Actually, not one ETF, but two! Or more! How can there be a need for a new ETF? Aren’t there enough already? Earlier this year, Motley Fool argued there are too many ETFs (1,929 at that time, probably over 2,000 by now) and they are covering pretty much every thinkable (and unthinkable) benchmark. Soon we might have more ETFs than publicly traded equities in the U.S., how crazy is that??? Why would I propose a new ETF that doesn’t already exist?
Here’s some background. I’m an index investor at heart and I like tax optimization. For so many years now, I’ve held equity index ETFs and Mutual Funds in both taxable accounts and tax-deferred accounts (both retirement and deferred compensation at work). It’s so painful to see the dividend payments in the taxable accounts getting taxed every year. Sure, it’s only about 1.9% dividend yield in the S&P500 right now but for us, that’s taxed at 15% federal, 10+% state (California!) and 3.8% Obamacare tax, for a total of almost 30% marginal tax! Isn’t there a better way? Sure! Simply put the taxable equity allocation into stocks that pay zero (or close to zero) dividends and keep the high-dividend stocks in the tax-deferred account where they can compound in peace and be taxed only once upon withdrawal rather than every year along the way! So, the two ETFs that I wish existed would exactly replicate the S&P500 if held in equal shares. But individually they’d have non-index weights and one would hold the equities with the lowest dividend yield and the other with the high-yield equities!
Notice that most folks already do this tax optimization across asset classes: Hold the tax-inefficient asset classes (bonds, REITs, etc.) in tax-deferred accounts and equities in taxable accounts. So, why not do this within the equity asset class as well for additional tax efficiency? How much extra after-tax return would we get out of this? Let’s look at the numbers…
Continue reading “Here’s an idea for a new ETF”
Welcome! We hope everyone had a very Merry Christmas! Between the holidays when we are all still digesting all the excess calories there’s probably less demand for heavy-duty safe withdrawal rats simulations, so let’s do something on a lighter note today. I have always been wondering, what is it with MMM? Mr. Money Mustache started it all, of course. Now we have Mad Money Monster, Millenial Money Man, and Miss Millenial MD. Am I forgetting anyone? Even some obscure corporation up North, Minnesota Manafucaturting & Mining, jumped on that same MMM bandwagon, no doubt to leech off Pete’s fame. Obviously their lawyers were smart enough to put the label “3M” instead of “MMM” on their little post-it notes packages, otherwise, they’d probably get a nasty letter from the lawyers in Longmont. OK, just kidding about 3M. But still, it got me thinking, if I hadn’t picked “Early Retirement Now” as the blog name what would I have picked in the MMM universe? Easy!
Mr. Millionaire Math!
That seems to convey the essence of the blog pretty nicely, don’t you think? I also got a nice project for Mr. Millionaire Math: How much (or how little) effort and how much time would it have taken to become a millionaire by now? We’ll do some (light!) number-crunching on that topic today. And I’ll throw in some last-minute, end-of-the-year smart-money moves as well…
Continue reading “Meet Mr. Millionaire Math! (Plus Three Year-End Smart Money Moves)”
Welcome back to the Early Retirement Now blog! I hope everybody had a safe and relaxing Fourth of July holiday. And if you don’t live in the U.S. and had to go to work yesterday we hope you had a nice Fourth of July, too! We are currently on vacation in Paris and I am sure even here I smelled some barbecue in the air yesterday, so folks seem to celebrate worldwide!
In any case, as we detailed last week, we plan to rent during early retirement, at least in the beginning. But even if and when we buy a house we’d likely pay cash and forego the mortgage deduction. Won’t we miss the deduction? Probably not! We found a few reasons to really appreciate this tax deduction but also two very bad reasons. Let’s start with the bad reasons! Continue reading “Good and Bad Reasons to Love the Mortgage Interest Deduction”
Last week, I read a nice post on Chief Mom Officer on the challenges of calculating savings rates. Right around that time I was also revisiting our 2017 budget and the projections of how much we are going to save this year. This is the last full calendar year before our planned retirement in early 2018 and it’s imperative that we stay on track and keep a high savings rate on the home stretch. But how high is our savings rate? Is there even a generally accepted way of calculating a savings rate? What are some of the pitfalls? We were surprised about how easy it is to mess up a calculation as seemingly trivial as the savings rate.
Continue reading “You want to know our savings rate? Which one?”
We are homeowners with a pretty sizeable mortgage but we also accumulated a nice retirement nest egg, which is actually many times larger than our mortgage. Even our taxable investments are several times larger than the mortgage. Still, we don’t pay off the mortgage because we like the benefit of leverage. We have a liability with a low-interest rate and assets with a much higher expected rate of return, so our overall expected rate of return is higher than without a mortgage. Our friend FinanciaLibre (now a defunct site) did some nice number crunching on this topic recently and we agree wholeheartedly.
Moreover, if you follow our blog you’ll also remember that we take a pretty dim view on bonds:
So, personally, we skip the bond allocation altogether. Others have written about this, too, check Physician on Fire’s 2-part guest post here and here. In light of all of this, here’s one question that occurred to us:
Why would anybody have a 30-year mortgage at about 3.50% and a bond portfolio currently paying around 1.8 to maybe 2.5% interest for safe government bonds?
Leverage works only when the asset has a higher expected return than the liability!
Continue reading “Why would anyone have a mortgage and a bond portfolio?”
There is a popular car insurance commercial featuring someone who “just saved a ton of money by switching to GEICO.” How much is a ton of money? $400? Well, by that measure we just saved more than “100 tons of money” or a whole century worth of car insurance savings. And we didn’t do so by switching, but by not switching our brokerage account. Ka-Ching, how easy was that? Continue reading “We just saved $42,000 by not switching to Betterment”
Tax Loss Harvesting is the rage now. Robo-advisers do it for you, and every DIY saver should seriously consider the benefits. Let’s look at what Tax Loss Harvesting is, how and why it works and how large (or small) the expected benefits can be. Continue reading “Tax Loss Harvesting: what is it and how large is the expected benefit?”
Running some income tax scenarios for when we finally retire in 2018, we ran into a situation where our ordinary income would be taxed at a whopping 30% marginal rate on our federal return, despite having a total income of “only” around $100,000 (married filing jointly). How is that possible? There is no 30% bracket, only 10, 15, 25, 28, 33, 35, and 39.6%. Moreover, the 30%+ rates don’t even start until $231,450 taxable income for married joint filers, right?
Wrong! Continue reading “That sneaky 30% Federal Income Tax Bracket”
Some people argue that there is a rule of thumb for which account is more attractive when saving for retirement (both early retirement and “normal” retirement). Jeremy over at Go Curry Cracker likes the 401(k) and is skeptical about Roth IRAs, while someone on Kiplinger recently recommended the Roth and trash-talked the regular 401(k) in light of higher projected future tax rates. Who is right? Nobody. There are likely no universally true answers to the following (and many other) questions:
- Taxable account vs. Roth IRA?
- Roth 401(k) vs. regular 401(k)?
- After-tax 401(k) contributions or a taxable account?
- Should I invest in a high-fee 401(k) at work or a low fee taxable account?
- What is the drag in after-tax returns from having to pay taxes on dividends throughout the accumulation phase?
- If you have a lot of money to invest and already max out the regular 401(k), should you shift more money into a Roth 401(k), to get more “bang for the buck?”
- Should I roll over an IRA to a Roth IRA?
- Should I use a deferred variable annuity to boost tax-deferrals?
- Pay down credit card debt first before saving for retirement?
It all depends on the individual situation, tax rates, expected return assumptions, account fees/expense ratios, etc. The only way to tell which account is more attractive is to get out the spreadsheet, punch in your particular parameters and compare. But how do you do that? Others did it before but sometimes we have the feeling they compare apples and oranges. A Roth 401(k) is best because you can withdraw tax-free? Not necessarily because you have to take into account the taxes you pay upfront when contributing to the Roth IRA.
We came up with an easy way to make sure you compare apples to apples to gauge the relative attractiveness of different accounts. Continue reading “The ultimate retirement account comparison in one single Google Sheet”
I remember recent posts by Plan Invest Escape and Slowly Sipping Coffee about bad advice from the experts, the so-called financial planners. The post itself and the comments from others about bad experiences with advisers can really raise your blood pressure. But you don’t even have to hire them. Sometimes just reading their posts online is enough to expose the empty suits. One of those nuggets was on Kiplinger (via Yahoo! Finance) today on why, ostensibly, the 401(k) is not a good option to save for retirement Continue reading “Why we don’t trust financial planners: a rant”