EE Savings Bonds are an interesting investment vehicle that often gets overlooked for someone who is looking to retire early. The reality is that a lot of us are planning to retire a lot sooner than the Social Security eligibility age. Social Security being an income stream that we cannot start until age 62 at the earliest. It’s rather important to bridge the gap in between the day you declare early retirement and the day you begin that social security income stream. Can EE Bonds be a plausible strategy to bridge the Gap?
Another month of spending shenanigans is in the books. October certainly looks to be better than September, but it’s not where I’d like it to be. The good news is that there are definitely some road trip expenses in here and I guess it’s good to know that anything I pay now while I’m gainfully employed, I don’t need to worry about paying for while i’m on the road. Read on to get inside the nitty gritty of my October expenditures.
Can I FIRE As a Single ?
A few weeks ago, I received an unexpected e-mail from a woman who was seeking FIRE, but wasn’t sure if it’s doable on her own as this community is dominated by high income couples. That e-mail is as follows:
Hi, I have been interested in early retirement and financial freedom topics for the last year or so. I have been reading lots of stories of couples retiring early and traveling the world … because it’s easier to save when you are sharing living expenses and common goals with somebody else , right? So I started to wonder if it is even a feasible goal to retire early as a single person. I started my research for single FIRE success stories … so far I haven’t found any. After FinCon was over I decided to ask Mrs. Our next life if she knows anybody and she suggested to check out your site. Here I am:) tell me how you do it ?
I wasn’t sure how to respond to this e-mail. As I’ve mentioned before, I consider a lot of what I do in the FIRE world to deviate from the usual narrative we see, with more than a little cheating. I utilize actively managed dividend-focused stock and investment grade bond funds to juice my income. My plan even includes going back to work. The horror! I’m also not doing the stereotypical American abroad backpacker thing.
If you’ve read my blog posts, you shouldn’t be surprised that my response was absolutely long-winded:
TJ’s Current Portfolio Allocation
I don’t have PersonalCapital monitoring my bank accounts which is where most of my cash is. If i did, it would be way too easy for people to guess my net worth since I plan on sharing my cash savings balance at some point. The cash in this screenshot would be the cash that is embedded inside of my various stock and bond mutual funds.
TJ’s Current Mutual Funds
Core Equity Positions:
Vanguard Equity Income
41% of portfolio – A High Quality Dividend-focused fund. 40% of an investment portfolio in a single fund might seem like a lot, but this fund actually has two similar-but-different strategies. 2/3 of the fund is managed by Wellington Management in Boston and the other 1/3 is run by an equity team at Vanguard.
There is a bit more turnover in the Vanguard managed portion and a big reason why I didn’t want to have too much of this fund in a taxable account. That being said, I can’t imagine why being all in on Vanguard Equity Income would be a terrible long term buy and hold investment for an average joe. It isn’t lacking in diversification. This fund should perform very similar to the Vanguard High Dividend Yield Index, which is the index that it attempts to out-perform. In the past couple years, the high dividend index has been the better performer. It all goes in cycles. So I tell myself I’m buying low. 😀 It’s not like I have 40% of my portfolio in a collection of random penny stocks. Ironically enough, the admiral share version of Equity Income is less expensive than the mutual fund version of High Dividend Index.
18% of portfolio. This one was selected for two reasons. The first: EXTREMELY Low Turnover. This is a large cap U.S Stock fund with an Upper Midwestern Concentration. They’re located in Minnesota and they definitely like their Minnesota companies. They’ve been a good steward of their client’s capital for over half a century. I like having part of my U.S. equity portfolio intentionally avoiding what I perceive as crazy tech valuations in California, New York, etc. Midwest focus is definitely a convenient way to stay out of that scene.
I definitely do pay a bit of a premium in management fees on this fund vs. a typical Vanguard fund expense. If you’re curious about the overlap between Vanguard Equity Income and Mairs and Power Growth, I’ve created a Google Sheet with all the holdings of each fund by weight as of 9/30/16. Other than both funds having Johnson N Johnson as a top holding (which I have no complaints about, JNJ is a great company.), there’s really not a lot of significant individual holding overlap, and I feel pretty good about the mix of companies that both firms have chosen to invest in.
Below is a backtested table and graph which compares a lazy 50/50 split between Mairs and Power Growth and Vanguard Equity Income starting on January 1, 1989. No rebalancing. Dividends reinvested. 1989 being the first full year that Vanguard Equity Income Fund existed. If you just skim and look at the ending balances, it looks like you absolutely crushed the 500 index with the active approach. That’s not the point though, and it would be a terrible reason to pick those two funds. If you take a closer look at the graph, you can see what really happened is your fund managers avoided that late 1990’s dot com bubble rise and the subsequent steep crash. Because they are conservatively managed funds that don’t chase growthy tech stocks with frothy valuations.
When you’re in a cap-weighted index fund, you’re more exposed to bubbles like this and that is just the nature of the game. Index fund investor solution: Work longer! Save more! Lower your Safe Withdrawal Rate! It’s not the only way though. If you have competent active management, you at least have the possibility of a fighting chance. This active mix offered more protection than the index during the more recent financial crisis, but it was still smacked around pretty hard. Still, avoiding 1 crash is better than avoiding none of the crashes, right? Avoiding the dot com bubble is the best explanation I have for why there is such a drastic variation in the two final balances after nearly 17 full years of being invested in primarily large American companies in both strategies. Highly unlikely that the next 27 years turn out exactly the same as the previous 27.
Image Source: Portfolio Visualizer
Note that the performance was almost identical before the dot com bubble, and very very similar coming out of both crashes. Don’t overlook downside protection in your equity funds, particularly after you shut off your primary income stream. ESPECIALLY if you are 100% equities as many early retirees have chosen to be. I was 100% in index funds in my taxable accounts during nearly all of my working career thus far. That was a time where I could handle more volatility and take advantage of investing regularly where the price of the security may be less important. A mini-retirement or early-retirement is a very different financial circumstance in that you might not be adding to your portfolio. I’ve scaled back and added roughly 20% bonds for the same reason.
Time in the market with compounded reinvestment is why it’s so important to start investing as early as possible; regardless of which fund you choose. I’ve heard others equate mutual fund investing to gambling. Long term investing is not the same as rolling the dice at a Las Vegas casino.
I think the following chart does a good job of showing the potential difference in current income if you go with a dividend strategy. In a high tax bracket, this is the probably last thing you want, but in a low bracket, it’s okay.. This is using the same data as mentioned earlier. Both portfolios have all dividends reinvested and no additional investments. No rebalancing.
Image Source: Portfolio Visualizer
The massive income in 2015 is because of the Covidien/Medtronic merger last year. Mairs and Power had owned a lot of shares of the Medtronic stock for a long ass time. That’s obviously not a typical income year for Mairs and Power Growth Fund. Though I’m sure Medtronic won’t be the last acquisition that forces a steep taxable gain distribution, it’s not a reason to avoid the fund in my opinion. Is the potential downside protection worth the potentially higher taxes? That’s an individual decision of course.
What about International?
It’s definitely a big hole in my portfolio. But plenty of people permanently stick to American equities. And, since I’m more focused on income than growth in the near-term, I’m mostly okay with it. I also don’t anticipate doing much (any?) spending in other currencies any time soon.
10% of portfolio. My most expensive fund for sure. They’ve had to close it to new investors because it has done so well. I guess they ran out of good small cap investing ideas in the Midwest. Sounds like responsible fund managers to me. I do not plan on adding any additional funds to this position.
Vanguard REIT Index Fund
10% of portfolio. I assume that these are the alternatives in the PersonalCapital graphic. I guess it’s slightly less than 10% now.
21% of portfolio. One of the lowest cost Actively Managed Bond funds (30bps) that I’ve ever seen. Mostly investment grade corporate bonds with some mortgages, car loans, credit cards, high yield bonds, and treasuries mixed in. Looking at the PersonalCapital allocation graphic, it appears there is a tiny sliver of foreign bonds too. I don’t have any issues with that.
Baird is in Wisconsin. They are no more expensive than what Vanguard charges for an actively managed bond fund. I could try to duplicate what Baird Core Plus is doing with a handful of Vanguard bond index funds. But that seems like a lot of extra work. Especially when there is a perfectly good mutual fund that already exists. I also like that Baird doesn’t “make guesses” on duration, as I learned here. I know Dodge & Cox intentionally has a shorter duration than the index.
Originally, I was going to use Dodge and Cox Income for my bond exposure. But then I figured I might as well save the 13 basis points on the management fee. The two funds are incredibly similar.
This is a pretty boring vanilla bond fund. You’re probably not going to lose your shirt in any diversified bond fund. If interest rates go up, your portfolio value will go down. But, you’ll recover that much faster if you reinvest the higher interest payments. I struggle with people who worry about losing value in their bond funds, but have no concerns about stock funds which are so much more volatile.
Also a completely random and useless fun fact, but during yesterday’s surprising stock market rise, my REITs and Bonds got comparatively shellacked. But The Baird fund didn’t go down as much as the intermediate treasury and corporate bond index ETF’s that are inside of my Wellington Motif.
My Weighted Expense Ratio
Just under 37 bps. Or basically right about what you’d pay in total for a robo-advised portfolio when you add in the cost of the robot to the cost of the underlying ETF’s. I’ll take my portfolio over the Robo’s any day.
Unfortunately, I don’t have any secret sauce investing advice to offer. My best advice is to do your own due diligence. I’ve made a lot of mistakes over the years. I’m just not a fan of the “one size fits all” approach we hear a lot about in this corner of the internet. Good luck to all.
I recently saw a claim by a fellow blogger that he expects the Wealthfront Direct 100 indexing option to juice investment returns by 0.5% -1% per year for anyone with a $100,000 taxable portfolio. He also claimed that “almost anyone” with that size portfolio would be in the 25% tax bracket. I don’t believe either of these claims to be true for a second and I’m definitely NOT pursuing that strategy. This post got so long that I’m splitting into two. On Thursday, I will reveal my current investment portfolio.
New Composition for Piano and Orchestra!
In order to connect to the internet today, all you really need is an obsolete smartphone with a wireless signal and transportation to get to the local Starbucks or McDonalds, and you’re good to go. It was much different when I first connected to the web. In our household, we had a 2nd phone line for our 28.8 kbps dial-up modem. When DSL modems and routers became a thing in the early to mid 2000’s, that was sort of a game changer in our household, because then it meant that we could all be connected to the internet on different computers at the same time. In the old days, when your sister or parent wanted to use the internet, you had to find some other activity to occupy your time. The struggle, people.
Our first computer was so old that it didn’t even have Windows on it. Only Microsoft DOS. I bet it was crazy expensive too. “Cloud” storage? Are you kidding with those internet speeds? I feel a little old. Kids today have no idea…
Somewhat recently, I recall a rather notable personal finance blogger (happily married, of course) ranting on Twitter about not wanting to see dating advice on personal finance blogs. I vehemently disagree with this mindset! I think it would be fantastic if PF bloggers, particularly those who have found some dating success during the age of highly competitive, low attention span dating apps, shared their knowledge for the rest of us sad single people who happen to have an awkward enthusiasm for personal finance and have had trouble seeking a long term connection.
You can’t really look at your money in a vacuum anyway. Money and life are interconnected in so many ways. In my case, money management is something that has been natural and a lot of aspects of it are second nature to me. Dating? Learning how to successfully do that is akin to learning a foreign language. Right down to the aftermath. That is, the more time I take off from dating, the more I seem to forget about the lessons that I’ve learned along the way. I actually went on a date this past Thursday. If you’re not interested in reading my dating thoughts, you can check out the much more accessible “bonus post” that I quietly published last Friday regarding leaving money on the table.
As I continue to prepare financially for an extended road trip, I’m learning that I’m becoming a lot more comfortable with the idea that it is perfectly acceptable to not optimize your finances to squeeze the most dollars out of your opportunities. I’ve mentioned before that I don’t think my life purpose is to maximize my money, but this is the first time I’ve really considered leaving some real cash on the table when it is clearly offered in front of me for the taking.
As it sometimes happen in the life of a blogger, you feel inspired to pre-empt a previously scheduled post.
This past weekend, I hosted an Australian woman who I had met in Canada five years ago. This is my favorite part of traveling. The people we meet and the connections that we develop. Remember that secret announcement that was coming up? Well I was GOING to be like “SURPRISE! I had a blogger in town and we recorded a podcast!”, but we had so much stuff to do and fit in our 3 days together and I was exhausted from exploring that it just never happened. But we did have several conversations where I literally said “this is why we should do a podcast”.
Like the time Toni told me she opened up Chrome in Incognito mode to book a flight in American version of an airline’s website rather than Australian to save $20. I had no idea that was a thing. How even though she has plenty of student loan debt, this is her EIGHTH trip to North America. Toni has been to more U.S states than I have. She’s a super interesting person. One of her hobbies is to go around the world and visit filming locations. I am fortunate to live within 30 miles or so of the city of Covina where the old WB network show Roswell was filmed. A show I actually watched, so I was definitely on board with adventuring through Old Town Covina. I’m sure a post on the Roswell filming locations is coming soon over there, so subscribe to her RSS feed and stay tuned.
One of the things Toni asked me was why I am not doing the working holiday in New Zealand. The last time I chatted with Toni, that was the plan. About six months ago, the plan was basically to do a quick tour of Asia and eventually settle into New Zealand for a year. I went back on forth on this a lot. I asked my dad “if I drop everything and go to New Zealand for a year, aren’t I just putting my life on hold?” and my dad, who is completely awesome, told me “No. I think that is you living the life that you want to live.” Right? Cheers for supportive parents. The exchange rate is favorable right now. I’ve been to New Zealand before and I enjoyed it. But clearly, I’ve chosen a very different path.
There are definitely financial reasons to stay in the country, and If there’s a theme I want to get across in this blog, it’s that you don’t have to choose to travel somewhere else over America to travel inexpensively while having a good time, but there are so many other non-financial reasons, and this is the post that fleshes them out.
Keep reading if you’d like to learn why I’ve chosen not to venture abroad at this point.