Financial Well-being

Compounding benefits of tax deferred contribution to plain old 401(k) or traditional IRA for higher bracket young earners is phenomenal. Think of deferred tax dollar as equivalent to a interest free money we are allowed to keep and invest . The magic of compounding on this interest free money could be as much as 3 times matching bonus  at retirement time for every dollar contributed  in 401(k) during typical 44 yrs of working career of a young earner. Wondering as how is it possible?  Let me illustrate it through an example. Say, 20-something new earner is in higher tax bracket (any earning above 50K is 22% bracket for single filer) earning 60K+. If this young earner defers taxes on the 10K higher bracket income by diverting that amount to 401(k), those deferred taxes would translate into 2200 tax dollars (let us call it "x") interest free loan from Uncle Sam. With 80/20 stock/bond allocation of funds, one could expect to have 6.5% long term annual return. The "x...

Every time our patience in buy-and-hold approach starts shaking due to emotional pain of loss during above turbulences, perhaps we need to remind ourselves that stocks are always volatile, but market eventually always recover. Several studies have proved that those who tried to time it have eventually lagged  the non-timers. I have seen over 30 pullbacks, 12 corrections and 2-3 bear markets in last 3 decades of my investing in stock funds. If I had tried timing all of these, my portfolio would have been perhaps just half of what it is. If we want to learn from history (all the best if you want to learn from your own mistakes of market timing), following chart might help in broadening our perspective about these short-lived pains ,which otherwise might seem quite long-lasting (without such perspective)

After-tax contribution limit for 401(k) and IRA(s) accounts are quite different.  For IRA(s), total combined  limit for IRA for deductible+non-deductible+Roth IRA(s) is $6000 (7000 for 50+) for 2021.  For 401(k), the combined limit of pre-tax, after-tax and employer match is $58000 for 2021. Based on above combined  limit, one can decide as what max after-tax amount makes sense to one.  Wondering as why would one bother to contribute after tax money? It's when one has maxed out before-tax contribution limit and does not qualify to contribute to Roth due to higher income. One can later convert this after-tax money to Roth. I will point to more details as I read following article in detail from a well-known authority on retirement planning: https://www.kitces.com/blog/irs-notice-2014-54-acquiesces-on-splitting-after-tax-401k-contributions-for-roth-conversion/

Are you frustrated with negative  YTD return of bond fund such as iShares iBoxx $ Invmt Grade Corp Bd ETF (LQD) and considering bailing out? If so, think twice  before bailing out. Bonds follow a pattern. Most of negative  return years are followed by oversized  return during subsequent year as seen below in year by year performance of LQD etf. So having little bit of patience could be your best friend when it comes to investing in bond funds. When held for 2 years , performance tends to revert to median  return.

Index based etfs are in general highly tax efficient as compared to it's mutual fund counterpart. It's because ETFs rarely generate any capital gain , even when index's underlying appreciated security is being replaced by another security. For example, VTI has not distributed any capital gain for it's 20 year's history, even though it has produced above 10% annual return during above period. Even during 2019 March selloff, there was no realized capital gain. For taxable accounts, it's better to own etfs than mutual funds, as taxes on deferred capital gains are deferred in etfs. Also, unlike mutual funds, there is no huge realized capital gains from other investor's panic selling during sharp downturn. There is no real outflow in case of etfs. Sellers sell shares and buyers buy them. Underlying securities remain unchanged .

Last month I re-financed our two fully paid cars with low 1.5% fixed rate for 7 years term from local credit union (DCU). For now I have parked this cash out into VTEB tax exempt muni bond fund. Going forward, I am planning to periodically (monthly) exchange this money from VTEB into Total Stock index fund ( VTI ) during next 16 months. I am hoping to dollar cost average in next 16 months and perhaps come out ahead in terms of timing (hopefully with some buy on low during some market correction in next 16 months).

Most of our emergency funding money is invested in muni fund called Vanguard Tax-Exempt Bond ETF (VTEB) . It's exempt from federal income tax. It's least expensive (0.06% expense ratio) muni ETF and contains highly diversified  investment grade national muni bonds. It's weighted coupon is excellent  (4.70%) and weighted duration is intermediate (hence less inflation sensitivity). It's federal tax free annual total return has been above 3%  since 2015 inception date. I have been lucky to get 5% annual return during last 3 years since I started investing in it. It's based on broader S&P National Municipal Bond Index.

That seems to be main focus of scholar Bengen's 4.5% Safe Withdrawal Rate research. It covers edge case scenario for retiree who happen to retire couple of years before worst possible crashes (or inflation) such as one in 1969-1979 or one in 2000-2010 decade.  If one is lucky enough to escape such scenario, they wouldn't need such $660K kind of retirement portfolio to survive 30 years. They could manage with half million portfolio itself and start with 6% initial withdrawal to meet 30K annual expense. BTW, scholar Bengen's original 1994 research was based on starting  with 4% withdrawal and then adjusting every year with inflation. Later he revised it to 4.5% based on assumption that (a) one invests into Total Stock (which includes small caps too) as compared to original study's  S&P 500 and (b) that one's withdrawals are reasonable to the point that most of it is taxed minimally.

Wondering as how much one needs to save in retirement portfolio to retire comfortably starting with one's early sixties (say at 62 age) for next 25-30 years of joint longevity and be lucky enough to survive  extreme uncertain period such as 2000-2010 lost decade (with two major crashes resulting in virtually zero compounding )?  Needless to say, it all depends on household's ongoing expenses during retirement.  If one retires at 62, one can collect reduced social security pension (say 75% of full 67 age benefit). Non-working spouse can also collect half amount as spousal benefit at 62. Combined household reduced  benefit could be around 25K to 30K a year for professional workers like us. If household's annual expenses, including medicare/affordable-care health insurance co-premiums/copays (typically 5-6K annually for retired household for routine care) are in 60K range, then perhaps one needs additional income of 30K to 35K beyond social security pension. If one ha...

https://finance.yahoo.com/news/way-convert-401-k-pension-223434278.html 2019 Secure Act makes it very easy (aka safe harbor) for 401(k) providers to offer expensive  annuity contracts within 401(k) plan. So, more and more 401(k) providers are likely to start capitalizing (collecting origination fee/commission  from insurance companies) such annuity insurance product offerings. However, as savvy investor, we should keep an eye on the hefty expenses of annuity products and choose our options wisely. For example, one cost-effective  option to increase guaranteed income is to postpone  taking social security benefits and, as a result, collect additional annuity income  through increased social security benefits itself. Using such simple approach, one can easily avoid  2-3% annuity related expenses every year. Above kind of annuity  offering from 401(k) plans is expected to provide no remaining legacy value at death , while the Safe Withdrawal Rate  ap...

Last updated: May 25, 2022 While researching for alternate penalty free option in inflation protected treasuries called TIPS , I came across one excellent ETF called PIMCO 15+ Year US TIPS Index ETF (LTPZ) . Above inexpensive long duration TIPS ETF has produced top notch long term return. In fact, it's almost two to three times  that of Total Bond index. Source: Morningstar Performance Tab As an active fund, it has outperformed even standard TIPS index too. LTPZ outperformance comes at cost of more volatility than it's index. For example, it's standard deviation (measure of volatility) is almost 3 times of it's index: Source: Morningstar Risk tab When risk is taken out of the equation, the strategy's absolute performance looks more positive . On a 10-year basis, it has beaten  the category index on an annualized basis by 2.4%. So my advice for investors would be to ignore volatility in short term and give it two years of time . It's lik...

  If one's retirement portfolio is more than 22 times of their net retirement expenses (net is after adjusting for social security income), such retiree in essence has overfunded portfolio. If portfolio is 50% or more overfunded (say more than 33 times of one's net retirement expenses), such retiree does not have risk of running out of money, even if faced with significant portfolio drop during initial years of retirement. This allows such retiree capacity to go for more calculated risk such as potentially all stock portfolio without worrying about outliving their portfolio. Following excerpt from above referenced Bengen safe withdrawal study illustrates that decently overfunded (say 50%-100% overfunded) investor could potentially accrue several times of initial portfolio value if they are willing to leverage their capacity of 100-percent stock portfolio: "Can you imagine how much wealth would have accrued to an investor who had a 100-percent stock portfolio o...