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Archive for December, 2008

2009 Tax planning

December 29th, 2008 at 06:18 am

As the year draws to an end it's time for a little 2009 tax planning. We are not planning any major changes unless we get pregnant with #2. If that happens early in 2009 we'll have to make some substantial changes, but as my dad likes to say, we'll burn that bridge when we get to it.

In 2008, we did a fair amount of jumping around with our retirement contributions, initially starting out very low, then increasing them as the year went on. My goal for 2009 is to keep a more "averaged" path, so we are setting my wife's 403b contributions to approximately 25% of gross. I am again planning to max out my SIMPLE IRA. Since the 2009 max has gone up to $11,500, that equals out to $442 every 2 weeks, or about 14% of my gross. Together it comes out to around 17% of total gross, with everything going in pre-tax. This is about the same as what we did last year on average.

We will probably not max out our Roths this year because the above strategy keeps us very close to the top of the 15% tax bracket. If we wanted to fully fund the Roths we would have to cut back on our pre-tax savings, and those Roth dollars would be taxed at 25% going in. We plan to put about $2K into the Roths this year, which could end up being either college money for our daughter or retirement money, depending on how things go.

Additional extra cash flow will go towards paying down our HELOC so we can keep our 6 month emergency fund in place.

Of course, if #2 will end up being born in 2009, the extra exemption will allow us to contribute less pre-tax and still stay in the 15% bracket, so the Roth contributions would get adjusted upwards. The extra $1K child tax credit wouldn't hurt either.

Retirement Investing Strategy

December 22nd, 2008 at 12:11 pm

I wanted to go over my investing strategy, since it seems a little unorthodox (but really isn't). My wife and I follow Scott Burns' 10-speed portfolio. Mr. Burns (a finance columnist for the Dallas Morning News and USAA) is more famous for his Couch Potato portfolio, which is equal parts Total Stock Market index and Treasury Inflation Protected Securities. Since this is 50% bonds, it is a bit conservative for me (although ironically it has outperformed the S&P 500 over the last 5 years).

Luckily, Mr. Burns has created more complicated versions of his CP portfolios, with equal parts of different asset classes, up to the Ten-Speed, which has 10 equally-sized different "blocks" in it. Here is the breakdown of the Ten-speed:

Block 1: Domestic total stock market
Block 2: Treasury Inflation Protected Securities
Block 3: International total market
Block 4: International bonds
Block 5: REITs
Block 6: Energy
Block 7: Large U.S. value stocks
Block 8: Small U.S. value stocks
Block 9: Emerging markets
Block 10: International value stocks

The reasons I like this portfolio:

-It is aggressive. With 80% equities, it fits my risk profile. In my case, I slightly modified Block 4 to use International Inflation-Protected Bonds, so all my bonds will keep up with inflation. I see inflation as a big problem in the future with all our government's pending obligations. The only real way to fund these obligations will be to print lots of money, which causes inflation.

-It is simply to implement and maintain. Simply total your portfolio, move the decimal point one digit to the left, and you've got your allocation in each block. Rebalancing is just as easy.

-It can be very cheap to own. I use Vanguard funds and ETFs whenever possible. Because of this, the average expense ratio for my portfolio is around 0.50%. I have read numerous studies that the best indicator of future performance is low expenses. Almost all of the 10-speed blocks are available as index funds or ETFs, which makes it relatively easy to find cheap choices for the blocks.

-It is diversified. With about 27% in large cap US stocks, 13% in small cap US stocks, 20% in international stocks, 10% in emerging markets, 10% in REITs, and 20% in inflation-protected bonds both here and abroad, it is not concentrated in any one asset class. This meshes nicely with David Swensen's investing strategy. Swensen is the incredibly successful manager of Yale's endowment, which has returned over 15% a year for the last 10 years. Swensen does not advocate holding large portfolio holdings in any one asset class.

The one thing I don't like about this fund is that it can require a lot of money to fund the minimums on 10 funds. Since our retirement accounts are split between 4 different accounts, we couldn't have 10 funds in each account and still make the fund minimums. The way I have gotten around that is to spread the 10 funds over 3 of the accounts. The 4th account is a 403b which has limited fund choices, so I use a more traditional asset allocation there. Once we've gotten large enough balances built up in the other 3 accounts, I plan to institute 10-speed portfolios in each one, which will make management easier.

For more information, see:

First time here

December 19th, 2008 at 12:20 pm

Well, I've been posting for awhile in the forum, so I thought I'd try my hand at blogging, since so many people seem to love it so much. I guess it can be kind of carthartic in a way.

To start off things so everyone is on the same page, I thought I would summarize my financial mindset:

1) Minimize unnecessary lifestyle expenses. This does two things simultaneously: make saving easier, and reduce the amount you need to retire on. My wife and I are pretty frugal people. We don't eat out a lot, indulge in mindless consumerism, or have many expensive hobbies. I do like to golf but I do it so rarely (and poorly) that it can barely be considered a hobby. Before our daughter was born we skiied a few times a year, and will probably continue to do that in the future. We drive older vehicles and are trying to get a good amount of life out of them. I work from home and my wife commutes only a mile or two so we don't put a lot of wear and tear on our vehicles. I am hoping to get 10 years out of them.
2) Splurge on things that matter, but pay cash for them. For one, we love to travel. It isn't as easy as it used to be with a young child, but we still manage to fit in 1 or 2 major vacations and a few long weekends a year. We save up for them all year long and pay cash when it's time to go. Technically we use a cashback credit card and then pay it off when the bill comes in. We love watching movies, so I "invested" in a low-end but functional home media center in our basement. Of course we paid cash for all of it. We don't go out to the movies nearly as much now that we have a kid, so this is the next best thing.
3) Save aggressively for retirement. I'd love to retire early, so I have tried to make retirement savings a priority, more so in recent years. My wife and I both took time off of working when we were younger to get master's degrees, so we started a little late. In addition, we didn't save much the first couple of years after we bought out house. But we've tried to make up for that the last few years, saving more than 20% of our pay yearly. That includes maxing out my SIMPLE IRA, putting about 10K in my wife's 403b, and maxing out 2 Roth IRAs. Our investments are about 80% stocks and 20% bonds, because I feel that 100% stocks is not going to get you that much higher return and is going to make for a rough ride along the way.
4) Use debt judiciously. I haven't followed this rule as well as I've liked. We don't carry credit card debt month to month. Our cars are paid off. Student loans are a thing of the past. We do have a mortgage, 2nd mortgage, and HELOC. The 2nd mortgage was part of the financing when we bought our house and is about 1/2 way paid off (it was a 7-year loan). The HELOC was supposed to just be for emergencies but I decided this year to take a large chunk out and put it in a savings account in case the bank decided to freeze our line. The rate is prime minus 1/2, currently 3.5%. Our savings account pays 3.75% so we actually make a little money doing this. My goal is to leave the savings account alone, giving us a sizeable (6-month) emergency fund, and pay down the HELOC over the next 3 years.

Well, that's the meat of it anyway. I'll be posting more detail in later entries. I don't want to give it all away now, or I'd have nothing to talk about!