1st Annual Louis Rukeyser Memorial Market Prediction Contest 2013 results, and my forecast for 2014


Louis Rukeyser

 Well now, this is a bit embarrassing.

Early last year I published a bit of satire titled How to be a Stock Market Guru and get on MSNBC. Basically I mocked the idea that anyone can predict the short-term market and laughed at those who claim they can. Just as one of my financial heroes, Louis Rukeyser, used to do on his weekly TV program Wall Street Week.

Every January Rukeyser would have each of his guests predict the market’s high, low and close for the year.  I forget his exact line, but after the predictions were in he’d say something like, “…with the understanding that even these exalted experts could be wrong, there you have it.”  And he’d wink knowingly into the camera.

Come the following December he’d salute those who’d come closest and chide the goats.

In that post, in his honor and in his lighthearted spirit I decided to do the same, introducing the jlcolllinsnh.com 1st Annual Louis Rukeyser Memorial Market Prediction Contest. 

Then, after all this emphasizing of how silly such predictions are, I went and won the damn thing myself. At least on the high and close picks. In fact, my prediction for the high, at 1825, was a scant 24 points/.013% off the actual high of 1849. Doesn’t get much more precise than that.

Now any talking head TV stock market guru who came anywhere close to my level of accuracy would be, modestly of course, loudly attributing it to their remarkable wisdom and bathing in the glory. All the while encouraging the belief that they’ll be able to reliably do it again and you should buy whatever it is they are selling. Most likely the fund they manage or the advice they offer.

Here at jlcollinsnh we strive to be a bit more honest. The truth is, very simply, I got lucky and there is no reason to think my predictions for 2014, provided for your entertainment below, will come anywhere close to duplicating those of 2013.

If there is value to be found on this blog, it isn’t in my short-term market prediction skills, “short-term market prediction skills” being an oxymoron and all. It is in, hopefully, providing some perspective on how the market tends to behave long-term and how to successfully invest in it for that long-term.

OK, enough of that. As promised last year let’s get on with saluting the winners and chiding the goats.


Poor goats. Always on the edge.

We’ll start with me.

In that post last January my predictions for the S&P (which incidentally closed 2012 up around 13% at 1426) in 2013 were:

High: 1825
Low: 1312
Dec. 31st, 2013: 1754

The market actually posted these results:

High: 1849
Low: 1457
Dec. 31st, 2013: 1848

What’s interesting here is that the low was reached on January 8th, just five trading days into the year. The high was on December 31st. This reflects an increase of about 29.5% in a relentless and almost smoothly straight climb up. I certainly didn’t predict that. Nobody did.

Interestingly VTSAX, the fund I favor for wealth building, was up about 33% for the year. The reason it did better being it holds small cap stocks in addition to the large caps of the S&P 500. Small caps tend to outperform in bull markets and 2013 was certainly a bull. But before you rush out and switch to a small cap fund, be warned they tend to get crushed further in the Bears.

While my predicted close of 1754 fell short, it was still impressively close and good enough to also snag the #1 spot in this year’s contest.

My 1312 low was way too bearish and didn’t even finish in the top three.

So how did my participating readers do? There’s praise to be given and goats a-plenty:

Reader RW was the only person more bullish than I and came within a whisker of beating me with a predicted high of 1875. That’s only 26 point off; very impressive:

High 1875
Low 1300
Close 1525

Good call there on the high, RW. On the low and the close, not so much. ;)

RW offered no reasons for the numbers but instead said: “Good to see you back safe and sound. Thank God the Mayan’s got it wrong!” The first referred to my end of the year 2012 travels and the second to the widely touted alleged Mayan prediction the world would end in December 2012. Maybe they’d have done better predicting the market.

RobDiesel finished in the money on all three counts saying:
I sat down to polish my pecuniary crystal ball and came up with this.

We’ll touch 1801, won’t drop lower than 1422 and close out the year at 1653.

His high came in at #3, his low at #1 and his close at #2. I’d say that makes him our overall winner! Keep that ball polished Rob!

My pal Shilpan also did well, finishing in the money twice. He said:

I am also bullish on the market.

High: 1675
Low: 1403
Dec. 31st, 2013: 1630

His low was good for #2 and his close came in at an admittedly distant #3.

Mind = Blown was the third least bearish on the low at 1385 and that got a #3 finish. Not bad for what seemed to be a bit of a half-hearted participation:
Hey, just posting here because I have a question, but I’ll hazard a guess. I work in the DC area and we are all terrified of the fiscal cliff – not that most of us would actually lose our jobs, the government is too afraid to produce cuts that would hurt anyone – so I’m a bit pessimistic. My guesses hedge quite a bit on what happens, and I know that we’ll have another non deal that will make everyone happy for a little bit. So I’ll say we’ll hit a high of around 1600 when that deal hits, hit a low of about 1385, and close the year at about 1475. Not very much volatility, but I really have no idea what I’m doing, and am mostly going off last year, the recent jump, and random thoughts.

No worries M=B, when it comes to this market predicting stuff none of us really have any idea what we’re doing.

So bearish was Mortgage Mutilator only a number for the low was offered:

My prediction is either stagnate or a drop due to all the issues of the debt you guys have. I reckon this will prompt the government to pull out some new harsh policies that will slow everything down.

I predict about 1400 at the end of this year :-)

Opps. But, as we’ll see, not by far the biggest “opps”. Better luck this year, MM!

The Mad Fientist jumped in first asking:

What are the chances of someone from Vermont actually winning this thing??

High: 1616
Low: 1361
12/31/13: 1555

Well, with predictions like those MF, not much. ;)

Still, as I said in my introduction to his guest post, this is a guy worth listening to. Just not about where the stock market is going.

Estate attorney Prob8 is a regular commentator around here and has become our resident death-taxes-probate-estate planning resource. He even has a guest post on the subject. He said:
Here’s my 2013 guess:

Low: 1326
High: 1646
Close: 1540

My guess is we should listen to him about that death-taxes-probate-estate planning stuff. On the stock prediction stuff, not so much.
Good luck next time, Prob8!
My pal Tom writes about travel and wine over at vinoexpressions. He declined to offer his own numbers but was pretty convinced I was wrong:

Sounds optimistic – but there’s not much room left but to climb upward.

We’ll invite Tom to try to do better this year, but for now we’ll only trust his grape related insights.

The New Mexico Lobo expressed shock at what seemed to be unfounded and rampant optimism run amuck:

What? Only two bears??? In the spirit of Marty Z. here goes…
Hi: 1530
Low: 1160
Close 12/31/13: 1210
I hope that I’m the big loser on this one!

As were we all Mr Lobo!

And you got your wish: The title of biggest loser in our little contest for 2013.

But as your consolation prize you’ve earned your official spot as the Marty Zweig spiritual heir around here. Zweig being the frequent Rukeyser Wall Street Week guest who was always relentlessly and deeply “worried about this market.”

Zwieg was even right once in a while. Maybe one day you will be too. :)

Finally, we have smedleyb. I’ve put smedleyb last not because he was completely wrong, although he was, but because he provided a great idea for this contest:

Before I post my predictions, I would like to request a guest blog spot for a week if my unscientific guesstimate proves to be uncannily accurate. Fair? lol.

That said: 1550 SPX, (by March), 1250 SPX (by September) 1325 SPX by December 31.

Yes, the months too. (I don’t mess around with my market forecasts!)

But jokes aside, the market will definitely be lower by the end of year. And you can take that prediction to the bank (of Greece).

Ah well. What you lacked in accuracy my good Mr. smedleyb, you made up for in confidence! Good thing you had that Lobo guy to keep you out of the dog house. ;)

But while his predictions came up short, smedleyb’s idea of a guest post prize is a definite winner. Since this is my site and I get to make the rules around here, I’m going to declare two winners:

RobDiesel not only took the #1 spot for the low, he nailed #2 for his close and was bullish enough to be over 1800 for his high, good for #3. An in the money sweep and deserving of the win! Well done, Rob!

 RW for his extraordinarily bold prediction of 1875 for the high. His was the only one more bullish than mine and it came within a measly two points of snatching victory from my grasp. That deserves a win in my book.

OK, guys, to claim your prize do so in the comments below and let us know what your topic will be. Of course, we’ll all also be anxious to see what you’ll forecast for 2014 so a year from now we can laugh at you for being wrong!

For those of you that were wrong this year, there’s no reason you might not redeem yourself for 2014 if you’ve the courage (foolishness?) to try again. We’ll be waiting to mock you yet again if you fail. Heh.

Don’t feel bad. In all likelihood, you’ll get to mock me too. Here are my 2014 predictions:

High: 2218
Low: 1806
Dec. 31st, 2014: 2125

Clearly, I continue to be very bullish, but I don’t expect as strong a gain as 2013 or the same smooth uncorrected rise.  I see it continuing its sharp rise into 2014 followed by a 15-20% correction from those new heights before settling into a very handsome gain for the year.  Here’s why:

Since the Spring of 2009 we have been on a slow, grinding climb back from the brink.  Corporations have cut expenses to the bone and have accumulated formidable amounts of cash.  Balance sheets remain exceptionally clean.  I expect the pace of recovery to continue to accelerate as the market senses that stock prices will continue to build on the 13%+ increase they posted in 2012 and 2013′s 29.5% increase.  A rising market tends to attract capital and continue to climb. At least until it doesn’t. ;)

The correction will be triggered by some bit of unsettling news. Market players will suddenly look around and seeing how far and fast the rise has been they’ll pull back sharply. But it will be short as the stronger positive forces reassert themselves.

Gee, reading that it almost sounds like I know what I’m talking about and really can divine the future. Don’t you believe it. And certainly don’t take any of this too seriously.  My crystal ball is just as cloudy as everybody else’s.

I’m certainly not changing my investment allocation and strategy based on any of this nonsense and you shouldn’t either.  As Mr. Rukeyser would gleefully point out, past results are no indication of future performance and even I can be wrong.  As I’d point out, I most often am.  We’ll see come next New Year’s Eve.

But a little bit of nonsense is fun once in a while. If you agree or just think you can do better than those that stepped up to the challenge last year, I invite your participation. Please follow the format I used above, and in the comments section clearly state your call for the 2014 high, low and close along with a few lines as to why. That last will help me in mocking you when you turn out to be wrong and in praising you in the unlikely event you turn out to be right. :)

Finally, thanks for your readership and support of this blog!

Happy new year

May Your 2014 be Healthy, Prosperous, Free and filled with Joy!

And on your journey remember:

“Everything you want is on the other side of fear.”

Jack Canfield

Note — January 10, 2014: Contest Closed

With 7 trading days and the first full week of trading done, it makes sense to officially close our little contest to new entries.  After all, late entries have an advantage. Theoretically anyways. Mostly we have had a large enough response that it already looks to be a larger chore than I expected tracking all this to determine the year end winners and losers. Ah well. That’s a year from now.

The market closed today at 1842, down from the year end’s 1848. Essentially flat and unexciting.  Some believe the first week of January is a predictor of what the year will look like overall. If so, both our Bulls and Bears have got it wrong. We’ll see!



Posted in Money, Stock Investing Series | 89 Responses

Closing up for the Holidays, see you in 2014

Happy Holidays

Once again the blog is closing up for some R&R holiday time. You’ll still be able to poke around to your heart’s content, but I won’t be available to respond to questions or comments until after the New Year. But before this year slips away, I did want to say….

Have a Wonderful Holiday

and a

Happy, Healthy and Prosperous

New Year!

Oh, and if you need some ideas for toddler Christmas gifts here’s How to Give Your Kids the Best Christmas Ever. For less than 5 bucks.

And while you read the rest of this post you can listen to a bit of seasonal music from the USAF Band. Fun to watch it come together, too.

Friday December 20th the S&P brushed 1824 the year’s high, before it closed at 1818. This is notable because back in January I wrote a post titled How to be a Stock Market Guru and get on MSNBC. In it I invited readers to enter the first annual Rukeyser Memorial Market Prediction Contest. Upon my return we’ll review the results but you might want to start thinking about your own predictions for 2014 in case you choose to enter.

Oh, and my prediction for the year’s high? 1825. Not bad, eh? If you are curious you can read that post and find out how I did it. And why it is meaningless.

Meanwhile, as always when I leave for a bit, here’s a collection of random stuff that has caught my eye over these past few months. Enjoy!


Mount Rainier casting its shadow. Up.

submarine under street

What’s cruising under your street?


For those not afraid of heights

When I went to FinCon back in October there were some 499 other financial bloggers there. Now I like to keep on top of this stuff as much as the next guy, but candidly I’m not going to wade thru 499 blogs to find the good stuff. Turns out, my pal JMoney does it for me and if you head on over to his site – Rockstar Finance – and subscribe he’ll do the same for you.

Each day he’ll shoot you an email with three suggested posts. It’s a great way to sample what’s out there. You might even find the occasional jlcollinsnh post. Not nearly often enough, but so far J$ has resisted my idea that Rockstar Finance really only needs one Rockstar…

old west

How the Old West really looked


How much caffeine do you get?



This is corn, and yes you can eat it.

The Global Rich List

tribal girltribal guy

Think the world is getting small and we are all becoming the same? Maybe not.

war statue mamayev-kurgan-4[3]

Soviet War Memorial: Notice how tiny the real people are.

A couple of videos:

Fine dining on tarantulas, cockroaches, scorpions and cow eye balls at

The Waldorf Astoria

At least they’re cooked.

13-year-old gives a TED Talk

chinese towers

The Towers of Kaiping


Giant Arrows Across America

I didn’t know about these. Did you know about these?

Shark Bay

Where the red desert meets the blue ocean. Shark Bay, Western Australia

Since it is the holiday season and you’ll likely be spending time with close friends and family, let’s take a moment and examine the power of “strong ties” and “weak ties.”

USA by Brits

The USA as seen by Brits

WWII bomber

More color photos from WWII

Some interesting reads:

finding home in burgundy

What to get me for Christmas


bear made of tires

Ever wonder what happens to your discarded car tires? Yong Ho Ji might just have released their animal spirits.


Itchy Feet blog

Itchy Feet, the book

And finally remember in the coming New Year…..

Fear, the other side

See you in ’14!

Posted in Random cool things that catch my eye | 26 Responses

Betterment: a simpler path to wealth


 Make it so, Mr. Data.

One of the things I’ve learned in the 2.5 years I have been writing this blog is just how many people there are whose eyes begin to glaze over at the mere mention of investing.

They know it is important but their mind just shuts down when the topic comes up. They have better things to think about, to do. Curing diseases, negotiating world peace, building bridges, teaching our children, patrolling the streets, raising their families and any number of other engaging activities that better fit their inclinations.

The problem is, of course, that money is key to surviving and thriving in our complex world.

Typically, these people turn to financial advisors and in truth the right advisor can be a sound solution. But not often. The problem is good, skilled and honest advisors are thin on the ground and finding the right one is often more work and risk than just learning this stuff yourself. But the harsh truth is, frequently that learning is just not gonna happen.

I can relate. Many are the subjects that cause my own eyes to glaze. Areas of my life where I just want to tell somebody this is the outcome I want and in a Captain Picard like fashion order, “Make it so, Mr. Data!”

Now, with a company called Betterment, we have exactly that…

data, commander

…a Commander Data of Investing, if you will.

I first came across these guys at FinCon back in October; these guys being Jon Stein the Founder and CEO and Katherine Buck, Community Manager.  Both are fully human in so far as I can tell, and considerably warmer than Mr. Data.

Over that long weekend we had several conversations that peaked my interest and several more by Skype and email these past couple of months. Plus I’ve been pouring over their website and discussing them with other financial folks I know and whose opinions I respect.

That’s why you are hearing about Betterment from me only now. It takes me time to get on board with a new financial concept like this. Crusty old geezer that I am, I’ve seen too many come and go. But I like what I see here, and here’s why:

A.  Your money is secure. This was my biggest issue and we spent a lot of time discussing it. More time, I gather, than they had been asked to spend before. Once I was satisfied, I asked Jon to put it into simple language and in his own words:

  1. Betterment is an investment manager. We advise customers how to reach their goals through a pre-determined portfolio of ETFs and then purchase those shares for our customers based on their final allocation setting, which they choose. We guide customers, but they finalize the stock /bond mix.
  2. Betterment maintains books and records of our customers’ accounts, and the clearing firm we work with keeps records of the same.
  3. We tell our customers what they are invested in — customers own these securities. If Betterment were to fail for any reason, customers would receive shares of the ETFs they own in-kind through SIPC insurance.

B. They understand and use the concept of index investing.

C. Your money is invested in low-cost Vanguard or iShares index funds, and I like the funds they’ve chosen.

D. Your money gets invested more broadly and in more funds than I discuss in my post Portfolio Ideas to Build and Keep Your Wealth. While the funds in that post get the job done, for the sake of simplicity I limited the number used. Adding more just doesn’t add enough value for the effort. But, with the effort seamlessly taken on by Betterment, a few more provides for a bit of useful fine tuning.

E. They create stock/bond portfolios based on your goals and then maintain that allocation for you automatically. You can accept their suggested allocation or customize it to your preference. Their software will then predict your odds of success.

F. You can create multiple accounts for multiple goals.

G. Once set they also automatically adjust the allocation in each account over time and you can easily change that allocation if you choose.

H. They can handle both your taxable and IRA/Roth IRA accounts.

I. Their costs are simple, low and clearly stated on their site. Under 10k = .35%, 10-100k = .25% and over 100k = .15%. Plus, of course, the expense ratio of the underlying funds.

J. They have a cool and engaging website that allows you to track your investments and might just kindle an interest in this investing stuff.

For example, here’s a chart showing how an allocation might change for a goal with a 25 year time frame. The closer to the time the money will be used, the more conservative the allocation. The various stock funds are represented in shades of green and the bond funds in shades of blue.


Betterment chart

One of the things that most intrigues me is that idea of easily having multiple accounts each targeted at different goals and with the different allocations those goals require.

For instance, one of the questions I frequently get here on the blog is what to do with money that is going to be spent within the next five years or so. Say, money being saved for a house down-payment or a vacation or to buy a car.

As I stress throughout my Stock Series, successful investing in stocks requires a long-term view and their short-term volatility makes them unsuitable for short-term goals. But cash accounts these days pay close to nothing.

The ideal solution would be a fairly complex blend of stock and bond funds balancing out the risk and adjusting as the time frame closes. I’ve never recommended this approach because implementing it was simply too cumbersome. But with Betterment this becomes easy-peasy.

Let’s suppose you plan to buy a car five years from now. Reading this blog you know paying cash is the way to go. Better to make the payments to yourself and buy when you have the money in hand.

Using Betterment you set up an account, make an initial deposit and tell it you are going to need, say, $10,000 in five years. Not only will it then sort out the most effective allocation and adjust it over time, it will tell you how much you’ll need to save/add to it each month to get there.

Of course, I’m not going to recommend this to you without trying it myself, and that example above is exactly how I’m going to use it. My initial deposit was $2500 plus the $25 they gave me for opening the account. So starting with $2525 and based on that five-year time horizon, I’ve set up the automatic monthly deposits of $100 Betterment has told me will get me to that 10k. I also chose to accept the 65%/35% stock/bond allocation they suggested. Depending on how my portfolio performs, they will also offer suggestions over time. Pretty slick.

But what is really slick is then you can begin to play. Plug in other numbers and do a little “what if” analysis. What if I funded it with an extra $1000? What if I deposited $200, $300, $500 or any other number per month? What if I let the money ride for 20 years? The software instantly shows you where you might end up.

Might not sound like a big deal, but it is surprisingly intoxicating. And very motivating. Just the thing if you are trying to inspire your children and introduce them to the magic of compounding. Or yourself.

If you want to give this a try, here’s how and what you can expect:

First, click here: Betterment

If you do you will arrive at a special landing page they’ve created for us jlcollinsnh.com readers.

Landing plane:page

Should be very smooth

 If you then follow the steps and open an account two things with happen:

  1. This blog will earn a commission. (Not that you should do it for this reason, but in the interest of full disclosure.)
  2. Your new account will be opened with a free $25 bonus deposit from Betterment.

Filling out the forms takes about ten tedious minutes, but then I find form-filling-out especially tedious. Still as such things go, it wasn’t too bad and I never threw up my hands in disgust or quit in despair. No small thing given my temperament. Heh.

Next they’ll send you a couple of emails verifying some stuff. 


  1. You’ll link to your bank.
  2. They’ll make a small deposit in your bank account based on the info you gave them to verify that link works.
  3. Once linked you can with a click move money into your Betterment account and set up automatic investments if you care to.
  4. Once the money arrives in your account, Betterment sends you an email letting you know. Personally, I really liked this feature as it saved me having to log on to check.
  5. Even more importantly you can, with a click, access your funds in Betterment. Not that us long-term investors want to do much of that. But it is always good to know you can get to your dough anytime and without fuss.

You’re good to go.

Recommending these guys is a big step for a hard-core Vanguard index investor like me. It might have you wondering just how and where I see them fitting in. They, of course, would say they can and should handle everything short of your 401k/403b/TSP plans. But there are fees involved here and, modest as they are, you don’t want to pay fees unless the value added is worth the price.

I see it this way:

If you have/can read thru and understand the Stock Series here on the blog you are good to go and DIY (Do It Yourself) directly with Vanguard.

But you might do well to consider Betterment if:

1. You really have little or no interest in this stuff and just want a solid plan created based on your personal goals. This is the same attitude you’d bring to an advisor but with Betterment you get the plan and results with less cost and risk.

2. You want to be invested now, but are still too early in the learning curve to DIY.

3. You are personally comfortable with investing but you also have this responsibility for your child or parent and see this as an easier, more effective tool for them. This is why I suggested Betterment to Colin in this post.

4. You are looking for an effective and efficient method of saving for short-term goals. This is how I’ll personally be using them.

5. You want to leave a financially disinterested spouse an easier way to deal with money than the DIY approach you’re comfortable with.

6. The time comes when you are no longer interested, willing or able to monitor your investments.

There could be many reasons for #6, but the one that as a geezer I’m personally starting to think about these days is aging. The harsh truth is that at some point, if we live long enough, our cognitive abilities begin to wane. Happens to all of us. And when it does, you don’t want to be hands on with your investments. Far to easy to be tempted into some wild scheme by those who specifically prey on the elderly or simply by our own delusions. When that time comes, .15% is a very small price to pay.

One final thing. If you’re like me you also like to know the people you’re dealing with.

As I said in my second to last post, I like smart people. And when it come to investing I like people who understand the key basics that lead to financial success. Jon fits the profile.

Since I can’t introduce him to you personally, this 2.5 minute video will help. In it Jon walks you thru a quick overview of the Betterment approach and how it works. He also talks a bit about how he runs the company. My guess is, like me, you’ll be impressed on both scores. But more importantly you’ll get a sense of the guy behind the company.


If I’d known him sooner I would have been an early backer. Were I younger, I’d be sending him a resume.

Addendum #1:  A note from Betterment to my International Readers…

“Betterment currently only operates in the United States, and for regulatory reasons cannot accept customers residing outside the country.  A customer must have a permanent U.S. address, a U.S. Social Security Number, and a checking account from a U.S. bank.” 

But the good news is, I’ve asked them personally about this and as they grow expanding internationally is definitely in the plans. I’ll keep you posted.


Posted in Money, Stock Investing Series, Stuff I recommend | 46 Responses

Case Study 6: Helping an ill and elderly parent

mother and adult childern

(Not actually Colin, his mother or sister)

Courtesy of Visual Photos

In today’s Case Study reader Colin offers us a chance to take a look at a tough situation many us have had or will have to deal with at some point. Many years ago, I did myself and with a situation eerily similar to Colin’s. His mother is sadly facing a serious illness and, with his help, is sorting thru a mix of investments that appear to have been chosen for the benefit of those selling them.

In this study we’ll see another example of why I don’t like investment advisors and we’ll examine some steps Colin can take to help his mother escape.

While I have already responded to Colin in Ask jlcollinsnh, it occurred to me this is a case that deserves wider readership. Many of you might benefit from the conversation and others might well have useful suggestions for Colin as well. If you do, I hope you’ll add your thoughts in the comments.

Here is Colin’s note:

I recently started reading your blog and I really enjoy all the great articles and advice.

I’m fairly confident when it comes to my own current investments, but I’d like to help my mother get her affairs in order and although I have ideas I’m a bit overwhelmed. I currently live in Germany so I’m somewhat limited with some of the help I can offer when I’m not in the US. I’m currently back in the US through the first week of January.

She was recently diagnosed with two types of cancer. One is a slow moving lymphoma and the other is squamous cell lung cancer which is large cell and less lethal than small cell lung cancer. She thought she was going to have surgery this week to remove a lobe of her lung but the date was moved to February. I came home with the intention to help her with her recovery but now that we have more time and energy I decided with her consent to help her get her home and finances in order.

My mother will be 65 in March and is retired. She receives $1,200 a month from social security. She has $40,000 in investments with Edward Jones of which $30,000 are in a taxable account and $10,000 are in an IRA. I was fairly shocked when I looked at what the taxable account is comprised of:

  • Freeport-McMoran Copper & Gold – FCX $13,876
  • Dawson Geophysical Co – DWSN $6,464
  • Broadcom Corp – BRCM $720
  • Patriot Coal Corp – PCXCQ $42
  • Hartford Balanced Income Fund C – HBLCX $11,071

The individual stocks are all holdover investments from a previous advisor at a different company my mother used.

I asked why no one at Edward Jones had sold the stocks as it is obviously very risky to have so much of ones money invested so narrowly especially at her age. She said that her current advisor wants to sell them but is waiting for the right time. That statement is a red flag to me. My mother did ask the advisor to take a small amount of her money and invest it aggressively.

I’d like to sell all of these stocks and the mutual fund and move most the money into Vanguard Total Bond Market with a small amount in Vanguard Total Stock Market and either a savings account, money market, or cd.

I know bonds are generally placed in tax deferred accounts but her income is so low I think her taxes would be minimal. Patriot Coal Corp is in the process of declaring bankruptcy and I was thinking it may be possible to use some of the capital losses to offset any capital gains. I’m not sure how bankruptcy affects selling stock. I realize that the stock may just be a total loss.

I think my mother would possibly like to stay with Edward Jones as they offer face to face advice (although I’m skeptical of the quality of it). I’m not sure if it would be possible to buy the Vanguard funds through EJ.

Would it be better to wait until the new year to put off paying taxes on the sale of the investments until the next tax year? I believe the Hartford Balanced Income Fund has a deferred load of 1% so I should probably read more about possible costs of selling it. If I transfer the investments to Vanguard from what I’ve read it would be better to transfer them in kind but I’m not sure all that implies.

Her IRA consists of:

  • Franklin Income Fund A – FKINX $4,240
  • Income Fund of American Fund A – AMECX $3,700
  • Lord Abbett Short Duration Income Fund A – LALDX $2,467

I’m slightly less concerned with these investments, but I’m nervous about how heavily they are invested in junk bonds. I didn’t know that mutual funds existed that would invest in dividend paying large cap stocks along with junk bonds. It is an interesting idea but seems overly complicated and risky. I would probably like to move these investments to Vanguard and place them all in Total Bond Market.

English cottage

Courtesy of Lilac  & Lavender

She owns her home with no mortgage in West Virginia on 60 acres in a rural area. Overall the house is in good shape but could use some repairs to plumbing and eventually will need a new roof. I’m sure other expenses will come up as often happens in life. The value is in the range of 80 to 100k. She has no desire or plans to move.

I think a possible asset allocation would be 70% Total Bond Market, 20% Total Stock Market, and 10% mix of savings account, cds, and money market. I like the Total International Stock fund as well (I own some in my AA) but it seems more volatile than is necessary.

She has a life expectancy as little as one year but possibly ten or more. It is really hard to tell at the moment. Besides the cancer she is very healthy and active. She will probably know more after her surgery in February but even then it is very uncertain.

I think it makes sense to have her assets as stable as possible so she can access the money as needed to make larger purchases for car and home repair.

My mother has a will and living will already. My sister and I are her only heirs and we are close and generally agree on how to proceed with all of these issues. My mother seems hesitant to spend the money to go to an estate lawyer but I think it would be good to go to see her options to protect her remaining assets and especially her home from medical debt.

I’m not concerned with inheriting the house or money but I also don’t want her to have to sign it over to the bank or hospital (she doesn’t either). She has been receiving a very generous amount of charity aid from the two hospitals she has been going to but the she has to reapply every six months. Currently she receives a 75% discount from one and a 100% from another. This won’t cover certain doctor’s fees though. She will have Medicaid until Medicare starts the month before she turns 65.

In your opinion does my mother have enough assets to warrant going to an estate lawyer?

It isn’t easy for me to make decisions with someone else’s money, but I don’t feel that my mother’s money is being handled appropriately.

I’ve read quite a few investment books at this point, but I have limited knowledge about issues she is facing. I’d hate to have someone from Edward Jones sell her another front load mutual fund with high fees and costs. I also don’t want her to lose her house. I know the decisions I make are ultimately my own and my responsibility but any advice would be greatly appreciated.

Thank you for your time,


And my reply:

Hi Colin…

I am very sorry to hear of the challenges your mother is facing with her health and finances. She is fortunate to have you there to help sort thru it all. And it is very fortunate she is open to your help and that you and your sister are on the same page.

You don’t mention what her annual expenses are, but I’m guessing she gets by on the $1200 from Social Security. I’m also going to assume you and your sister are willing and able to kick in to help support her if needed. This will play a role in the idea I’ll be suggesting at the end of this reply.

I am concerned that your mother asked the advisor to take a portion of her money to “invest aggressively.” This is the last thing someone her age and with her limited resources should be doing. Hopefully the advisor was honest enough not to take advantage of that request, but typically that’s like providing chum to sharks. In any event make sure it is off the table.


You are right to be concerned about her assets being in individual stocks and the advisor wanting to wait to “sell at the right time.” My guess is that this means some, in not all, are trading at a loss. It is foolish to hold on to these hoping for better days.

I agree with your plan to sell them all and redeploy the money at Vanguard in the Total Stock and Total Bond Funds. It is also a good idea to hold some cash for the house and car repairs you foresee. You are correct in that, at her income level, taxes are not much of a concern.

You should be able to sell the shares in the bankrupt company, but of course not for much.

It might be possible to buy the Vanguard funds thru Edward Jones (EJ), but why? You want to take all this and the IRA money out of EJ. Looking at what they have her in, the last thing your mother needs is more free advice from them. Clearly, these investments were made to benefit the broker, not your mother.

Likewise, roll the IRA into Vanguard. You can call Vanguard and they can help with the process. Don’t be surprised if EJ drags their feet and otherwise makes this difficult. It happens all too often. They don’t like seeing the gravy train head out the door.

Since your mother has minimal tax concerns, with the taxable account the easiest thing to do is have EJ sell everything and send her a check. She owes them no explanation. You could also do this with the IRA but you’d have to be sure to reinvest it in the Vanguard IRA within 60 days to avoid any taxes. But again, not a big deal for her.

Since we are near year end and just to spread the tax liabilities a bit, assuming there are capital gains in those stocks (and if not, no tax worries at all), you can sell the taxable stuff this year.

Then in January move the IRA to Vanguard and convert it to a Roth. Theoretically this will be taxable, but again in your mother’s situation a non-event. Once there, she’ll never have to pay tax on any withdrawals from it. Plus the Roth is much more advantageous to you and your sister should you inherit it.

Be sure she lists you as beneficiaries on all these accounts. This avoids probate and insures it passes seamlessly to you. Same with the taxable stuff.

And no, your mother doesn’t have enough assets to need an estate lawyer, but be sure her will is up to date.

As for the house, it sounds like that is where she is most comfortable and since she’s been there awhile and it is mortgage free I see no reason she shouldn’t stay as long as she is physically able.

My guess is that you might get some push back from her on leaving EJ. Sounds like she enjoys the interaction. But she is paying too steep a price. Here’s an alternative that would serve her better.

If you look at the right hand column here on the blog you’ll see an ad for Betterment. In the next few days I should have a post up recommending these guys. Not quite as cheap as DIY with Vanguard, they do provide an exceedingly simple way to invest in a portfolio of index funds. Rather than choosing the funds yourself, you open an account and tell them your goals. The software then suggests the asset allocations to reach those goals. Very simple and effective, and maybe just the level of involvement that your mother will enjoy with out the risk of expensive mistakes or her being sold high-profit-for-the-broker crap.

You mention a concern about losing the house to medical debt, but it is unclear in your comment whether she has that debt now or is concerned she might in the future. Regardless, she might want to consider moving some of her assets to you and your sister, and this is the idea I referred to in the beginning of my reply.

The IRS allows your mother to gift you and your sister each $14,000 with no tax consequences to you or her. If she can get comfortable with the idea, it would effectively take her taxable account from 30K to 6k. Less worry for her and possibly helpful in insuring the charitable benefits she now enjoys. Of course, if the time comes when she needs the money, you and your sister must be prepared to channel it back to her.

Hope this helps. Good luck to you and all the best to your mom!

Addendum #1:

Second thoughts on having mom gift money. From aspiringyogini in the comments below:

“I’m glad to hear that you will be talking to an elder care lawyer. We have consulted one too and have had good results. Your lawyer will very likely urge your mother to NOT give you money, just in case she needs long term nursing care and might need to qualify for Medicaid to get coverage. In order to qualify there is a 60 month look back period and if she has given money to her kids, then she would not qualify. This website echoes that and our elder care lawyer confirmed it too:http://www.elderlawanswers.com/how-gifts-can-affect-medicaid-eligibility-10006

Addendum #2: 

Also see Prob8′s detailed comment below. He is the author of this guest post:  Death, Taxes, Estate Plans, Probate and Prob8.

 More Case Studies

Posted in Case Studies | 25 Responses

Stocks — Part XX: Early Retirement Withdrawal Strategies and Roth Conversion Ladders from a Mad Fientist


Albert Einstein in fine form

I like smart people.

People who can make me sit back and think, Mmmm. I never thought of that. Or I never thought of that in quite that way.

In most fields where I have a lay interest, physics or anthropology or evolution or psychology for example, this is not all that hard to do. My knowledge level is modest and my learning curve in the early stages.

With investing, not so much.

I’ve been working thru my understanding of money, how to think about it and how to use it for decades. You’d be hard pressed to think of a mistake I haven’t made. When I read the arguments against the validity of index investing, for instance, it is my own voice I hear in my head.

So it is not often these days I find a writer who truly expands my financial horizons. Someone so clear and insightful that when we disagree I find myself re-evaluating my thinking. But what a thrill when I do.

If you are a regular here, you may well already be familiar with The Mad Fientist. So impressed have I been, that I’ve fallen into the habit of routinely referring to his ideas and linking to his posts. I have even on occasion, and it is hard to fully express how rare this is for me, submitted my draft posts to him for peer review.

The most notable of these was my rant: Should you avoid your company’s 401k plan?

Offended deeply by the egregious fees many 401k plans have begun to charge, I dearly wanted to be able to tell you to simply skip these plans. Doing so would have appealed to my sense of justice and my appreciation of simplicity. But the facts lead to a different conclusion and at my request in Addendum I MF laid out the case for the value 401k plans provide even with their ugly fees. He was, of course, correct.

In many ways, that addendum was the precursor to this Guest Post.

Some of the more frequent questions I’ve been getting of late relate to how best, exactly, to begin pulling the 4% once retirement is reached. A major concern, especially for those retiring well before age 59.5, is how to access all those tax advantaged accounts without penalty. MF has it figured out and shares it right now, right here.

(I’ll also be writing more on Pulling the 4% in the future.)

If you are not already a MF reader, consider this a taste. For those serious about investing, my guess is you’ll shortly be as big a fan as I.

And if as you read his stuff you find an idea or two that conflicts with my own, it just might be possible he is the one who is right.

So now…

From the Mad Fientist:


Taxable vs. Tax-Advantaged

For investors, there is a recurring debate over whether to invest in taxable accounts or tax-advantaged accounts and how much to allocate between the two.

Taxable accounts are great because you can access your money at any time and you don’t have to worry about the government charging you any fees to do so.

Tax-advantaged accounts, on the other hand, allow you to reduce your taxes, thereby allowing you to invest more, but there are rules that govern how you access your money (for more info on the various types of “buckets”, check out Jim’s excellent post here).

Obviously, if you plan on retiring early, you’ll need to have access to a certain amount of money prior to standard retirement age so the debate is particularly heated within early retirement circles.

I’d say though, that not only is there a clear winner in this debate, it is even clearer for those aspiring to retire early. Winner: Tax-advantaged.

Tax-Advantaged Accounts

The main reason tax-advantaged accounts are usually best is because they allow you to put more of your money to work for longer. By investing the money you save on income tax, you can dramatically increase your savings rate and build up your FU money quicker.

Over on my site, I wrote an article titled Retire Even Earlier Without Earning More or Spending Less and in that post, I compared two different scenarios (see graph from the post below).

In the first scenario, a person who starts with nothing, makes $60K per year, spends $16,800 per year ($1,400 per month) and invests the rest in a taxable account is able to retire in just under 11 years (assuming a 5% real rate of return).

In the second scenario, I used exactly the same numbers but rather than only invest in taxable accounts, the person instead maxes out his tax-advantaged accounts (i.e. IRA, 401(k) with 5% employer match, and HSA) and invests what’s left in a taxable account.

This one minor, seemingly insignificant change results in shaving over two years off of his working career! That means, without earning any more, spending any less, or taking on any additional risk, he was able to reduce an already short working career by nearly 20%!

Retire Earlier Without Earning More or Spending Less

In this chart…

  • The dark green line represents the first scenario, using taxable accounts only.
  • The bars represent the second scenario, using maxed-out retirement accounts (the light green portion) and taxable accounts (the dark green portion).
  • The dashed red line represents how much he needs to be financially independent.

By utilizing his tax-advantaged accounts, he is able to reduce his taxable income from $60k to under $34k and therefore reduce his federal income tax burden by over $5,000 per year. As you can see in the graph, the additional tax savings that he is able to invest every year, when combined with the employer 5% 401(k) match, really adds up!

Now while it’s obviously beneficial to utilize tax-advantaged accounts, you may be wondering how you can access the money you contribute to the accounts before the standard 59.5 retirement age without being penalized.

Roth IRA Conversion Ladder

The best strategy, in my opinion, is to build a Roth IRA Conversion Ladder.

Here’s how it works…

Assume our example early retiree maxed out all of his tax-advantaged accounts during his working career and now has large amount of money in his 401(k) and Traditional IRA when he retires early at age 39.

Once he quits his job, the first step to accessing this money early is to move the 401(k) funds into his Traditional IRA. This step is the easy part and according to Vanguard, the rollover can be set up in about 20-30 minutes (although it may take 2-3 weeks to be processed).

After rolling over his 401(k) to his Traditional IRA, he can now start building a Roth conversion ladder.

The IRS rules state that you are able to convert a Traditional IRA to a Roth IRA, as long as you pay ordinary income tax on the conversion. It’s possible though, due to a low amount of income during early retirement, that he won’t have to pay any tax at all on the conversion. If the conversions are tax free, that means he will have avoided paying any tax on the money (tax-free contributions to 401(k)/Traditional IRA, tax-free growth within the retirement accounts, tax-free conversion from 401(k)/Traditional IRA to a Roth IRA, and tax-free distributions from the Roth)!

Assume for this scenario that he is confortable paying a few hundred dollars in tax each year for the conversion so he decides to convert $12,800 each year to cover over 75% of his $16,800 worth of annual expenses during early retirement.

Once the money has been converted into a Roth IRA, the converted amount is then available for withdrawal, tax and penalty free, five years after the conversion date (the earnings on those investments, however, need to remain invested until standard retirement age).

To build up his $12,800 conversion ladder, he moves $12,800 from his Traditional IRA to his Roth IRA every year. After the fifth year, he is then able to withdraw $12,800 per year from the account. Assuming he continues to convert $12,800 every year, he will be able to withdraw $12,800 from his Roth IRA, tax and penalty free, every year for the rest of his life.

It should be noted that since he won’t be able to access his retirement account money during the five years he is building up the conversion ladder, he’ll need enough in his taxable accounts to sustain himself for those years. Luckily, he ends up with over $100,000 in his taxable account (see the age 39 dark green taxable bar in the 1st chart) in this example scenario so he’ll be able to live off of that money until he is able to access the funds in his Roth IRA.

Here’s a graph to illustrate what the Roth IRA in this example would look like when building up the conversion ladder:

Roth IRA Conversion Ladder

Since you can build as big or as small of a conversion ladder as you want, you could potentially fund the majority of your early retirement using this strategy.

Substantially Equal Periodic Payments*

While the Roth IRA Conversion Ladder strategy is the method I plan on using to access my retirement account money before standard retirement age, there is another method that is worth mentioning.

It is possible to withdraw money from an IRA before standard retirement age, without penalty, by setting up a withdrawal schedule of Substantially Equal Periodic Payments (SEPP).

There are different ways you can calculate your periodic payments but the general idea is that you are able to withdraw a small percentage of your overall IRA balance every month, quarter, or year.

The downside to this strategy is that you would need to continue the periodic payments for five years or until you turn 59.5, whichever is later. If, for some reason, you stop your disbursements before the time restriction is up, you would be responsible for paying a 10% penalty on all of your periodic payments.

For more information on this strategy, check out the IRS FAQ on the topic.

I won’t be utilizing this method because 1) it seems much more complicated than the conversion ladder strategy and would likely make tax time even less fun than it already is, 2) I don’t want to be forced to withdraw money from my IRA in years when I don’t need to, and 3) the conversion ladder strategy is more than sufficient on its own to get early access to retirement-account money so there is no reason to complicate things with another method.


Obviously each person’s situation is unique so you should run your own numbers before making any changes to your contributions.

For many people though, utilizing tax-advantaged retirement accounts could allow you to supercharge your savings rate by drastically reducing the amount of money you pay in taxes.

Since many early retirees will likely have a low amount of earned income over a larger portion of their adult lives (i.e. the years after retiring), it is possible to access the money in tax-advantaged accounts early without paying any penalties or taxes at all, making this strategy particularly useful for future early retirees wanting to achieve financial independence sooner.

The Mad Fientist writes about financial independence, early retirement, tax avoidance, travel hacking, and geographical arbitrage over at madfientist.com.

Here are two more related Mad Fientist posts:

 The Guinea Pig Update The Mad Fientist demonstrates theory put in to action

Roth IRA Horse Race How to supercharge your conversion ladder

jlcollinsnh again…

As I said at the very beginning, I like smart people. And the readers here certainly qualify as is reflected in both the calibre of their questions and of their answers. But I also know many blog readers tend to skip the comments section. That is a mistake around here:

*Addendum #1: Substantially Equal Periodic Payments (SEPP)

In the comments below reader Lucas has provided several detailed responses to some questions posed. Taken together they almost are a post on this subject themselves. Well worth a read if you are considering this option.

Addendum #2: Roth Withdrawal Rules Summarized

Reader TLV also added to the SEPP conversation in the comments. In addition he/she provided a nice explanation of the Roth withdrawal rules ending with this:

So, to summarize:
*Tax free: contributions any time, conversions after 5 years from conversion, earnings after 5 years from opening Roth IRA AND over 59 1/2.
*10% tax: Conversions within 5 years from conversion
*Income tax: Earnings before 59 1/2 but due to 72(t), education, or medical; earnings after 59 1/2 but within 5 years of opening Roth IRA
*Income tax + 10%: Earnings before 59 1/2 and not meeting any other exceptions.

 Addendum #3: Retirement Withdrawal Strategies by my pal Darrow is an excellent overview of some of the options and he includes his personal approach.

Addendum #4: Curious as to what your taxes might look like in retirement? While everybody’s situation will vary, here are two excellent posts from my pal Jeremy detailing his own tax strategy as he travels the world as an early retiree: Never pay taxes again and his actual 2013 tax return.


Posted in Guest Posts, Stock Investing Series | 76 Responses

Death, Taxes, Estate Plans, Probate and Prob8

 spiderman uncle

 “With great power comes great responsibility.”

      Spiderman’s dead Uncle Ben

(Oh, and some other guy named Voltaire.)

So, too, with wealth.

One of the pesky things that nobody ever seems to tell you while you are accumulating it, is that is that having and keeping it requires effort. You must learn how to invest it and how to protect it from the many forces that would happily pull it from your pocket into theirs. And this Great Responsibility of Wealth continues after you die. How unfair is that!?

But if you shirk this responsibility, your wealth will flee from you; while you are alive or after you are dead.

So far on this blog we’ve only talked about the alive part. This is not because I don’t think the death part is important. I very much do and in fact have had my own Will and other documents in place for many years.

Rather it is because I am not qualified to write about this stuff. While it might not always show, I try to write about only those things I actually understand. For this topic my knowledge base is simply too limited. For my own needs I have personally relied on legal professionals to get it done.

Early on a reader calling himself Prob8 began showing up on this blog. His comments were always well reasoned and well written. In my mind I heard his name as Prob(ably)8 and wondered, as I sometimes do with internet names, what it meant.

Back in October I finally had the chance to meet him while attending FinCon, the conference for financial bloggers like me. Turns out he is an attorney with a practice focused on estate planning and “probate” is the correct pronunciation of Prob8.

Regardless of the pronunciation, it didn’t take me long to figure out that in Prob8 I had just the right guy to fill in a knowledge gap around here for which my own abilities came up woefully short. He graciously agreed and here is his Guest Post. In an appropriately lawyerly fashion it begins with a disclaimer.

 Estate Planning Made Understandable

by Prob8


DISCLAIMER – You should contact a licensed professional to assist in the preparation of your estate plan.  This post and any comments are not legal advice and will not create an attorney-client relationship.  If you are not in the United States, this post may be useless to you and will probably suck to read.  You’ve been warned.

At some point in your life I suspect you will question whether you need an estate plan.  This may happen when someone you know dies, you reach a certain level of wealth, or perhaps when a friend or family member plants a seed in your mind.  For me, estate planning did not make it onto the “to do” list until my first child was born.

If you have not yet planned your estate, you might be wondering why you need to make a plan.  You probably don’t want to spend any more time than necessary in life with a lawyer.  You certainly don’t want to give them any of your hard-earned money.  I don’t blame you.  I feel the same way.

At a basic level, you need to make a plan in order to deal with incapacity during lifetime and distribution of your assets in an orderly fashion at your death.  But estate plans can accomplish much more than that.  Additional goals for many who plan their estate include avoiding the probate process (more on this later), reducing or eliminating estate tax (more later), creating creditor protection for heirs, and creating guardians for minor children.  Of course, this is not an exhaustive list and not all of these things will be relevant to you.  If some are relevant, you should give serious consideration to preparing or reviewing your plan.

Not everyone has an estate plan and that might get you thinking about whether there are alternatives to formal planning with a lawyer.  There are.  Let’s discuss some of them.

Informal Estate Planning

The first thing you need to know is that your state has an estate plan for you already in place.  The good news is that it’s free of charge and requires no formal documentation or effort on your part.  The bad news is that it probably doesn’t say what you want and relying on it will likely lead to increased costs and aggravation for your family.

1.  State Default Rules.

Let’s assume you have no formal documentation and your death occurs.  For simplicity, let’s also assume your assets are solely in your name with no co-owners or named beneficiaries.  Having failed to plan your estate, your family is now subject your state legislators’ opinions about how your assets should be distributed.  Perhaps you are okay with your state’s plan.  Perhaps not.  If you’re unsure, you should do some research.  You can start here (http://estate.findlaw.com/planning-an-estate/state-laws-estates-probate.html).

Example: Because I practice in Illinois (and because it’s the home of Jim’s alma mater) (jlc: Go Fighting Illini!), let’s assume you live here too.  Let’s also assume you have a spouse and an adult child.  At your death, Illinois law says your spouse would be entitled to the first $20,000.  After that, the net assets will be distributed 1/2 to your spouse and 1/2 to your child.  Is that what you intended?  I don’t know . . . you’re dead.  Unless your wife can channel your spirit through Oda Mae Brown*, I doubt we will ever know.  I can tell you that unless your family gets along really well, someone is probably going to be upset with that result.  Especially if this is a second marriage and the child is from a former marriage.

Death isn’t the only thing covered by your state’s default rules.  You’re also covered in the event you become incapacitated due to accident, illness or otherwise.  As with the death laws, the rules for handling your affairs while incapacitated vary from state to state.  In some cases, your spouse might be able to make limited medical decisions on your behalf.  More likely, some form of court proceeding (known as a “guardianship” in Illinois) will be required for making material and long-lasting medical decisions on your behalf.  Please note that relying on state default rules for incapacity will probably be time consuming and expensive.

When it comes to money, someone will almost certainly need a court proceeding to make financial decisions and pay bills on your behalf during your incapacity.  As you might imagine, involving money has a tendency to increase the contested nature of a court proceeding.  This is fine with me as a lawyer: It helps in my efforts to accumulate my own F-You Money.  It’s not so good for your efforts.

2.  Beneficiary/POD/TOD Planning.

A convenient and mostly free way to reduce some of the potential problems, costs and uncertainty of having no plan is to plan by use of beneficiary designations, pay-on-death (POD) designations and transfer-on-death (TOD) designations.  Making an account automatically pay to someone upon your death is as easy as completing a form provided by your bank, insurance company or other financial institution.  In some states (http://www.nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter5-1.html), you can even name transfer-on-death beneficiaries with respect to certain types of real estate and even vehicles (http://www.nolo.com/legal-encyclopedia/naming-tod-beneficiary.html).

There are some benefits to this type of planning.  Being cheap and relatively easy is certainly a nice benefit.  Planning this way will also help you to avoid probate provided your beneficiaries outlive you.  Assets transferring in this fashion will generally not be subject to the claims of your creditors at death.  Also a very nice benefit.

Planning this way isn’t all sunshine and rainbows though.  First, this works for many mainstream assets like bank accounts, investment accounts, retirement accounts and life insurance.  It does not work so well for assets like small business/partnership interests, most personal property, and real estate in many states/instances.  This type of plan probably does not work well for parents with ankle-biters as they may receive their “inheritance” at the age of majority in your state.  Please note that to the extent you have (or later create) a Will, your POD/TOD/Beneficiary designations will take precedence over anything you say in that Will.

Also, you must be very careful about your financial institution’s default rules for what happens if a beneficiary (perhaps one of your children) does not survive you.  Does your institution pay to the surviving beneficiary or do they pay to the deceased beneficiary’s descendants?  If you plan this way, you must review the plan if a beneficiary dies before you.

A significant problem with this type of planning is that it does not deal with your incapacity.  If you become incapacitated while using this planning method you are stuck with the default (i.e. guardianship) rules we already covered.

For those of you with an estate large enough to trigger federal or state estate tax, this type of planning will do nothing to reduce that burden on your beneficiaries.

3.  Joint Ownership (with right of survivorship).

Owning assets jointly with someone else is another way to informally plan an estate.  Many of you probably already engage in this sort of planning by owning assets jointly with your spouse.  For jointly owned accounts, the death of one owner will automatically make the other person the sole owner – the Last Will and Testament of the first to die is irrelevant as to jointly owned assets.  Further, incapacity of one joint owner will allow the other joint owner to have full access.  Planning this way works well for real estate, financial institution accounts (except qualified accounts like IRA’s and 401k’s), and many forms of personal property.

While this works well for married couples, most people are reluctant to name their children as joint owners of their property (privacy and being subject to their children’s creditors are big reasons).  As a result, the death of the second joint owner will result in probate unless other steps are taken.  If you have an estate tax problem, planning this way may not be your best bet.  Of course, this planning method needs to be combined with something more to deal with incapacity of both owners or the surviving owner.

Formal Estate Planning

While informal planning may work in some cases, it comes with gaps that need to be filled.  That’s where formal estate planning comes in.  Every plan should consist of a minimum set of documents**.  Here they are and what they do (at a very basic level):

A.  Last Will and Testament.

Although a Will can accomplish many tasks, the primary one is to direct the disposition of your assets at your death.  For parents with underage children, Wills can often be used to designate who will raise your children and how/when their inheritance will be distributed.  The issue of guardianship for minors is probably the most common reason I see for people making their first estate plan.

Although a Will is an essential component of every formal estate plan, it not the most effective tool for dealing with two of the other very common reasons people make a plan – probate avoidance and estate tax reduction/elimination.  Since the term “probate” is such a big concern for many people, let’s take a minute to discuss what it is and why a Will can’t help you avoid it.


Probate is the process of validating your Will at your death, ensuring your valid debts and expenses are paid and distributing your net estate in the manner you direct (with limitations).  While many people believe having a Will avoids the probate process, quite the opposite is true.  In order for your Will to be validated, it must be filed in court and a judge must say it meets all the technical requirements in your state – an essential element of the probate process.  If it fails to meet those requirements, your Will is invalid and your estate will be administered in accordance with the state default rules mentioned above.

There are many reasons people don’t want their estates to go through probate.  The three most common are:  1. the probate process is very public – your Will, heirs, asset information, etc. are all open to inspection by anyone who wants to look; 2. the probate process takes a relatively long time to complete (varies by state) which tends to tie up your assets; and 3. the probate process can be expensive.  If you want to know more about probate, this should get you started: http://legal-dictionary.thefreedictionary.com/probate

You should note that only those assets owned by you in your individual name are subject to probate.  Anything with a beneficiary, TOD/POD or jointly owned (with right of survivorship) will bypass the probate process.  Further, small estates may not need to be probated.  The definition of a small estate varies across the country – see here to check your state’s rules. (http://www.nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter8-2.html)

B.  Power of Attorney for Healthcare.

This document is primarily designed to appoint an agent to make medical decisions on your behalf if you are incapacitated.  Without this document, a court proceeding will typically be required to give someone the legal authority to act on your behalf.  This document typically begins upon signing and terminates at your death.  If your state requires certain language to be “durable” (i.e. survives your incapacity), you must make sure that language is incorporated.

C.  Power of Attorney for Property.

This document allows an agent to manage your business and financial affairs.  As with the healthcare power of attorney, failing to have this document will likely result in a court proceeding to allow someone to pay your bills, manage investments, and do all things asset related.  Your agent’s powers typically begin upon signing and end at your death.  If you are uncomfortable giving your agent that level of immediate power, you may want to consider making the document effective upon the happening of some future event (e.g. your incapacity).  Again, don’t forget to include durability language if required by your state.

D.  Living Will.

Although included in the basic set of documents list, this document is considered optional to many people.  The document is designed to deal with the specific issue of end-of-life care (e.g. life support machines).  If your healthcare power of attorney is broad enough to adequately cover life support machines and end-of-life care, you can consider skipping this document.  However, if you would like to give your agent and family specific instructions for end-of-life care a living will should be considered.  If you aren’t sure whether to include it, do a little research on living wills in your state.  Here is Illinois’ form document to give you a flavor for what one says.  http://www.state.il.us/aging/1news_pubs/publications/poa_will.pdf

As mentioned, using a Will as your primary post-death planning tool will leave a couple significant gaps – requiring probate and failing to efficiently deal with estate tax.  If these issues are a concern for you, the following additional document should be considered:

E.  Revocable Living Trust.

A revocable living trust is a document you create during your lifetime to hold your assets.  You are typically the trustee of the trust during your lifetime which ensures that you maintain full control of the trust assets.  If properly used, this document will become the primary vehicle to manage your assets both during your lifetime (even during incapacity) and at your death.  Once an asset is transferred to your trust, you technically no longer own it.  Instead, your trust owns the asset and you are merely the trustee.  This is the reason any assets transferred to your trust avoid probate – remember, only assets you own in your individual name at death are subject to probate.  If you own real estate in multiple states, a trust is a great way to avoid having to probate your estate in each jurisdiction.

Estate Taxes.

If you are married, a properly prepared estate plan using trusts can reduce and often eliminate the need for your heirs to pay estate tax.  Before you prepare a plan to deal with estate tax issues, you must first determine if you have an estate tax problem – most people don’t.  If your estate is less than $5,250,000 (2013 exemption amount which will adjust over time), no federal estate tax will be due at your death.  If you are married, you can pass up to $10,500,000 to the next generation without triggering estate tax by filing the proper documents at the first spouse’s death.  Please note, your “estate” consists of anything in which you had an ownership interest at the time of your death including jointly owned accounts, accounts where you’ve named a beneficiary, IRA’s, 401k’s, life insurance, etc.  I bet life insurance surprised you.  Although the benefits are generally not income taxable to the beneficiary, they are counted in your gross estate for estate tax purposes.  For more detail, see here  http://www.investopedia.com/ask/answers/09/life-insurance-tax.asp

Even if you don’t have a federal estate tax problem, you must also determine whether you have a state estate tax issue.  Some states collect estate tax while others don’t.  If your state collects the tax, the exemption amounts are going to be lower than the federal government.  To see your state’s rules, start your research here  http://wills.about.com/od/stateestatetaxes/qt/nostateestatetaxes.htm

A final note on estate tax . . . you can pass an unlimited amount to your spouse at death.  If you are single with an estate above the state or federal exemption amounts, there are solutions but you’ll need to get more creative.

DIY Planning.

I suspect many of you are like me and enjoy doing things yourself – both for the joy of accomplishment and for the money savings.  If you plan on doing your own estate plan be very careful.  I have been practicing law for more than a decade – in the estate planning arena for most of that time.  In that time, I have administered several DIY Wills.  None of them accomplished what the testator intended.  Many had fatal flaws leading to their outright rejection in court.  All of them led to above-normal administration costs.

This biggest problem I have with DIY planning is that problems are often not discovered until it’s too late.  It’s not like improperly fixing a leaking faucet.  If you mess that up, you’ll know.  You can always try again or call a professional.  Estate planning documents are a bit different.  You may not know there’s a problem.  If there is a problem, you’re probably already dead or incapacitated and can’t fix it.

If you decide to write your own, please at least consider having them reviewed by a professional.


* Bonus points if you know who that is without looking it up.

** Special circumstances may require additional documents.  Those circumstances and documents are beyond the scope of this post.

Note from jlc:

Prob8 practices law in Illinois. If you would like to talk to him about engaging his services, say so in the comments and I’ll connect you thru email.


My pal Darrow just put up an excellent post on this stuff, too. It is especially worth reading if you are considering doing this as a DIY project: Do it yourself Estate Planning.

Addendum 2: Curious as to what your taxes might look like in retirement? While everybody’s situation will vary, here are two excellent posts from my pal Jeremy detailing his own tax strategy as he travels the world as an early retiree: Never pay taxes again and his actual 2013 tax return.

Posted in Guest Posts, Life | 34 Responses

Case Study #5: Zero to 2.6 million in 25 years

chau wine toastchau wine toast

In Case Study #4 we looked at reader EmJay’s potential transition from a current corporate career into a new life funded in part by his financial independence. A family man at age 48 and with 2.6 million in net worth, the conclusion was he easily had the resources to chart and enjoy this next, freer stage in his journey.

The longer I write this blog the more I am struck with the incredible range and diversity of the readers here. Very much as with the Chautauqua attendees described in A Week of Dreams.

This range is on best display in the comments, where readers ask questions and exchange ideas with me and each-other. For my money, some of the most interesting information is to be found in these conversations. The questions expand and clarify the topics the posts introduce.

But be that as it may, I am also aware that many blog readers skip reading this material all together. It is for this reason I occasionally move especially striking comment dialogs into the post as addendum. And it is how this follow-up Case Study came to be.

Not surprisingly, for those readers just starting their own financial journeys, there is a keen interest in what the path from Zero to 2.6 million in 25 short years actually looks like.

Reader Tom asked exactly that in Case Study #4′s comments and EmJay graciously provided a detailed reply. What is striking to me is how ordinary this path is.

Certainly EmJay and his wife had successful careers. But they also started out with quite modest incomes, elected give up one of those incomes to have a stay-at-home spouse once their son was born and there is a failed business venture in the mix. Yet, in the end, the results are very impressive.

So why is EmJay a multi-millionaire when just a few years ago the news programs were clogged with stories of other manager and executives a few short months from losing their houses? Here’s what jumped out at me:

  • EmJay and his wife married a bit later in life and after their careers were starting to roll.
  • They had their son after they had established some financial stability.
  • They share similar financial attitudes.
  • They stayed married. Perhaps those first three points helped?
  • They started investing early.
  • They maintained a high savings rate.
  • They learned from their mistakes and moved on.
  • They didn’t panic during the big crash of 2007-9.
  • They avoided lifestyle inflation.

That’s my take, anyway. Here’s what they both had to say in their own words. My editing reflects only formatting. Enjoy!


This is actually not Tom.

From Tom:


Thanks again for a great post! I stumbled across your blog earlier this summer and have spent the last few months catching up from the beginning, now if I could only get my parents and girlfriend to read the stock series!!


Question for you and any other readers for that matter.

I believe I’m one of the fairly younger readers here (25) and recently have gotten very serious about savings, cutting expenses as well as building my income (from work & recently, in 2013, attempting to find other ways – investing, etc.) As I have begun to do this, its apparent I missed out on a few things those initial years of working, maxing out 401K, investing my excess cash instead of letting it sit in a bank account, etc. With that in mind, I have made it a serious goal to grow my income as fast as possible, so the compounding effects will be felt later on.

Now for that question –(do not feel obligated if you would rather not share further details)

Through the course of your career, what is the level in which you achieved that income that would were satisfied, and knew could bring you to this end result? Based on your net worth it seems like you may have been making that salary over 100K for quite some time. Is this a level that you have just built up to over the course of your career? Or were there times that it was higher and you have adjusted/switched positions for lower salary as you became closer to FI?

I think this may be an interesting topic to look into and could greatly benefit the younger readers — What should be the typical growth of salary year by year (for your main source of income) to achieve these goals? Are we on the right track?

Best Regards & Thanks again,


making a point

And this is not actually EmJay.

EmJay replies:

Hi Tom,

If you are getting a start on developing a lot of the good habits identified on this and other similar forums at the age of 25, you are off to a good start and well ahead of most of your peers. You’ll also be well ahead of my schedule.

I’d say the only thing that I did right in the early stages of my career is put money in company 401K’s. I didn’t really get serious and smart about our investments until I was approaching 30.

If I would have had an information source and community such as this in my mid-20’s, I can only imagine how much earlier we would have achieved Financial Independence. There were definitely mistakes made along the journey.

You pose an interesting question. The most complete way that I can think of answering it is by walking you through my financial journey and some of the milestones along the way.

The vast majority of my career has been spent working in Corporate America and it has been a pretty steady and stable upward trajectory in my salary. Here’s an overview of my income and savings trajectory (to the best of my memory) starting with my first job out of college:

- I generally started with zero savings coming out of college but also had zero debt. My wife started an IRA while in college and also finished school without any debt. Major kudos to both sets of parents for helping us to get started without a mountain of debt.

Year 1:

My starting salary in my first job was $22K. (FYI – Based on an online inflation calendar that would be roughly equivalent to $43K in today’s dollars). Assume 4-7% annual salary increases until the next big job change. Started putting money into 401K right away.

Year 5:

Changed jobs/industries and my new salary was in the low $50’s plus a bonus plan.

Years 7-8 

(30’ish years old): Living together and then marriage, becoming DINK’ers (Double Income No Kids). Between both salaries, surpassing $100K for the first time.

We were saving about 40-50% of our joint take home pay while also contributing to 401K’s up to at least the company matching amount.

This was the time period where I ramped up my knowledge on investing. We started with a financial advisor for a year or two. After further educating myself on investing and realizing how much we were paying in fees and commissions, we ended our relationship with the advisor and decided we could do better on our own.

We also bought our first home for $180K. Started investing in Vanguard mutual funds around this time.

Year 11: 

Have first child. After working a part-time schedule for a year or two, my wife decides to be a full-time Mom. Back to living on one salary. My stand alone salary is in the low $90’s. Also start investing in 529 Plan.

Year 13/14:

This is about the time that my salary cracks $100K for the first time; saving rate of 30-35%; also start maxing out 401K each year based on govt. limits.

Year 15 +/-: 

First time that portfolio cracks $1,000,000. This is probably the first time that I’m thinking, WOW, I might be able to take an early exit from the work rat race if we can keep this up.

Year 16/17: 

Decide to pursue an Entrepreneurial opportunity. Make approximately $25k and zero savings during this time period. The opportunity didn’t work out as planned but no regrets in trying.

Year 18: 

Sell first house for $490K (the house we purchased 10 years earlier for $180K). Buy new home in the $500’s. Re-enter Corporate America with a salary of $120K; we continue on the one salary. I see annual increases in salary of 5% on average leading up to the present day.

Years 20-23: 

The dark days of the market. Our portfolio is roughly cut in half during this time period. I stay the investing course, do not withdraw from the market and continue with auto-investing into Vanguard Funds and 529 Plan each month. (jlc–emphasis mine)

Year 25/Present Day: 

Salary in the $160K range. Continue maxing out 401K and investing approx 30% of take home pay; wife has picked up some part-time work the past few years which pays peanuts but she enjoys it. The equivalent of all her income goes into an IRA for investment and tax deduction purposes. Also re-financed the home mortgage a couple of times over the past seven years.

Additional Income:

Throughout the course of my career, bonuses and stock options probably contributed another $200K of after tax income. I believe it is important to disclose this for a complete picture of our journey and some things that made our present day situation possible. Aside from using some of this income for home remodeling projects, the majority went directly into Savings.

Mistakes made along the way:

    • Used a Financial adviser for a couple of years; paid high fees and commissions
    • Purchased a lot of individual stocks along the way and still own many of them. Some did pretty well. But, many did not.

Things we did right along the way:

I’m not sure if it was an article here on Jim’s website (jlc–Yep: The Simple Path to Wealth, one of my earliest.) or another but somewhere along the way, I read that rule #1 on the path to Financial Independence is (assuming one marries) to make sure you pick a spouse with similar financial views. My wife and I have always shared similar values and beliefs when it comes to finances and our journey has been a true team effort.


    • Since we’ve been married, we’ve been investing 30-50% of all take home pay per year.
    • We have stayed true to investing for the long haul and have not committed the common mistakes of buying high and selling low.
    • Discovered John Bogle, Vanguard, and Index funds fairly early in life.


    • We have lived well below our means, especially as it relates to big ticket items such as home and cars
    • We drive our non-fancy cars forever
    • Hardly ever go out for dinner
    • Do a lot of our own home improvement projects
    • Always pack a lunch for work
    • Keep house temperatures low during the winter and high during the Summers
    • Use the dryer as little as possible
    • Some other frugalities


Final Thoughts:

We don’t lead a Spartan life by any means. We have a nice home, drive two cars, pay for Cable TV, have a calling/data plan that is more expensive than it should be, have some expensive hobbies/interests, etc.

But, we also have some frugal spending habits and have saved at a fairly good rate. There is no question that we can and will reduce our spending habits. I applaud those folks that are able to save 50-75% of their earnings, keep their expenses way down and achieve Financial Independence even earlier in life.

We took a less extreme path along the way than some others but have still been able to achieve a level of Financial Freedom that a majority of Americans will never achieve. I guess my point is that there are different ways in getting there and now you have a better picture of our journey.

Addendum: Can Everybody Really Retire a Millionaire?  

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Posted in Case Studies | 36 Responses

Case Study #4: Using the 4% rule and asset allocations.

asset allocation

Today’s Case Study gives us a chance to explore how to determine net worth and how to apply the 4% withdrawal rate against it. It also takes us into the arena of applied asset allocations.

Since this correspondence and its questions come from somebody with a high net worth, it also gives me a chance to share with you an asset allocation strategy I’ve been contemplating. It is a variation of the 50/25/25 model discussed here and here. We’ll do that at the end of the post.

But first, let’s read EmJay’s letter and answer his questions.

Hi Jim,

Let me begin by expressing my appreciation for all the time and energy you have devoted to providing the content on this website. I discovered both the MMM and your website just a few weeks ago and there has been a bit of an obsession consuming all the valuable information provided. Great stuff!

Let me fill you in on my situation and I’ll pose a few questions where I would greatly value your thoughts and input. If you don’t have the opportunity to respond, I totally understand as I’m sure you receive quite a few of these messages. If nothing else, my questions may provide some ideas for some future articles.

My wife and I are in our late 40’s and we have two early teen year children. My current take home income after taxes and 401K deductions (max) is approximately $120K.

Already a big fan of Vanguard, this is where we have all our savings/investments. However, our investments are spread over many mutual funds (combo of indexed and managed funds) as well as we own several stock purchases. I know what I need to do as far as re-allocation goes based on your series.

I believe we have achieved Financial Independence based on the 4% Rule (but this is the source for some of my questions that follow) and I’m ready to step away from my current job into semi-retirement as I explore possible 2nd career opportunities and other valuable ways to spend my time doing things that I enjoy.

Current State:
Annual Spend: $70K
We’re actually closer to $65K but through a combination of cost cuts that I know we can make while also accounting for an increase in our health insurance costs as we move off employer-provided coverage, I want to cautiously plan assuming an annual spend of $70K.

Non-Retirement/Taxable Vanguard Accounts: $1.1 million
Retirement Vanguard Accounts: $900k
Total Savings: $2 million
Current Allocation is roughly 80% Stocks, 15% bonds, 5% cash

Additional Assets:
529 College Savings Plan for the kids – $250K (Note: Our State’s plan is run by Vanguard and has the lowest fees of any 529 Plan in the country)
Home Equity – $350K (still have about $150K left on our mortgage with 13 yrs remaining on our 15 yr loan @ 3.5%; $1400 monthly mortgage)


1.  Am I able to include our Retirement Savings as part of the overall Financial Independence (4 % Rule) calculation? Or should I only be taking into account my assets in the Non-Retirement/Taxable accounts? I have seen some conflicting views on this point.

I’m 48 so I won’t be able to access my retirement accounts for another 11+ years. My thinking is that the Retirement funds continue to grow untouched while we live off the dividends and capital gains in the non-retirement/taxable account to cover our expenses in the interim. Make sense?

2.  Should one typically include their Home Equity as part of the 4% equation? I haven’t been and view it more as a surplus for the future if/when required.

3.  With our home equity, does it still make sense to also invest in the Vanguard REIT index if for no other reason than diversification of Real-Estate ownership?

4.  In doing the re-allocation of my many mutual funds to the select few index funds in my non-retirement account, will the capital gains on those funds that are moved to another fund be subject to Taxes? My understanding is yes which could have some bearing on when and how swiftly I do the re-allocation as I believe I could end up paying dearly in taxes.

5.  Should I go with the suggested 50/25/25 allocations in both the Taxable and Retirement accounts or would you suggest that I place my investments in the Vanguard REIT Index and Vanguard Total Bond Index in the Retirement Accounts only? (I seem to recall you making this suggestion elsewhere)

I’m close to being ready to pull the trigger on semi-retirement and financial freedom but need to have my ducks in a row to help get my wife totally on board and comfortable with some aspects.

I know more pay-checks will be in my future. I don’t know when, I don’t know what I’ll be doing and how much I’ll be doing it (full-time vs. part-time) but I want it to be on my terms. I haven’t experienced much work joy in my 25+ years of employment to date.

Thanks again for sharing your experiences and wisdom and for considering my questions.


Walking thru the questions

My reply:

Hi EmJay…

Let me begin, in turn, by offering a hearty “Job well done!”

Based on the “4% Rule and your projected 70k annual spending rate, you are already comfortably well into Financial Independence (FI). At 4% that spending rate requires only 1.750 million and your net worth is around 2.6 million.

You have earned the financial right to do what ever you please. Plus you are entering an age where your time is far, far more valuable than adding more money to your stash.

Let’s walk thru your questions:

1. In thinking about the 4% rule, you should look at your total net worth. Tax-advantaged and Taxable accounts are simply the buckets in which you hold your investments. Based on your numbers, this gives you 2 million.

You are correct to think about them separately when it comes to withdrawals. The taxable accounts will provide your living expenses until you hit 59.5 while the tax-advantaged accounts grow untouched.

2. Yep, your 350k home equity is also figured as part of your net worth. So now you are at 2.350 million. You can certainly view this as a surplus if you like and as you have. You might also just think about it as an extra cushion that puts your financial picture in an even more powerful position. At 70k your withdrawal rate has now dropped to only 3%. Sweet! And this will allow your stash to grow even more over the years you are retired.

Also consider that at 4% 2.350m throws off 94k:  24k more than your projected spending. While I wouldn’t suggest you ramp up your spending to this level, you should be aware that you have some “splurge money” if you so choose.

With a basic withdrawal rate of 3%, you could easily splurge once every couple of years. Maybe a big trip, maybe a new car, maybe a house remodel or maybe even your own charitable foundation.

3. Since your home equity is part of your net worth, you also use it in calculating your allocations. If you choose the 50/25/25 allocation I personally use, you’ll want 25% in real estate.

25% of 2.350m is 587.5k. Since you have 350k of this covered in your home equity, the balance of 237.5k would go into the REIT VGSLX.

While you didn’t ask, I’d also keep your 3.5% 150k mortgage. That’s a nice low rate and I see no need to pay it off early.

Let me also make the point here that when calculating the cost of owning a home, the opportunity cost of any equity should be included; the 350k in your case. For more on that, check out this post.

4. Yep. Anytime you sell shares in your taxable accounts it will be a taxable event. You’ll want to tread carefully here.

First, do as much of the re-allocation as you can using the tax-advantaged accounts.

Second, consider you might be better off just holding the funds you have rather than taking the tax hit.

Third, if you have losses in any of these investments you can harvest them to offset the gains as you re-allocate.

Fourth, since your living expenses will be coming from these funds, by carefully selecting the order in which you draw from them you can slowly and more tax efficiently reduce the number of funds you have while improving the overall quality of your remaining holdings.

5. As a general rule you should keep the investments that pay dividends and interest in your tax-advantaged accounts. Stock index funds are inherently “tax-efficient” and so are the better choice for taxable accounts. Of course these are fine in tax-advantaged accounts too.

Once you retire and your income drops this will be less of a concern. Even with your net worth, your taxable investment income still should leave you well under the 15% tax bracket ceiling. Keep in mind any income from your new activities could alter this.

Next under the category of “You didn’t ask but…”

…let’s turn our attention to the 250k in the 529 plans for your kids. Not much to say. You’ve got it well invested. (I’m guessing Utah is your state?)

But careful readers will have noticed I included this 529 plan money in initially pegging your net worth at 2.6m. But then I went on to exclude it in the conversation on allocations and withdrawals. The reason is, this money is earmarked for a very specific goal. As such, I prefer to set it aside for these kinds of discussions.

Finally, you say: “I haven’t experienced much work joy in my 25+ years of employment to date.” You are not alone in that. But those days are about to be behind you and a long, bright future awaits.

 Freedom from chains

You’ve done a wonderful job in positioning yourself and your family for a path on your own terms. You’ve paid your dues and you deserve it.


Allocation Variations

As mentioned at the beginning, I’ve been noodling some ideas on modifying the 50/25/25 allocation model for folks with a high net worth, high risk tolerance and an aggressive investing profile. For our  purposes here we’ll consider 2 million+ as high net worth.

This is an aggressive option to consider. It is for those who seek maximum growth and have maximum flexibility and the intestinal fortitude to accept the additional risk.

If we review the thinking behind the 50/25/25 stock/bond/real estate allocation, recall that stocks serve as our growth engine, bonds as our deflation hedge and REITs as our inflation hedge. The bonds and REITs also help smooth out the ride and provide a bit more dividend and interest income. But those are secondary benefits.

We are mostly using them to hedge against another deflationary Great Depression or a bout of hyper-inflation. Of course they also hedge against much more minor variations of these, too.

Now remember, if we start to see large deflationary or inflationary moves, our bonds or REIT investments will grow dramatically. That is, after all, the core idea: We have one asset class performing well even as the others suffer so we remain –relatively– fiscally healthy.

But how much do we really need? Once over 2 million in assets you are in pretty rarefied air. So maybe, just maybe, rather than percentages, total dollars in each asset could be the measure. This would cap the amount in bonds and REITs while letting the amount in the more powerful (and more risky) growth engine of stocks grow. With 2.350m it might look like this:

  • 500k in bonds (21%)
  • 500k in RE (21%)
  • 1350k in stocks (57%)

Of course the dollar amounts can be whatever best fits your risk tolerance and your desire for growth. You could, for instance, set the threshold for switching to this approach at 3 million. The 50/25/25 percent formula would give us:

  • 750k in bonds
  • 750k in RE
  • 1.5m in stocks

Once over 3 million it would start to change to a dollar allocation. For instance 3.350 million would then look like this:

  • 750k in bonds (22.4%)
  • 750k in RE (22.4%)
  • 1.85m in stocks (55%)

The point is not that one of these is “right” but rather this is another way to think about your asset allocations. Using it, the numbers can change to match your goals and personal preferences. However, I would suggest this is something for only those over 2 million in net worth to consider. Short of that, using the straight percentages is more helpful.

Let me know what you think in the comments.

Addendum 1:  Please note – I no longer hold VGSLX. Please see Stepping away from REITs for a discussion as to why.

Addendum 2: How EmJay went from zero to 2.6 million in 25 years.

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Posted in Case Studies | 59 Responses

Republic Wireless and my $19 per month phone plan

dark and stormy

Painting by Sergey Gusev

It was a dark and stormy night.*

She told me to wait. Maybe I should have listened.

But I was impatient and headed to South America. The idea of remaining in touch, of having access to my email, the internet and, wonder of wonder, free international calls was not to be denied.

“No!” I cried. “I must have it now! Now, I tell you! Now!”

“It will only break your heart,” she said, “as it has so many others. This is not the one for you.”

But I was blinded by love. No longer thinking rationally. The thought of travel to distant foreign lands without it suddenly became unthinkable. Unbearable. I would not be denied.

I bargained. Cajoled. Begged. Pleaded. Threatened. Ranted. Insisted. And, finally, (this one being true) just asked.

And the nice Republic Wireless (RW) PR lady sent me the Motorola Defy XT phone. I’ve hated it ever since.

 weep for me

Weep for Me

So that’s the bad news and, blessedly, the end of my little melodrama.

The good news is that I remain enamored with Republic Wireless, its service and the concept behind what they are doing here. Moreover they have a new phone coming shortly: The Moto X. While I can’t yet speak from experience (I can now and it is a HUGE improvement!**), by all accounts this one will be a major step forward and will put to rest many of the Defy XT’s shortcomings.

So, if you are a cut-to-the-chase sort, here’s the bottom line:

  • Republic is a fine company with which to deal and very much worth supporting.
  • Wait for the Moto X phone before you sign up. It shouldn’t be long. It is due in November.

The Phones.

Understand first, I am not a fan of technology. I am a fan of useful and reliable tools. When a technology reaches the point of being a useful and reliable tool, I’m on board. Unfortunately, many technology companies are infamous for using their customers in their beta-testing.

Depending on your perspective and inclinations, you will have read that last either as:

“Those rascals!”


“Of course! That’s what makes tech so cool. I get to be part of the process!”

I’m a “those rascals” kind of guy and when they, and you “of course” types, get it sorted out, please let me know.

The problem with the Defy XT is that it is very much a phone for the “of course” types and since it is also tech that’s a couple of generations old, they have long since moved on. Time to just bury the thing. Thankfully, that’s what Republic is on the verge of doing.

In the beginning, I started a log to keep track of its many shortcomings. But with its pending demise, wading thru all those points in this post seems, well, rather pointless.

What is interesting, at least to me, is why Republic chose to go with such a flawed phone to begin with. The answer to that, apparently, is that Republic has the potential to break the expensive strangle hold other cell phone service providers have on us. That, it seems, has made the many cell phone manufacturers reluctant to supply Republic with their products. The revenue at this point would be peanuts and the risk of offending their bigger customers not worth taking.

Understandable. Cowardly, but understandable. Maybe shortsighted, too. Republic looks to have a very bright future, especially if the Moto X meets expectations.

Republic Wireless, the service.

When the nice PR lady first approached me about doing a review, her timing could not have been better. Our then cell phone service had just tried to hose us. Again.

My daughter had returned from her year studying in France. While she was there, we suspended her cell phone service. Part of that service was $10 a month for unlimited texting.

When she returned, we called and re-instated her service. With the first bill came a $400+ charge for texting. Oh, you wanted the unlimited monthly texting for $10 again? After an irate call or two they cut the bill to $100. Better, but being hosed is being hosed.

That, in a microcosm, is my (and I dare say your) typical experience with cell phone, and for that matter cable, companies.  They are forever looking to pad the bill and boost your monthly costs. Hoping you won’t notice and/or will let it slide. In dealing with them you’d best be always on your guard. And who needs or wants that? Especially with an alternative on the horizon.

So my first, last and only real question for the nice RW PR lady was this:

“Is there anything, anywhere I can do with this phone that will ever cost me more than $19 a month?”

“Nope,” she said.

“Just to be absolutely clear. Nothing at all? Intentionally? Unintentionally?”


Impressively, this has proven to be true. I’ve used it here, there and everywhere, including unlimited calls, texts and data to and from South America and it is $19 each month.

Here’s my understanding of how it works:

Whenever you are in range of a wi-fi connection you connect and, just like your laptop, the phone uses the internet to download data. And also text messages and your phone calls.

If you don’t have a wi-fi connection, it defaults to the Sprint network and uses regular cell service. The idea is that most of the time, you’ll be using the internet and that is essentially free. The cellular service usage is typically small enough that the prices can be as low as they are.

Of course, the cellular service is only as extensive and as good as Sprint. Beyond their range, the phone only works in wi-fi mode. So, in South America for instance, my phone worked only when I had a wi-fi connection, just like a laptop or tablet.

cafe san sebas

Cafe San Sebas, Cuenca, Ecuador

My RW phone knows this place.

I quickly got in the habit of asking for wi-fi passwords where ever I went. The phone then remembers all of these and I have to say I found it pretty cool to return to my favorite cafes in Ecuador and have my phone automatically connect, just like coming home.

But for me the biggest plus is just dealing with a cell phone company that is not plotting to screw me. This is so refreshing it makes up for the shortcomings of even the Defy XT. Add to that the cost, which is a fraction of what we’d been paying, and you know why I plan to stay with RW. It kind of reminds me of dealing with Vanguard. And if you’ve read much of this blog, you know just how high that praise is.

This is not the service for you if….

….you value having the state-of-the-art newest and best phone from the company of your choice. For now, at least, RW = Motorola.

….are dependent on your phone for your business. In all candor, since I haven’t tested the new Moto X, I can’t yet recommend RW if your phone is also a critical tool.

However, this is the service for you if, like me, you value…

….low-cost. $19.95 per month for unlimited calling, texting and data – with no hidden traps – is tough to beat.

….supporting a company that is trying to improve service and choice in an industry that sorely needs it.

….supporting a company that, like Vanguard, truly seems to see value and success in putting the needs of their customers first.

….fast, friendly and competent tech help. Republic doesn’t offer a help-line number to call but they do offer several other options ranging  from a community forum right on down to snail mail (!). Personally, email works best for me and they’ve responded much, much quicker than the 48 hour window they promise.

moto s

Moto X

With the new Moto X phone they are now offering four different plans. Here they are, as described by RW and cribbed directly from their website:

$5 Wi-Fi only plan
This is the most powerful tool in your arsenal of options. Why? You can drop your smartphone bill —at will— to $5. If you’re interested in getting serious about cutting costs, you can use this tool to best leverage the Wi-Fi in your life to reduce your phone bill. It’s also the ultimate plan for home base stickers and kids who don’t need a cellular plan. It’s fully unlimited data, talk and text —on Wi-Fi only.

 $10 Wi-Fi + Cell Talk & Text
One of our members, 10thdoctor said :  “I use WiFi for everything, except when I’m traveling and for voice at my school.” Yep, this is the perfect plan for that. Our members are around Wi-Fi about 90% of the time. During that 10% of the time where you’re away from Wi-Fi, this plan gives you cellular backup for communicating when you need to. This plan both cuts costs and accommodates what’s quickly becoming the norm: a day filled with Wi-Fi.

$25 Wi-Fi + Cell (3G) Talk, Text & Data
Lots of people are on 3G plans today and are paying upwards of $100 a month on their smartphone bills. That’s nuts. This plan is here for you during the times when you need the backup of cell data. For folks who want to surf Facebook and check email in the car (as a passenger!) or who travel regularly for work, this option lets them enjoy all the benefits of Wi-Fi with the luxury of 3G cellular data. You may find you only want this cellular back up part of the month —no problem! Switching during the month to the $5 or $10 plan is easy, and is a great way to keep more money in your wallet.

 $40 Wi-Fi + Cell (4G) Talk, Text & Data
We heard you tell us that you wanted a super fast option, so we added this arrow to your quiver. This plan is here for you when you’ve got a road warrior kind of month, and you’ve got a serious need for speed. Have to get work done on a long train ride? And need to work fast? This is your guy. Just like the other plans, it’s just a few clicks away.

Will I be able to switch between plans?
Yes! When you purchase a new Moto X phone, you’ll be able to choose whatever plan you like—and you can also switch plans up to twice per month as your needs change. For example, if you know you’ll be taking a vacation and might require more cell data one week, you can switch to a cell data plan right from your phone and then switch back to a Wi-Fi “friendlier” plan once you return home.

That ability to switch as your needs dictate seems pretty sweet to me.

In short, despite the rough go with the Defy XT I’ll be sticking with Republic. Truth is, for all the issues, it was very cool to be able to call the USA from South America and still not push my monthly cost past that $19.95. Of course, that only worked when I had wi-fi available. But still, very cool.

Even more cool is the monthly savings and the sense that I’m now dealing with a company not looking to pick my pocket at every opportunity.

Assuming they stay true to this path, Republic’s future looks bright to me. I expect they will continue to expand and improve their service and the hardware.

I might even give the new Moto X a whirl.**

If you’d like to give Republic a try yourself, just click on the ad below. By way of full disclosure if you sign up, this blog will earn a commission.


*This phrase, in writer’s circles, is widely regarded as the most cliched, hackneyed and simply worst possible opening line in all of fiction. So of course I’ve always longed to use it. Now I have. I promise not to again.


November 14, 2013. The new Moto X phone has now been released. With it I can now give RW my unfettered recommendation. So if you want to give them a try, the time has come.

**June, 2014. Both my daughter and I just upgraded to the X and already the X is showing itself to be a major improvement. We were able to trade in our XTs for $100 credits. Good riddance!

My wife chose the G and she too is now free of Verizon.

Posted in Life, Stuff I recommend | 69 Responses

Case Study #3: Let’s get Tom to Latin America!


Image courtesy of Wikipedia

I wasn’t planning two Case Studies this close together. Really. But then Tom dropped this note in my lap (actually on Ask jlcollinsnh) and it proved irresistible on several fronts:

–It provides a chance to make a key point about F-You Money:

Unlike the amount needed for full financial independence (FI) and retiring, all that is needed is enough to embolden you to explore new and interesting options.

–It involves long-term international travel.

–It provides a great illustration of how to execute my 10-year plan without being stuck as an office drone.

–It provides a chance to illustrate how your F-You Money can grow to make you FI even while you’re off having adventures.

Let’s take a look at Tom’s situation, plans and questions:

Dear jlcollinsnh:

Help a Hoarder Go Back to School!

Hi! I’m a huge fan of your site. It’s nice to see your investing optimism amid all the doom and gloom of the mass media. Anyway, I’d love your advice on my current situation.

I’m currently working in a high paying job. It’s as life sucking as can be but the pay is amazing. At the end of this year, my contract will end and I’ll have amassed $250k in a checking account. Foolish, I know. It was my dumb “let’s try to time the market phase,” but I’ve grown out of it. You’ve shown me the light!

After this job ends, I plan to study in Latin America (I’m from the US) for five years. During these five years, I’ll have no income and expect to spend $16k a year, which is a firm, inflexible requirement. Once I graduate, I plan to permanently relocate and work in Latin America and start savings again, albeit at a much more modest rate than now. I’d then eventually like to retire early – perhaps around the age of 40.

Here are some stats:
Age: 28

Liabilities: $0.

Assets Upon Getting Laid Off and Going to School: $250k in checking, $17.5k in a Vanguard small cap 401k

Cost of School (2014-2018): $16k/year x 5 years = $80k

Savings Once Back in the Workforce (2019-2024?): $6k/year in savings (low salary but worthwhile profession)

Retirement Goal: (2025/age 40-ish): $450k in investments (18k/year withdrawal rate)

As I’m now an enlightened reader, I’m ready and excited to invest and have my money work for me. How would you suggest investing?

Note: I can only invest in taxable accounts, since I’ve already maxed out my Vanguard small cap 401k for the year and I am not interested in a Roth IRA as I plan to be in a low tax bracket during early retirement.

My current investment ideas include:

1. Keep the 80k needed for school low risk and highly liquid (high-interest checking and CDs?) and invest the remaining funds (170k) in the VTSAX, which I wouldn’t touch for at least 10 years. I’ll stay strong!

Pro: I’m guaranteed to not have to touch my VTSAX fund since I’ll have cold, hard cash to pay for school.

Con: I stupidly have too much cash sitting around.

2.. Take the entire 250k and invest in one of Vanguard’s conservative balanced funds, such as the Target Retirement Income Fund, or Lifegrowth Funds, or slightly more aggressive VBIAX and make monthly withdrawals as I go through school.

Pro: An excessive amount of cash isn’t sitting around doing nothing

Con: I risk having to make my aggressive 6.4% withdrawal rate during a possible down market during my time in school.

What do you think? I’m dealing with two different time horizon heres, Short term 1-5 years for school and medium term 10-15 years for early retirement.

Keep up the great work on the blog!!



croc feeding

Tom’s not been foolish. This guy, however….

Courtesy of http://www.break.com

Welcome Tom…

…and thanks for the very interesting scenario! Let’s get started with some general observations:

Don’t think of having held cash as having been foolish. Think of it as having been patient in figuring out what you needed to know about investing before making your move.

Looking at the two options you lay out, I’d say you’ve used your investment research time well.

Too often people rush into buying individual stocks or chasing “star” fund managers without understanding the landscape and how vanishingly difficult those paths are. Now that’s foolish.

Nothing at all wrong with holding your cash until you are sure about what you plan to do. This is for the long-term, after all. Time spent getting it right is time well spent. This includes time spent being sure you are mentally tough enough for the wild ride. Sounds like you are.

Speaking of being mentally tough, congratulations on being tough enough to:

  • stick out your high-paying sucky job long enough to set the stage for your adventure.
  • avoid the lifestyle inflation that could have trapped you in that job.
  • avoid taking on debt that would have made those chains even stouter.

All these are key parts of my ten-year plan linked to above. At age 28 you’ve managed to position yourself beautifully.

So let’s turn our attention to your two investment ideas and play with this cool Compound Interest Calculator I cribbed from Johnny Moneyseed’s recent post From employment to retirement in 7 years.

Scenario #1.

Actually, including the 17.5k you have in your 401k you are heading to Latin America with 267.5k.

If we pull the 80k you’ll need for the next five years into cash that leaves 187.5k to invest.

The 17.5 in the 401k Vanguard Small Cap Index fund is just fine left there for now. We’ll come back to it later. The rest — 170k — we’ll drop into VTSAX.

Now it gets fun, and a bit tricky.

Over time, the market returns somewhere between 8-12%. But with a five year time horizon, your actual results could range much higher. Or lower. I’m not overly concerned about this as your plan is to continue to keep this money invested and growing. So for the sake of this conversation, let’s run the numbers three ways. You’d end with:

  • $239,303 at a somewhat pessimistic 5%, but still offsetting 51.5k of the 80k you will have spent. Not bad.
  • $275,499 at a fairly modest historical return of 8%, more than replacing the 80k you will have spent. The beauty of money working for you illustrated!
  • $330,439 at an aggressive historical return of 12%, making you wealthier than when you started. Woo Hoo!

Now, what happens when you have been back working and adding that annual 6k from 2019 to 2024? Dropping each of the ending numbers from above in to our calculator, by 2024 you’d have:

  • $340,229 @ the 5% projection
  • $386,426 @ the 8% projection
  • $456,545 @ the 12% projection

As you can see, the bad news is that only one of these projections gets you to your 450k goal. The good news is you are now looking at a 10 year time horizon and the further out you go the more likely you are to get to the higher return levels.

So, even pulling the entire 80k you’ll be spending into cash up front gets you some pretty impressive potential results.

Scenario #2.

Keeping all the money fully invested, pulling it only as needed.

Since you are starting with 267.5k and you’ll be withdrawing 16k per year, you have a 6% withdrawal rate. If you haven’t already, now I’m going to send you over to give my post on withdrawal rates a read.

What you’ll see is that, while starting to push the envelope, 6% is not completely unreasonable. Especially given a bit of luck, the short time you’ll be doing it and the fact that, unlike somebody say 65 or so, you’ll have the ability to work your way thru it if the market turns against you.

Taking a look at the Trinity Study Update I referenced in that post, you’ll see what makes these academic withdrawal studies tricky is when they account for inflation over 30 years. Tough bar.

Comparing charts 3 & 4 you can see this clearly. Since it also designed to examine extended periods of 15 years or more, you need to be careful extrapolating to your 5-10 time frame. As we’ve discussed, the shorter the time frame the more likely your returns are to be outside the norm. For better or worse.

Understanding that, it is still instructive to look at chart #3 and the 15 year results @ 6%. Notice that 100% stocks gives the best results and that those results diminish the more bonds you add. Of course, 100% stocks will also magnify the “outside the norm” dynamic described in the paragraph above.

So now, hopefully, you can see I’ve set up a framework for your decision.

If you go with your scenario #1, you’ll get a good result but one likely to leave you a bit more work to do beyond 2024 before hitting your 450k goal.

Go with your scenario #2 and you’ll keep more money working (and at risk) and greatly improve your chances of being at 450k or more by 2024, but with a greater risk of a larger gap should the market move against you for an extended period. Go with a 100% stock portfolio version and you’ll magnify this effect.

So you’ll also need to decide between the idea of the balanced funds you mentioned or 100% stocks in VTSAX. It really depends on your temperament and goals. Personally, I’d be willing to risk having to work a bit longer against the potential of having more when I wrap it up in 2024. But that’s me.


Psst. He might go for an option #2 version.

Not surprisingly, by extension, I’d go with one of the #2 versions. I’d set it up with Vanguard to transfer $1333 each month to my checking account and I’d never even glance at the funds while I was kicking it in Latin America.

As for a Roth, even though you plan to be in a low tax bracket, don’t be too quick to dismiss funding one. Things could change and you can always withdraw all your contributions tax and penalty free. Only the money it earns need be left in place, growing forever tax-free. It may never benefit you to the max, but it will benefit you. And there is no reason not to do it.

Ok, now back to that 401k. As soon as you are in your first year of no income, I’d roll this into a Vanguard Roth IRA. I’d also move it to VTSAX at this point, although if you are especially fond of the Small Cap Index fund that’s fine too.

While technically a taxable event, with no other income, at this amount the rollover should be tax-free. Once there it will grow tax-free forever.

Since for those first five years you won’t have income you won’t be able to add to it. But in 2019 when you start earning again, fund the Roth fully each year.*(See addendum #1) In fact, this is where most (up to the max allowed by law) of your planned savings in those years should go. Especially since it sounds like your income will be low enough not to need the immediate tax deduction.

There you have it. You are in a great position to pursue your new adventures while your money does the heavy lifting for you going forward!

What will you be studying and where exactly?

Travel safe and keep us posted!


*Addendum #1:

In the comments below reader Andres schooled me on the Foreign Income Exclusion for US expats and its effect on Roth IRA contributions. Here is our conversation…


One small wrinkle I’ve learned from living abroad: unless Tom makes more than the Foreign Earned Income Exclusion (which will be $97,600 for 2013 and is indexed to increase with inflation) he won’t be able to contribute to his Roth IRA if he is living and working full-time outside of the United States. However, he will be able to contribute to his taxable brokerage accounts as normal.

My reply:

Thanks Andrés…

Great input and something I didn’t know.

It got me doing a bit of research and I’d like to expand a bit on your comment.

The IRS says you can contribute to a Roth IRA if, in 2013 you

1. received taxable compensation during the year, and
2. your modified Adjusted Gross Income is less than certain levels which are detailed here:

Since the first $97,600 of foreign income is excluded, unless you make more than this you wouldn’t meet the income qualification.

However, in determining your income limit, this excludable income is added back in.

For a single taxpayer like Tom the income limit for a Roth IRA starts at 112k and phases out thru 127k. That is between 112k and 127k you can fund part of a Roth.

So, if Tom makes $97,600 or less: No Roth. Since the income is excluded, he doesn’t meet the earned income test.

If Tom makes over 127k: No Roth. He is over the income limit.

If Tom makes 100k, he could contribute $2400 to his Roth. That is his total adjusted gross income of 100k – the 97.6k exclusion = 2.4k

If Tom were to make between 103.1k (97.6k + 5.5k) and 112k he’ll be able to fully fund his Roth at the allowed $5500. Once over 112k the amount allowed gets steadily reduced until it is gone completely over 127k.


And this is why I hate writing about tax stuff! :)

Addendum 2:

Also from the comments below is this great strategy presented by Jay Jay. Tom should definitely do this.

Thanks Jay Jay!

Jay Jay:

I’ve been reading your blog for quite some time (love it, and thanks for doing it!), but this is the first time I’ve felt I might possibly add some insight.

Since Tom’s income will be so low, his dividends and capital gains should be tax-free (assuming his ex-patriot status doesn’t impact that) up to $32k or more, depending on deductions and exemptions.

I know you usually recommend a “set it and forget it” approach to index fund investing, but it might make sense in Tom’s case to consider occasionally selling off his fund if it has experienced some gains, and then immediately buying back into it. He would of course need to calculate what amount he could sell which would still keep him in the 0% cap gain tax bracket. If he remains in a 0% tax bracket, all he’s lost is his transaction costs.

This is sort of the opposite of a wash sale. Instead of locking in a loss, you are locking in a tax-free capital gain. It also re-establishes the cost basis, so if he ends up in a higher bracket in the future, his capital gains will be less than if he hadn’t made the sale/repurchase. As far as I am aware, there is no 30 day limit for sales/repurchases that involve a gain.

My additional considerations:

Because Tom will be using Vanguard funds he need not even worry about transaction costs, which Jay Jay rightly points out could be a consideration in other scenarios.

However, when using Vanguard funds there is this glitch:

“If you sell or exchange shares of a Vanguard fund, you will not be permitted to buy or exchange back into the same fund, in the same account, within 60 calendar days.”

The easy way around this is to exchange from VTSAX to VFIAX (S&P 500 index fund) and back to VTSAX after 60 days. While VTSAX slightly out performs VFIAX over time, for short periods either could win making this an non-issue. In fact, I’d be comfortable enough with VFIAX to say just leave the funds there until you are ready to harvest the profits again.

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Posted in Case Studies, Travels | 29 Responses