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Retirement

On Track Retirement Doubts: What’s a Spending Goal?

Personal Finance      by

Today we’re honored to host a guest post from the inimitable Nelson Smith from Canadian Dividend Investing on DQYDJ. Enjoy!

Each week, Canada’s Globe and Mail (think of it as our country’s own New York Times, complete with the paywall and 14 opinion writers who have the most inane thoughts on things) features a couple with doubts about their retirement.

Picture of Canadian coins
Retirement concerns – and humble bragging – are universal.

The people profiled tend to follow a certain pattern, because if editors know anything… it’s what generates hate clicks. They’re usually in their 50s or 60s, and they’re almost always upper-middle class or outright wealthy. Net worth statements are included with every profile, which usually are at least mid-six if not seven figures.

I’ve taken to making fun of these stories on Twitter when they come out, dubbing them as “local couple swimming in money wants to know if they can possibly survive their golden years” or some other similar snark.

The answer is never in doubt. Of course they can afford to retire. All that’s accomplished is an anonymous couple gets to brag about how much they have and some financial planner gets a few quotes and a plug in a national newspaper.

And then last week’s profile happened. It is the purest form of comedy since Napoleon Dynamite (at least I think, I’ve never seen it), and it deserves nothing more than a sound mocking. I’ll do my best.

Marvin and Melody have done well, earning professional degrees, paying off the mortgage on their Toronto home, and paying for their sons’ university education. They’ve also managed to save a tidy sum.

We’ll soon see the first part of this is a massive understatement. They’ve “done well” like my body odor is a “slight” problem. Look, I appreciate your concern, but if my wife can’t convince me to go to a doctor what chance do you people have?

Lately, the stress of running his own consulting company has Marvin thinking about scaling back or even quitting – especially now that Melody is back working full time. Melody is sympathetic. If Marvin quits, he’ll be leaving behind income of nearly $150,000 a year. Melody earns about $95,000 a year in high tech. He is age 54, she is 53.

How will this poor couple manage to make ends meet on a mere $95,000 a year if Marvin quits? Oh the sacrifice!

“I have recently returned to work full time after nine years of working part time, preceded by a decade of staying at home with our children,” Melody writes in an e-mail. Marvin is suffering from “extreme stress,” she adds.

Marvin is a consultant. Isn’t that the laid-back job that certain kinds of professionals take as a retirement project? I don’t know. Maybe he’s just a bad consultant.

“I feel bad for all the stress Marvin is having.” – An Iraqi veteran with PTSD, probably.

“I wonder if we could live in comfort for the rest of our lives if he stops working or greatly reduces his workload,” she adds… Their aspirations are high: A retirement spending goal of $100,000 a year after tax, including an expensive vacation each year.

Ah yes, the ol’ We’d-Like-To-Have-Our-Cake-And-Eat-It-Too retirement. This is totally reasonable. We can’t expect Marvin to have to sacrifice anything if he just throws up his hands and quits. How dare we even suggest that.

In the meantime, they have to finish paying for the boys’ tuition and living costs at an out-of-town university. One graduates next year; the other in 2020.

The total projected cost for these three years of university? $110,000.

American readers should keep in mind it costs substantially less to go to college in Canada versus the United States. The average student who lives away from home spends about $20,000 a year.

Which means the couple is spending more than $15,000 more than the average each year to send their freeloading sons to university. Or to put it in percentage terms, 75% extra. Those kids must be drinking a lot of beer.

We asked Stephanie Douglas, a partner and portfolio manager at Avenue Investment Management in Toronto, to look at Melody and Marvin’s situation.

My second favorite part of these things is when the financial planner gives obvious advice. My favorite part is when I slam my face against the nearest wall hard enough to make my nose bleed.

If Marvin decides to retire this year, they would deplete their investable assets by 2050, when Melody would be 85 and Marvin 86. At that point they would either have to borrow against their house…

Oh no! Downsizing would be the worst kind of sacrifice!

Which would be worth an estimated $1.7-million with inflation, or sell it to help pay for their living expenses.

What a terrible problem, trying to unlock cash from an asset worth $1.7 million. Orphans with no feet will feel bad for Marvin and Melody. “Take my last dollar, Marvin,” they’ll say. “You need it more than I ever will.”

The couple face some substantial demands on their income, the planner notes. They want to continue to support their children through university at an estimated cost of $110,000 over the next two years. They value their annual family vacations at a cost of $15,000 a year. And they have a $38,400 loan to pay off.

We’ll get back to the loan in a minute. It’s probably the best part.

Also, and I’m sorry for even suggesting this, but maybe they could cut back on the $15,000 a year in travel?

“How dare you ask them to do without!” – Tribesmen in Sri Lanka

A better option would be for Marvin to work part time, she says. This would help them meet their retirement goal by preserving their capital and allowing them to save more.

No kidding. Thanks, Stephanie.

“More money is better than less money.” – Stephanie Douglas, the smartest person in the world.

“For example, they could achieve their spending goal if Marvin works until age 61 at a reduced salary of $70,000 a year and continues to save $3,408 monthly [$2,491 to registered retirement savings plans and $917 to their tax-free savings accounts] until retirement.”

Financial planners need to grow up and tell people to spend less. They “could achieve their spending goal?” What the hell is a spending goal? That’s the dumbest thing I’ve ever heard.

I have a better spending goal. Why don’t you spend less? There, I’m a genius financial planner now.

Alternatively, they could save more aggressively while Marvin is still working at his current salary, which would allow him to retire earlier, Ms. Douglas says.

More money is better than less money, part 8,000.

Once Melody retires, they will get $6,000 a year from her defined-benefit pension plan.

This is the worst pension of all time, but they keep mentioning it.

Finally, Marvin and Melody should eliminate their $38,400 in debt before Marvin retires. With their current debt payments of $400 a month, it would take nine years to pay off. “They should focus on paying this down as soon as possible.”

Paying down debt is a no-brainer, and the couple should aggressively save to do just that.

Except, wait. From the next section, which outlines their assets and liabilities:

  • joint cash $32,660
  • her cash $5,540

You read that right. They can literally cut a damn check and pay off this debt. Tomorrow. How this wasn’t first on the list of things to do is beyond me.

Speaking of the couple’s assets, what else do they have going on?

  • House $900,000

In San Francisco that gets you a 14×22 foot vacant lot with eight homeless guys squatting on it.

  • his RRSP $540,977

Barely six figures

  • her RRSP $89,564

I lose more money under my couch cushions every week.

  • joint non-registered portfolio $245,000

That’s not even enough to bribe a jury.

  • his TFSA $63,894
  • her TFSA $72,171

This will quickly be squandered on glitter and temporary Paw Patrol tattoos.

  • Total: $2.1-million

Only $2.1 million. How will they ever survive?

Next comes their monthly expenses, and there are some doozies. Including:

  • phones, TV and Internet $482

If I spent $500 a month on my phone, TV, and internet, I would smash them all to bits out of frustration.

They pay their kids’ cell phone bills, don’t they? Nothing drives me crazier. You know they’re just using those iPhones to strike out on Tinder, right?

Hey baby, do you want to come back to the apartment my parents pay for? Where are you going?

  • vitamins & supplements $8

Eight bucks a month is nothing, but I still have questions.

  • life insurance $10

Repeat after me: if you’re worth $2.1 million, you don’t need life insurance.

  • clothing $90

Marvin insists on a new furry costume every quarter. He’s a bunny.

Want a free financial facelift? E-mail finfacelift@gmail.com.

My new goal in life is to make up a scenario and get my own fake financial facelift.

Anyhoo, that about wraps it up. Stay tuned for the next edition of the Globe’s financial facelift series, titled I Have Even More Money Than The Last Guy, Please Don’t Mock Me Nelson. Or something like that.

If you guys need me, I’ll be weeping in a corner.

Nelson Smith formerly wrote for Financial Uproar, the worst personal finance blog in the history of the world. You can find him today at Canadian Dividend Investing, which might be slightly better but probably not. He likes nothing better than when you refer to him as a cat parent.

Why Do Americans Retire?

Economics      by

In our average retirement age in the United States piece we briefly discussed retiring for health reasons… then didn’t dive deeper. Through the lens of 2017 Survey of Household Economics and Decisionmaking responses, today we’ll evaluate retirement reasons for the living retiree population. We’ll touch both why do Americans retire as well as craft a definition for voluntary versus involuntary retirement.

Why Do Americans Retire?

The 2017 SHED asked a nice combination of retirement reason questions, nicely split between voluntary and involuntary. It also asked respondents to rate how important each reason was between ‘Very’ and ‘Not at all’. We only count respondents here who answered the prompt (refused or not asked are omitted).

 Not ImportantSomewhat ImportantVery Important
Poor Health61.84%14.39%23.77%
Wanted to Do Other Things41.42%32.17%26.41%
Didn’t Like the Work70.41%19.49%10.10%
Family Responsibilities64.22%19.34%16.45%
Wanted More Family Time44.12%28.02%27.86%
Forced or Lack of Work73.53%10.51%15.96%

As you can see, ‘Wanted more family time’ counted the highest number of current retirees ranking it ‘very’ – a full 38.6% of retirees. With ‘Somewhat Important’s included, 58.58% of retirees responded with ‘Wanted to Do Different Things’. Using that measure, ‘Wanted More Family Time’ also did well at 55.88%.

Why do Americans retire reasons
Americans ranking somewhat or very important for retirement reasons

On the negative side (and combining somewhat and very), ‘Poor Health’ was the most common involuntary reason retirees gave on the survey. A full 38.16% of retirees fit that mold, followed by 35.78% ‘Family Responsibilities’.

Involuntary vs. Voluntary Retirement

The survey split its 6 split involuntary and voluntary reasons for retirement evenly. It also lets us divide the population into men and women to see if involuntary or voluntary retirement dominated in either sex.

We ranked ‘Poor Health’, ‘Family Responsibilities’, and ‘Forced to Retire or Lack of Work’ as involuntary reasons. For retirees ranking those, apparently retirement wasn’t fully a choice in their hands. Conversely, ‘Wanted to Do Other Things’, ‘Didn’t Like the Work’, and ‘Wanted More Family Time’ we classified as voluntary. These reasons make it clear that a retiree wanted to retire… at least at some level.

We split up respondents into only voluntary and involuntary using ‘Very Important’ responses to the prompts. A retiree counts as involuntary if they only have a ‘very’ for an involuntary reason. The same logic applies to voluntary – only if ‘very’ showed up on the voluntary side and not the other.

Because of the methodology, the best way to read the table is ‘mostly voluntary’ vs. ‘mostly involuntary’.

 All RetireesMenWomen
Voluntary28.72%28.57%28.84%
Involuntary25.01%25.82%24.34%

Luckily, voluntary retirees were the norm. There wasn’t much gender disparity, either – for men and women, voluntary responses dominated retirement reasons.

Still, the difference wasn’t overwhelming, and although we received a strong signal from some retirees we aren’t able to categorize everyone. A full 46.27% of retirees either refused to state, were mixed between voluntary and involuntary, or ranked no reasons ‘very important’.

Conclusions on Retirement Reasons in America

It’s hard to state whether the numbers are surprising… or even to make a normative judgement good vs. bad. When we took you through our retirement savings math, you’d be forgiven for thinking we’d see different results from this data. Once again – and as we’ve discussed recently – much of the perceived gap in savings versus successful retirement is credit to Social Security. (We’ll look next at funding sources in retirement.)

As for the numbers in isolation? Of  ~49.3 million retirees in the United States,  3/4 of them weren’t (only) dragged into retirement involuntarily. Still, that leaves a full 25.01% of retirees who would have kept working if not for various circumstances.

Average Retirement Age in the United States

Economics      by

The average retirement age in the United States among currently living retirees was 59.88 years old. The median living retiree left work at 62 years old, and the most common age to retire was 62 years old. 18.7% of retirees retired at age 62, and a whopping 63.1% retired between the ages of 57 and 66.

62 is currently the minimum age to collect Social Security in the United States while 66 is considered “full retirement age”.

Next, we’ll show the average retirement age for men and the average retirement age for women and alternative retirement age measures. Data for this post comes from the 2017 Survey of Household Economics and Decisionmaking from the Federal Reserve.

Average Retirement Age for Men in the United States

In 2017, 22,295,155 retired men lived in the United States – 45.26% of all retirees.

On average, these men retired at 59.62 years old. The median male retiree left work at age 62, and 62 was the most common retirement age… just like the retirement population in whole.

Average Retirement Age for Women in the United States

In 2017, 26,965,901 retired women lived in the United States – 54.74% of all retirees.

On average, these women retired at 60.11 years old. Following the same pattern, the median age women retired at was 62 years old and 62 was the most common age.

Cumulative Retirement by Age for Retirees in the United States

According to the 2017 SHED, there were 49,261,056 retirees in America in 2017. Interestingly, 61.9% of currently retired Americans waited until their 60s – or later – to retire. 15.1% waited until at least 66 years old to retire.

It’s important to note here – we’re only looking at retired men and women. Even at older ages, many Americans are still in the workforce – see, for example, FRED’s data on the subject. Of the retired population, here’s the cumulative percentage of retirees who were retired by a specific age:

Cumulative retirees by age in the United States (Inclusive) and average retirement age of 62
Retirees by Age in the United States (Inclusive)

When Do People Retire in the United States?

Although the data above does state the average ages for the various American retiree populations, it might not be the full answer. While this methodology is correct it’s still a slightly biased picture.

If you’re still working or you’re concerned with policy and demographics you probably want to know the average retirement age for all workers. Using the data above includes responses from the long-retired who left work under different economic conditions. Additionally, due to ill health and death surveying current retirees displays survivorship bias towards retirees healthy enough to respond to the survey. Succinctly: the deceased can’t respond to surveys.

We attempted to control for this with a couple screens: looking at the recently retired as well as those who didn’t retire for health reasons.

What Age Did People Retire Recently?

Although people in poor health may die within a year or two of retirement, one screen that helps is to look at people who retired in the last 1-2 years*.

Of retirees who responded with a retirement age, around 9.2% retired recently. (Applying that to all retirees means approximately 4.5 million people retired recently).

This population had an average retirement age of 62.66. Median retirement age was 63. The most common retirement age for recent retirees was 65.

*We can’t give an exact timeframe. Due to survey timing and whole number ages these folks may have retired up to 1 day under 2 years ago. This introduces bias due to birth month matched with survey timing – but it is unarguably a better population for some questions than ‘all retirees’.

What Age Did Healthy People Retire?

Although poor health isn’t the only factor that can force retirement, it was a big factor. Of living retirees, 34.7% reported that their health was very or somewhat important for retiring.

Taking only retirees who reported health as Not Important to their decision, 62 was the most common retirement age. The average retirement age was 60.69, and the median retirement age was 62.

What Age Did Healthy People Recently Retire?

What about for people who retired recently and didn’t consider health reasons in their decision?

For this subset, the average age was 63.16 and the median retirement age was 63. Proving that health matters quite a bit in retirement decisions, the most common retirement age for this group was 70 years old. From the not-a-coincidence department, 70 is also the maximum Social Security age… and comes with the highest monthly payment.

What Do We See in the Average Retirement Age Data?

While setting out to do this research, I noticed that almost all the authoritative sources displayed the same survivorship bias we detailed before our last few measures. If you’re recently retired and are wondering about your peers it’s the correct view, but it doesn’t tell the whole story.

Sure, this post sometimes borders on pedantism. It was worth it, though – here are a few interesting observations from this retirement data:

  • After (attempting) control for survivorship bias, recent retirees have a higher retirement age than all living retirees
  • Healthy retirees worked longer than unhealthy retirees
  • Social Security makes a huge difference in retirement planning (as we’ve seen in our retirement savings and net worth posts)
    • 62 years old – the minimum retirement age to collect – comes up again and again in retiree slices
    • Recently retired healthy individuals most commonly chose to work until 70
Average Retirement Age in America for all Retirees and Subgroups
Average Retirement Age in America for all Retirees and Subgroups

What do you see in the data?

Riding the Market Weather

Bay Area  Economics  Investing  Personal Finance  Retirement  Taxes      by

Picture of Janet Yellen
“Aunt” Janet Yellen, Chair of the Board of the Governors of the Federal Reserve (IMF Photo)

June 29th, 2006.

It was an innocuous day as the stock market was booming in the post-9/11 recovery. The economy was torrid and the unemployment rate was 4.6% in the USA.

That fall, I opened up my checking account with Charles Schwab with their floating-rate free checking account (with no minimums or ATM fees) was paying 4.50% interest. That date was the most recent time the FOMC voted to raise interest rates, settling in at 5.25%. An estimated 36% of the workforce is comprised of millennials, which presumably entered the workforce in the 2005-2006 area at earliest. That means that almost 2 in 5 employees in Wall Street have not experienced a rate hike (probably more considering the young skew of the profession, I’d venture around 45-50%)

I admit it. I am one of the generation who has never been in the workforce during a rate hike. My long term plans, however, are completely unaffected by anything the Federal Reserve does. I am going long equities in a diversified, global portfolio. I am using my salary periodically invest into both my taxable account (more below) and my tax-advantaged accounts like 401(k) and Roth IRA.

How to React to Market Volatility

In short, you don’t.

I’m still chipping away into my investments, despite the graph over here to the right starting to look a< little scary. This is the first time in my career that a little market volatility made a real shock to my net worth. But, would you react differently if the previous month had, instead, the shock on the left?

What did you do here?
What did you do here? (Google Finance)

Looks a little rosier.
Looks a little rosier. (Google Finance)

If it is unclear from the two graphs, the downward graph was from 7/20/2015 – 8/25/2015 where SPY saw a price decrease of 12.18% and the other graph is from 9/29/2015 – 10/16/2015 where SPY saw growth of 8.04%. For those like our friend Allison Schrager who though volatility implies a need to sell at the top, it was perhaps a little disheartening to see the market recover so quickly.

So, did this volatility do anything?

Enter U.S. Code § 1211

Not a new concept to many interested in financial independence but an eye-opener to those who have not seen the advantages before, tax-loss harvesting is a technique used by long-term investors to limit their total tax liability. The intent is to take advantage of short-term decreases to get money back at tax season (or to counteract other gains) and to shift the eventual gains from a recovery into long-term capital gains. This is usually accomplished by swapping very similar ETFs (to maintain the exact same diversification) with each other after a drop to realize a loss.

Example:

You own 100 Shares SPY on 7/20/2015 @ $212.59 each

You sell 100 Shares SPY on 8/25/2015 @ $187.27 each

100 x ($187.27 – $212.59) = -$2,532

You buy 100 Shares VTI (essentially the same ETF) on 8/25/2015 @ $96.95

According to the IRS, this is a loss of $2,532 this year. When the VTI eventually recovers, the optimal tax strategy is to hold for longer than a year so it is realized as long-term capital gains (which are taxed at 0% or 15% as opposed to your personal income tax rate). For example, if you live in California as a single earner making >$90,000: your Federal Marginal Income Tax rate is 28.0% and your CA Marginal Income Tax rate is 9.3%. This means that above ~$21,259 investment and the maneuver pulled will net you (0.373 * $2,532 = $944.44) back at tax season. Not bad!

The cool part about the above is you don’t need to do it when the stocks return. You just wait and hold until they roll into long-term capital gains. Isn’t long-term investing sweet?

Cheers,

Cameron Daniels

Selling Out (Part 2 of 4 on my move to San Francisco)

Bay Area  Debt  Offbeat  Personal Finance  Real Estate  Retirement      by

In Part One of this series, I talked about my overall transition to San Francisco.

In this entry, I’ll talk about some of the stresses involved in moving and cleaning up the personal finance life along with the move. As I wrote about in a series of posts in 2013, I purchased a house in Texas… Lovely carpeted bathroom. Oldest and smallest in the neighborhood: 1994 and 2,100 sqft.

Sometimes I amaze even myself
Beautiful timing

I snagged an adjustable-rate mortgage in May 2013 for 2.50% APR. Boom. (Look at that timing! I predicted it perfectly!)

(Actually, I just got lucky and was giggling as rates were skyrocketing.)

At the time, many were doubting my usage of the ARM, especially with rates so historically low. I was planning on not having to sell for a while but I wanted to secure the better cash flow in my time in the house. Situations change. Within 17 months from the purchase of my house, I had a job offer across the country and I decided to take the plunge and move.

My last day for my previous company in Texas was December 1st. My first day at my new company in California was December 2nd. It was quite the commute! (Thank you, Spirit Airlines… I’m missing that DFW hub).

I flew into San Francisco and it was raining the entire week there and it has barely rained since. (I am not joking.) I still had the house in Texas rented out, though. I had checked Zillow and had gained a bit of equity in my house but I had the house rented out to tenants so I thought I would hold onto it for a while.

Hail broke a skylight. Water heater broke. Dogs ate my fence.

The little annoyances of long-distance ownership started to pile up as I was getting acclimated in a new city in a new time-zone. It was always a delight receiving municipal calls about gas outages and the like at 8am Central time on a weekday.

Later in the spring, the tenants had decided to move on (I had known them previously) from the Texas house so I decided to sell it after checking the market.

Heroes in a half-shell
During the floods in Texas this year, turtles started popping up everywhere – including inside my house.

Could I FSBO from across the country? The answer is yes! One of my friends from my time in Texas had been in the market for houses in the area and was looking for the exact specifications of my house. Hooray for generic 3br/2ba! I put a little bit of money bringing the place up to snuff and then wrote the papers. This is when the joy began…

I met with a real estate lawyer and had him draft up the documents (total expense of $1,000). We sent it over to the buyers and we had it signed the same day. The closing got pushed once and there was some escrow delay due to some confusion at the title company but everything cleared and we’re good now.

Now, I can share with you the numbers of my 25-month housing investment – with everything indexed to $100,000 for a bit of anonymity. Only the purchase price vs. capital improvements, etc. Sorry, not going to reveal some of the rent numbers and cash flow stuff:

  • Purchase Price $100,000
  • Expenses:
    • Air Conditioner $4,105
    • Lawyer Fee – $1,000
    • Repairs $465.78
    • Carpet Installation $1,210
  • Sales Price $110,526

ROA – 2.35%

So, was it a good investment? The keys the above calculations are missing is the rent cash flow and the leverage associated with the investment. It is difficult to calculate an exact ROE due to the many different inflows and outflows – rent payments, mortgage payments, capital improvements, expenses, etc. Most of my estimates have come to between 25%-35% per year during those two years. I took the proceeds, killed my student loans and am now just tossing the rest of the money in stocks now.

I made a bunch of mistakes along the way.

I’m going to have to pay LTCG on the sale of the house because I didn’t live in it as a primary house for 2 years. I started capital improvements I wasn’t able to finish. I underestimated the necessity of an air conditioner in a Dallas August(!).

Overall, though, it was a very positive experience – I loved owning a house and enjoyed the process during both the purchase and the sale. Luckily, I was able to find a purchaser on my own accord and avoid the process with a realtor with having to sell from afar. I didn’t even have to go back for the closing! Although there was a surprising amount of faxing involved…

Come into the 21st century please title companies.

Cheers,

Cameron Daniels

Geographic Arbitrage: Savings Rates and Amounts Saved vs. Location

Personal Finance      by

Globe spun to Europe and Russia

As I’ve mentioned before, I once moved from Texas to California.

With this move came a significant increase in both salary… and cost of living. It led to my savings rate decreasing but my overall dollar savings level staying relatively the same.

Today let’s explore the pros and cons of working in a high vs. a low cost of living area through so called geographic arbitrage. We’ll examine its impact on savings rate as well as overall retirement savings.

Expenses Scale Differently Than Income: You Can’t 8x a Salary Between States

One of the important distinctions that many have mentioned (and I have found to be true) is that income does not scale quite as quickly as expenses.

For example, the difference in $/sqft in a house in Texas vs. San Francisco is roughly 8-10x.

In other words, in order to purchase a similar house in California to my Texas house, I would need to spend eight times what I previously had. (If I could only negotiate an 8x increase in salary to move, then this wouldn’t be a problem!)

Most of you will find that the differences in salaries do not entirely close the gap. Other things are also more expensive in California too:

  • Groceries
  • Gasoline
  • Entertainment venues
  • Taxes

All of these are higher, or generally scale with the cost of housing here. These expenses are not easily made up in salary.

Savings Rate isn’t The Whole Story: When Dollars Saved Matters

We talk about savings rates here on DQYDJ often – ideal savings rates, magical savings rates, and even track our own savings rates.

For those who have a decent savings rate – or better – the fact that income scales less than expenses is actually not that big of a problem.

Let me illustrate with an example (fictional numbers, all):

Low cost of living state:

  • Salary: $50,000
  • Expenses: $25,000
  • Savings: $25,000
  • Savings Rate: 50%

High cost of living state:

  • Salary: $70,000 (40% increase)
  • Expenses: $37,500 (50% increase)
  • Savings: $32,500
  • Savings Rate: 46.4%

As you can see from the example above, your salary may increase by a lower percentage than your expenses yet your overall dollars saved can still increase. It didn’t matter that your overall savings rate went down because the increased salary was such a dominant number.

This is the scenario that I found myself in: my expenses scaled at a higher percentage than my income but I saved way more absolute dollars.

Savings Percentage vs. Absolute Dollars Saved

Over much of the blogosphere, savings rate is the most important metric.

Fair enough – it gives a sense for how much you are spending in relation to how much you are saving for retirement. Well… fair enough if you plan on staying put exactly where you are in retirement.

If you wish to stay fixed in location, then savings rate should be the most important metric to determine your retirement ability.

I, however, see all the dollars in my retirement account as fungible. I’m trying to maximize the total number of dollars I can save so I can pick and choose where to go when I decide to retire.

For example, you can save a smaller portion of your salary with a higher dollar tag in a high COL area. If you then move to a low COL area immediately on retirement, your expenses will drop as well, making it even easier for you to live.

Geographic Arbitrage: Saving More Money at a Lower Savings Rate

If you are not specifically tied down to an area, the absolute maximum number of dollars you can save is the best health indicator for retirement. You need to estimate how far your stash can take you in the palce you eventually want to move.

After all the calculations, your dollar figure in your portfolio relative to your expected expenses are the numbers that matter the most to your financial health.

How quickly you get there – or how securely you can control your finances – depends on more than just your savings rate.

Taming Your Spending Per Decade

Personal Finance      by

My cowriter and I briefly discussed (verbally, not through some sort of electronic medium) how spending can be roughly modeled by looking at it from different perspectives – one of the key ones being “how old you are”. Enter today’s topic: spending per decade.

Even though many pieces of advice are specific, it’s the concepts which can be applied elsewhere – a 30 year old buying a house is going through a different thought process than someone buying her first car, but they should be drawing from the same bag of financial tricks.

That said, here’s what I felt was the biggest spending per decade for a typical North American.

Spending per decade: Picture of a clock
This vaguely reminds you of spending per decade right?  Clocks and everything?

Teenage Years

Is there really a question?  In your teens, it’s all about controlling those higher education costs.

As college has become something of a “rite of passage” for the American middle class, lots of teenagers are ending up in college by the end of their teens.  Now, we’re spilled lots of digital ink on whether that’s a good thing (in the right circumstances, of course it is!) – but it can also undoubtedly be an expensive thing.

Controlling education costs is probably the best way to get ahead, financially, in your teens.

20s

Although some of you are in the home buying process by your 20s, the biggest spending will likely be lifestyle.  Eating out, going out and the like – but also transportation.  Sure, there’s a stereotype about Millennials and not owning cars (or even having licenses), but c’mon – lots of Millennials, our current generation-in-their-20s, own cars.

So control that lifestyle inflation and you’ll be well on your way.  And don’t overspend on a car…

30s

In your thirties, it’s all about the house.  It’s tempting to think your income will still rise like it did in your 20s… but as we’ve shown in recent articles, it starts to level out in your late 30s for both females and males.  Don’t overshoot your income curve and buy a house you can’t afford.

Luckily, homes do tend to appreciate in value (or at least the land they are situated on appreciates in value) – at least enough to match inflation.  If you sit on your home long enough, you may have some of that forced savings working in your favor – but remember to be smart going into the purchase to keep stress levels down in the meantime.  Remember that most of you will be paying for the house into your 60s.

40s-50s

There might be another large post-secondary educational expense in your 40s or 50s on your grown children – now it’s time to look at educational spending from the other side.  First, how will this affect your finances – is there any way to minimize the damage?  And, second, how can you help your son or daughter manage whatever debt is coming from school?  Keep it modest, and you’ll both be ahead of the game.

Second, your income may not be appreciating at the same rate as it did in your 20s, but you certainly should be saving money for retirement at quite a clip.  This is the time to double check the funds you are in and your asset allocation – you can easily lose more than a few new-car values in inefficient funds which don’t do much more than track an index, or even lose out by being too conservative.  Be careful here!

60s+

Your 60s is the traditional time for retirement – so, yes, that is the typical largest expense.  Make sure you fully understand your desired lifestyle, and look into whether your current assets can support what you’re looking to do in retirement.  Unlike some of the mistakes you can make in the other decades, it’s harder to make up for lost time in your 60s.

Of course, if you are retired, it’s possible to reduce your expenses as well to better fit what your assets can support.  That might mean toning back your expectations on lifestyle, but it’s better to be ahead of the game – because no one knows exactly how long retirement will last (hopefully a long, long time!).

Spending per Decade: It’s All Relative

All of those decades, and the advice is the same – carefully weigh the cost/benefits versus your resources of all of your decisions and you’ll do fine.  If you err on the side of caution, you’ll be in much better shape than the majority of North Americans by the time you hit your 40s, 50s, or 60s – and isn’t a relatively (financial) stress-free life past 40 something everyone wants?

My Retirement Asset Allocation

Investing  Personal Finance  Retirement      by

Over the Thanksgiving weekend, I decided to play around with Morning Star’s X-Ray tool. The tool takes your entire portfolio and analyzes the asset allocation by geography, by risk level, by asset class as well as by type (growth vs. value, etc.). Here is what my current asset allocation across my portfolio is (asset type):

  • 39% Domestic Stock
  • 50% International Stock
  • 8% Bonds

Geographically:

  • North America 48%
  • Latin America 2%
  • UK 9%
  • Europe Developed 18%
  • Europe Emerging 1%
  • Africa/Middle East 1%
  • Japan 8%
  • Australasia 3%
  • Asia Developed 5%
  • Asia Emerging 4%

Initial thoughts are that I’m surprised how much exposure to Japan I have and how little to Latin America in comparison.

In Defense of Risk

At my current age and time until retirement, I am well-positioned to take on additional risk. Thus, I am targeting a 95/5 stock/bond split and a >50% International allocation in my stocks. I should be able to handle huge downswings (I’m thinking >40% in two years is within the cards at some point in my working career) and not jeopardize my retirement assets.

See my colleague PK’s asset allocation here.

How does your allocation compare?

Cheers,

Cameron Daniels

September 2014 Goal Assessment

Debt  Personal Finance      by

At the end of last year, I stated that I wanted to pay down ~$34,000 in consumer debt (outside of my mortgage). I am writing today to report on both a level of success and a switch in strategy.

How am I faring?

In short: decently.

I am not currently on track to hit my $34,000 this year. As of today, September 17th, I have ~$16,000 left to go. I want to revisit the reason behind my goals and update about how my strategy has changed.

My colleague PK and I both have similar opinions about the stock market and liquidity in general at this point in our financial lives…. It is time to de-leverage!

Freeing up cash-flow for me triggers a similar positive reinforcement mechanism as building up equity in a house or even purchasing investments. On the other hand, I am young enough to appreciate the time value of money and look for more ways to leverage current net worth into future gains. For this reason, I have prioritized maxing my 401(k) contributions for the year above paying down this debt.

Taxes, Taxes, Taxes

There is an annual $17,500 contribution limit for employees to their 401(k). This is the same for everybody until the age of 50 when you can make “catch-up” contributions of $22,500.

The major point of me writing this: your opportunity to contribute expires each year. Thus, if I go under by $5,000 on contributions this year, I will be unable to make it up next year. Since my debt is relatively low-cost (4.75%), I am prioritizing the the stock market and the tax savings of the 401k over paying off student loan debt.

Past performance is not an indication of future results, but so far this year I’ve done well- my return is beating the S&P 500. I am heavily into foreign equities at this point.

The Trifecta

I feel a bit guilty switching up my plans mid-year but I felt I needed to be honest about my goals and my results. I don’t feel I can complete the trifecta all at once. Add onto this a major renovation (~$4k) of my master bathroom and I still feel proud of most of my accomplishments. My trifecta in order of importance:

  1. Roth IRA $5,500
  2. Traditional 401(k) $17,500
  3. Consumer Debt $34,000

So far, I have paid off:

  1. Roth IRA $5,500
  2. Traditional 401(k) $5,800
  3. Consumer Debt $18,000

Only 3 1/2 months left to go, it is going to be tough to hit these goals but I am remaining steadfast!

Cheers,

Cameron Daniels

FICO is a Corporation

Debt  Personal Finance      by

Much has been written about the recent change in the FICO scoring system from both mainstream media and personal finance blogosphere.

Using my compelling inside information and incredible subject matter expertise, I can insist that it will not make much of a difference.

What?  Huh?

First, a little background. Fair Isaac (FICO) is a publicly traded company (trading under, intelligently, the ticker symbol FICO) that sells credit scores to companies.

Picture of a Credit Card Machine
Meet the new credit worthiness! Same as the old credit worthiness!

Credit Bureaus (the major three of which are Experian, TransUnion and Equifax) are also publicly traded companies that keep information that they provide to companies. What is their product? They sell information about you provided by some banks to other banks so that other banks can intelligibly determine whether to extend a line of credit to you.

Understand this: they are not government entities. Credit bureaus are publicly traded companies trying to make a profit using you as the product. Companies often use FICO (a product of Fair Isaac, remember) in conjunction with the scores provided by the bureaus themselves and their own internal, proprietary models to either determine your rate or to make decisions on whether they are willing to extend credit.

Get That?  FICO is a Product SOLD to Banks and other Institutions

Every few years, Fair Issac comes out with a rehash of their FICO credit scoring model. It is very often a very similar (to older products) tweaking of the variables that determine creditworthiness. For example, in a new model versus an older model, adding an inquiry to your record might cause your FICO to drop 2 points instead of 1.8.To the average consumer, this is 100% meaningless. The core tenets of personal financial discipline remain the same:

  1. Keep utilization low
  2. Pay on time
  3. Don’t charge off
  4. Don’t revolve
  5. Pay off all your credit cards
  6. Don’t carry a balance.

The Obvious Conclusion

That’s right: I just wanted to iterate that Fair Isaac themselves have a very obvious incentive to overplay the differences between versions of their models… marketing.  Convincing people that the newest model is vastly superior to the old models makes banks want to change the version of the FICO product they purchase and license!

Banks can still purchase an older FICO model for cheaper and the more FICO overplays the changes, the more they are able to sell the product at a heightened price (Brand New! Up to date credit scoring system! Now for only $9.99!).

The takeaway: not much has changed and it still does not mean much (if anything at all) to the end consumer.  Think about that the next time you see a blog talking about the huge benefits of the ‘new credit scoring model‘ – it’s the same as talking about any other new product, except for the fact that consumers aren’t the ones buying it.

They are… in a way… the ones selling it.

 

Cheers,

Cameron Daniels

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