Gaijin Shogun
An original painting by Alex Ferrar
On display at his restaurant Sobremesa, Antigua, Guatemala
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 there is a price to be paid.
Returning from this latest trip to Mexico and Guatemala I have over 100 comments and questions waiting for a response here on this blog. That’s just counting the ones that actually require a response.
I love getting questions and comments here and, when I’m around, look forward to them each day. On a daily basis, it is relatively easy to keep up. But left to build for a few weeks they become an intimidating task. Catching up can easily overwhelm the time normally allocated to writing new posts. And, of course, new posts are also thin and rare while I travel.
When readers take the time to comment I am very appreciative and if they ask a question or two I very much like to be able to respond. But buried in the comments section of whatever post they’ve chosen, our conversation is unlikely to be seen and enjoyed by other readers. In fact, when answering I can’t really even be sure the original commentator has subscribed to the comments and will see the response. It is tempting to blow off these questions and simply move on to writing new posts more readers will see.
But the calibre of most of the questions I get here is excellent and, as I’ve often contended, the comment section on this blog has some of the best, most interesting content. So here’s my plan. I’m going to start working thru all these comment/questions, answering them in the posts where they were made. In addition, I’m going to select several of the most interesting and reproduce them in a series of posts — starting with this one. I see three benefits:
- It will get responses to readers who were kind enough to comment.
- It will get the flow of new posts started.
- It will introduce readers who don’t currently bother reading the comments to some of the content to be found there.
- It might even introduce you to some older posts you’ve missed so far.
OK, that’s four. Works for me! Hope it works for you, too.
Oh, and I’ve named this post after the featured painting above. Enjoy!
From:
How to give like a Billionaire
Workinghard:
I don’t know how many times I’ve thought about a charitable trust fund. It’s been on my someday wish list. However, it’s my understanding that any money in the fund can only go to qualified non-profit or tax exempt organizations. Is that correct? Or can the money be used to help individuals in need? We give 10-12k a year to people rather than churches or organizations. I also prefer giving anonymously which calls for some creativity and using people out-of-state to help. It would be nice to have some of the advantages of a charitable trust fund.
Thanks for addressing this topic! Now to read your other blogs.
jlcollinsnh:
Welcome WH…
Correct. Your fund can only contribute to qualified, established charities. I suspect this is because, since it is tax-deductible, the same rules for IRS charitable tax deductions apply.
As it happens, like you, I frequently prefer to give directly to individuals and small organizations that may not qualify.
So what I do is occasionally fund my charitable trust with larger donations that get me over the IRS standard deduction for the tax benefit. This money is then distributed over the next several years.
At the same time the money I choose to give anonymously and to places not qualified I give randomly and without concern for the tax break.
Hope that helps.
Workinghard:
Thanks for replying and everything you’re doing to help us (me)!
I don’t care about the tax advantages per se of a charitable trust but the anonymity would be great.
bookaunt:
Just to let you know that you can open a charitable gift account at Fidelity for $5000 while you are waiting to build a bigger stake
jlcollinsnh:
Good to know, bookaunt.
But for smaller sums like $5000 I would just distribute the cash directly to the charities of my choice without bothering with a charitable trust.
Such trusts, in my view, are better at providing an immediate tax advantage for a larger donation that will be distributed over time.
For instance, unless you have other deductions $5000 will be under the standard deduction amount and no tax benefit will be realized.
But if you fund your trust with 25k and then distribute the money over five years at 5k per year, you get a very valuable 25k deduction in the year you fund your trust.
Make sense?
bookaunt:
There are times when even a $5k charitable fund can be useful. It worked for us a couple of years ago when we wanted to sell some stock that had a significant capital gain. By funding our gift fund with that stock, we were able to shield the profit from taxes – worthwhile to us even though the amount was not much over $5k (but we did have other deductions).
Also – when looking at setting up one of these funds, note that both Vanguard and Fidelity charge an annual cost/maintenance fee.
From:
Stocks — Part V: Keeping it simple, considerations and tools
Stephen:
I love this blog and am making my way through this series avidly.
I was wondering how much of this applies to international investors? I live in Australia. Does “the market always goes up” still apply to the Australian market? It seems to historically, however since it’s such a small slice of the international market I was doubtful it was as secure.
I would like to simply invest in VTSAX, but the vanguard situation is different over here.
https://www.vanguardinvestments.com.au/adviser/adv/investments/overview.jsp
Most of those charge a fee of 0.70% or .090%, and they track the Australian share market, not the US.
However there are also ETFs listed at Vanguard Australia – these appear to have much lower pa fees. There is one which is the “total US market” for 0.05% pa! Is buying such an ETF the same as buying VTSAX in the US, or am I missing something?
https://www.vanguardinvestments.com.au/adviser/jsp/investments/etfs.jsp#etfstab
I’m sorry if this is confusing, I guess I’m just wondering the best way to attempt to emulate your strategy of buying the total US stock market whilst living in Australia
VTS, in the second link you provided, is indeed the equivalent of VTSAX and the ER of .05% is great. Be careful, however. Since it is an ETF you might well face commission charges when you buy or sell.
Since you’ve been working your way thru the blog, perhaps you’ve already come across these two posts:
http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
http://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
You’ll especially want to read the comments in both those posts. Several Aussies have weighed in with their ideas and experiences.
Cheers, mate and good luck!
Great information and thank you for sharing all this.
I can tell you that with all the career emphasis most folks have, we just don’t seem to wrap our minds around the investing logic until it’s late in the game.
I’m retiring in May this year when I turn 62. I have a pension that will “just cover” my monthly expenses. I plan to ‘not’ take my social security benefit until I reach full 66yr status. I also have an employer 401K with sufficient funds that is managed by Vanguard. I will likely need to tap into earnings to bridge the gap until I reach age 66. 81% of my holdings are currently invested in company stock (oil) and I’m considering utilizing your “4 tools” advice.
Any advice on how to arrange dividend/earnings income withdrawals and whether to roll into an IRA?
Also I notice you state the rule of thumb for Stock/Bond ratios, but then you say…doesn’t matter. Can you explain why?
Thanks, Rich
Hi Rich…
Thanks and glad you find it useful.
Were I in your position I would be VERY concerned about having 81% of my assets in just one stock. Even if I loved that stock.
If this holding is in a tax advantaged account I’d promptly shift it into the broad-based index funds discussed in the post. If not and assuming you have a large capital gain, I’d begin shifting as rapidly as possible consistent with limiting the tax hit as best you can. This, of course, will take a careful analysis of your full tax picture; something well beyond the scope of this blog.
Structuring withdrawals can be almost anything you choose. For us, we first spent down the various investment “mistakes” I’d accumulated. Now we pull what we need each month from our joint VTSAX fund in our non-tax-advantaged account. In our IRAs we have more VTSAX along with the bond and REIT funds described above. The dividends from these I have reinvested. We also shift some each year to our Roth IRAs to reduce the amount we have once we hit age 70 and the Minimum Required Distributions (MDRs) kick in. The idea is I’d prefer to pay up to 15% now than 25%+ later.
Once I have to take the MDRs, those will provide our living expenses and our joint VTSAX fund in our non-tax-advantaged account will be left alone to grow again.
As you can see, this is all unique to our situation and needs. It may or may not be useful to others.
But I would suggest not worrying about just spending your dividends and interest. Better to look at all your investments as a whole, limit yourself to total withdrawals of 4% or less and take those withdrawals from wherever it makes sense at the time.
I don’t recall saying stock/bond ratios don’t matter. They are a tool for smoothing the ride. Once you stop working and start drawing on your investments, this is important. But while you are still working and adding money to your investments, I suggest toughening up and accepting the wild ride for the greater return stocks provide over time.
I LOVE YOUR BLOG! I have a question for you. I’m 37 years old and work for a Governmental Agency with a Pension. On the side, I contribute some money into a 457(b) plan. I currently have $67,000 in there in a Vanguard Target Date Fund, 2045. The Expense Ration is .18. Now, I understand that this ER is great, but I had a thought…can’t I invest in each of the three index funds that make up the 2045 Target Date Fund and save some on the ER? Am I missing something here!?
Thanks for your blog and for your willingness to share your wisdom with us young, dumb people!
Brian
jlcollinsnh:
And no one who asks questions is dumb. I wish I’d been smart enough to ask more back in the day.
Anyway, your thinking is spot on. You can absolutely replicate any target date fund using a selection of index funds, and with lower ERs (expense ratios) to boot. You’ll just have to remember to do the rebalancing on your own, something the TDF does automatically for you.
In fact, I just did our annual rebalancing of the three funds described in the post last week. Easy peasy! And fun. At least for me.
From:
It would be great to meet you one of these days, Justin. Enjoy your travels and who knows what little dive we might stumble across each other in?
Walt:
I’m actually in much the same boat as Jim was, but without the $300 rent coming in.
We bought my mother-in-law a condo and pay the HOA for it to the tune of $350 a month plus debt service of course. We also pay for cleaners to come in once a month, because she is an awful housekeeper.
She, of course, has zero savings, doesn’t work, and lives on social security of around $750 a month.
Fortunately our association is the opposite of the one he describes – the HOA hasn’t gone up in three years, and there are no special assessments. As with many condo boards they’re a bunch of kooks, but they’re very careful with the money. One of them wanders the pool area over the summer yelling at people who leave the outdoor shower running too long.
I look at the condo when I’m visiting, though, and I wonder how long until she starts complaining about the ancient carpet and other things – but the carpet was in very good shape when she moved in. Add in a woman who flat out doesn’t clean, her piggy 12-year-old grandson and two cats who pee everywhere, and things don’t stay nice for long.
She has occasionally said things that make me think she believes this arrangement is somehow to our financial advantage. Of course, she hasn’t made a sound financial decision in her whole entire life, so there’s that…
My strong suggestion is to NOT buy your parents’ housing. Go ahead and subsidize it if needed but it’s not a comfortable place to be.
jlcollinsnh:
Yikes!
Your situation sounds much worse than mine!
David:
Next time she suggest the condo is to your financial advantage, suggest she move somewhere else if she can find a better deal. And if she can’t find a better deal, you expect a sincere “Thank you” or she can move out anyway.
My mom and dad taught me not to put up with passive-aggressive excrement (or any other kind!) from anyone.
From:
Pickpocket at work
Stocks Part VIII-b: Should you avoid your company’s 401k?
Ally:
HI Jim, GREAT post, GREAT video. I am really enjoying having my eyes opened. I always thought I was good at watching the fees in my 401k.
I am lucky enough to have Vanguard options in my 401K which I utilize. My boyfriend on the other hand has an awful 401K (in my opinion). I tried picking the “best” of the options available but I feel lost.
He has JP Morgan and Putnam funds available to him and all have annual expense ratios of 1.04%-1.38% and all are Actively Managed accounts so the Load Charge is anywhere from 5.25% to 5.75% per fund. I think this is just outrageous.
My question is, is it best to just pick one fund with an outrageous fee or spread the money and diversify? Does it cost more to have all your money in one bad fund or many bad funds?
Thanks,
Ally
jlcollinsnh:
Holy crap, Ally….
Those options he has really do sound ugly. “Outrageous” doesn’t seem strong enough a term.
Are there no choices without the loads?
As for your question: The only reason it would cost more to have the money spread around is that some of those funds are even worse than the others. Other than that, more funds are just more hassle in keeping your allocation choices in balance. Given those loads, he should be sure to do that with new money rather than buying and selling shares.
Personally, I’d look for the lowest cost fund offered. It is likely to be the index fund if they offer one, and that’s what you’d want anyway.
But if all the funds have fees as intense as what you describe, I’d be tempted to skip it all together. I’d certainly hesitate before funding it beyond the company match. (Please tell me there is a company match!)
If he is feeling ambitious, he might also campaign for better choices with his HR department.
Read Addendum #1 very carefully and walk thru the Mad Fientist’s math as it applies to your boyfriend’s situation, and then decide.
Good luck and please keep us posted!
Jeff:
My 401k includes the following Vanguard funds – is there any reason to choose something other than the mid-cap index fund? Just want to make sure I’m navigating these correctly!
Mid-Cap Index (VIMSX) Prime Money Market (VMMXX) Target Retirement 2010 (VTENX) Target Retirement 2020 (VTWNX) Target Retirement 2030 (VTHRX) Target Retirement 2040 (VFORX) Target Retirement Income (VTINX) Total Bond Market Index (VBMFX)
jlcollinsnh:
Hi Jeff…
The mid-cap index fund is likely your lowest cost fund choice, but it is also very focused on one type of stock: Mid-sized companies.
If you have other investments outside your 401k you can balance this with large cap and small cap index funds. I’d shoot for about 70% large and 15% in each of the small and mid cap funds. This will roughly duplicate the Total Stock Market Index fund like VTSAX.
If you don’t have other investments, one of the better diversified Target Retirement funds would likely be a better choice for you, even with the bit higher expense ratio.
From:
Why your house is a terrible investment
Jon:
Mr. Collins:
Another terrific article where you provide a compelling argument mixed in with a “single finger salute” ( f-u money’s second cousin, twice removed) to tired conventional wisdom.
Of course, many of these “experts” that dispense this advice are broke and/or leveraged. I wish I would have “met” you years ago but sure enjoy your work now. Thanks for what you do.
By the way…I’m a satisfied homeowner yet don’t claim be a real estate baron by any means.
jlcollinsnh:
Thanks Jon…
Glad you liked it and glad we’ve “met” now. Also glad to meet someone who can be both a satisfied homeowner and still appreciate the concepts in the post. I’ve owned them myself for 28 years.
Nickster:
I don’t mind renting, but I don’t know how much is my “F-You Rent.” That is to say, how much money do I need to:
1) Rent in pretty much any area I like2) Rent as much space as I need3) Have the option to renovate or decorate as I please4) Not worry about getting evicted
jlcollinsnh:
Welcome Nickster….
The best way is to simply take your annual rent and multiple it by 25. That is, if your monthly rent is $1000, you’d multiple 12k x 25 = $300,000. In turn, 4% of 300k = $12,000. It is the same formula as for figuring your FI number: http://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Only you can answer your questions 1 & 2. Once you do you should be able to figure the rent needed.
As for #3, most landlords will limit your ability to move walls or paint the place in the exotic colors of your choice. At the very least, you’ll be expected to return the place to it’s original and presumably more rentable condition.
It is the same as if you owned the place. Come time to sell you’ll need/want to walk back any exotic renovations you’ve made. Even the most tasteful updates can simply go out of fashion by the time you chose to sell. Unless, of course, resale value is not a concern.
As for #4, most landlords are looking to keep good tenants not evict them. But if you plan on behaving badly, owning might be the better choice. It is much tougher for your neighboring owners to get rid of you than a responsible landlord.