Category Archives for Invest & Retire

Year-End 2013 Blogging and Personal Goal Review

Back in January of last year, I laid out some personal goals for my life in general and blogging goals for My Personal Finance Journey for the 2013 year.

As I experienced in 2012, (click the following link to view my 2012 blogging goals and year-end progress updates) by tracking these goals periodically, it provides me with more accountability and visibility to what I am doing and where I want to go with this community/blog and in my life. As such, the purpose of this post is to review how I did in 2013 in reaching the aims I set up for myself.

As far as life goes from a personal and blogging perspective, 2013 was a mixed year, with both successes and moderate shortcomings on my goals.

• Personally, it went very well, with me making good progress in my PhD program, doing a lot of bike riding to stay in good shape, and getting engaged in March.
• From a blogging perspective, we had some great successes, with record levels of blogging income/charity give back, very consistent content from our staff writing family, and some great asset allocation and asset location (Three-Legged Stool for Retirement) analyses being conducted.
• However, as usual, graduate school has taken quite a bit of time/effort, and as such I wasn’t able to spend quite as much time on my blog (and we’ll most likely see this reflected by a good number of “Did not accomplish” status updates below). In addition, Google made some algorithm changes that I believe kept down my overall traffic levels. But, such is life I suppose, so I’m not too disappointed about it all!

So, here goes! An update on how I did in 2013 for my blogging and personal goals, with updates highlighted in bold text below. This should be fun!   

The blogging goals for 2013 were as follows:

• Read and interact with (comment) 25 partner blogs per week.
  • Did not accomplish.
  • For the first part of 2013, I had a great Virtual Assistant (VA) that was helping me with commenting. However, she went MIA about half way through the year, and I haven’t heard from her since.
  • I have since been trying to find another VA to fill this role so we can continue with this goal.
• Continue active participation as a proud Yakezie Personal Finance Blog Network member.
  • Done.
  • However, I could stand to do a little more interacting in the forums in the next few weeks.
• Publish 3-5 blog posts per week.
  • Done, thanks to MPFJ’s great staff writers! Thanks everyone! 
• Obtain 600 unique visitors per day average by end of 2013.
  • Did not even come close to accomplishing. 
  • I was hopeful at mid-year that moving to WordPress would magically increase my traffic since everyone had told me that it improves your SEO, etc.
  • In general, I have been very satisfied with the move, and I feel like my reader engagement has increased. I even recently got an increase in Page Rank as well.
  • However, I think that due to some Google Search Algorithm changes that were made in 2013, my search engine traffic decreased. Since that is the biggest driver to my overall traffic levels, I believe that’s what caused overall traffic to be lower.
• Host all personal finance blog carnivals (Festival of Frugality, Cav of Risk, Carnival of Personal Finance, Totally Money, Carnival of Retirement, Carnival of Financial Planning, Carnival of Passive Investing, etc).
  • Done. This was fun!
• Continue organizing Carnival of Passive Investing in 2013. Offer hosting of the 12 editions for 2013 to guest hosts. If you’re interested in hosting, shoot me an email! You can view the schedule by clicking here. Also for the Carnival in 2013, my goals are to a) continue getting passive investing authors involved and b) start reaching out to financial journalists (maybe from Kiplinger’s or Money Magazine, etc) and/or financial reporters on TV.
  • Done. Thanks to all of our guest hosts so far this year! We were able to fill up all of the slots. 
• Continue to spread word about benefits of passive investing over active investing. Get involved in BogleHeads forums as well.
  • Done.
  • I did pretty well on this one in the 1H2013, but ran out of time in the last half of the year. Hopefully, I can improve upon this next year.
• Write 1 guest post for another blog per month to expand reach of my ideas.
  • Did not accomplish.
  • I slacked badly this past year on the guest posting! 
• Create an eBook on one of the following topics – a) Ways to be Frugal, b) Investing Strategy, c) Steps to Buying a Home, d) Getting out of Debt, or e) Financial Prioritization / Account Hierarchy. Once create book, market it afterwards.
  • On track.
  • I made quite a bit of progress putting together an e-book on “31 Days to a Financial Revolution” over the 2013 Christmas Break.
• Possibly transfer blog to WordPress hosting. First, migrate Carnival of Passive Investing for practice before do My Personal Finance Journey.
  • Done.
  • I transferred MPFJ.com to WordPress self-hosted back in June 2013. It was quite a bit of work, but I am very satisfied with it so far. I may switch Carnival of Passive Investing at some point, but since it isn’t my main site, I don’t feel as big of a need to move it.
• Create and publish monthly newsletter – “Intelligent Financiers Newsletter.”
  • Did not accomplish/did not have time. 
• Attend blogging, marketing, finance, or real estate classes at local community college or nearby conference locations. Particularly, I would like to take a class or two to learn more about Search Engine Optimization (SEO) and also how to publish a book in hard-copy.
  • Done.
  • I attended a local blogging conference in the Spring of 2013 called BlogVille 2013. I learned a lot of cool things!
• Submit blog posts to blog carnivals every two weeks to expose my blog to new audiences and build links.
  • 1/2 Done / 1/2 Did not accomplish.
  • However, here lately, I have not been doing so well with this because my fiancé, who was helping me submit articles to blog carnivals, ran out of free time to help me. So, I have since found and have been training a Virtual Assistant to help with this activity. Has worked well so far!  
• Successfully execute Tour de Personal Finance in July this year. For 2013, plan further ahead of time to gather more entries (max = 64) and get some sponsors involved.
  • Done.
  • The event went amazingly well this year!
  • $1400 in cash prizes were doled out to the event winners and the charities they selected.
  • I was also very glad that we were able to get 64 participating blogs this year and also had Debt Free Direct on board as our platinum sponsor!
  • You can read all the details in the recap post by clicking here.
  • I look forward to hosting the event again this year in 2014!
• Do Easy Like Sunday Morning Roundup and Recap 1X per month minimum.
  • Did not accomplish.
  • Ran out of time for this one!
• Continue social media presence on Twitter and Facebook. I would also like to try to incorporate some use of Pinterest as well.
  • 1/2 Done / 1/2 Did not accomplish.
  • Similar to the blog carnival post submitting goal above, I haven’t been executing as well lately because my fiancé ran out of time to help me do this. However, I am in the process of screening a Virtual Assistant to help me with this promotion.
• Feature one Cheapskate Jake Frugal Ramblin’ per month.
  • Did not accomplish. 
  • Did not have time for this one.
• Run 10% Blog Income Give Back Project each month. Continue teaming up with local charities to build relationships. Focus on visiting the charity personally after each give back concludes. Try to get other sites interested in doing something similar and also begin to look for sponsors for 1-2 of the giveaways.
  • Done.
  • The current cumulative total given to charity = $2,298, and the current cumulative total given to blog readers = $1,028
• Start and grow personal finance group speaking service. Generate ideas for speaking topics. Offer to local community first and build from there. Create page promoting service on My Personal Finance Journey.
  • Did not accomplish/did not have time.  
• Continue to try to find other ways to help people with their finances away from the blogosphere. One thing I’ve applied to do is become a volunteer credit counselor with Credit Education.org. However, I have not heard back from them, even after submitting my application multiple times. Another option I could pursue is offering general advice on finances from a life coach perspective – lifestyle, frugality/money-saving tips, life values and dreams, etc. You have to be very careful in making it clear to not offer advice on specific financial instruments since you must have the correct certifications for that (which I do not have). This might be hard for me to resist delving in to the specifics, but it could be fun! I would definitely need to learn more about the legal aspects first though.
  • Did not accomplish/did not have time.  
• Start building my family’s genealogy as time allows (this is a lower priority goal).
  • Done. I was able to get several posts up on this site.
  • I decided that my day job is such that I don’t think I will ever have enough time to focus on building the content on secondary sites in any significant way (at least for now). As such, I want to just focus on MPFJ /Carnival of Passive Investing, and the family genealogy site as time allows.
• Network with other bloggers, with a particular focus on physically meeting them to build relationships. The bloggers I have met in person so far are really interesting people!
  • Done.
  • I attended a blogging conference in town earlier this spring, and got to meet some very interesting bloggers and social media / website experts.
• Incorporate affiliate resources in to posts where relevant.
  • Done. 
  • However, I still haven’t found a way to discuss affiliate-related content very often on this site, and to date, really haven’t made any money with this.
• Negotiate advertising deals for other sites.
  • Done.
  • I’ve been enjoying doing this quite a bit!

 

In addition, my personal goals for 2013 that I set were as follows:

• Get to bed at midnight or earlier.
  • Done.
  • Been doing very well at this! I don’t seem to have the energy to stay up until 2am every night anymore! haha
• Take 1 day off per week (Saturday or Sunday) completely from doing work on my blog or from my graduate research job to keep my mind feeling more “fresh.”
  • Done.
  • Instead of taking an entire day off each weekend, I’ve been focusing on getting out and doing a big bike ride or hike once per weekend. Afterwards, I generally am pretty tired, so even though I might answer a few blogging emails or do a few things, I don’t work all that much.
  • However, with the weather lately being colder, I haven’t been able to get out as much. But, that is pretty normal.
• Become better at following the Getting Things Done email/work flow management system to focus my time and energy on high value projects first and avoid distractions.
  • Done, but could always stand for some continuous improvement/reminder to do this. 
• Hike or bike ride 1 time per week with a group.
  • Done. 
• Do a bike race if my Achilles starts to feel better.
  • Did not accomplish/delayed.
  • At the end of the summer, my Achilles was feeling much better after getting a new custom foot orthotic made for my flat feet. I could ride for 6 hours a single day on the weekend and not have it hurt. However, I would feel it slightly the next day, and would have to take several days off before biking again.
  • Because of this, I decided it was time again to go in for another bike fit since I hadn’t had one done since 2006 in Boulder, CO (and after all, technology probably has improved since then!).
  • I was pretty satisfied with the bike fit, as the guy was able to confirm that I didn’t have any leg length discrepancies or other biomechanical defects except for a crookedly-healed dislocated shoulder I got back in 2005 at a college party.
  • After making some pretty big changes to my position during the bike fit, it took me a couple weeks to figure out that the position he prescribed would not work for me. Therefore, I set about changing my position to a point where I could ride again.
  • After making some changes again, I found a good position I could live with. However, the cold weather soon hit, and I haven’t ridden much since then.
  • Thus, all of this is to say that this goal will have to be pushed off to next year!
• Hike more with the Charlottesville Hiking Group.
  • Did not accomplish since I mostly did biking on the weekends during the nice-weather months.
• Read one personal finance book per month.
  • Done and surpassed.
  • I’ve probably averaged about 2-3 personal finance books per month over the course of 2013.
• Go backpacking one time per month in warmer months.
  • Did not accomplish since I was so involved with bike riding on the weekends this year.
• Take a trip out-of-town 1 time per month. Visit sister’s new home in Raleigh. Visit one of the beaches in Virginia.
  • Did not accomplish.
  • As usual with the biological/cell-based nature of my experiments in graduate school, it’s been hard to get totally out of town during the weekends.
• Learn how to build a group speaking business.
  • Did not accomplish.
  • However, I did recently purchase a book that discusses the ins-and-outs of building a group speaking business.  

How about you all? How did you do in accomplishing your personal/professional goals you set for yourself in 2013? 

Share your experiences by commenting below!

How an Emergency Fund Can Make You a Better Investor

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

When it comes to investing, talking about an emergency fund is just about the least exciting sub topic possible.

After all, an emergency fund mostly sits in the bank gathering interest – and not much of it at that. But few people realize the real importance of an emergency fund from an investment perspective, and how it can actually make you a better investor.

Better investor as a result of having an emergency fund? How is that possible? There are several ways…

 

Creating and maintaining a basic “grubstake”

We can think of an emergency fund as something like “seed money”. It’s the money that you would use to rebuild your finances if you lost everything you had. Until the 20th century, this was often referred to as ”hocking the family jewels”. Since most of us don’t have a treasure trove of jewels safely hidden away in a strongbox, an emergency fund is really the next best thing. Having it well-stocked is a way of making sure that there are “jewels” that can be sold in the event of an emergency.

 

The safest of all safe investments

Every investor should have a certain percentage of their portfolio sitting in safe assets. Exactly how much you will have will depend upon your age, your risk tolerance, and financial factors beyond your portfolio, such as income level, expenses and debt. But no matter what those levels might be, it’s absolutely essential to have at least some money sitting in safe investments.

Emergency funds have the advantage of being the safest of all safe investments. You typically will invest them in nothing more exotic than a savings account or bank money market fund, or in certificates of deposit. It’s not that you can’t invest part of your portfolio in money market funds or certificates of deposit – or even U.S. Treasury securities – but an emergency fund has certain aspects the make even safer than those.

For one thing, since an emergency fund is typically held a local bank, you actually will have physical access to the money in the event of an emergency. It will also be fully covered by FDIC insurance. Similar safe investments held in brokerage accounts have neither the easy access nor the FDIC insurance.

This isn’t to say that an emergency fund will satisfy the need for safe assets in your investment portfolio. You should have some such assets in your basic portfolio, in addition to your emergency fund. But your emergency fund is that “cookie jar” that you keep outside your portfolio, and well beyond the potential for risk investments of any kind.

That kind of safety gives you an extra margin of protection against market shocks and less-than-perfect investment decisions.

 

Keeping your head in a short-term crisis

One of the silent benefits that an emergency fund has for investors is that it can enable you to keep a clear head at a time when you may be facing financial difficulties on the home front. Imagine you lost your job, but had no short-term savings to cover bills until unemployment checks started coming in? You probably would make some panic moves that you would live to regret later.

Just having an emergency fund available enables you to avoid that panic. That will give you the ability to maintain your long-term investment plans despite short-term disruptions in your income, or sudden spikes in your expenses. An emergency fund acts as a psychological insulator between you and your investments. And that is exactly what you need in order to successfully invest over the long haul.

 

Avoiding disturbing your investment portfolio for living expenses

On a more practical level, an emergency fund can keep you from having to raid your investment portfolio in the event of a crisis. If a crisis were to occur, and you have no emergency fund, you might be tempted to tap your investments in order to raise cash for survival purposes.

If you’re mostly or entirely invested in equity investments at the time, it could force you to liquidate those positions at a bad time. That can result in taking investment losses that you will lock in permanently as a result of selling your positions.

An emergency fund can provide you with the ready cash that you’ll need to meet short-term emergencies and avoid having to disturb your investments at all. At a minimum, the emergency fund will provide you with enough money to enable you to make rational decisions about how you get through the crisis at least in the near term.

 

“Sleeping money”

There’s much to be said for having your savings and investments arranged in such a way that you can get a good nights sleep on most nights. An emergency fund will help you to do that. Not only will it provide you with a margin of safety in the event of an income disruption or a large expense, but it can also be a welcome safe harbor in the event of market slide that brings down your investment portfolio.

A good nights sleep will enable you to have a clear head, which will make it easier for you to develop a strategy to deal even with problems within your portfolio. It does this by removing the prospect of immediate threats from your life by providing you with a cash cushion.

The next time you get annoyed at the low return you’re earning on your emergency fund, stop and think about the many ways that the fund enables you to be a better investor then you would be without it. Even if it doesn’t provide a good return on your money, an emergency fund is still a perfect investment in so many other ways.

How about you all? How much of an emergency fund do you like to keep on hand?

Aside from the direct benefit of using it to pay for short-term expenses in the event of an emergency, do you feel that having an emergency fund has enabled you to be a better investor?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/79818573@N04/8719057729/

Year-End 2013 Current Asset Allocation and Net Worth Growth

Hello there everyone!

The past few months have been quite eventful, with planning to finish my PhD by next August, starting the job-finding process, starting an internship with the University’s licensing / commercialization office, getting engaged/planning our wedding for September 2014, and trying to submit a journal article to the ACS Journal of Chemical Biology here in the next few weeks. 

Anyhow, with 2013 now being just a memory, it’s time to review the progress on my net worth realized the past year! So, without further ado, let’s get started – first with reviewing my net worth growth during 2013! As always, if you have any questions, please ask via email or commenting below!

As I’ve mentioned before, the goal of this running net worth and asset allocation progress update series is two-fold:

• 1) To share how I (as a fairly normal non-financial professional) approach various financial issues that come at me throughout life so that you can use my learnings to assist you in your financial decision-making, and
• 2) To make me more accountable in sticking to my various financial goals that I set forth by periodically evaluating my status and making adjustments.

Overall, I would say that 2013 went amazingly well from a financial perspective. I’ve been able to make a lot of progress towards my personal, professional, and financial goals (even raised a total of $11,000 for the MS Society with my MS Bike Ride!).

In particular, I’ve been able to efficiently leverage my three-legged retirement stool accounts (Roth IRA, taxable account, and Roth 401k). And, I’ve been able to invest significantly in my blogging goals with the help of several amazing staff writers on the site.

On top of that, the overall market did very well during the past 12 months!

With all of the up and down that has occurred, let’s take a look and see how it affected my net worth progress…shall we?

 

Liquid Net Worth Growth (Not Including Condo Nor Blog/Graduate Fellowship Unpaid Income Tax Savings)

In October of 2011, I had to make a fairly significant change in how I calculate my net worth and asset allocation percentages each month. The change pertained to the cash I consistently save up throughout the year in a high interest online savings account (Dollar Savings Direct) in order to pre-pay self-employed or unpaid (from my graduate research fellowship) income tax to the government in the form of quarterly tax payments. What was happening was that the balance in this tax savings account (which was being counted in to the cash portion of my asset allocation) was becoming too large, and it started to skew my asset allocation calculations.

To remedy this, since October of 2011, I’ve started using a system of calculating my liquid net worth, which includes all of my various equity and fixed income holdings but excludes 1) my equity and debt related to my condo and 2) the amount of savings I have accumulated so far during the year earmarked to pay the tax man. I’ve decided that doing the analysis in this fashion helps me remain more objective in making financial decisions without being influenced by assets that are needed for shorter-term living/tax expenses.

Keeping this important change in mind, let’s continue…

 

Overall Liquid Net Worth Growth

From 27-December-2012 to the beginning of Jan, 2014, the S&P 500 index increased 28.09%. Pretty awesome by any standard you think about really!

During that time period (January-December 2013), my liquid net worth (excluding condo ownership and unpaid tax savings) increased 31.27%, which seems pretty good since I do not have full equity exposure in my portfolio (only 70% equity – more details below).

With an ~30% increase in the overall market, several important things come to my mind for investors going forward:

• Now is NOT the time to get greedy with stocks!
• Now is NOT the time to try to “predict” that the market will go down!
  • Historically, investors are VERY GOOD at being too heavily invested in the stock market at times when the market is overvalued and not being invested enough when the market is undervalued.
  • In addition, historically, investors are VERY BAD at predicting the direction of the market.
  • This cycle of bad decision-making greatly decreases investor returns.
  • Because of this, it’s important to remember to not stray from your target asset allocation balance between equity and fixed income investments.
  • This ensures that you:
    • 1) Do not shoulder more risk than you can tolerate (if a market downturn occurs) and
    • 2) Do not fall in to the trap of trying to predict the market direction (if the current growth continues).

 

Condo Equity Growth

I still currently have 19.88% home ownership in my condo, with this accounting for 13% of my real net worth (so net worth subtracting the condo loan – this is different from the net worth figure discussed above).

As I continue to learn more and more about advanced personal finance topics, I have become quite sure about one thing – I am not the biggest fan of aggressively building up as much home equity as is possible. While I am sure that home ownership is a great idea for personal finance success, I don’t believe that pre-paying a mortgage far beyond what is required is a very good investment (unless the mortgage loan interest rate is very high).

Why is this? Because the money that you pay over and beyond what is required (even though it is saving a little bit on interest, which is tax-deductible, so not really that much savings) is not gaining you any type of return whatsoever – it is essentially money stuffed under a mattress.

Instead, I have been taking the money I have leftover and maxing out my Roth IRA, then saving an equivalent amount in an after-tax account, and then using any that is then left over to contribute close to the maximum allowed for my Individual Roth 401k account.

 

Permanent Portfolio Performance Update

In November 2011, I became fascinated/interested enough in Harry Browne’s Permanent Portfolio asset allocation strategy in order to give it a small trial run with my own money (less than 1% of my liquid net worth). As such, I’ve decided (for fun!) to start tracking the performance of my small ETF version of the Permanent Portfolio in order to compare it to how the market is doing.

While holding the Permanent Portfolio from the end of December 2012 to the beginning of January 2014, the Permanent Portfolio decreased in value by 4.88%. During this same time period, the S&P 500 index increased by ~28%. So, looks like it did not perform better than the general equity market during this time period. However, one really cool thing I’ve noticed about this portfolio is that it is indeed very stable – with it never dropping or gaining more than 1% or so in any given month. Just as Harry Browne predicted, eh?!

In addition, it is also very apparent that the strategy has A LOT of tracking error with the overall market. So, ask yourself whether you think you would be OK missing out on big gains in the stock market like the one over the past year in exchange for more stability before committing significant money to the Permanent Portfolio.

We’ll continue to keep an eye on this portfolio in 2014 and beyond. Should be interesting to see what happens!

 

Making Future Child a Millionaire Update

In December 2013, I researched/published a post about how regular folks can make their current or future children millionaires by saving $1 per day for 23+ years and then letting the money sit and grow until the child retires at age 65.

In this same post, we examined whether an annuity or regular/taxable mutual fund account would be a better home for these savings. What we saw was that a regular mutual fund would yield more savings in the end because of the favorable long term capital gains taxation that you receive.

Anyhow, I decided that I would set one of these accounts up for my future child now since it is so easy to do. Because I didn’t want to commit $3000 to fulfill the minimum investment requirements for a Vanguard mutual fund, I decided to put these savings in to a taxable ETF account, containing the following ETF – Vanguard Total World Stock ETF (VT). I choose this ETF because it has a low expense ratio, good exposure to US + international stocks, and most of all, I didn’t already own this ETF so I could maintain segregation of this account from my existing ones.

The current balance is $59 (1 share). We’ll keep monitoring this one and see how it grows over the years! 🙂

 

Review of Current Asset Allocation (Excludes Condo and Tax Savings)

• Overall Fixed Income / Equity Allocation
  • Currently, 31% of my net worth is invested in fixed income instruments (cash or bond funds), and 69% is invested in equity.
  • This is only 1% off from my targets for these categories of 30% (fixed income) and 70% (equity). So, it is still within my +/- 5% allowable band limits.
• Equity Allocation
  • In the equity portion of my portfolio, 71% is invested in US Domestic Equities with the remaining 29% being held in international equities. 
  • This is within the tolerance banding limits of my equity breakdown targets of 70% and 30%, respectively, for US Domestic and international holdings. So, no action is needed at this time regarding this component of the analysis.

While the overall percentages for these categories look fairly good, a detailed look (table/listing below) at the allocation breakdown reveals the real story and provides for better analysis of the current state.

Remember: In order to maximize the benefits of your asset allocation strategy, a red flag goes off if your current % allocation in a category is greater than +/- 25% change from the target allocation. This is my trigger that I need to rebalance that aspect of my portfolio.

 

Analyzing my current asset allocation percentages, it appears that my current asset allocation is aligned with my target levels within the +/- 25% band limits. Thus, no action is needed at this time.

 

Three-Legged Stool for Retirement Allocation

I added a new financial goal added during the 1st half of 2013 to continue building, optimizing, and balancing a Three-Legged Stool for Retirement.

The idea behind this strategy is to target having a 1/3 split between tax-free, tax-deferred, and taxable accounts by the time you hit retirement in order to have flexible control over your income sources so that you can optimize your tax bracket each year.

Since I am in the 15% tax bracket, I first maxed out my Roth IRA for 2013.  My next move was to contribute an equivalent amount in an after-tax investment account in order to have money that is accessible for needs prior to retirement. Having completed that, I am now working towards maxing out my contributions to a Roth Individual 401k with Vanguard.

Listed below is my current asset location split between the three-legged stool account types:

• Tax-Deferred = 33.4%
• Taxable = 44.1%
• Tax-Free = 22.58%

On one hand, I have been very satisfied with how I have been able to increase my three-legged stool tilt towards tax-free and taxable accounts and away from tax-deferred accounts in 2013, focusing especially on contributing to my Roth IRA and Roth 401k.

However, as you can see by the percentages above, I still have a ways to go to increase my tax-free allocation. This is especially important for me right now since I am in a very low tax bracket in graduate school (but also have fairly limited cash in terms of being able to pay the income tax to convert tax-deferred money to tax-free accounts).

 

My Next Moves For The 1H2014 Time Frame

2014 is going to be a big/busy/involved year for me financially, emotionally, and intellectually. Because of this, it’s tough to fit in all of my next financial moves in to one small section of a post. However, just off the top of my head, I need to get started with the following things:

• Begin fundraising for the 2014 Tour de Vine National MS Society event.
• Send out 1099-MISC for blog contractors by Jan 31^st, 2014.
• Use my 1% home value home maintenance fund to fix various small things that are broken around my condo after 3 years of use. 
  • These things include a closet door off the hinges, the light-switch in the bathroom not working all the time, the towel rack in the bathroom needing to be re-attached, and some pipes under the sink that need to be re-caulked. Once I get these things repaired, I will then need to replenish the depleted funds in the home maintenance account.
• Finish contributing to an Individual Roth 401k Account with Vanguard by the April tax deadline (maximum amount, taking Roth IRA contributions and deductible portion of self-employment tax in to consideration).
• After finish contributing to Roth 401k for 2013 tax year, begin contributing to Roth IRA for 2014 tax year.
• Reconcile / finalize business income and expenses for 2013, print out records of all transactions, start getting together information for 2013 tax return.

• I will also need to process the $1500 I have already saved up for a personal donation in support of my ride.

 

Wish List

• At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund, whenever more money is needed to increase my domestic large cap asset class holdings. This gives better, broader diversification to the US stock market.
  • I finally was able to exchange my 2 – S&P500 Vanguard index funds for the total stock market fund above during the last week of December. Great success!

How about you all? How did you progress with your net worth in the July-December 2013 time-frame? What are your thoughts about the strength of the market right now? Do you think it’s getting too overvalued? 

What financial challenges are you currently facing?

Share your experiences by commenting below!

2013 Year-End Financial Goals Review

Happy New Year everyone!

I hope you all have enjoyed the holidays, were able to relax with family and friends, and got to have some champagne to bring in the New Year!

For the past week and a half, my fiancé and I have been on the road and in the air away from our home in Virginia. First, we celebrated Christmas with her family in Northern Kentucky (a little south of Cincinatti). Then, we headed out to my childhood home in Arkansas for my sister’s engagement party and to celebrate New Year’s. Currently, we are on our way back to Virginia to get started working again after the weekend.

Back in January of last year, I set my financial goals for 2013. Since the year is now officially finished, I figured it would be a good time to sit down and take a few minutes to review how I did in reaching or NOT reaching (in some cases) the various targets I set for myself. 

Overall, I would rate 2013 as top-notch financially and personally. I got engaged back in March of 2013, and am planning to finish my PhD by August of 2014 and get married shortly after. On top of that, the stock market has increased over 25%! Nice!

So, here goes, a review (in bold below) on how I did in 2013 reaching my financial goals. Enjoy, and I look forward to reading any comments you all have!

 

Short Term (Less Than 1 Year) Goals

• Contribute $5500 (or ~$458 per month) to my Roth IRA with Vanguard this year (maximum allowed, which increased $500 in 2013 compared to the $5000 maximum allowed in 2012!).
  • Done. I finished maxing out these contributions in around the May timeframe. Yahoo!
• Reach short-term net worth target for this year (1.42X my current net worth).
  • I’m getting a lot closer, but not quite there yet.
  • I need an increase of about 10% more from where I am now, so that’s definitely better than a 42% increase needed back in January of 2013! 
• Maintain target 6-9 months of expenses in cash reserve emergency fund in Dollar Savings Direct account.
  • Done. 
  • With me getting married in 2014, it will be interesting to see if this level changes / if I need to re-evaluate my savings level.
• Rebalance mutual fund portfolio to meet asset allocation target %’s (70% equity, 30% fixed income overall).
  • Done. Going well. 
• Put together a will and have it reviewed by a lawyer.
  • Have put together a will, but still have not gotten it reviewed by a lawyer. Need to though! 
• Continue to save money for trip to Grand Canyon or to see Niagara Falls.
  • Done.  
• Invest $500 in Microloans with Microplace.com to support Latin American micro entrepreneurship. This equates to $42 to invest per month.
  • Done. 
• Donate $1,150 to Multiple Sclerosis Foundation in 2013 (5% of take-home pay in my graduate school research assistantship job).
  • Done. I actually donated $3,000 this year. Yah! 
• Fund raise $7500 for MS 150 bike event in June 2013.
  • Done and surpassed. I ended up raising over $11,000 total this year for the MS Society, which puts my total in the past 5 years at above $25,000. Nice! 
• Save 3% of take home pay each month (after taxes) for Dream Account.
  • Done.
• $30 per month save for doing running races / bike rides as part of health life values account.
  • Done.
• $20 per month save for buying fresh vegetables as part of health life values account.
  • Done.
• Save ~20% of (blogging income (if any) minus amount of income deferred to Individual 401k with Vanguard plus untaxed graduate fellowship income from my research job) in a high yield online savings account in preparation for 2013 taxes.
  • Done.
• Apply for new graduate research fellowships since the one I have from the NSF will run out in 2014 (and need to apply for new ones about a year ahead of time).
  • Canceled / no longer applies.
  • Since I am graduating by next August when my NSF Fellowship runs out, I will no longer need to apply for a new fellowship to take its place. It seems to have worked out nicely!
• $30 per month save for trips to visit friends/family in other states.
  • Done.
• $10 per month save for purchasing food for backpacking trips in the Blue Ridge Mountains once a month.
  • Done.
• Contribute at least 20% of blogging income to Individual Roth 401(k) with Vanguard.
  • Done.
  • According to the account hierarchy priority order, in 2013, I first maxed out my Roth IRA before starting to contribute to my Roth 401k with Vanguard.
  • By the time of the 2013 tax deadline, I will have saved 100% of my blogging net income in my Roth IRA and 401k combined. Nice!
• Execute any business tax deductions I can for 2012 taxes.
  • Done.
• Use 1% home value home maintenance fund to fix various small things that are broken around my condo after 2.5 years of use. These things include a closet door off the hinges, the light-switch in the bathroom not working all the time, the bathroom towel rack holder coming unscrewed, and some pipes under the sink that need to be re-caulked. Once I get these things repaired, I will then need to replenish the depleted funds in the home maintenance account.
  • Did not accomplish.
• Execute 4 estimated tax payments for blogging + graduate research fellowship income on the following dates – 1) April 15, 2013, 2) June 17, 2013, 3) Sept. 16, 2013, and 4) Jan. 15, 2014.
  • Done.
• Save $111 per month until have a total of $1600 for health expenses for dogs we adopted (for annual health checkup, Frontline/Interceptor, and miscellaneous health emergencies/treatments needed. I will have the $1600 total after March 2013.
  • Done.
• Help friends become debt-free.
  • On track.
• Continue investing in long-term content growth of blog.
  • On track. 
• Continue building, optimizing, and balancing a Three-Legged Stool for Retirement
  • Done.
  • Since I am in the 15% tax bracket (and recently confirmed that I will be again in 2013), I first maxed out my Roth IRA for 2013.
  • My next move was to contribute an equivalent amount in an after-tax investment account in order to have money that is accessible for needs prior to retirement.
  • Next, I began to work towards contributing as much as possible to a Roth Individual 401k with Vanguard.
  • Since my graduate school fellowship income does not count as “earned Income” for retirement plan contribution purposes, I had to make sure that my combined Roth IRA and 401k contributions were less than my net blogging income minus the deductible part of self-employment taxes. It appears that by the tax deadline for 2013, I will be able to contribute the maximum possible to both of these retirement accounts. It has worked out well.

 

Mid-Term (3-5 years out) Goals:

• Continue contributing maximum allowed to Roth IRA and Individual Roth/Traditional 401k each year using dollar cost averaging.
• Reach intermediate net worth target (~2.2X my current net worth).
• Own a rental property by 2018.

 

Long-Term (greater than 5 years out) Goals:

• Obtain a net worth of $1,000,000.
• Own a home free of mortgage payments.
• Own a vacation home in the mountains or a ski resort.
• Accumulate enough funds not have to work, but will probably anyways because I would get bored. 

How about you all? How did you do with your financial goals for 2013? What techniques do you find are most effective in holding yourself accountable and on-track for your goals you set?  

Share your experiences by commenting below!

Sneaky Tricks To Actually Accomplish Your New Year’s Resolutions

The following post is by MPFJ staff writer, Catherine Alford. Cat is a freelance personal finance writer who blogs at www.BudgetBlonde.com. 

Wouldn’t be amazing if we could actually accomplish our New Year’s Resolutions? As in, wouldn’t it feel incredible to completely, 100% succeed in meeting or exceeding them?

Well, if you want to actually make some good goals and have 2014 be the most amazing year yet, I have some sneaky tricks that will help you to get there.

Here they are below:

 

1.    Make Month-to-Month Resolutions

A year is definitely a long time. I mean, can we really promise ourselves to not say a curse word for all 12 months of it?

Or, can we really expect ourselves to stay out of a fast food joint for the entire year? I mean, there are always exceptions and special circumstances that cause us to break our resolutions, and if you’re anything like me, breaking resolutions causes you to beat yourself up.

We don’t need that this year!

So, let’s make some month-to-month resolutions. Maybe January can be the month of flossing your teeth every day. Perhaps February can be the month of reading one book that you’ve really wanted to enjoy. You can really do anything for 30 days, so maybe if you set a time limit on your resolutions, they will actually get accomplished!

 

2.    Pick Something Fun to Accomplish

Why do your resolutions always have to be so awful?

I mean, why give up eating bread when you can make resolutions that are fun and exciting? For example, you can make a resolution to keep up with movies this year. I am horrible at movie conversation. At a party, when someone says a movie quote and everyone laughs, picture me standing there with a blank look at my face. I have no idea what you are talking about when you give a movie quote, and it’s something I should work on!

Another example is keeping up with old friends, which is my husband’s New Year’s resolution. My husband has gotten so busy and so caught up with medical school that he rarely has time to send an e-mail to some of his best friends growing up. He’s made it his goal to do a better job of staying in touch with them in 2014. Everyone loves getting e-mail and snail mail, so that should be a relatively painless and fun resolution to work on this coming year.

 

 3.    Make Resolution Teams

One tip I always give people is to share your resolutions with others, but my ultra sneaky tip is to actually get on a “Resolution Team.”

For example, don’t just tell someone you want to lose weight. Actually find someone that shares that same goal, and work together with them to get ‘er done. If you want to give up drinking Diet Coke, don’t just tell your coworkers. Try and rally them and make everyone who shares an office with you do the same thing.

Resolutions are much easier to keep when you stamp out temptation, so be the person who gets everyone else excited about goals so that you can accomplish something amazing.

 

4.    Make a Resolution That’s Teeeeeny Tiny

Don’t get me wrong; big goals are great.

I love it when people say they’re going to pay off 500k worth of debt. However, the bigger the goal, the harder it is to make it happen.

So, why not start with something teeny tiny? I’m talking about drinking an entire bottle of water every day or trying to touch your toes every day. This type of resolution takes pretty much zero time and zero effort. I’m not trying to encourage you to be lazy about your resolutions. I’m just trying to show you that you can feel accomplished and give yourself a pat on the back for actually sticking to them if you make goals that are reasonable.

 

 5.    Set a Goal You’ve Already Halfway Finished

I know you might think this is cheating, but there’s no sneakier way to accomplish your goal than to pick one that’s already halfway done!

So, if you’ve started organizing your garage, make a resolution to finish it. If you’ve already changed out two of the doorknobs in your house, then make it a goal to fix the rest of them. Basically, it’s a sure fire way to feel accomplished because the goal has already been started and you already know how to do whatever it is that you’ve chosen.

Ultimately, setting New Years Resolutions is definitely a great thing to do every year. However, the reason people fail to accomplish them is because they make it too hard on themselves! Next year, be sneaky! Try the tricks above so that you can feel great and tell the world that you stuck to your goals and did something awesome to improve yourself.

How about you all? What are your 2014 resolutions? Are you going to be sneaky and accomplish them? Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/photoann/6605711959/sizes/l/

Does The Research Favor Investing In High Dividend Yield Stocks?

The following is a guest post by Squiggle over at www.financesquiggle.com.  To read further on investing strategies, see his post on the best way to invest $10,000. Enjoy!

Talking to most stock investors, you’ll hear of attempts to maximize returns or beat the index.  Those who strictly adhere to the Efficient Market Hypothesis (EMH) contend that the stock market is too competitive and that stock prices reflect all readily available information, making consistently above average returns impossible.  Hand-in-hand with EMH supporters, Random Walk Theory proponents will tell you stock prices are simply too random for you to achieve above average returns in the long-run.

The research is mixed, however.   Many studies show that certain types of stocks tend to have better returns.  Below is a summary of some of the evidence supporting investing in stocks with high dividend yields.

 

Research Highlights in Favor of High Dividend Yields

Tweedy, Browne Company LLC published a fascinating paper strongly in favor of investing in stocks with high dividend yields.  One study in the U.K found that from 1955 to 1988, the decile of stocks with the highest dividend yields had a compound annual return of 19.3% compared to 13.0% for the index.

O’Shaughnessy Asset Management has a similar paper supporting high dividend yields.  In a US study from 1930 to 2011, the top decile of dividend yield stocks had a compound annual return of 11.6% vs. 10.2% for all US stocks.  Even more exciting, from 1990 to 2011, the top decile of dividend yield stocks worldwide had a compound annual return of 14.8% vs. 6.9% for the index of all stocks.  The top decile beat the benchmark in 100% of the 5 year rolling periods throughout.

Credit Suisse published another promising paper on the topic, with an added twist.  The firm examined the returns in 12 countries and reached the same conclusion that high dividend yields produce superior returns.  They also examined a second variable of payout ratio (the percentage of net income paid out as dividends).  In the majority of the countries studied, the combination of high yield, low payout ratio produced the best returns (in a few cases high yield, high payout won).  For example, in the United States from 1990 through 2008, the high dividend yield, low payout ratio portfolio had the highest compound annual return of 15.4%, while the S%P 500 returned 8.4% annually.

 

Recent Performance of High Dividend Yield Funds

Despite the research, high dividend yield funds haven’t been fairing well in the last several years.  Here are three examples vs. the S&P 500 since their inception.

From March 20^th, 2007 to December 16^th, 2013 the S&P 500 beat the Vanguard High Dividend Yield Index Fund (VHDYX) 28.8% to 16.57%.

From October 19, 2007 to December 16^th, 2013, the S&P 500 beat Tweedy, Browne’s Worldwide High Dividend Yield Value Fund (TBHDX) 14.69% to 10.47%.

From September 17, 2010 to December 16, 2010, the S&P 500 beat the O’Shaughnessy Enhanced Dividend Fund (OFDIX) 61.0% to 23.32%.

Final Thoughts

Unfortunately, high dividend yield funds have not been performing well in the last several years.  However, the research in favor of stocks with high dividend yields is robust.  Those with high dividend yields tend to outperform those with low dividend yields handily (especially those with a low payout ratio).  As with most strategies that have shown outperformance over the long run, there are periods of underperformance.

Despite this recent lag, decades of sound research make this strategy worthwhile as part of your portfolio for the long-term.  Diversification is one of the cornerstones of personal finance, so it’s best to dedicate only a fraction of your investments to high dividend yield stocks.  Additionally, research shows that funds with low fees outperform those with higher fees over long periods.  Accordingly, dedicating part of your portfolio to the Vanguard High Dividend Yield ETF (VYM), with a low expense ratio of 0.10%, is an excellent investment choice.

How about you all? Do you think it is possible to beat the market returns by investing in high yield dividend stocks or a dividend-based index fund? Share your experiences by commenting below! 

References

Patel, Pankaj N., Souheang Yao, and Ryan Carlson. “Quantitative Analysis: Global Dividend Strategy.” Credit Suisse, 23 Jan. 2009. Web.

“The High Dividend Yield Return Advantage.” Tweedy, Browne Company LLC, 2007. Web. 16 Dec. 2013.

Viswanathan, Ashvin. “Dividend Yield vs. Dividend Growth.” O’Shaughnessy Asset Management, 20 Sept. 2012. Web. 16 Dec. 2013.

Startups That Make Financial Management Easier

The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.

People receive financial advice in a number of ways. Some people turn to friends and loved ones that they perceive as being successful financially for advice on how to manage their finances. Others choose the assistance of a financial advisor who is paid to help them manage their finances effectively. Now, there are dozens of new investing and personal finance-themed startups that are designed to make financial management easier for all consumers.

These companies offer everything from algorithm-based investment advice to online financial advisor search tools to online financial planning and budgeting tools.

 

LearnVest

LearnVest originally started as a budgeting Web site directed at women.

Today, LearnVest offers both online financial advisor services as well as free budgeting tools. In the four years that the company has been in operation, it has provided comprehensive and conflict-free financial advice to the middle class.

Founder Alexa von Tobel wanted to make financial advice as widely available and affordable as any other mass-produced consumer product or service. LearnVest charges a $399 upfront fee and $19 a month, or $608 annually, for its financial planning services. Customers that are just interested in reaching a particular financial goal, like paying off debt or starting a budget, can obtain help for less.

LearnVest recently received another large round of financing from investors which will allow the company to expand its hiring as well as open a training and adviser hub in Phoenix. The company will be releasing a newly designed product, a seven-step customized financial plan, in the near future. The company is also working on a potential deal with American Express, one of its new investors, and is working with employers and financial planning firms to sell its program within 401(k)’s.

 

Betterment

Betterment offers straightforward online tools that allow savers to manage their investments themselves. Betterment allows people to roll over their personal or corporate retirement plan and they can connect their bank accounts to Betterment’s own systems. People who move their retirement or savings accounts to Betterment can choose from index and exchange-traded funds from Vanguard and iShares. Customers also have the choice to leave most of the decision-making to Betterment’s software by inputting information about their goals and risk tolerance.

Betterment charges an annual fee on the assets it manages. The fee for Betterment’s no-minimum account begins at 0.35% annually. Customers who can afford to put more in and elect to maintain higher account balances are charged lower rates. The company currently manages more than $200 million in assets for thousands of customers, mostly in the form of savings and retirement accounts.

Betterment CEO Jon Stein believes the financial services industry should use crisply designed technologies that make financial management easier, smarter and more efficient. Betterment is very user-friendly, so if someone doesn’t have any specific financial goals set, the site will suggest some based on what other users with a similar income level or profession profile are saving for. Betterment tries to cut through the complexity to make financial decisions as easy as possible for the account holder.

 

SigFig

Sigfig offers algorithm-based investment advice based on users’ aggregated accounts. The company’s advice gives investors recommendations for how to optimize their investment portfolio with regards to fees, management expenses, and risk adjusted returns. SigFig allows its user to link accounts from more than 100 different brokerages. The company also offers weekly suggestions for saving money and improving investment performance.

SigFig was initially known as Wikinvest, an investment tracking wiki. The company changed to its current advisory business model in May 2012 after becoming an SEC-licensed Registered Investment Advisor (RIA). According to co-founder and CEO Mike Sha, the company relies on data-driven analysis to deliver “unbiased, scientific portfolio recommendations.”

SigFig utilizes a business-to-business-to-consumer (B2B2C) distribution model. The company licenses its Web and mobile investment tools to publisher partners in exchange for a revenue share. SigFig also generates referral fee revenue when a consumer switches to investment advisors recommended by the company. The company doesn’t take commissions on trades or collect an asset management fee.

 

Jemstep

Jemstep is a money-management website that lets retail investors import their retirement-account data and get automated advice. The company was founded in 2008 by Michael Blumenthal, a former stockbroker who is now the company’s co-chief executive officer. Today, the company has a membership of around 2,000 users, including employees at Google and EBay.

In January, Jemstep began offering its automated portfolio manager to the public as a free service. For suggestions about specific funds to buy and sell, the company charges a flat monthly fee that starts at $18 per month and is based on the size of the user’s retirement portfolio. Advice on asset allocation is free.

The service will remain free for those managing less than $25,000 in retirement assets, but for those managing larger portfolios, the cost can be as high as $70 per month. However, those with larger portfolios also get to take advantage of the company’s portfolio analysis service as well as tracking and rebalancing advice.

How about you all? What do you think of these services? Have you used LearnVest, Jemstep, Betterment, or Sigfig?

Share your thoughts with us. Share your experiences by commenting below! 

Photograph: http://www.flickr.com/photos/68751915@N05/6848822477/

The Asset Location Decision – Should That Mutual Fund Be Held in a Tax-Sheltered or Taxable Account?

A question that is very important and often overlooked (I know I have messed this up before big time) is, “In what type of account should I place the mutual fund that I am thinking of buying?”

A general guiding rule is that as many equity mutual funds as possible should be held in taxable accounts, and taxable bond funds and REITs should be placed in tax-advantaged accounts. Of course, this assumes that you have the choice/flexibility to do this, that you have also first funded your tax-advantaged retirement accounts, and have enough money in taxable accounts to fund short-term needs.

Page 150 of Bill Bernstein’s The Intelligent Asset Allocator provides a very nice, succinct summary of where each type of mutual fund should go. This list is shown below for the Vanguard family of mutual funds:

 

For Tax-sheltered Accounts (401k, Annuity, or IRA)

In general, value funds and REITs should only be held in tax-sheltered accounts due to the following reasons:

• Value funds have high turnover (selling stocks and buying others). Turnover can kill your profits with taxable accounts.
• REITs obtain most of their long-term returns from dividends. The taxes on dividends can kill your profits in a taxable account.

–Vanguard Value Index Fund

-Vanguard Short-Term or Intermediate Term Inflation Protected (TIPS) Fund

-Vanguard Extended Market Index Fund

-Vanguard Small-Cap and Small-Cap Value Index Funds

-Vanguard REIT Index Fund

-Vanguard Short, Long, or Intermediate-Term Bond Index Fund

-Vanguard Total Bond Market Index Fund

These funds should only be held in tax-sheltered accounts because they have a good amount of buying and selling involved in maintaining the index representation, which can in turn increase your tax risk.

 

For Taxable Accounts Only

There are several types of funds which make zero sense to hold in a tax-deferred account, since these funds manage taxes in such a way that give you a lower return in exchange for less tax liability.

–Vanguard Tax-Managed Growth and Income Fund

-Vanguard Tax-Managed Small-Cap Fund

-Vanguard Tax-Managed International Fund

-Vanguard Tax-Exempt [Anything – Bonds, etc] Fund

 

For Tax-Sheltered and/or Taxable Accounts

Although it is acceptable to hold equity mutual funds in tax-sheltered accounts, if possible and with all else being equal, it is best to try to hold them in taxable accounts. This is especially true for international equity funds since they allow investors to use a foreign tax credit to offset some US taxes owed.

Another general rule is that the broader the definition of the asset class mutual fund, the more tax-efficient it will be (for example, emerging markets vs. total international stock fund). Also, large cap funds are more tax-efficient than small-cap funds.

The following feature makes holding equity funds in taxable accounts preferable:

• Tax-deferred accounts like 401ks and traditional IRAs convert long term capital gains and reinvested qualified dividends (taxed at a lower rate if held in a taxable account) to a ordinary income (taxed at a higher rate) upon account liquidation during retirement.

–Vanguard S&P 500 Index Fund

-Vanguard Total Stock Market Index Fund

-Vanguard European Stock Index Fund

-Vanguard Pacific Stock Index Fund

-Vanguard Emerging Markets Stock Index Fund

-Vanguard Total International Stock Index Fund

 

Order of Preference in the Asset Location Decision

Since starting to employ this concept in my personal finances 3-4 years ago, I have realized that optimizing the asset location decision is not very straight forward (read: not as cut-and-dry as the groupings above would lead on to be) because of many complicating factors, including setting up different accounts at different times, balancing the need to fully fund retirement accounts prior to taxable ones, and mutual fund minimum balances.

As such, I wanted to share a very useful listing I found in Larry Swedroe’s book, The Only Guide You’ll Ever Need for the Right Financial Plan, that ranks mutual fund classes by the preference to hold the fund in a tax-deferred/tax-advantaged account. 

In other words, #1 below = the fund asset class having the highest priority/need to be housed in a tax-advantaged account, and #14 = asset class that does better in a taxable account.

1. REIT
2. TIPs
3. Taxable Bond Funds
4. US Value Equity
5. US Small Cap Equity
6. Emerging Market Value Equity
7. Emerging Market Small Cap Equity
8. Emerging Market Equity (Total/Core)
9. International Small Cap Equity
10. International Value Equity
11. US Equity (Total/Core)
12. US Large Cap Equity
13. International Equity (Total/Core)
14. Tax-Exempt and Tax-Managed Funds

How about you all? When you are first buying a mutual fund, do you consider what type of account it should be placed in for maximal tax efficiency, or is your buying/location decision based on other factors?

Do you follow asset location principles similar to the ones mentioned here or another strategy?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/rmgimages/4882451618/sizes/m/in/photolist-8rrQLj-gXa2Mf/

How Can Normal Folks Make Their Child A Millionaire? – Part 2 – Which Savings Account/Vehicle Should Be Used?

In this post series, we are examining questions that came up while recently reading Kevin McKinley’s book entitled, Make Your Kid a Millionaire: 11 Easy Ways Anyone Can Secure a Child’s Financial Future.

As the title suggests, the book’s overall message is that if you take some well-timed steps, it’s easy to accumulate a large amount of wealth for your child by the time the he or she reaches retirement. While there were many specific points covered in the book, the two key questions/themes that I am exploring in this post series are listed below:

• Question # 1 – What, when, why, and how should you start saving for your child’s financial future/retirement?
• Question # 2 – Having established a savings strategy, what is the best type of account/vehicle in which to save money for your child?  

In Part 1 of this series, we found that because of the power of compounding interest, saving $1 per day starting when your child is conceived through the time he or she graduates from college can yield almost $2 million for them by the time they are ready to retire. 

Having been convinced of the importance of starting to save for your child’s financial future and developed a strategy, the question then becomes, “In what type of account/savings vehicle do you place your child’s retirement savings?”  

Let’s explore this concept a little more in-depth today!

 

Requirement Criteria for Savings Vehicles

Let’s face it – there are a myriad of options available in today’s competitive market place for savings vehicles. So, how does one decide which type of account is best to use?

In order to help with the selection, I’ve listed the criteria I would use to help narrow down the options:

Criteria #1 – Account must have low cost, passively-managed equity index mutual funds. As we’ve established many times before, index funds beat 70% of professional active money managers, so I have no business trying to actively manage my funds as a part-timer. We want to have the account eligible for equity (stock-based) mutual funds because our investment time horizon is 65 years, meaning that we can shoulder a lot of risk during that time period and do not need to add much in the way of fixed income instruments. As such, this rules out products such as whole life insurance and a tax-exempt municipal bond fund.  

Criteria # 2 – Account will not be used for short-term child financial needs, but rather for the child’s financial future near/during retirement. As we discussed in Part 1, the goal of saving $1 per day for your child is not to cover the ever-expensive cost of raising a kid (nor would it yield a sufficient amount of money in a short period), including sending them to whatever college they choose. As such, tax advantaged college savings plans, including Coverdells, 529s, UTMAs, etc, are disqualified from the selection.

Criteria #3 – Account has no income requirements and is not required to be transferred out of your personal control at a set point and/or is owned by the child. If all goes according to plan, the $1 per day that you gradually save will be transferred to your honest, hard-working, deserving child when they reach a ripe retirement age. However, if your child turns out to be someone who misuses money and cannot be trusted, you want to make sure that you can retain control over the savings. Taking this criteria in to consideration exludes IRAs / 401ks in the child’s name from the running. Even though you could technically save money in YOUR OWN IRA/401k and simply use it for your child once you are retired, we will work under the assumption that YOU need your retirement savings.

Having laid out these 3 criteria, where does that leave us?

Essentially, 3 options remain – a taxable/regular mutual fund account in your name, a variable annuity in your name, or some form of trust set up by a lawyer. While I do believe that trusts are a suitable option (will be covered in an upcoming post by one of our staff writers, Jeff), this post is aimed at things normal folks can do. Thus, we’ll limit it to accounts that can be set up without paying lawyer fees.

 

Deciding Between a Taxable Mutual Fund Account and a Variable Annuity

In his book, McKinley’s calculations come to the conclusion that a variable annuity will result in more money during retirement for a child vs. a taxable mutual fund account.

The reasoning provided behind this is that the tax-deferral in an annuity provides more money to be eligible for compounding vs. a mutual fund. However, in his calculations, McKinley assumes that the taxable mutual fund earns 10% each year and distributes all of these gains as normal taxable income. He then proceeds to say that this calculation may not accurately represent how mutual funds today operate. Thus, I wanted to see what was really going on here. 

Having covered the ins and outs of annuities pretty in-depth in a recent post, I just wanted to provide a brief summary of annuity characteristics:

• Annuity contributions are after-tax and grow tax-deferred until withdrawal eligible at the age of retirement (59.5 years of age).
• Your savings/contributions and/or earnings are NOT accessible prior to the age of 59.5 without a 10% penalty.
  • Since in this instance, we are not interested in withdrawing money prior to the child retiring, the 10% penalty can be ignored.
• Ordinary income tax is owed on all withdrawals (early or after age 59.5) of annuity earnings but never for recovering your contributions/basis.
• Annuities can have higher fees.

For our comparison, we’ll assume:

• 10% gross annual return on mutual funds inside the annuity and taxable investment account.
• Invest $1 per day from 1 year pre-birth to when the child graduates college at age 23.
• Fees/Expense Ratios:
  • Taxable account mutual fund charges a fee of 0.17% per year (same as Vanguard Total US Stock Index Fund).
  • Variable annuity charges a fee of 0.48% per year (assumes we are investing in a low cost Vanguard annuity, Total Stock Market Index Portfolio option).
• Ignore gift taxes/the cost to transfer the savings to your child at retirement age and transaction fees.
• Constant level total ordinary income tax bracket = 35%.
• All dividends and capital gains distributions are re-invested back to the vehicle. For the regular mutual fund account, we’ll assume that you reinvest the dividend after using it cover the taxes owed for that year.

 

A Detailed Look at What Taxes Are Owed on Regular Mutual Fund Holdings in a Year

Before we proceed, we need to obtain an in-depth understanding of exactly what tax liability we are responsible for each year by holding the Total Stock Market Index mutual fund in a regular account.

In other words, if we assume a 10% increase in account value each year, how much of that gain will be owed in taxes in the specific year that will affect our compounding interest power? My first guess is that it is not the full 10% account value increase…

To review, there are 3 primary ways that an equity mutual fund can result in taxes that you have to pay:

• #1 – The mutual funds issues you a dividend, or a set percentage of each share’s value that you are holding.
  • Ordinary dividends are taxed as ordinary income at your normal income tax rate (%35 in our example).
  • Qualified dividends are taxed at a reduced, 15%, level.
• #2 – You did NOT sell any shares of your mutual fund, however, you still may owe capital gains taxes for the underlying stock transactions the fund managers executed throughout the year (reported on 1099-DIV form).
• # 3 – You (or your estate) sells your shares of your mutual fund directly when you are ready to hand the money over to your child in retirement, causing you to owe (mostly long-term)  capital gains taxes (reported on 1099-B form / Schedule D).
  • In either #2 or #3, there are 2 levels of capital gains taxes that can be paid.
  • Short-term (less than 1 year, 1 day) capital gains taxed at ordinary income/ordinary dividend tax rate (35% in our case).
  • Long-term capital gains taxed at lower, 15%, rate.

To figure out how much tax the dividends and capital gains distributions would translate to on a per year basis to pay, I looked back on my 1099-DIV for 2010, 2011, and 2012 from Vanguard for a similar fund.

• In all 3 of these years, 100% of the dividends I received were qualified, meaning they would be taxed at the lower, 15% tax rate provided I didn’t sell any of the shares shortly after the ex-dividend date.
  • According to this site, the >100 year average dividend yield for the overall stock market is 4.40%, meaning about 1/2 of our assumed return comes from dividends. I very much doubt dividends will be this high going forward, but I cannot predict the future, so we’ll use this.
• In all 3 of these years, I received $0.00 in total capital gains distributions. 
• Therefore, we’ll ignore capital gains distributions and assume a 4.40% annual qualified dividend in our example.
• Essentially, this means that this mutual fund is VERY tax efficient, just as the passive investing books say it is.
• Intriguingly, in looking back at my Vanguard transactions for the past few years, the ONLY capital gains distributions I have incurred were with bond funds. Crazy eh?!

 

So, Which Vehicle Will Give Your Child More Money When They Retire?

As we’ve seen so far, deciding between a deferred variable annuity and a regular taxable mutual fund account for long term savings for your child’s retirement is not exactly simply. Furthermore, it requires quite a bit of knowledge of the tax code as well.

To make some final conclusions about which vehicle is better, we need to run some calculations using what we’ve learned. A copy of the spreadsheet that I put together is shown here, and I highlighted the key findings in the summary table below. 

I included 3 scenarios – annuity, regular mutual fund, and a regular mutual fund where each year’s taxes are paid from another source other than distributed dividends.

Annuity

The first calculation I ran was for the stand alone variable deferred annuity. Even though the annuity did have a >2x higher expense ratio than the mutual fund account, the nice thing was that all of the money was able to compound free of taxes until withdrawal.

However, the annuity gets killed by taxes on the withdrawal side (see red highlighted box in table above), and results in the lowest amount of money left to your child.

Even though the contributions/premiums you paid in to the annuity are tax free to withdrawal, every bit of appreciation in account value beyond that gets taxed as ordinary income at 35% when it comes out.

This is somewhat unfair because much of that increase in account value has been due to dividends (which would have been qualified if held outside of the annuity) and long term capital gains on shares you have held for MANY MANY years.  However, these all get lumped as “earnings” in annuity language, which are taxable at the ordinary rate. It hurts!

Regular Mutual Fund

Even though the regular, taxable mutual fund account has a lower expense ratio than the annuity, the account gets beat out during the accumulation phase by the annuity since a portion of the distributed 4.40% annual qualified dividend are being used to pay the 15% tax on said ordinary dividend.

However, the benefits on the liquidation side make up for any accumulation shortcoming, allowing for the final after-tax amount of the mutual fund to be >17% higher than that of the annuity (green highlighted cell in above table). 

“How does this happen?”  – you might be asking.

Essentially it boils down to 2 things:

1. The total stock market mutual fund is very tax-efficient during holding, since it only resulted in qualified dividends (which are taxed at a lower, 15% rate) and no capital gains distributions during accumulation, and
2. The preferential treatment given during liquidation regarding reinvested dividends and sales from long-term stock holdings that are not allowed in the annuity structure:

• If you remember, with the annuity, all increase in account value beyond what you paid in as contributions/premium got converted to normal income @ the 35% income tax rate.
• For the regular stock mutual fund, you only pay 0.13% of the account’s pre-liquidated accumulation value at a higher 35% short term capital gains rate, whereas in the the annuity, you paid ~35% of the accounts value in taxes at the higher rate.
  • This is because in the mutual fund, the only short term holding held less than one year will be the penultimate reinvested dividend. The rest is either recovery of cost basis or taxed at the long term capital gains rate of 15%.
• Regarding dividends, with the annuity, dividends earned by the sub-accounts are viewed as earnings and are therefore taxed at withdrawal as normal income. With the mutual fund, the qualified dividends are distributed to the investor, which then you can use to purchase additional shares, increasing your ending cost basis.

Regular Mutual Fund, But Paying The Qualified Dividend Tax From Another Source

One of the books that I recently read was Ric Edelman’s (one of my favorite authors in finance) book, The Truth About Money. In the book (page 84 to be exact), he mentions that, “In all our 1,000+ collective years of practice as financial planners and investment advisors, having worked with thousands of clients and with $5 billion in client assets, we have never seen a client sell a bond or liquidate a bond fund in order to raise the cash needed to pay the taxes that Schedule B are owed.” 

And, reading this got me thinking about how it might apply to this strategy of saving money for a child’s retirement. What this means is that in practice, normal folks might pull the money for the dividend taxes owed on the mutual fund from another source vs using the account value and/or dividend to do so. And, if this were the case, I was curious what financial ramifications it woudl have for the child’s retirement savings.

Taking this in to consideration, I put together the 3rd scenario analysis listed in the table above.

Using this strategy, having a similar liquidation scheme as the regular mutual fund scenario described previously, your child would end up with >61% more money (tan cell in above table) than the annuity strategy, and >41% more money than the mutual fund strategy where account value is used each year to pay taxes. Not too shabby, right?!

 

Conclusions

In summary, we have laid out several criteria needed for an appropriate account/savings vehicle in which to place the $1 per day that we discussed in Part 1 that could make your child a millionaire by the time he or she retires. By doing this, we narrowed down the options to 2 vehicles – 1) a deferred variable annuity and 2) a regular, taxable mutual fund.

From there, we found that even though annuities defer taxes during the accumulation phase, the fact that all increases beyond contributions are treated as earnings/ordinary income causes annuities to be more expensive to access during retirement than a taxable mutual fund. The end result is that from a mathematical perspective, saving the $1 per day in a regular mutual fund allows you to be better off. 

Of course, there are some instances outside of the realm of mathematics where annuities may indeed make sense. For example, since annuities are classified as insurance contracts, they are likely to be more shielded from creditors than a traditional mutual fund account. Further, many offer some sort of death benefit guarantee. Finally, the fact that annuities do have the 10% withdrawal penalty can be beneficial if you are the type of person that might be tempted to access a mutual fund account prematurely.

However, it is my belief that for the majority of “normal” folks, saving the $1 per day in a regular mutual fund account with Vanguard or Fidelity will beat out an annuity. 

How about you all? What type of savings vehicle do you use to save money for your child’s financial future? 

If you don’t currently save in this fashion, hypothetically, which type of savings account do you think would be best suited for your needs if you were to do so?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/86530412@N02/7960787444/sizes/m

Two Lessons I Learned About Retirement Planning

The following post is by MPFJ staff writer Travis.  Travis is a customer blogger for Care One Debt Relief Services, and also appears weekly at Enemy of Debt.  Travis candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband he provides a unique perspective on balancing debt, finances, and family.

Retirement Planning. 

Do these words instantly make your eyes glaze over?  For many people, it does.  It’s like that statistics class that you wonder all semester when you’ll ever use the information the instructor is droning on and on about each day.

The thing is, you can’t afford to not pay attention.

During orientation for my first job, I was informed that I could contribute to a 401K plan, and that my employer had matching funds for the first 3%.  Sounded like a great deal, so I started off contributing 2%.  I felt good about myself, I was doing the adult thing and planning for my retirement.  But was I contributing enough to accumulate a big enough nest egg for the retirement I wanted?  Did I even know what that meant?

I didn’t have a clue, and worse yet, I didn’t talk to anyone.

The first time I talked to anyone about my retirement goals was five years into my marriage when my wife was pregnant with our first child.  We visited with our life insurance representative about our changing needs to the imminent addition to our family.  He helped us set some reasonable retirement goals, and a plan of action to achieve them.  I upped our 401K contributions to be inline with our action plan, and figured we were good to go.

I went along like this for several years.  At some point, I thought it would be a good idea to take a closer look at the 401K statements that showed up in my mailbox every three months.  I thought I was being smart by diversifying my contributions across several funds that my employer had available within the 401K such as a Large Company Fund, Small Company Fund, and even an International Fund.  When I took a look at how each fund was performing, I noticed that the fund I had been sinking the majority of my money into was giving me a return of less than half of some of the other funds.

Another mistake that may have cost me tens of thousands of dollars.

Here’s a  simple example to show how much even a small percentage change in your rate of return can affect your investments.  Let’s say that at a person contributes $300 a month from the day he starts his first job at age 22, until the day he retires 40 years later.  Now, let’s say that his investments give him a rate of return of 4% per year, compounded quarterly.

$300 a month for 480 months, rate of growth of 4% compounded quarterly = $353,415.92

What happens if we up the rate of growth a single percent?

$300 a month for 480 months, rate of growth of 5% compounded quarterly = $455,341.69

In our very simple example, that’s a difference of over $100K, or an net increase of close to 29%!!  You can see how paying attention to your investments can dramatically change your financial picture for  retirement.

I quickly called my insurance representative who invited me to pay him a visit to re-evaluate my retirement goals as well as the growth performance of my retirement funds.  He half-jokingly scolded me for not calling him for so long.  But the realization of how I had handled my retirement savings taught me two very important lessons:

Retirement goals are not a one time “set it and forget it” deal:  As you progress throughout life, your goals will change and you need to adjust your retirement planning accordingly.

Review your retirement fund growth periodically:  When you calculate projected retirement savings, you use an estimated average growth rate.  It is essential to check how your funds are doing periodically to see if you need to adjust where your money is invested, or your contributions based upon how your money is growing.

We have had to halt our retirement contributions over the last 4 and a half years while we were enrolled in our debt management program and concentrating on paying off our consumer debt.  With only 4 months to go until we complete our program, it’s time to schedule another appointment to go over our retirement goals, and examine how our money is growing.

We have goals for retirement, and through careful and constant planning we aim to achieve them.

How about you readers, how often do you re-evaluate your retirement goals?  When was the last time you did so?

Image courtesy of hyena reality / FreeDigitalPhotos.net