Viewing the 'Investing' Category
Quick snapshot of the financial situation as of close of business 9-Apr-15:
Home: $169,378 minus ($129,766.66) mortgage = $39,611.34 equity
- 401(k): $113,746.98
- Roth IRA: $115,696.03
- Rollover IRA: $65,449.31
- Rollover IRA Brokerage: $9818.84
- HSA: $1132.78 (currently in cash; need $2500 minimum balance to invest)
- Taxable: $149,983.61
- Stock Options: $294,073.85 vested (out of $504,931.90 total)
Net Worth: $819,710.37
In recent weeks/months, I've made the following adjustments to my portfolio:
- Swapped 20% of my 401(k) from Vanguard Institutional Index (VINIX) to Vanguard Extended Market Index (VEXAX) to approximate the Vanguard Total Stock Market Index (VTSAX, which I can't get directly in my 401(k)), and balanced my future contributions to be an 80/20 split.
- Seeded $11K from money market into a taxable VTSAX holding, and will henceforth be using that instead of my S&P500 holding, which I'm retiring.
- Increased my taxable investments from $400/week to $500/week -- because I got a raise and bonus at the end of last year, and what else am I gonna do with it? :P
- Killed my (brand-new ) traditional IRA. I apparently make too much money to take the deduction now.
- I want my domestic to international equities ratio to be 2:1, but I'm at 2.76:1 right now, so I'm aggressively rebalancing my AA more towards international without triggering taxes. All of my Roth IRA and 80% of my taxable contributions are going towards Vanguard Total International (VTIAX). If this approach is taking too long (e.g. if by next quarter that ratio has barely shifted), I might buy/sell within my Roth space, or rebalance my 401(k) contributions.
I set a goal in Mint where I called reaching $1M in assets (excluding home/car equity and HSA) "FIRE", and the projected completion date is sometime in 2017 (April 27 at the moment, but it jumps around a lot). I love the fact that market appreciation is actually dwarfing my (fairly substantial) monthly contributions. Go Go Gadget Compound Interest!
I have made the executive decision to no longer use a Target Retirement fund to manage my retirement asset allocation. That's right, the training wheels are finally coming off. It's time to learn to balance my investments on my own!
I have decided to make this change for a few reasons. The first is that the Vanguard Target Retirement funds charge fees based on the investor share class, and due to my portfolio size, I will save hundreds of dollars per year by moving over to the equivalent admiral share class. That's a good enough reason as any to make the switch, even if I wanted to keep the Target Retirement fund's pre-determined asset allocation. For a few hundred extra bucks per year, I am willing to deal with the so-called "inconvenience" of having to manually rebalance my investments.
Another reason to leave the Target Retirement fund is that I want the flexibility to change my asset allocation. Right now, the 2050 fund allocates 10% to bonds. I do hold bonds, but I'd rather hold them in my taxable accounts, and save the tax-advantaged space for equities with higher growth potential.
As an aside, I've heard the argument for holding less tax-efficient funds such as bonds and dividend-yielding stocks in the tax-advantaged space. My gut feeling, however, is that protecting equity growth and capital gains (especially in the Roth space, which not only grows but is also distributed tax-free) beats out protecting bond interest and dividends (which are designed to be lower), although I am totally willing to be convinced otherwise using math. Right now, though, I'm also using bond holdings specifically as a short- and intermediate-term savings vehicle, so I want them to be easily accessible in a non-retirement account.
I also realized that I am likely going to retire sooner than 2050 and may need to deviate from their glide path anyway, so I might as well cut the cord now.
As for how I'm handling the asset allocation... I have decided to hold a 70/30 split of Vanguard's Total Stock Market Index Fund and their Total International Stock Market Index Fund. This mirrors the Target Retirement 2050's exact ratio of these same two funds (at 63% and 27%) but without the bonds. In reality, this is slightly complicated by the fact that my active 401(k) is held in a separate account with different fund choices, but I'll get as close to this breakdown as I can. The larger goal is to force myself to start actively managing and rebalancing my asset allocation.
Out of laziness and expedience, I handle almost all of my money management passively. All bills that stay constant month-to-month are on auto-pay, and investments are either on payroll deduction or auto-drafted on a weekly basis. To avoid accidental overdrafts, I keep my checking balance very high, and my cashflows are generally positive. As a result of this setup, I can go for a fairly long time without looking at my bank accounts.
A side effect of this passive approach is that a lot of cash accumulates in my checking account when I'm not paying attention. Every once in a while, I'll pop in and transfer a few grand out into savings and/or bump up my investments, but those actions weren't aggressive enough to prevent my cash holdings from topping $75K in recent months.
I know that $75K is too much to hold in cash. Following the standard advice of keeping 6 to 12 months of expenses in liquid assets, I should only be holding around $15K (+/- $5K). After my car purchase in 2012, which was my biggest anticipated expense, there's been no need to hold additional cash on hand.
So if I'm committed to holding no more than $15K in cash, where should I put the remaining $60K? The lowest hanging fruit by far was to pay off my student loans, so I did that. Boom, that took care of $7K, and Sallie Mae is out of my hair for good. But that still leaves $50K or so that still needs a good home.
One obvious option is to sink it all into equities, and that is a reasonable suggestion, given my long timelines and high(ish) risk tolerance. But I'm hesitating on taking this course of action for a few reasons. The first is that I don't feel like I'm underexposed to stocks. In my (half-hearted) attempts to drain my checking balance, I've already increased my automatic investments to $400 per week, to the point where my cashflow is now pushed into the negative. (I should be fine after my year-end bonus/raise, though.) Combine that with my maxed out 401(k) and IRA contributions, and I'm sitting at $43,800 worth of stock purchases per year. That's half of my base (gross!) salary, so I can hardly be accused of not investing enough.
A slightly more tangible objection to the lump sum stock investment idea is that I am in the process of researching and planning what to do with all of my stock options. I'm looking into this because I've already vested into quite a large number of shares, but action is not necessarily imminent because I've still got a few more years to go in terms of vesting into the rest. However, if I'm interested in a buy-and-hold cash exercise, I will need a considerable amount of cash up front (tens of thousands, easily). I'm concerned that if I tie up all my money in equities right now, I may not be able to pull it out in the next few years if I wanted to do a cash exercise. But the time horizon is still long enough that it seems a shame to not invest at all.
So I've decided to compromise. I bought some bonds instead! Specifically, I got the Vanguard Intermediate-Term Investment-Grade Fund Admiral Sha..., which (coincidentally!) has a minimum balance of $50K. This fund holds, according to its description, "diversified exposure to medium- and high-quality investment-grade bonds with an average maturity of five to ten years" by investing in "corporate bonds, pooled consumer loans, and U.S. government bonds within that maturity range". That seems consistent with both my time scale and risk tolerance. I do understand how bond prices work in conjunction with today's insanely low interest rates, but bonds are designed to provide steady income and returns, and it's got to beat the return on my savings account.
In conclusion: I've successfully ditched my cash! I am not buying more stock, but I am still investing. I suspect I'm be done with direct bond purchases for the time being, and may even allocate any returns back towards equities, but at least I don't have $50K burning a hole in my pocket any more.
I realize that pensions are rare like unicorns these days, but I actually have a small one under a previous employer. It's not worth much because I only worked there for three and a half years before being laid off, but the pension is supposed to pay out $261.88 per month starting in 2049 (when I turn 65).
They are now offering what I presume is a buyout. I can either:
1. Roll over a lump sum to an IRA or another employer's qualified plan ($6352.78).
2. Take a lump sum cash distribution ($5082.22).
3. Start monthly payments now ($24.71).
4. Retain the original pension benefit.
Should I take it? To figure out if this is a good deal, I calculated the present value of this future annuity.
Step one: Calculate the PV of the annuity at age 65. I'm arbitrarily using an interest rate of 6%, and a life expectancy of 100 (so 35 years).
PV(0.06/12,12*35,261.88) = $45,928.57
Step two: Discount that to today's dollars using the same rate.
PV(0.06,2049-2014,0,45928.57) = $5975.55
So it looks like the lump sum payment is a reasonable offer. I'm also assuming an extremely long life expectancy, which would bias the value upward. I'm not sure what rate I should use, but 6% is a figure I can hope to beat by investing on my own. I've tried plugging in different interest rates, but that causes the PV to fluctuate wildly.
I am really tempted to take it. If I roll it into an IRA now, I know I'll have control of and access to it before age 65, which is particularly helpful if I'm planning ER. I also avoid the risk of the company underfunding, raiding, or otherwise reneging on their obligation (I'm looking at you, Hostess) anytime in the next 35 years. I have so far been completely ignoring my pension in retirement planning, so this would allow me to take it into account.
I have until month's end to decide. Hmm.
Yesterday, I vested into some more of my employee stock options, the ones I got three years ago before the stock price shot up almost six fold. I logged onto Mint and checked my net worth -- it's jumped up to almost up to $600K.
Out of curiosity, I then asked the SO for the balances on his accounts, and added everything up, and… holy moly.
Together, we are now worth over one million dollars. We are officially millionaires. (WHAT!! Whoa.) It's a bit surreal. We are now, in actual fact, the millionaire(s?) next door.
And we shall celebrate this fact with walnuts.