Archives for October 2014

Scary Longevity Charts for Couples in Retirement

It’s time for some morbid Halloween thoughts! Via an AAII interview with William Sharpe, it appears that the Nobel Prize winner and Sharpe Ratio namesake is working on a software project called Retirement Income Scenarios (blog and software site). It’s not very sleek and I haven’t spent much time with it, but one of the features is a longevity chart:

One of the things that people can do using the illustrative software program available through my retirement income blog is to type in their age and sex and their partner’s age and sex and see the probabilities that both will be alive, that one will be alive or that the other will be alive year by year in the future, based on a set of actuarial tables. Most people don’t want to look at such a graph, but I think it’s important to do so. Most who do this react by saying “that’s a long time, a really long time.”

Sharpe wants people to realize they may live a long time and “scare” them into saving more, working longer, and/or being more careful with their portfolios. Here is the example chart given for retiring couple with male age 66 and female age 63. The green bars show the probability of both spouses being alive at a given year in the future. The blue bars show the probability of just the husband being alive, while the red the bars show the probability of just the wife being alive.

male66_720

As you can see, there’s a good chance (roughly 40%) that the woman will live another 30 years after retirement. That is a really long time.

So I started up the software and ran the number for something closer to our situation – both male and female currently 36 years old. Here’s the longevity chart produced:

both36_720

When I examine this chart, I have a different perspective. Being male, I notice that there is a roughly a 10% chance that I won’t make it to age 66. There is a 20% chance (1 in 5) that I won’t make it to 76. The idea of dying before I can actually enjoy retirement – that is scary to me. So yes people can “just” work longer, but also remember that your time on this Earth is limited and not guaranteed. There are many paths out there, but I don’t plan on working hard until 65 or 70 and then hoping I can relax for while before I croak.

Schwab Intelligent Portfolios: Free Automated ETF Portfolio Manager

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(Update 10/28: Schwab has indeed announced their free robo-advisory platform called Schwab Intelligent Portfolios, although it won’t actually start opening new accounts until Q1 2015 and not much new was leaked besides confirming that they will not charge any advisory fees, trading fees, or account fees. You’ll need $5,000 minimum to open, $50k minimum for tax-loss harvesting. Media coverage at Reuters, NYT.)

Original post below:

Speaking of robo-advisors, Reuters reports that discount brokerage Schwab is “weeks away” from announcing their own automated online portfolio management service similar to what is provided by Betterment, Wealthfront, and FutureAdvisor. This is big news because:

  • Schwab is a well-recognized name brand in the financial industry and has their own army of affiliated financial advisors.
  • This service will reportedly be free with no advisory fees, just the cost of underlying ETFs.
  • Schwab has their own set of in-house index ETFs with very low fees. Their Core US Index ETF (SCHB) has an annual expense ratio of 0.04%. Their Core International Index ETF (SCHF) charges 0.08%. Their Core US Bond Index ETF (SCHZ) charges 0.06%, and US REIT Index ETF (SCHH) charges 0.07%. (full list)

Theoretically, this could mean you could get a managed ETF portfolio with automatic rebalancing for safely under 0.10% annually or 10 basis points, all-in. If that happens, that would certainly shake up the industry and perhaps light a fire under Vanguard to do something similar. Hopefully they don’t force you to own some of their more expensive niche ETFs. Vanguard Target Retirement Funds offer a diversified portfolio of index funds and internal rebalancing, but the average cost is 0.17% annually.

If the article is correct, it may be worth waiting to see what Schwab has to offer before opening a “robo-advisor” account elsewhere.

Wells Fargo + Apple Pay = Up to $30 in Bonuses

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Use your iPhone 6 to make an Apple Pay purchase with your Wells Fargo credit card by November 30, 2014, and you’ll earn a $20 statement credit.

Use your iPhone 6 to make an Apple Pay purchase with your Wells Fargo debit or prepaid Card by November 30, 2014, and you’ll earn a $10 statement credit.

AirBNB Promotion Codes: $40 in Free Travel Credit

airbnblogoUpdated. Airbnb rents out everything from private rooms to entire houses to ancient castles. We stayed at Airbnb’s in Europe and it was great for a family with little kids. We could cook simple meals in the kitchen and eat around a real dining table. You felt more like a local family.

$40 in free Airbnb credit for new users. If you’ve never stayed at an Airbnb, you can get $40 in travel credit towards your first rental with my referral link. I believe I will get $20 of credit after your first booking. Thanks if you use it.

Before booking, I would definitely read review and look for a “Superhost” if possible. Here is a NY Times article with Airbnb tips from a former Superhost.

Have an extra room or taking a long vacation? Airbnb can estimate your income as a host if renting out a private room, in-law unit, or entire house. You can share a spare room in your apartment or do a pseudo-“home swap” by renting out your whole home the next time you’re out of town. You can open your space for one day or all year.

Looking to help others? Airbnb helps connect people displaced by natural disaster and those with open rooms. Right now, they are helping to shelter people affected by the volcanic eruptions in Hawaii.

Share you own Airbnb experiences in the comments.

Amazon Fire Streaming Stick 50% Off with Prime

fire_stickOffer expired, now $39. Many cable TV “cord-cutters” get their TV fix using an HDTV over-the-air antenna and/or a streaming video device like the Roku, Google Chromecast, or Apple TV. Amazon has just announced their new Amazon Fire TV Stick. The regular price is $39, but if you have Amazon Prime and order it by 10/29/14 at 6am Pacific, you can get it for just $19. Here’s a comparison chart against similar competitors provided by Amazon (click to enlarge):

fire_compare2

Notably, Google Chromecast does not support Amazon Prime Instant Video and does not include a physical remote. Fire does not support HBO Go.

Not a Prime member? Join as Amazon Mom for a free 1-month Prime trial and get 50% off diapers. Join as Amazon Student with a .edu email address and get a free 6-month Prime trial.

I have an older Roku box that I’ve been using on and off for the last couple of years – it is useful for Plex which streams my own media from my hard drive to my TV and also for various kids shows on-demand from Amazon Prime Instant Video. (I cancelled my Netflix subscription after having kids since I don’t have time to binge-watch TV anymore.) So why am I going to buy this? Because my 2-year-old lost/hid/ingested the remote, and this new gadget is cheaper than buying a replacement Roku remote!

Sequence of Returns Risk During Retirement Illustration

Businessweek has an article discussing the difficulties when trying to make a retirement nest egg last for the rest of your life. Most people just worry about the average returns of their investments. But another important concern during the withdrawal phase is sequence of returns risk.

Two retirees can start with the same initial portfolio balance and experience the same average return, but if one experiences highly negative returns in the first few years of withdrawals they can end up with very different outcomes. Instead of explaining this concept with a list of numbers, here is a graphical version from the BW article. Both Jane and John start with $1 million, experience 7% average returns, and take out $50,000 a year with a 3% increase each year for inflation.

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Jane ends up 20 years later with $700,00 more than she started, and John is flat broke. Although the sequence of returns shown is a bit extreme, they are simply mirrored and it is still entirely possible.

Some people take this to mean that you shouldn’t retire when the market has been on a good bull run, but I think the point is that you simply don’t know what order your future returns will be. The bull run could keep on going and create a bubble, and then pop many years later. Or something like a declaration of war could crush the market even further even if things have already been bad for a while.

Briefly, a couple of options that can help alleviate this sequence of returns risk are a dynamic withdrawal strategy that continually adjusts to actual returns (no set number every year), and also annuitizing part of your portfolio using a single-premium immediate annuity. Finally, don’t forget the traditional advice of holding a sizable chunk of quality bonds in your portfolio.

Prosper vs. LendingClub Investor Experiment: 2 Year Update

lcvspr_clipoIn November 2012, I invested $10,000 into person-to-person loans split evenly between Prosper Lending and Lending Club, looking for high returns from a new asset class. After diligently reinvesting my earned interest into new loans, I stopped my after one year (see previous updates here) and started just collecting the interest and waiting see how my final numbers would turn out at the end of the 3-year terms.

It is now about a week shy of the two year anniversary of this experiment, so here’s another quick update.

$5,000 LendingClub Portfolio. As of October 20, 2014, the LendingClub portfolio has 157 current and active loans. 71 loans were paid off early and 21 have been charged-off ($314 in principal). 3 loans are between 1-30 days late. 5 loans are between 31-120 days late, which I will assume to be unrecoverable. $3,515 in uninvested cash from early payments and interest. Total adjusted balance is $5,392. LendingClub reports my adjusted net annualized return as 5.27%. Here is a screenshot of my account.

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$5,000 Prosper Portfolio. My Prosper portfolio now has 142 current and active loans, 85 loans paid off early, 31 charged-off. 6 loans are between 1-30 days late. 6 are over 30 days late, which to be conservative I am also going to write off completely (~$66). $3,024 in uninvested cash (early payments and interest). Total adjusted balance is $5,334. Prosper reports my net annualized return as 5.56%. Here is a screenshot of my account.

1410_prosper

Recap and Thoughts

  • P2P lending is legit. LendingClub is preparing for an IPO on the NYSE. Institutional investors are buying a significant portion of LendingClub and Prosper loans. This WSJ article says 66% of Prosper loans in 2014 have been sold to institutional investors. What started out as the Wild West of unsecured loans is now accepted by Wall Street. This would suggest that reliable positive returns for investors are more likely, but also that chances for outsized returns will be diminished.
  • If you continually reinvest your interest, the return numbers you see will be higher than your actual long-term returns. Due to how they are calculated, your reported return will deteriorate as your loans age and more borrowers default. After two years, Prosper reports my annualized return as 5.56%. 4 months ago, it was 5.76%. 8 months ago, it was 7.55%. LendingClub reports my annualized return after 2 years as 5.27%. 4 months ago, it was 5.94%. This doesn’t mean you shouldn’t invest and your returns may better than mine, but be aware of this pattern if most of your loans are new.
  • If I were to invest all over again… First, I would do it within an IRA to avoid tax headaches. I would also buy at least 100 loans x $25, which also happens to be the $2,500 minimum for free automated investments at LendingClub (no minimum at Prosper). Picking loans can be fun for some but I got bored after a while.
  • LendingClub vs. Prosper relative performance. I tried my best to invest at both websites with the same criteria and overall risk preference. Right now, LendingClub is ahead by a bit. I wouldn’t put too much importance on the absolute numbers as I stopped reinvesting into new loans (at both sites) after the first year. Here’s an updated chart tracking the LendingClub and Prosper adjusted balances separately over these past two years:
    1410_prosperlc

Early Retirement Portfolio Income Update – October 2014

When investing, should you focus on income, or total return? I like the idea of living off dividend and interest income, but I also think it is easy for people to reach too far for yield and hurt their overall returns. But what is too far? That’s the hard part. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. If possible, I’d like to invest for total return and then live off the income.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (10/18/14) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.78% 0.43%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.81% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 3.35% 0.80%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 2.97% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.51% 0.21%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 1.70% 0.34%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 1.78% 0.36%
Totals 100% 2.31%

 

The total weighted yield was 2.31%, as opposed to 2.49% calculated last quarter. This means that if I had a $1,000,000 portfolio balance today, it would have generated $23,100 in interest and dividends over the last 12 months. Now, 2.31% is significantly lower than the 4% withdrawal rate often recommended for 65-year-old retirees with 30-year spending horizons, and is also lower than the 3% withdrawal that I prefer as a rough benchmark for early retirement. Hurray for zero interest rates!

So how am I doing? Using my 3% benchmark, the combination of ongoing savings and recent market gains have us at 90% of the way to matching our annual household spending target. Using the 2.31% number, I am only 69% of the way there. That’s a big difference, and something I’ll have to reconcile. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems extremely cautious.

Early Retirement Portfolio Asset Allocation Update – October 2014

Here’s an update on my investment portfolio holdings for Q3 2014. This includes tax-deferred accounts like 401(k)s and taxable brokerage holdings, but excludes things like physical property and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover all of our household expenses.

Target Asset Allocation

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I try to pick asset classes that will provide long-term returns above inflation, regular income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (don’t buy what you don’t understand).

Our current ratio is about 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-directed portfolio of low-cost index funds and low turnover, we minimize management fees, commissions, and taxes.

Actual Asset Allocation and Holdings

1410_portfolio_aa

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Notable Changes

Last quarter, I had sold my PIMCO Total Return fund holdings. Well, that was lucky on my part with all the recent Bill Gross drama. I decided to sell my stable value fund holdings too as I needed rebalance into more TIPS bonds and I was now able to buy TIPS inside my employee retirement plan using the Schwab PCRA brokerage window. All of our tax-deferred space is now taken up with TIPS and REITs, so the rest of my bonds are tax-exempt munis and savings bonds.

Otherwise, not much new, I rebalanced with new money and reinvested dividends. By this, I mean I don’t automatically reinvest dividends into the same mutual fund or ETF that generated them. Instead, they accumulate for bit and then I reinvest them in whatever asset class has been lagging recently. This also makes fewer tax lots for my taxable accounts.

That’s it for portfolio holdings. In a separate update post, I will update the amount of income that I am deriving from this portfolio.

Which SUV, Minivan, or Crossover Is The Most Space-Efficient?

siennaIn the October 2014 issue of Car and Driver magazine, they have an article “Space Exploration” comparing the space-efficiency of “hatchbacked” vehicles – hatchbacks, wagons, crossovers, SUVs, vans. Their definition of space efficiency was carrying capacity compared to the amount of ground a vehicle occupies. Specifically, the maximum seats-down cargo volume divided by footprint (length times width). Trucks don’t count.

I can’t find a version of the chart online, so here is my rundown of the findings:

  • The most space-efficient vehicles were cargo vans usually bought for commercial use. Not surprising, as these are often seen as airport shuttles. Examples are the Ram Promaster, Mercedez-Benz Sprinter, and Ford Transit. The extended body, high roof versions of these vans have ratios as high as 3.69.
  • After that, the minivans rule: Toyota Sienna 1.38, Honda Odyssey 1.33, Chrysler Town & Country 1.30. (Nissan Quest was only 1.00.)
  • Huge SUVs are next: GMC Acadia 1.06, Ford Expedition 1.08, Toyota Sequoia 1.06.
  • After that, things get more interesting. The Scion xB is 0.86 is actually a bit better than the Toyota Highlander at 0.83 and the Mercedes GL at 0.79. The Honda Fit is 0.71, on par with the Jeep Grand Cherokee at 0.68 and Audi Q7 at 0.67. Relatively disappointing small cars include the Nissan Juke 0.46, Ford C-Max 0.49, and Kia Sportage 0.62.
  • Want electric? The Mitsubishi i-MiEV is 0.80 while the Nissan Leaf is 0.35 and Chevrolet Volt is a paltry 0.12. I would note the MiEV is tiny though, it looks like a golf cart driving down the road.

As you might expect, in general tall and boxy shapes make for high numbers. Space-efficiency isn’t everything, but it can be an important factor to consider if you have a growing family or certain hobbies. It would have been nice if they also used the alternative definition to be cargo volume divided by base retail price (space per dollar).

Comparing Three Major Levers You Can Pull On Your Retirement Portfolio

One of the most popular posts on the Vanguard blog is My one piece of investing advice by Andy Clarke. Let’s start with the following baseline scenario:

  • Investor begins working at 25, but starts saving at age 35.
  • 12% savings rate
  • Moderate asset allocation (50% stocks and 50% bonds)
  • Salary starts at $30,000 but increases with age

Now, imagine there are three “levers” that you could pull in order to try and increase your final savings balance at retirement – asset allocation, savings rate, or time horizon. In each case, everything else in the scenario stays the same.

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Which single option do you think has the most impact? Taken from the blog post, the results below are based the median balance found after running Monte Carlo computer simulations based on historical returns.

threedoorsresults

I would look past the absolute values and instead focus on the relative effect of each option. In case you haven’t figured it out, the one piece of investing advice is “save more”. The easiest lever to pull is a more aggressive asset allocation because it doesn’t require the pain of spending less and saving more (though you get more stomach-churning bumps and less reliable results). But here we see that saving just 3% more was equally powerful. If you pulled all three levers, your final balance would have more than doubled!

Coupon Code: $10 off $100 at Costco.com

Costco CardsYou can get a one-time use coupon code for $10 off a $100+ purchase at Costco.com if you visit SavingsTooBig.com and share the deal. I’d say the easiest option is Twitter as I didn’t even have to actually post the tweet to get the code (although I did anyway… why not share?). Costco.com is actually a good way to get big or heavy stuff delivered directly to you; their shipping cost quotes have often been a lot lower than I thought it would be. You can also buy a lot of stuff for the same price as in-store, so why not save $10.

Only valid on Costco.com. Not valid in warehouse. One coupon code per Costco member. Ineligible purchases include: new Costco memberships, Costco membership renewals, gift of membership, online gift certificates, Costco Cash cards, custom installation services and online-digital print orders. Not valid for orders at the Pharmacy, Costco Travel or Costco Business Delivery. The merchandise total in your cart must equal $100 or more before tax and shipping to receive the $10 off. The coupon code must be entered in the promo code box at checkout to be valid. This offer may not be combined with any other offer or promotion. No cash redemption value. View Official Rules. Offer expires 12/31/2014.

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