of these.

This money can be transferred to your checking account or anywhere else you choose. A phone call to Vanguard, and most any other firm, will get you friendly and helpful assistance in walking though it all the first time.

Principles

Next, let’s look at some of the guiding principles behind the approach we use and which I am about to share.

First, notice that in constructing our 75/25 allocation, we look at all of our funds combined, regardless of where they are held.

Second, we have all dividends, interest and capital gains distributions re-invested. I am not captivated by the idea of “living only off the income” as many are. Rather, I look toward drawing the ~4% the research has shown a portfolio like mine can support.

Third, I want to let my tax-advantaged investments grow tax-deferred as long as possible.

Fourth, as I am within ten years of age 70 1/2, I want to move as much as I can from our regular IRAs to our Roths, consistent with remaining in the 15% tax bracket. This strategy is described in detail in the post on RMDs (required minimum distributions). 

Fifth, once we hit age 70 1/2 and are faced with RMDs, these withdrawals will replace those we had been taking from our taxable account.

Pulling the 4% in action

1. First we think about the non-investment income we still have coming in. Even once you are “retired,” if you are actively engaged in life you might well also be actively engaged in things that create some cash flow. We are no longer in a savings mode, but this earned money is what gets spent first. And to the extent it does, it allows us to draw less from our investments and in turn allows them still more time to grow.

Cats-Dogs

2. Remember those “cats & dogs” I had left over in our taxable accounts? Upon entering retirement, those were the first assets we spent down. We started with the ugliest ones first. While you may or may not chose to follow the rest of our plan, if you have such remnants left in your own portfolio, I strongly suggest this is how you off-load them. Do it slowly, as needed, to minimize the capital gains taxes. Of course, if you have a capital loss in any of them, you can dump them immediately. You can then also sell some of your winners, using this capital loss to offset those gains. Any tax loss you can’t use, you can carry forward for use in future years. You can also use up to $3000 per year of these loses to offset your earned income.

3. Once those were exhausted, we shifted to drawing on our taxable VTSAX account. We will continue to draw on this account until we reach 70 1/2 and those pesky RMDs.

4. Since the taxable VTSAX account is only a part of our total, the amounts we now withdraw each year far exceed 4% of the amount in it. The key is to look at the withdrawals not in terms of the percent they represent of this one account, but rather in the context of the whole portfolio.

5. We could set up regular transfers from the taxable VTSAX as described above, but we haven’t. Instead my wife (who handles all our day-to-day finances) simply logs on to Vanguard and transfers whatever she needs whenever she notices the checking account getting low.

6. This withdrawal approach may seem a bit haphazard, and I guess it is. But as explained in this post, we don’t feel the need to obsess over staying precisely within the 4% rule.

7. Instead, we keep a simple spreadsheet and login our expenses by category as they occur. This allows us to see where the money is going and to think about where we might cut should the market plunge and the need arise.

8. Each year I calculate what income we have and, consistent with remaining in the 15% tax bracket, I shift as much as I can from our regular IRAs to our Roths. This is in preparation for the RMDs coming at age 70 1/2. When that time comes, I want our regular IRA balances to be as low as possible.

9. Once we reach age 70 1/2, we will stop withdrawing from our taxable account and let it alone again to grow once more. Instead, we will start living on the RMDs that now must be pulled from our IRAs under the threat of a 50% penalty.

10. While I’m fairly certain the money in our taxable account will last until we reach 70 1/2, if it were to run out we’d simply begin drawing money from our IRAs ahead of the RMDs. In essence, this would be the money I had been shifting into the Roths. And, again, I’d strive to keep what we withdrew consistent with staying in the 15% tax bracket.

11. Despite my efforts to lower the amounts in our regular IRAs, the RMDs, once we are both forced to take them, will likely exceed our spending needs. At this point we will reinvest the excess in VTSAX in our taxable account.

There you have it. While you could, you don’t have to follow this exactly. You are free to adapt what works best for your situation and temperament.

For instance, if the idea of touching your principle goes against your grain and you want to spend only what your investments earn, you can instruct your investment firm to:

  • Transfer all your dividends, interest and capital gain distributions into your checking account as they are paid.
  • Since all these together will likely total less than that ~4% level, should the need arise, you could occasionally log on and simply transfer some more money by instructing that a few shares be sold.
  • Or have your dividends, interest and capital gains transferred as they are paid and schedule transfers from your taxable account on a regular basis to bring the total up to ~4%.

For example, if you had $1,000,000 in your portfolio allocated 75/25 stocks and bonds:

  • At 4% your withdrawals equal $40,000
  • Your $750,000 in VTSAX earns ~2% dividend, or $15,000
  • Your $250,000 in VBTLX earns ~3% interest, or $7,500
  • That totals $22,500 and if that’s all you need, you’re done.
  • But if you want the full $40,000, the remaining $17,500 you’d withdraw from your taxable account. Taken monthly it would be ~$1498.

This seems overly cumbersome to me and I present it only to illustrate how someone focused on living on only their investment income might approach things.

Here’s what I would Not do

scolding

I would not set up a 4% annual withdrawal plan and forget about it.

As we saw in this post, the Trinity Study set out to determine how much of a portfolio one could spend over decades and still have it survive. Adjusting each year for inflation, withdrawals of 4% annually were found to have a 96% success rate. This became the 4% Rule designed to survive the vast majority of stock downturns so you wouldn’t have to worry about market fluctuations in your retirement.

It made for a great academic study and it is heartening that in all but a couple of cases the portfolios survived just fine for 30 years. In fact, most of the time they grew enormously even with the withdrawals taking place. Setting aside that in a couple of the scenarios this approach would leave you penniless, in the vast majority of cases it produced vast fortunes. Assuming you neither want to be penniless or miss out on enjoying the extra bounty your assets will likely create, you’ll want to pay attention as the years roll by.

This is why I think it is nuts to just set up a 4% withdrawal schedule and let it run regardless of what happens in the real world. If markets plunge and cut my portfolio in half, you can bet I’ll be adjusting my spending. If I was working and got a 50% salary cut I would, of course, do the same. So would you.

By the same token, in good times, I might choose to spend a bit more than 4% knowing the market is climbing and that provides a strong wind at my back. Either way, once a year I’ll reassess. The ideal time is when we are adjusting our asset allocation to stay on track. For us, that’s on my wife’s birthday or whenever the market has had a 20%+ move, up or down.

True financial security, and enjoying the full potential of your wealth, can only be found in this flexibility. As the winds change, so will my withdrawals. I suggest the same for you.

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