Well, this was a rare delight.
Photo courtesy of Kate
Well, this was a rare delight.
Photo courtesy of Kate
Courtesy of Fritz Cartoons
At some point, if you have been following the Simple Path to Wealth described in these posts, you will be able to chose to have your assets pay the bills rather than your labor.
How quickly you reach this point will have much to do with your saving rate and how much cash flow you require. In any event, your assets will have reached the point where by providing ~4% they can cover all your financial needs. Or said another way, your assets now equal 25-times your annual spending.
Having left your employment, you will have rolled any employer based retirement plans, such as a 401k, into your IRA, and the investments themselves, will be split between stocks and bonds held in the allocation that best matches your personal risk profile. Ideally, these will be in Vanguard’s low-cost index funds: VTSAX for the stocks and VBTLX for the bonds.
As we discussed in The 401k, 403(b), IRA and Roth Buckets post, these two funds will be in your tax-advantaged and ordinary (taxable) buckets. By this time you will have pared these down to just three: IRA, Roth IRA and taxable. My suggestion — and personal portfolio — is to hold them as follows:
As you can see, if you are single, you will actually have four fund accounts. VBTLX in your IRA and VTSAX held in all three places: Roth, IRA and taxable. If you are married, your allocation might look something like ours.
My wife holds: VTSAX in her Roth and in her regular IRA.
Jointly we hold: VTSAX in our taxable account and minimal cash for spending needs in our savings and checking accounts.
So together we have two Roths, two IRAs and one taxable account. Across these we have one investment in VBTLX and five in VTSAX. Our allocation is 75/25, VTSAX/VBTLX.
It is also very possible that, even if you’ve embraced this Simple Path, you still have other investments. If these are in your tax-advantaged accounts you’ve likely rolled them tax-free into Vanguard. But if they are in taxable accounts, the prospect of a hefty capital gains tax might have persuaded you to hold on to them. When I retired, we also had some of these “cats and dogs”, mostly in the form of individual stocks I had yet to break the habit of playing with.
At this point the discussion risks becoming a bit complex. There is almost an endless array of ways you might withdraw the ~4% you’ll be spending from your investments. So, let’s start with the mechanics of how this works and then I’ll share with you some guiding principles and exactly what we are doing and why. From there you should have the tools you need to form your own strategies.
If you hold your assets with Vanguard, or any similar firm, the mechanics of withdrawing your money could not be easier. With a phone call or a few clicks online, you can instruct them to:
This money can be transferred to your checking account or anywhere else you choose. A phone call to Vanguard, and most any other firm, will get you friendly and helpful assistance in walking though it all the first time.
Next, let’s look at some of the guiding principles behind the approach we use and which I am about to share.
First, notice that in constructing our 75/25 allocation, we look at all of our funds combined, regardless of where they are held.
Second, we have all dividends, interest and capital gains distributions re-invested. I am not captivated by the idea of “living only off the income” as many are. Rather, I look toward drawing the ~4% the research has shown a portfolio like mine can support.
Third, I want to let my tax-advantaged investments grow tax-deferred as long as possible.
Fourth, as I am within ten years of age 70 1/2, I want to move as much as I can from our regular IRAs to our Roths, consistent with remaining in the 15% tax bracket. This strategy is described in detail in the post on RMDs (required minimum distributions).
Fifth, once we hit age 70 1/2 and are faced with RMDs, these withdrawals will replace those we had been taking from our taxable account.
Pulling the 4% in action
1. First we think about the non-investment income we still have coming in. Even once you are “retired,” if you are actively engaged in life you might well also be actively engaged in things that create some cash flow. We are no longer in a savings mode, but this earned money is what gets spent first. And to the extent it does, it allows us to draw less from our investments and in turn allows them still more time to grow.
2. Remember those “cats & dogs” I had left over in our taxable accounts? Upon entering retirement, those were the first assets we spent down. We started with the ugliest ones first. While you may or may not chose to follow the rest of our plan, if you have such remnants left in your own portfolio, I strongly suggest this is how you off-load them. Do it slowly, as needed, to minimize the capital gains taxes. Of course, if you have a capital loss in any of them, you can dump them immediately. You can then also sell some of your winners, using this capital loss to offset those gains. Any tax loss you can’t use, you can carry forward for use in future years. You can also use up to $3000 per year of these loses to offset your earned income.
3. Once those were exhausted, we shifted to drawing on our taxable VTSAX account. We will continue to draw on this account until we reach 70 1/2 and those pesky RMDs.
4. Since the taxable VTSAX account is only a part of our total, the amounts we now withdraw each year far exceed 4% of the amount in it. The key is to look at the withdrawals not in terms of the percent they represent of this one account, but rather in the context of the whole portfolio.
5. We could set up regular transfers from the taxable VTSAX as described above, but we haven’t. Instead my wife (who handles all our day-to-day finances) simply logs on to Vanguard and transfers whatever she needs whenever she notices the checking account getting low.
6. This withdrawal approach may seem a bit haphazard, and I guess it is. But as explained in this post, we don’t feel the need to obsess over staying precisely within the 4% rule.
7. Instead, we keep a simple spreadsheet and login our expenses by category as they occur. This allows us to see where the money is going and to think about where we might cut should the market plunge and the need arise.
8. Each year I calculate what income we have and, consistent with remaining in the 15% tax bracket, I shift as much as I can from our regular IRAs to our Roths. This is in preparation for the RMDs coming at age 70 1/2. When that time comes, I want our regular IRA balances to be as low as possible.
9. Once we reach age 70 1/2, we will stop withdrawing from our taxable account and let it alone again to grow once more. Instead, we will start living on the RMDs that now must be pulled from our IRAs under the threat of a 50% penalty.
10. While I’m fairly certain the money in our taxable account will last until we reach 70 1/2, if it were to run out we’d simply begin drawing money from our IRAs ahead of the RMDs. In essence, this would be the money I had been shifting into the Roths. And, again, I’d strive to keep what we withdrew consistent with staying in the 15% tax bracket.
11. Despite my efforts to lower the amounts in our regular IRAs, the RMDs, once we are both forced to take them, will likely exceed our spending needs. At this point we will reinvest the excess in VTSAX in our taxable account.
There you have it. While you could, you don’t have to follow this exactly. You are free to adapt what works best for your situation and temperament.
For example, if you had $1,000,000 in your portfolio allocated 75/25 stocks and bonds:
This seems overly cumbersome to me and I present it only to illustrate how someone focused on living on only their investment income might approach things.
Here’s what I would Not do
I would not set up a 4% annual withdrawal plan and forget about it.
As we saw in this post, the Trinity Study set out to determine how much of a portfolio one could spend over decades and still have it survive. Adjusting each year for inflation, withdrawals of 4% annually were found to have a 96% success rate. This became the 4% Rule designed to survive the vast majority of stock downturns so you wouldn’t have to worry about market fluctuations in your retirement.
It made for a great academic study and it is heartening that in all but a couple of cases the portfolios survived just fine for 30 years. In fact, most of the time they grew enormously even with the withdrawals taking place. Setting aside that in a couple of the scenarios this approach would leave you penniless, in the vast majority of cases it produced vast fortunes. Assuming you neither want to be penniless or miss out on enjoying the extra bounty your assets will likely create, you’ll want to pay attention as the years roll by.
This is why I think it is nuts to just set up a 4% withdrawal schedule and let it run regardless of what happens in the real world. If markets plunge and cut my portfolio in half, you can bet I’ll be adjusting my spending. If I was working and got a 50% salary cut I would, of course, do the same. So would you.
By the same token, in good times, I might choose to spend a bit more than 4% knowing the market is climbing and that provides a strong wind at my back. Either way, once a year I’ll reassess. The ideal time is when we are adjusting our asset allocation to stay on track. For us, that’s on my wife’s birthday or whenever the market has had a 20%+ move, up or down.
True financial security, and enjoying the full potential of your wealth, can only be found in this flexibility. As the winds change, so will my withdrawals. I suggest the same for you.
Addendum 1: For a detailed look at how one early-retired couple in their 30s traveling internationally with a soon-to-be-born baby does it: Cash Flow Management in Early Retirement
Addendum 2: What is your retirement number — The 4% Rule, an extraordinarily good post on the subject from Go Curry Cracker.
Addendum 3: My other Stock Series post on the subject: The 4% Rule, withdrawal rates and how much can I spend anyway?
Much as been changing in the world of health care here in the US. While the opinions on these changes vary widely, one thing I can say with some certainty is that the number of people having access to and choosing High-Deductible Health Insurance Plans is likely to increase. These plans basically allow you to “self-insure” for part of your health care costs in exchange for lower premiums.
In the past, most health insurance plans came with very low deductibles and paid for most every medical cost beyond them.
Those were the good old days.
As medical costs have skyrocketed, so have the insurance premiums required to provide such comprehensive coverage. Now, by having the insured (that is to say, you) shoulder some of the risk, the high-deductible plans are able to offer insurance against catastrophic illness and injury at more affordable rates. In exchange the insured (you, again!) is responsible for paying the first medical bills out of pocket each year, typically $5-10,000. To make this a bit more affordable and attractive, Health Savings Accounts (HSAs) were created to help handle these out-of-pocket expenses.
Basically, these are like an IRA for your medical bills and, as we’ll see, the way they’ve been constructed creates some very interesting opportunities.
With an HSA, as of 2014, you can set aside up to $3300 for an individual and $6550 for a family each year. Like an IRA, you can fund this account with pre-tax money. Or, put another way, your contribution is tax-deductible. You can open an HSA regardless of your income or other tax-advantaged accounts to which you might also be contributing.
Here are some key points:
This is also a good moment to point out that, while HSAs are often confused with FSAs (Flexible Spending Accounts), they are not at all the same. The key difference is that with an FSA, any money you don’t spend in the year you fund the account is forfeited. The money in your HSA, and anything it earns, remains yours until you use it.
What we have here is a very useful tool, and one well worth funding for those who have access to it. But as promised above and as might be said on a late-night TV infomercial…
Remember how I said this creates some very interesting opportunities? Some additional key points:
As we sit back and ponder all this, an interesting option occurs.Suppose we fully funded our HSA and invested the money in low-cost index funds? Then we’d pay our actual medical expenses out-of-pocket, carefully saving our receipts, while letting the HSA grow and compound tax-free over the decades.
In effect, we’d have a Roth IRA in the sense that withdrawals are tax-free and a regular IRA in the sense that we got to deduct our contributions to it. The best of both worlds.
If we ever needed the money for medical expenses, it would still be there. But if not, it would grow tax free to a potentially much larger amount. When we are ready, we can pull out our receipts and reimburse ourselves tax-free from our HSA, leaving any balance for future use. And should we be fortunate enough to remain healthy, after age 65 we can take it out to spend as we please, just as with our IRA and 401K accounts, paying only the taxes then due.
And how about those nasty RMDs discussed in Part XXIV? Well, so far the law has been silent on this point. It could go either way. Keep your fingers crossed.
The bottom line is that anyone using a high-deductible insurance plan should fund an HSA. The benefits are simply too good to ignore.
Once you do, if you choose, you can turn it into an exceptionally powerful investment tool. I suggest you do.
My pal, The Mad Fientist, calls this “Hacking your HSA” and he has created this cool graphic illustrating it:
I suggest you click anywhere on the above to see his full post describing the process,
as well as his post The Ultimate Retirement Account.
Illustration courtesy of The Hindu
Someday, if all goes well and you haven’t already, you’ll wake up to find you’ve reached the ripe old age of 70 1/2. Hopefully in good health, you’ll rise from bed, stretch and greet the new day happy to be alive. You’ve worked hard, saved and invested, and now are contentedly wealthy and secure. Since you’ve diligently maxed out your tax-advantaged accounts, much of that wealth might well be in those, tax deferred for all these years. On this day, if you haven’t already, you’ll begin to fully appreciate the “deferred” part of that phrase. Because your Uncle Sam is waiting for his cut and he figures he’s waited long enough.
Except for the Roth IRA, all of the tax-advantaged buckets discussed in Part VIII of this series have RMDs (required minimum distributions) as part of the deal and these begin at age 70 1/2. This includes Roth 401k and 403(b) plans. Those you can and should roll into your Roth IRA the moment you get a chance anyway.
Basically this is the Feds saying “OK. We’ve been patient but now, pay us our money!” Fair enough. But for the readers of this blog who are building wealth over the decades, there may well be a very large amount of money in these accounts when the time comes. Pulling it out in the required amounts on the government’s time schedule could easily push us into the very highest tax brackets.
Make no mistake, once you reach 70 1/2 these withdrawals from your IRAs, 401Ks, 403(b)s and the like are no longer optional. Fail to take your full distribution and you’ll be hit with a 50% penalty. Fail to withdraw enough and the government will take 50% of however much your short fall is. That’s right, they will take half of your money. This is not something you want to overlook.
The good news is that if you hold your accounts with a company like Vanguard, they will make setting up and taking these distributions easy and automatic, if not painless. They will calculate the correct amount and transfer it to your bank, money market, taxable fund or just about anyplace else you chose and on the schedule you chose. Just be sure to get the full RMD required each year out of the tax-advantaged account on time.
Just how bad a hit will this be? Well, there are any number of calculators on-line and you can plug-in your exact numbers for an accurate read of your situation. Vanguard has their own, but so do companies like Fidelity and T. Rowe Price. To give you an idea of what the damage might look like, I plugged into Fidelity’s to provide the following example.
You’ll be asked your birth date, the amount of money in your account as of a certain date they specify (12/31/13 when I did it) and to select an estimated rate of return. I chose January 1, 1945, $1,000,000 and 8%. No, those are not my real numbers. In a flash the calculator gave me the results year by year. Here’s a sample:
Year RMD Age Balance
2015 $39,416 70 $1,127,000
2020 $57,611 75 $1,367,000
2025 $82,836 80 $1,590,000
2030 $116,271 85 $1,742,000
2035 $154,719 90 $1,750,000
The good news is that even with these substantial withdrawals, the total of our account will continue to grow. Of course, as we’ve discussed before, these are estimated projections. The market might do better or worse than 8% and it most certainly won’t deliver 8% reliably each year on schedule.
The bad news is, not only do we have to pay tax on these withdrawals, the amounts could push us into a higher tax bracket. Or two. This, of course, will depend on how much income you have rolling in from your other investments, social security, pensions and the like.
To give you a frame of reference, here are the tax brackets for 2014:
Based on this we can see that, even with no other income, by age 90 our taxpayer’s RMD of $154,719 will put him in the 28% tax bracket even without considering any other income.
And that’s based on starting with only $1,000,000. Many readers applying the principles on this blog and starting in their 20s, 30s, 40s and maybe even 50s can easily expect to have several multiples of that by the time they reach 70 1/2.
Something important to note here, and that confuses many people, is that this doesn’t mean he pays 28% of the full $154,719 in taxes. Rather he pays 28% only on the amount over the $148,850 threshold of the bracket. The rest is taxed at the lower brackets on down. Should his other income bump him over the $226,850 threshold for the 33% bracket by, say, one dollar, he will only pay 33% in tax on that one dollar.
Of course, if you think of the RMD as the last money added, that is the money taxed at the highest rate. For instance, if he has $73,800 in other income, taking him right up to the 25% bracket line, any amount of RMD will be taxed at 25% or more.
It is worth noting that all of this is before any other deductions and exemptions, and those serve to reduce your taxable income. While looking at all the possible variations is a discussion beyond the scope of this post, we can consider an example. For 2014 a married couple gets a standard deduction of $12,400 and personal exemptions of $7900 ($3950 each). In effect this means they don’t reach the 25% bracket until their AGI (adjusted gross income) reaches $94,100. ($94,100 – $7900 – $12,400 = $73,800)
So is there anything to be done?
Assuming when you retire your tax bracket drops, you have a window of opportunity between that moment and age 70 1/2. Let’s consider the example of a couple who retires at 60 years old, using the numbers above. They have a 10 year window until 70 1/2 to reduce their 401k/IRA holdings. They are married and filing jointly. For 2014:
If their income is below this $94,100 they might seriously consider moving the difference out of their IRA and/or 401k and taking the 15% tax hit. 15% is a very low rate and worth locking in, especially if 10 years from now their tax bracket could be twice that or more. True they lose the money they pay in taxes and what it could have earned (as we saw with the Roth v. deductible IRA discussion in Part VIII), but we are now only talking about ten years instead of decades of lost growth.
So, if they have $50,000 in taxable income they could withdraw $43,700. They could put it in their Roth, their ordinary bucket investments or just spend it. Rolling it into a Roth would be my suggestion and is in fact what I am personally doing.
You don’t have to wait until you are 60 or even until you are fully retired to do this. Anytime you step away from paid work and your income drops, this is a strategy to consider. Especially if you find yourself in the 0%-10% tax brackets. This is a variation of the Roth Conversion Ladder the Mad Fientist shared with us in Part XX. However, remember the further away from age 70 1/2 you are, the more time you give up during which any money you pay in tax today could have been earning for you over the years.
There is no one solution. If as you approach age 70 1/2, your 401k/IRA amounts are low, you can just leave them alone. If they are very high however, starting to pull them out even at a 25% tax bracket might make sense. The key is to be aware of this looming required minimum distribution hit so you can take it on your own terms.
One final note. We’ve touched a bit on tax laws in this post. While the numbers and information is current as of 2014, should you be reading this a few years after publication, they are sure to have changed. The basic principles should hold up for some time, but be sure to look up the specific numbers that are applicable for the year in which you are reading.
In the comments below, Kenneth points out that Roth 401k and 403(b) plans DO have RMDs, unlike Roth IRAs. The solution is to roll your Roth 401k into your Roth IRA as soon as the opportunity presents itself. One more, of many, reasons to move from your employer based plans as soon as you are able.
Also in the comments, Mr. Frugalwoods wonders if there isn’t a charitable giving option/solution to dealing with RMDs. How to Give Like a Billionaire
Here are a couple of great related posts from Go Curry Cracker:
Reader Sean points out in the comments an exception to the age requirement, and his explanation is much clearer than the IRS FAQ he cites as his source:
Hi Mr. Collins – just thought I would point out that there is a way to defer taking RMDs out of your employer’s 401(k) plan.
The IRS code allows someone who is over 70.5 to defer taking RMDs if he or she is not a 5% (or greater) owner of the employer and still a current employee. Note that the plan’s legal document must allow for this (it is an employer option to write this into the plan’s legal document, and most do this – but it is always good to check with this much money, taxes, and a potential for 50% penalty on the line.)
So if you continue to work for an employer past age 70.5, and you have no ownership in the employer, you could choose not to have these withdrawals, if you plan allows.
See http://1.usa.gov/1v7brrI for RMD FAQs. FAQ #1 states this exception.
So theoretically, this could open up the possibility of rolling over all of your tax deferred monies into that employer’s plan, and continue to work, and defer RMDs into the future…
The beach just steps out side the Shamba door
Summer is full upon us and so are the jlcollinsnh annual travels. This year we are headed back to our in-laws beach house on Lake Michigan in Wisconsin. It is a drop dead gorgeous setting with sandy beach stretching for miles in both directions. We call it Shamba, a Swahili word meaning, near as I can figure, a remote rural place. It is one of my favorite places in the world and we are fortunate that they graciously allow us its use.
In addition to walks on the beach, I’ll have some serious downtime to spend on the book. I’m about half way through the first major rewrite and with any luck will have rough manuscript completed by the time we leave. From there it is a process of polish, polish, polish.
Looking over the rooftops of Hacienda Cusin
We’ll have about a week back in New Hampshire before I head down to Ecuador for this year’s Chautauqua. We had an absolute blast last year and I am really looking forward to it. Plus being up in the Andes, it will be a welcome break from summer’s heat. While this event sold out in less than two weeks, word is due to cancellations we now have two spots open. If you are interested: Above the Clouds Retreats.
In my own post, Travels with “Esperando un Camino”, I talk about our prefered style of travel. This is what Somerset Maugham has to say:
“I admire the strenuous tourist who sets out in the morning with his well-thumbed Baedecker to examine the curiosities of a foreign town, but I do not follow in his steps; his eagerness after knowledge, his devotion to duty, compel my respect, but excite me to no imitation. I prefer to wander in old streets at random without a guidebook, trusting fortune will bring me across things worth seeing; and if occasionally I miss some monument that is world-famous, more often I discover some little dainty piece of architecture, some scrap of decoration, that repays me for all else I lose. I am relieved now and again to visit a place that has no obvious claims on my admiration; it throws me back on the peculiarities of the people, on the stray incidents of the street, on the contents of the shops.”
Same concept. He just says it more succinctly, with greater style and much more elegantly.
Meanwhile, here’s some random stuff that caught my eye and educated or amused me. Sometimes both.
Charm of Light, designed by Timucin Sagel of Istanbul, Turkey
The landscape above is entirely underwater. As are these.
How talking about frogs leads to internet porn: Explaining sex to an eight-year-old
Imagine you are a Martian sitting on your front porch sipping your morning coffee when this comes bouncing past:
Ever wonder what the journey to financial independence might look like in real-time? My pal the Mad Fientist is putting his Guinea Pig thru it right now:
Do you hate thinking, talking, reading about insurance? Especially life insurance? Me too. Might be why I never wrote about it for the blog. Now I don’t have to:
Yeah, it’s about insurance, but an easy and useful read anyway. Cool title, too.
How about taxes? 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.
More on why VTSAX is the cat’s meow from:
Sunk Costs: how to look forward not backward.
Here’s why jlcollinsnh.com can enjoy such a large European readership:
Courtesy of Jakub Marian
The results say India for me. Well, I’ve been there a couple of times, but that was back in the ’80s. Might be time to go again!
See that thing on the guy’s finger. That’s a pull-tab, the way cans were opened once upon a time. They found their way onto the ground everywhere. People used to speculate as to what archeologists would make of these things in the distant future. I haven’t seen one in decades.
Here are more Coke ads from the 1960s. Slices of life back in the day.
In my Manifesto I end by saying: Read.
There is nothing you can’t learn, no place you can’t go, if you read.
Maugham’s The Razor’s Edge might now be my all time favorite novel, although I still love Cold Mountain. Written in 1943 and set in the 1920s, it is the story of engaged Larry and Isabel. One who wants the free-spirit life of roaming and learning and the other who craves the luxuries and status wealth can provide. The dialog that leads to them to take their separate ways is stunning. Fun, but also an important read for those walking a different path.
In my luggage as we head to Shamba are two more of his novels, a collection of short stories and a collection of his travel writings. I’m not sure if these will inspire me in my work on my own book, distract me from it completely or leave me too discouraged in the face of such superb writing to continue with it. But I know I’ll enjoy the reading of them.
Wash is a beautifully written and constructed novel set in the early 1800s. It is about slavery without all the clichés to which books about slavery typically fall prey.
Back in March while in Antigua, Guatemala more than once I’d stop by Sobremesa for a late dinner. The crowds had cleared by then and what was left was always an interesting mix of characters. One traveler was carrying Shantaram. Alex, the joint’s owner, reached below his counter and produced his own copy. At some 900 pages it is an intense travel adventure that will have you literally tasting the flavor of India as you read. Perfect book for your travels, exotic or home based.
One last thing. Sometime this winter I’m thinking of traveling to Uruguay and/or Argentina. If you happen to live there and/or have a connection and might be interested in meeting and offering some suggestions, please let me know.
Enjoy your summer!
Addendum – Ethical Investing: Overall I am not a fan of ethical investing. Not because, I hope, I’m not ethical but because anytime you ask investments to do more than make money for you, you begin to ask too much. Plus what is ethical is subject to very wide interpretation. Still it is a question that is important to many people and it comes up around here on a regular basis. My friend, FF, just published this excellent post both describing ethical investing and making the case for it. When the question comes up in the future I’ll just link to it.
Moto X, my new phone
Long-term readers might recall my original review of Republic Wireless and their dreadful Defy XT phone last October. In short, I said great company to deal with, but wait until they make the Moto X phone available before you sign up. Having dealt with the Defy XT since then, that was excellent advice.
The good, no make that great, news is the Moto X has been on the market for a while now and I just got mine a couple of weeks ago. It is light-years better and a piece of technology that actually has made my life better and cheaper.
Better because the Moto X is far more user-friendly and cheaper because now I can switch between plans. 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 smart phone 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 smart phone 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 has been pretty sweet for me. Mostly the $10 Plan serves my needs just fine, and that’s half the cost of the $20 per month I was paying with the Defy XT. When I travel domestically, I’ll bump up to the $25 plan so I can pick up the internet on the road. For my international trips I’ll drop down to the $5 Wi-Fi only plan since that’s all that works overseas anyway.
My wife picked up the new and less expensive Moto G phone and she likes it just fine. In fact, I’m hard pressed to tell the difference, although I’m told the X takes better pictures. But then our needs are modest.
So now, unlike my review last Fall, I can recommend both Republic and their phones without reservation. If you’d like to give it a try yourself, just click on the ad below. By way of full disclosure if you sign up, this blog will earn a commission.
Since the Deft XT is my only other smart phone experience, I also asked my more tech-savvy pal Lito what he thinks of his new Moto X. You might recall Lito from the cool guest post he wrote: Cafe No Se. Here are his comments:
If you have experience with Republic and any of their phones, please share your thoughts in the comments. Thanks!
Life is balance and choice. Add more of this, lose a little of that. When it comes to investing, that balance and choice is informed by your temperament and goals.
If I had it to do over, this blog would be likely named The Simple Path to Wealth after one of my very earliest posts and currently the working title of my upcoming book.
Financial geeks like me are the aberration. Sane people don’t want to be bothered. My daughter helped me understand this at just about the same time I was finally understanding that the most effective investing is also the simplest.
Complex and expensive investments are not only unnecessary, they under-perform. Relentlessly fiddling with your investments almost always leads to worse results. Making a few sound choices and letting them run is the essence of success, and the soul of the simple path to wealth.
The Wealth Acquisition Stage and the Wealth Preservation Stage. Or, perhaps, a blend of the two.
The wealth acquisition stage is when you are working and have earned income to save and invest. For this stage I favor 100% stocks and VTSAX is the fund I prefer. If financial independence is your goal, your savings rate in these years should be high. As you invest that money each month it serves to smooth out the market’s wild ride.
You enter the wealth preservation stage once you step away from your job and regular paychecks and begin living on income from your investments. At this point I recommend adding bonds to the portfolio. Like the fresh cash you were investing while working, bonds help smooth the ride.
Of course, in the real world the divisions might not always be so clear. You might find yourself making some money in retirement. Or over the years you might move from one stage to the other and back again more than once. You might leave a high-paying job to work for less at something you love. For instance, in my own career it was never about retirement and there were many times when I stepped away from working for months or even years.
But using this framework of two stages and two funds, you have all the tools you need to find your own balance. In determining that balance you’ll also want to consider two additional factors: How much effort you are willing to apply and your risk tolerance.
For the wealth acquisition stage an allocation of 100% stocks using VTSAX is the soul of simplicity. Further, most studies have shown that this allocation provides the best return over time. But not all. Some studies suggest that adding a small percentage of bonds, say 10-20%, actually outperforms 100% stocks. You can see this effect by playing with this calculator: Vanguard Retirement Nest Egg Calculator You’ll also see that adding too great a percentage of bonds begins to hurt results.
Now remember that these studies are not carved in stone and like all calculators this one relies on making certain assumptions about the future. The difference in projected results between 100% stocks and an 80/20 mix is tiny. How those results actually unfold over the decades is likely to be equally close and the ultimate winner is basically unpredictable. For this reason, and favoring simplicity, I recommend 100% stocks using VTSAX.
That said, if you are willing to do a bit more work, you could slightly smooth out the wild ride and possibly outperform over time by adding 10-25% bonds. If you do, about once a year you will want to rebalance your funds to maintain your chosen allocation. You might also want to rebalance anytime the market makes a major move (20%+) up or down. This means you will sell shares in whichever asset class has performed better and buy shares in the one that has lagged.
Ideally you will do this in a tax-advantaged account like an IRA or 401k so you don’t have to pay tax on any capital gains. Having to pay capital gains taxes would be a major drawback and another reason to focus on holding just VTSAX. This rebalancing is simple and can be done online with Vanguard. It should only take a couple of hours a year. But like changing the oil in your car, it is critical that you actually do it. If you like this idea but are unsure you’ll remember to rebalance or simply don’t want to be bothered, here are two fine options:
Both allow you to choose your allocation and then they will automatically rebalance for you. They cost a bit more than the simple index funds you’d use doing it yourself — you are paying for that extra service — but they are still low-cost.
Basically, bonds smooth the ride and stocks power the returns. The more you hold in stocks the better your results and the more gut wrenching the volatility you’ll be required to endure. The more bonds, the smoother the ride and the lighter the results. If you are going to hold stocks you need to be mentally tough enough not to panic when they plunge. And make no mistake, over the decades you own them, plunge they will. Usually at the most unexpected times.
There is a major crash coming and you’ve got to…
Let’s be clear. Everybody makes money when, as it has now since 2009, the market is on the rise. But what determines whether it will make you wealthy or leave you broken and bloody at the side of the road, is your ability to stay the course and ride out the storms. If you have any doubt as to your ability in this regard, you will be better off avoiding stocks. Regardless of what the calculators say.
Factors to consider in assessing your risk tolerance.
Temperament. This is your personal ability to handle risk. Only you can decide, but if ever there was a time to be brutally honest with yourself this is it.
Flexibility. How willing and able are you to adjust your spending? Can you tighten your belt if needed? Are you willing to move to a less expensive part of the country? Of the world? Are you able to return to work? Create additional sources of income? The more rigid your lifestyle requirements, the less risk you can handle.
How much do you have? As we’ve discussed, the basic 4% rule is a good guideline in deciding how much income your assets can reasonably be expected to provide over time. If you need every penny of that just to make ends meet, your ability to handle risk drops. If, on the other hand, you are spending 4% but a big chunk of it goes towards optional hobbies like travel you can handle more risk.
Taking all these considerations into account, here’s what we do personally:
Our daughter is just beginning her career and her wealth acquisition stage. She wants things to be a simple as possible. She is 100% in VTSAX and likely will be for decades to come.
I am retired and my wife will be shortly. Assessing the three risk factors above our personal tolerance is very high. We hold an aggressive allocation of 75/25 stocks/bonds. The more common and conservative recommendation for our age would be 60/40 or even 50/50.
Our allocations very well might not fit your needs. But this post should give you an idea of how to approach the question and reading the Stock Series will help you understand just what you are dealing with when investing in the market. After that, you have to know yourself.
What would the bursting of the bond bubble look like? (Thanks to Kenneth in the comments for this one)
When should I make the shift into bonds?
This is very much a function of your tolerance for risk and your personal situation.
For the smoothest transition you might start slowly shifting into your bond allocation 5 or 10 years before you are fully retired. Especially if you have a fixed date firmly in mind.
But if you are flexible as to your retirement date and more risk tolerant, you might stay fully in stocks right up until you make the change. In doing so the stronger potential of stocks could get you there sooner. But if the market moves against you, you’ll have to be willing to push your retirement date back a bit.
Of course, anytime you shift between the acquisition and preservation stages, you’ll want to reassess and possibility adjust your allocation.
Balance and choice. Yin and yang
Does age matter?
As you’ll note from above, I’ve divided investment stages by life stages rather than using the more typical tool of age.
This is an acknowledgment of the fact that people are living much more diverse lives these days. Especially the readers of this blog. Some are retiring very early. Others are retiring from higher paid positions into lower paid work that more closely reflects their values and interests. Still others, like I did, are stepping in and out of working as it suits them, their stages fluidly shifting.
So age seems not to matter. At least not as much as it once did.
But that said, age does begin to limit your options as it advances. Age discrimination is a very real thing, especially in the corporate world. As you get older you may not have all the same options readily available as in your youth. If your life journey involves stepping away from highly paid work occasionally, you’ll do well to consider this.
Further, as you age you steadily have less time for the compounding growth of your investments to work.
Both these considerations will influence your risk profile and you might well want to consider adding bonds a bit earlier if that’s the case.
Is there an optimal time of year to rebalance?
Not really. I’ve yet to see any credible research indicating a particular time of year works best. Even if someone were to figure it out, everybody would rush to it negating the effect.
I do suggest avoiding the very end/beginning of the year. It is a popular time for rebalancing and many are engaged in tax selling and new buying. I prefer to avoid the possible short-term market distortions might cause. Personally, we rebalance once a year on my wife’s birthday. Random and easy to remember.
I have some of my investments in tax-advantaged accounts and some in regular accounts. How can I rebalance across those?
This can be cumbersome and you’ll just have to work with what you have. While it is best to hold bonds in tax-advantaged accounts, it does complicate rebalancing.
First, you should be considering all your investments as a whole when figuring your allocation.
Next, as a rule it is better to buy and sell in tax advantaged accounts to avoid creating taxable events.
Unless you happen to have capital losses in a given year. Then it is best to take them in your taxable accounts when possible.
For instance, you might own VTSAX in both an IRA and in a taxable account. Should you need to sell to rebalance that year, sell in the taxable account to capture the loss. You can deduct it against any other gain you happen to have, including any capital gain distributions. You can also deduct up to $3000 against your earned income. Any loss leftover you can carry forward to use in future years.
Does more frequent reallocation improve performance?
Some contend it can over time. Betterment makes this case. I’m not sure I fully buy the premise, but I do like the way they use your new contributions and any dividends to make it happen efficiently. It is a bit more work, but if you like you can also do this yourself with your index funds.
What might my taxes look like in the Wealth Preservation/retirement stage?
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.
There you have it: The considerations you’ll need to review and the tools you’ll need to use to create the asset allocation that best fits your situation. I’d be very curious to hear what your asset allocation looks like and why. Please leave a comment if you are willing to share. Oh, and let me know if I missed anything that belongs in the FAQ.
Addendum: The Path to 100% Equities
Thanks, Paul, for the great and well thought out analysis. Very helpful as I re-evaluate my thinking on these things.
I’ve held them for the hedge against high to hyper inflation and to a much lesser extent for the income. While something like land might serve this role, it occurs to me once you start adding buildings RE has really become a business like any other and as such it is just as susceptible to the ravishes of hyperinflation as any other.
REITs, of course, hold mostly apartments and commercial buildings. I’m very close to changing my position on this. With that in mind, any further REIT thoughts? Also, what would your choice be for a hedge against hyperinflation? My guess is most would say gold. But I gather that, like me, you are not a fan of the metal….
You’re correct that it wouldn’t be gold for me.
Honestly, I take MMM’s wild optimism here. I assume it’s not going to happen. There’s a few reasons for this.
Primarily, hyperinflation is just hard to plan for and to truly be protected from it I think you’d have to allocate a huge amount of resources that will then otherwise underperform.
Secondly, if the US goes in to hyperinflation I think the saying “You can run, but you can’t hide” would become painfully clear to the whole world. The US economy is such a central feature to the world economy that I think it would be hard to avoid the consequences with any typical assets.
Thirdly, if we look at the German stock market performance during their hyperinflation, it’s really not that bad, even in USD terms.http://www.businessinsider.com/heres-what-happened-to-stocks-during-the-german-hyperinflation-2011-11
Not bad as far as hedging a black swan.
Lastly, I think it’s something you could somewhat see coming. Once you know hyperinflation has arrived, I’d do things like hold foreign currency and/or say, cattle. I’d still avoid gold because foreign currency is a better medium of exchange and a steak is way more useful to someone on a monthly basis than a gold brick. In basically every hyperinflation situation we see that people are remarkably flexible. Barter systems spring up, so goods that are useful short-term (food, gas, clothes, etc) are going to maintain similar relative values.
Due to all of that, I just don’t really think it’s a situation worth hedging against. Ultimately, going back to MMM’s optimism, the most important asset during hyperinflation is me. If I can maintain my usefulness, I can make my way through hyperinflation. I’m sure it’d set financial independence back for me (or mess up plans for those already in it) but long run, we’ll be okay.
As far as last thoughts on REITs, after our discussion I’d have to say this. I think they have their place in more active portfolio (say someone who does growth, value, small cap type break downs). I think there they can make sense so long as you are following market conditions and keeping up with potential legislation as far as home ownership. Otherwise, in a fire and forget type portfolio, I have to agree with your conclusion, they’re essentially a specific business, and I think they won’t offer any substantial difference compared to a stock/bond portfolio.
I think international exposure would give more diversification although even that seems to correlate more and more with US performance. I lean toward the keep it simple approach. I enjoy talking about this stuff, but I don’t enjoy tracking finance news to the level required for anything beyond a big dumb stock/bond index portfolio.
If you want real estate as a hedge to hyperinflation (along the lines of my cattle ownership) I think you’d have to physically own the land with all the joys that entails.
So, there you have it. While the REITs have been a solid performer for us, they really aren’t well suited for the serious inflation protection role for which they were bought. For these reasons,
later today I’ll be entering an order to
Since these are mutual funds rather than ETFs, this trade will execute at the market’s close. When the dust settles our allocation will be 75% stocks/25% bonds. (It had been ~50% VTSAX, 25% Bonds and 25% REITs) Since REITs are a form of stocks, essentially our allocation remains the same.
But what about an inflation hedge?
Well, first remember that stocks serve that function well in all but the worst hyper-inflationary times. Then take a look at that last link Paul provided on how the German market performed during the 1930 when they went thru perhaps the most famous hyper-inflation in the developed world’s history. Pretty encouraging, especially considering that true hyper-inflation is a pretty rare thing and, as Paul suggests, something that we should be able to see coming. But I am pondering some alternatives, some along the lines Paul mentions.
*Note concerning the painting:
When I asked my pal Alex to suggest one of his paintings to illustrate “stepping away” he sent me Samsara, along with this note:
“…this is as stepping away as you can get. Buddhists believe that there is a ladder of sorts that we ascend (or descend) during the cycle of life, death, and rebirth. We are rewarded for good works in one life by ascension to another life with better circumstances. The eventual destination is Nirvana, or Oneness with all things. This painting illustrates the passage of a soul from one vessel to the next, and for a moment is noticing that there is something else and is hesitating.”
This move from REITs is a fairly big step and it has required going thru editing and/or adding notes and addendum to the posts where references to REITs and VGSLX appear. Seems there are many more than I realized. I think I got most, if not all. But if you see one I’ve missed, please call it out in the comments below and I’ll get it taken care of. Thanks!
An original painting by Alex Ferrar
On display at his restaurant Sobremesa, Antigua, Guatemala
Welcome to the third in this series of posts featuring questions and answers from the comments that have accumulated during my recent travels. As with the first two, it is named after the featured painting above.
As described in the last two posts, Q&A I: Gaijin Shogun and Q&A II: Salamat , traveling without a computer, as I do, provides a wonderful break from the relentless onslaught of non-stop connectivity that is the mark of our modern world. For a brief few weeks it gives me the chance to return to the more peaceful time of not so long ago when our days were more fully our own. But this leads to a backlog of great comments and questions waiting for a response.
So in this series of Q&A posts as I work thru all these comment/questions, answering them in the posts where they were made, I’m also going to select a sample of the most interesting and reproduce them as posts in their own right. I see four benefits:
Hope you enjoy them!
I love your articles and agree with most of them. I’m on the fence on this particular one.
I’m currently following AAII’s model shadow stock portfolio which has worked great for me since I started following it in the past couple of years.
I’m young and have been investing only a few years in the market and I’ve been seeking the answer to this question – should I invest in individual stocks or index funds.
AAII’s shadow stock portfolio’s return since inception in 1995 has been 17.9% vs S&P 500′s 9.43% for the same period. It seems to me that their model certainly seems to be working. I would like to know your thoughts as well. Do you still believe it’s better to invest in VTSAX vs just shadowing AAII’s model stock portfolio?
Glad you love what you are finding here and hope you continue to read more.
This post is really at the core of what I believe and discuss here. It is not just my opinion, but the conclusion of an ever increasing body of research. Even Warren Buffett, perhaps the best stock picker of all time, is on board with the concept of indexing.
I am unfamiliar with the AAII model you mention, but there are countless investments out there striving to out perform the market. Some do for some periods of time, and they are endlessly creative in presenting their track records in the most favorable light.
But every prospectus carries this warning: “Past performance is not a guarantee of future results.”
The are both the truest words in these documents and the most ignored.
It is easy to look back and find the funds and portfolios that have outperformed in the past. It is impossible to predict which will do so in the future.
That said, it is great AAII has worked well for you so far and I completely understand the temptation to continue. It just seems so reasonable. It took me years to accept how vanishingly difficult it is to outperform the market and how rare and fleeting those that seem to are.
For more, check out my story of CGMFX at the end of this post: What we own and why we own it
I have heard that if the income limit on SS taxes was removed, the cash in/cash out future problem with the SS trust fund would go away.
Of course the “richer folks” would get socked with a big tax increase that they have not had to bear for years and years and years, as the “poorer” folks have been doing since the “poorer” have been paying the SS tax on all of their earnings in most cases.
Another plus for the SS fund would be that since there are fewer “richer folks”, there won’t be a rich-baby-boom bubble to deal with.
Two other points, SS is also a disability insurance program, and pays survivor benefits to children and widows if the worker dies. So, it is more than just a retirement fund. It’s a mixed bag with heavy social overtones.
And it still is a financial floor on which one can build on with their own savings plan.
Secondly, as to early retirement, another reason to take the money and run, is that you may still be “young” enough to want to do and enjoy many things that down the road ten years or so, you won’t care so much about doing. Or your physical situation will have gone down hill as is the case with older folks (two heart attacks + for me), and as such, doing some things will be out of the question. For example, it’s hard to paint or do needlepoint with shaking hands. And doing most things requires the ability to be able to walk, and walk a lot, and go up and down stairs or pathways. So, if you can’t walk much, or you get dizzy, etc., plan to stay home a lot.
Lastly, SS is an insurance system by which workers save for their future via the SS tax on their earnings, so that if or when they die, get disabled, or get old, society won’t have to pick up the tab for their or their family’s full support.
I used to work for SS many years ago, and have no work connection with SS anymore. My views and opinions are mine alone.
Glad you liked it, especially as someone who used to work there. I appreciate you adding your perspective. Great points!
Since SS payments are at least somewhat tied to contributions made, I wonder how that would be handled if the income limit were removed. If the payouts were still capped at the current levels, SS would become more of a simple income redistribution scheme.
Depending on one’s viewpoint, that may or may not be a good thing. But I think it should be part of the discussion.
As for SS and early retirees, check out: Go Curry Cracker: Social Security and Early Retirement
I think you and my other readers will find it interesting and useful.
This is an old thread, but I’m hoping my question will get answered!
Of course I’ve read a lot about the subject, but I’m wondering your personal belief regarding student loan debt and investing. Unfortunately my parents didn’t school me in the “value” of education, nor did they school me in the (EEK!) terrible side of debt.
Anyways, I have no other debt except student loans and live very frugally. I also make a decent salary and have a good retirement fund going. Should I focus on paying off my student loans before building up anymore retirement funds? What are your thoughts? Or does anyone else have opinions/experience in this situation?
Super big thanks!
Basically, I would apply my rule of thumb for paying off a home mortgage. If the interest rate is:
6% or more, focus on paying off the loan.
4% or less, focus on building your investments.
In between, follow your heart.
Since I despise debt that last for me would mean focusing on paying off the loan.
If you do decide to focus on the loan, pay the absolute maximum you can each month.
The good news is, by the time you’re done, you’ll have a very strong habit of sending that money off. So it will be easy to then channel it into your investments and watch them build! You’ll be amazed at the progress.
Good luck and please keep us posted!
I’d add a third thing to this list…
3. Empathy/Perspective. Unfortunately, some days for one reason or another I am the asshole.
While this was written from the point of view of dealing with the assholes around us it is worth remembering that we are all, at times, the asshole in question.
Great article Jim. I’m a big believer that people create some of their luck but I think its important if you are doing well to be appreciative for some of the good fortune you may have had along the way.
Unfortunately many people who make bad decision after bad decision blame their lot in life on bad luck. I have a good friend who has a terrible attitude and he is convinced his lack of success is 100% bad luck when it is actually his attitude holding him back.
I had an illness in the late 70′s and early 80′s that caused me to use my student loan money to purchase a TR3A ( a lot of it in boxes), then I traded a perfectly good Pontiac for a Spitfire with the rocker panels completely rusted out because it looked so cool. Of course it had the identical self destructive engine as yours.
Then, during my first job out of college I bought at TR6 with a credit card. (Still had TR3 in the yard not running) It broke in two one day while driving over a railroad track. I had paid 2300 for it, 400 in welding the frame back, and sold for $4500. I guess that financed my losses on the other two.
Moral of the story, you need to buy a couple more Triumphs, kind of a dollar cost averaging thing. (What I learned in college with the rest of the student loan money)
Ha! That got coffee sprayed all over my keyboard!
Too damn funny! And I’ll bet those reading who have never owned a Triumph (lucky devils) think you exaggerate. Ha, again!
So, I should DCA into a couple more, you say? Mmmmm. Spoken like a man who has a couple to unload…
This post sent some shivers down my spine, because my husband just started collecting bank notes – hey, this stuff will be worth millions some day, and yes, we will send our kids to college on them.
Shipments from ebay arrive daily to our home – some with old notes costing several thousand $$ per pop. Sad thing is that I am sure the ebay value of these things already has taken into account the note appreciation (if any) and they are selling at net present value.
Just hoping we can resell those notes some day for what he paid for them.
Hope you have a plan “B”
If not, it will be character building for your kids to pay their own way…
Hi Jim. I’ve spent the past week reading almost all your blogs and it’s been wonderful! A friend helped me find MMM and he lead me to you. I thank all of you for posting all this great advice to help me achieve freedom as soon as possible! And for free!
I understand the principles of 4% and calculating what I need my net worth to be but I’m struggling with details. Based on our current spending I’d like our retirement expenses to be about $40k. That means I need to save $1m before we are free. But, how is inflation calculated? I understand I need $1m in today dollars but if we can get there in 10 years do I keep tracking to $1m, or will this number go up as the years go by? Because in 10 years we will need more than $40k due to inflation.
My husband and I are in our early 30s and while we have saved a lot over the past 10 years it all hasn’t been invested, earning maximum returns for us. We’ve stepped up the rate and I hope to get there in 10 years I’m just struggling with the details of calculating what my “freedom fund” needs to be.
Thanks for the help!!!
There are a couple of ways to approach your question.
You could estimate the rate of inflation and plug it into one of the many on-line calculators and let it figure how much you’ll need to replicate the spending power of 40k when you retire. The problem, of course, is that inflation will likely not unfold as you predict.
Better, it seems to me, to simply aggressively build your freedom fund and track how much it can throw off at 4% each year as it grows. At the same time you can assess each year how much you’ll need/want when you retire.
Over the years, those numbers will come together. When they intersect, you’re there!
That’s what I did anyway!
But if you want to get a bit more technical, Eric Bahn also just put up a nice post you might find helpful: Calculating when you can say: F-you
I am a bit late to the party with this comment but I have been reading through your site and loved this post. It describes very well how I would like to travel the world.
I recently traveled to Thailand, it was fun and a great learning experience as my first international trip. But the trip, taken with and largely planned by friends, suffered from some of the very issues you describe. I had small bits of experiences as you describe, but I would enjoy having even more genuine travel experiences.
How do you do it? From my little bit of experience I can tell it will take a lot of research and planning. Unlike your daughter I traveled little as a kid and am not sure how to go about travel and having experiences like those you describe. Simply flying to a foreign location and going from there does not seem like it would lead to experience such as you describe.
Sites/sources such as lonelyplanet seem have been ruined by commercialism/tourism. Any recommendations? Perhaps the answer is simply experience.
How do mesh the competing goals of f-you money/financial independence and expensive travel?
No worries being late, glad you made it!
I think AJ nailed it, a lack of planning is the key and it sounds like your trip to Thailand suffered from a bit of over-planning. I tend to just show up, wander around and see what happens.
Now that I’m older and have gone soft, I do book the hotel for the first night or few before I arrive and I like to arrange for a driver and car to meet me at the airport. There is nothing like stepping off a plane after a long, tiring flight and finding someone there with a smile holding up a sign with your name on it.
If I know someone who has been, I’ll ask for their recommendations for a hotel. And since I like my hotel centrally located and an easy walk from places, I’ll check the location on their website. This is exactly how I found the place where I stayed in Guatemala last month.
For what it is worth, I don’t use the travel guides like Lonely Planet or sites like Trip Advisor. Nothing against them, just never felt the need. And, as I think about, I guess I’ve always kinda figured they’d be out of date by the time I got there and would lead me to places that were by then overrun.
Once there, I just ask people where to go and what restaurants are good. Other travelers are easy to talk to and happy to help. When I find a good place to eat, I’ll also ask the owners where else they’d recommend. Figuring this stuff out gives you a reason to engage people in conversations. Which is one of my key goals.
But mostly it just takes showing up, not being tied to a schedule and going with the flow. This can take a few days, so it’s good to have more than a week to play with. Even now it is not unusual for me to hit a bit of a depression in the early days before things begin to come together. So, if this happens to you, don’t be overly concerned.
As for the FI/travel balance, it is a matter of choosing what you want to spend your money on. It is a fallacy, it seems to me, that pursuing FI means you can’t spend money on anything else. You just can;t spend money on everything else. Most people can afford both FI and travel assuming, of course, that they are not also indulging in fancy cars, homes, wardrobes and the like.
Plus, traveling this way can be surprisingly cheap. My hotel in Antigua was about $18 a night. Not fancy, but spotlessly clean, well located and run by incredibly friendly folks.
For more check out: So what does a month in Ecuador cost anyway?
Here’s another great source on the hows and costs: Go Curry Cracker
Oh, and it helps to travel alone. When you are with other people you are less approachable and less likely to approach others.
Good luck and safe journeys!
Sorry to be a detail Nazi, but it drives the math nerd inside me wild. You say that your prediction of the high was .013% off. It was 1.3% off or off by a factor of .013. Adding in the percent sign moves the decimal place. Your point still stands, and I greatly appreciate the fantastic content on this site.
No worries, Bryon…
…your correction is very much appreciated
I operate this little blog with no help. No proofreaders or fact checkers. But I am very concerned that what appears is as technically accurate as possible.
So I am always grateful to readers who care enough to point out any errors.
That said, I am not enough of a mathematician to fully understand your correction here. Could you elaborate?
If you’ve read this far and have concluded that only I have answers around here, it’s understandable. But wrong. Click on the link above for a remarkable guest post and equally remarkable conversations, all in an area where I have little to nothing to offer.
“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”
How is this done? Anywhere I have read it is taxed as ordinary income when you do the conversion. Oh, unless you mean his Personal Deduction/Exemption take care of the tax due on the conversion??
That’s pretty much how you do it. Standard deduction and personal exemption = $20k per year tax free for a married couple with zero kids.
With our 3 kids, we can actually convert $31,700 totally tax free. And even more than that since we get the child tax credit (x3). Needless to say, the Root of Good household won’t be paying federal taxes in retirement either.
An original painting by Alex Ferrar
On display at his restaurant Sobremesa, Antigua, Guatemala
Welcome to the second in this series of posts featuring questions and answers from the comments that have accumulated during my recent travels. As before, the post is named after the featured painting above.
As described in the last post, Q&A, traveling without a computer, as I do, provides a wonderful break from the relentless onslaught of non-stop connectivity that is the mark of our modern world. For a brief few weeks it gives me the chance to return to the more peaceful time of not so long ago when our days were more fully our own. But this leads to a backlog of great comments and questions waiting for a response.
So in this series of Q&A posts as I work thru all these comment/questions, answering them in the posts where they were made, I’m also going to select a sample of the most interesting and reproduce them as posts in their own right. I see four benefits:
Hope you enjoy them!
I’m loving your posts referred by MMM, thanks so much for all the great info.
A long time ago, I kinda fell into the conventional wisdom trap of 60/40 allocation of stocks/bonds; but I have to say that I am comfortable with a bit more risk (even at my advanced age :).
I’m 56 and retired 3 years ago, and left my 401k in my company’s plan because it’s cheap and easy. 58% is mostly in 3 funds, S&P Index (.06 fees), BlackRock US Equity (.09) and BlackRock Extended Equity (also 9 cents). The 42% is in PIMCO’s biggie, the Total Return Fund, but the expense here is significant — 0.46 %.
The past 10 yrs has been great, but the last 2 PIMCO has suffered. So I guess I have 3 questions for you, if you care to opine:
You should know that I’ve got a separate 50k invested in REIT’s outside the retirement fund, as well as 50k in a Colombian coffee farm! And I’m considering Lending Club as well… so I feel like I’m doing pretty well as far as diversification goes.
Glad you found your way here.
You certainly sound well diversified and I bet there is a great story behind your Columbian coffee farm! If you care to share it, I also bet I’m not the only one who’d be interested. 😉
As to your questions:
1. Your S&P index fund and the two BlackRock funds have nice low ERs. While it is good you’re happy with the returns, don’t forget we’ve been in a powerful Bull market for the last few years. At some point the Bear will revisit for a while. This won’t mean the funds stopped working. Just a heads up.
2. Not crazy at all, especially with your other diverse investments and as long as you recognize that you will be adding some risk in seeking greater returns. Balancing risk/reward and smoothing the ride is what asset allocation is all about. But don’t be tempted to try to time the market in doing this. See: Investing in a Raging Bull
3. Jack Bogle is fond of saying “performance comes and goes, but expenses are forever.” Or something like that. Many actively managed funds will outperform the index for a year or two or even several. But ultimately they underperform as apparently PIMCO is now. If, as I suspect, your BlackRock funds are also actively managed I would have the same concern about them even though it sounds like they’ve done well for you of late. This is why my money is only in index funds as described in the post.
Hope this helps!
It DOES help, thanks Jim.
So… the story on the Colombian Coffee Farm, it’s interesting. When my last company offered me a generous early-out pkg a few years ago, at 53, I could have walked across the virtual street to Apple or Google etc., but I was already in the mindset of escaping the cubicle.Since I had saved pretty well and they literally GAVE ME the F-you money (how ironic), my wife decided to take a sabbatical and we hit the road, living in several places in Mexico for the past year, then Florida’s “Space Coast” for a few months, and I write to you now from our current temporary home in S Africa, right next to Kruger Nat’l Park, where zebras and giraffe regularly block our driveway and hang out on the porch. We are so thrilled to be able to do this, and it is definitely on a tight budget.
Anyhow, while living in Mexico with a lot of free time to read, I stumbled into various excellent blogs, like MMM and Live and Invest Overseas and now yours.
Live and Invest Overseas is where I learned about the coffee farm, and so I took a week-long “due diligence” trip last August to Medellin to investigate. It seems that Colombia has the POTENTIAL to grow some of the very finest coffee in the world, yet their multiple layers of profit-grabbing, price-dictating middlemen have not only impoverished the coffee farmers, they have indirectly forced the production of mediocre coffee.
Along came a company called Coffee Latin America and its sisters Logistics Latin America and Tierra Cafetera (now Cima), which bought a few very large farms that were in distress, and created a new model by inviting investors to share in the land ownership and the profits from coffee production.
By cutting out the middlemen, they are able to focus on high-quality coffee only, return to the old ways of production (mono-crop to multi-crop), stop using chemical pesticides, and rewarding the farmers with higher pay, incentive bonuses, and health & pension benefits (never seen before).
So, I can’t vouch for the results yet, because I’ve only been invested a half-year, but the 5-year projections show profit growing steadily from 3% to 19%, and continue on indefinitely at 19. Plus I physically own my 3 acres of the 120-acre farm, and am free to sell it, but the company has first right of purchase.
So in a nutshell, I bought 3 acres of a Colombian coffee farm that is now dedicated to replanting high-quality beans in a sustainable, organic manner, with socially responsible practices, for $50,000 US, and I lease it back to the coffee farm in return for 2.5% (my share of the farm) of 80% of the profits. (The 20% goes to the farmers as incentive bonus.)
I think it’s a win-win-win and I’d rather have it there than where it was, in employee stock shares that were going up, down, and nowhere. I can only hope that the returns will be as promised, but I know 19% is a lot to ask for; I’d be happy with 10.
If anyone is interested, I can pass along the website for the company, I’m hesitant to do it now because it may appear that I’m promulgating or shilling for them. That’s not my intention…but you asked!
By all means, post the link if you’d like.
Great story, on many levels.
Perfect example of how new vistas open up when we lift our noses from the grindstone.
Right now I have a question in Ask jlcollinsnh concerning ethical investments. Your coffee plantation will be part of my response.
And I love how they gave you the F-you money to fund a chuck of your escape. Ha!
Now I want to hear about living in South Africa! My wife is from Zanzibar and ever since our last visit we’ve talked about return to explore more of that continent.
Two questions regarding small cap stocks:
1. If small caps historically tend to outperform large caps (over the long-term and provided you don’t panic), why do you not recommend overweighting small caps? Or being only invested in a small cap index?
2. More practically, if one only has a choice of an S&P-tracking index fund in a 401K, would you see any problem with balancing it out with the addition of a small cap fund?
3. If one were to look to tilt toward small caps, would you recommend VISVX (small value) or VSMAX (small cap index)?
As always, thank you. Hope you’re having a good vacation.
Great questions, Clint…
and thanks for the kind wishes on my travels and you patience in waiting tim my return for this response! It was a wonderful trip!
1. Your premise is correct and that could be a fine strategy.
But you have two considerations. First, the small caps will give you an even more volatile ride, along with long periods of underperformance. Second, you’ll want to consider adding an international fund, and the extra risk these entail, as you won’t have this covered as with VTSAX. For more: International Funds
2. That would work. Just remember, if your aim is to duplicate VTSAX, that index holds only about 20% in small caps. So 80/20 would be your S&P 500/SC allocation.
3. I’d go with VSMAX for the broader sweep of small cap stocks it holds.
Hope that helps!
Hi Jim, hope all is well. I’ve been absorbing your blog like a sponge absorbs water. I just finished reading the entire stock series… really great stuff you’ve got here, it’s enlightening to say the least. Thank you!
I have a question for you regarding Vanguard’s money market fund (VMMXX). Since it is a money market account, Vanguard allows for checkwriting services… my question is, are there any tax implications for writing checks? Vanguard states on their website that “for tax purposes, checks are considered redemptions”.
Glad you’re enjoying it and I appreciate the kind words!
Money Market funds strive to maintain share value at exactly $1, so typically there is no capital gain or loss when you sell shares. So, no taxable event — even though checks written on them are redemptions.
I say typically because on rare occasions an MM fund will “break the buck” — that is the share value will drop below $1. This is a very big and negative deal. It last happened in the financial crisis of 2008, but only with a couple of MM funds. None were Vanguard’s.
So for all practical purposes, you have nothing to worry about here.
But, with interest rates so low, MM funds are no longer a very profitable place to keep cash. Banks, especially on-line banks, pay more these days and enjoy the benefit of FDIC insurance. My checking account actually pays more interest than VMMXX. But both are vanishingly small percentages.
I still use the MM fund, but mostly now just for convenience.
Just wanted to tell you I’m so glad I came across your blog!!
I’ve always found the stock market to be so interesting and wanted to become a broker but in the end I’m majoring in accounting. Turned out to be one of the best things I’ve done because I’m already working for a firm making about 25k a year (after taxes).
Anyway, I’m 19 and just opened a Roth and invested my first few paychecks – 3k (enough for VTSMX). I’m extremely lucky at the opportunity I’ve been given.
I still live at home and only have my phone payment; saving about 90%. I’m currently working to get my AA, while it’s not easy being a FT student and maintaining a FT job, I know it’ll be worth it in the end.
Can’t say how grateful I am at the plethora of information I’ve devoured on your site, One step closer to having my FU Money.
Thanks – Jonathan
Congratulations on what sounds like a splendid start. Would that I were as wise when I was 19!
As you might well already know, once your VTSMX account hits 10k Vanguard will automatically roll it into the lower cost VTSAX for you.
Finally, thanks for the kind words. You made my day!
Newbie here! Trying to make sense of all this.
I’m looking for your Vanguard recommendations in my freshly started 401K.
Are these index funds?
Vanguard LifeStrategy® Conservative Growth 0.70%
Vanguard LifeStrategy® Moderate Growth 0.70%
Vanguard LifeStrategy® Growth 0.70%
LVIP Vanguard International Equity ETF 1.20%
What about this guy?
LVIP SSgA S&P 500 Index 0.54%
Always nice to have another newbie join in!
Only the last one is an index fund.
However, the first three are each what are known as a “fund of funds.” That is, they are made up of other funds and each of these are made up of index funds.
The idea is that you get diversification and automatic rebalancing, but the ER (expense ratio) is a bit higher.
For instance, Vanguard LifeStrategy® Growth –https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT — is made up of:
–Vanguard Total Stock Market Index Fund Investor Shares 56.1%
–Vanguard Total International Stock Index Fund Investor Shares 24.1%
–Vanguard Total Bond Market II Index Fund Investor Shares† 15.9%
–Vanguard Total International Bond Index Fund 3.9%
Basically an 80/20 stock/bond split using a nice selection of funds.
Were I young and planning a few more years of work, of those you listed that’s the one that would be my choice.
Great story and some very worthwhile advice from all involved. I love the points about living with less and focusing on relationships over “stuff”. I’m also amazed by Tom’s ability to live such a mobile life with a family in tow. Hard to do that with lots of unnecessary possessions on hand. Reminds me of the wisdom in one of David Cain’s recent posts on raptitude.com (“Everything In It ‘s Place, Now and Forever.” )
So as not to armchair quarterback Tom’s decisions in an effort to apply lessons to my own life, I’d love to hear what advice he has based on his story. Above and beyond his very wise comment about the value of relationships over material desires, that is. With all the forks in the road that he faced, I’m sure he developed at least an unconscious list of rules to live by that have helped him maintain such a positive outlook and ability to attract quality people in his life. I say this based on both his successes and his failures, as lessons obviously can be learned from both.
Hey, Tom here. In response to Deacon’s request, I have a few rules I live by …
#1. Seek the truth; there is a lot of deception in the world. Learn to find out what is true and what is false. It takes some effort, but it’s worth it.
#2. Get outside everyday and breath fresh air, get some exercise, even if it’s just a nice long walk.
#3. Look everyone in the eyes when you talk to them; it will instill trust in both parties and you will learn to read others’ responses.
#4. Tell the ones you love (family and partner) that you love them.
#5. Simplify, simplify … Thoreau was right. We sure can’t take all this stuff with us.
#6. Work at a job you love and put your all into your work. That being said, don’t take your work home with you. Take time to unwind.
#7. Eat healthy, have a drink daily, but don’t overdo either.
#8. Be thankful for the things money can’t buy.
#9. If you have kids, take them fishing, camping, whatever. Show them there is another world out there that has nothing to do with electronics or stuff.
#10. Take the back roads in life, stay off the freeways.
Thanks for the response Tom, and to jlcollinsnh for the addendum. Very wise words to live by. I have to say that my #1 and #2 would be exactly the same. Interesting how certain life events will cause me to remember or re-evaluate certain of my own ‘rules’, but these two (and maybe a couple others) are constantly in focus. Thanks again for the words to live by.
You will end up a wealthy man Deacon … like me.
One thing I don’t get: How is it that supposedly MOST people perform worse than the corresponding index share market?
Let’s say you are right and one can not predict shares that outperform the market, – is it then not that by pure chance 50 % of us would perform better, 50 % would perform worse, – i.e. would there not a normal bell curve type distribution around the mean?
This is of course different if I pay fees for a managed fund, or if I pay lots of fees for trading, – but if we take that out of the equation for this question, – if it just came to me deciding to pick my own stocks out of a basked (let’s say the Dow Jones), – would my chances not have to be 50 : 50?
Thanks for clarifying!
Sorry for the delay. I was actually hoping to get the Mad Fientist to weigh in on this as I’m curious as to what his take might be.
In any event, my answer is simply that people have an almost endless array of ways to repeatedly lose money in the market:
..and a bunch more I’m not thinking of just now. So it is not just one event with a 50/50 chance but an endless stream of events, each stunningly easy to get wrong.
But you are right in this way: If you and I were to choose a given stock and you went long while I went short, we would each have a 50/50 chance of being right.
In fact this is exactly what happens with each specific trade in the market. For every buyer who thinks the time is now, there is a seller happy to unload. At that moment, only one can be right.
Index funds, on the other hand, rise relentlessly (although not smoothly) and are self cleansing. as described in this series.
Luckily, Jim chimed in with a great response (no big surprise there) so hopefully that answered your question.
I wrote an article about some of the cognitive biases that cause us to make bad investing decisions so feel to check that out for a few more reasons why most people underperform the market.
From: Stock Series
I recently found your site along with MMM and the Mad Fientist and I am loving everything I have read. I have implemented most of the stuff you teach here in my own finances.
My question is about a traditional IRA vs a Roth IRA. I am 24 with a $50K salary. I noticed you are a big proponent of the Roth IRA however in Part XX, Mad Fientist contradicts this and suggests it’s better for someone in my position to use a traditional IRA.
Just wanted to get your thoughts on this and if you actually recommend the traditional or Roth for someone in my position.
Thanks for creating this amazing blog and I look forward to anything you might post in the future!
Thanks for the kind words. Glad you like it here.
Astute observation and great question.
Indeed MF’s analysis has altered my thinking. Go with the ideas in Part XX.
Thanks for the quick response! I was hoping you would say that since I already maxed out my Traditional IRA for 2014 haha!
I am so happy I have found your blog. It is slowly changing my thinking.
Have you ever watched/read anything from Michael Maloney such as his series Hidden Secrets of Money?
These are extremely well produced and (I think and would love to hear why you think not) very persuasive. I understand he is someone who could be just selling something (precious metals) but he doesn’t come across that way at all.
So I am torn. Is what he says right or is it more unreasonable to bet against this country and its economy?
I would love to hear your thoughts!
Thanks so much for your blog!
Glad you are finding value here.
I am not familiar with Mr. Maloney or his series and unfortunately don’t have the time, or candidly the inclination, to spend with it.
I will say that one of the reasons I started this blog is because there is so much nonsense out there. Some is simply bad advice. Much is bad advice design to sell you crap.
I will also say that there are no “Hidden Secrets of Money.”
As you read thru the blog here you’ll have a clear idea of how I see things. It then shouldn’t be hard then to contrast my ideas with others and decide for yourself.
Just be careful. And you might want to read this: You, too, can be conned
Love to read here.
Just a thought . . . not that I’m a lawyer…
Looking at the following text “…By leaving a comment on this blog it becomes the property of jlcollinsnh.com and it may be used in another post, article or book. …”
I wonder if you might be better served by adjusting a portion of that from “…becomes the property of jlcollinsnh.com…” to something along the lines of “…becomes licensed to jlcollinsnh.com in an ulimited fashion, though the material itself is solely the product and property of the posting entity…”
My thought may be obvious, though if not, I suspect it’s a better liability to have an unlimited license to use the product rather than becoming the owner of the product, with whatever liability the ownership may carry.
If you happen to read this comment and find it way off base, I look forward to finding out how/why.
Often willing to “pay it forward” & encourage others to do the same . . .
Glad you like it!
Thanks, too, for your suggested phrasing. It may well be better than what I’m using, or not. Thanks for giving me a chance to reconsider it.
I’m not a lawyer either and am just trying to let people know what to expect when they post comments and questions and I respond.
I know we have lawyers out there reading. Any thoughts?