Social Security Is My Bond Portfolio

My Dad is an Investor.  I say Investor with a capital I because I remember him studying investments in his home office (aka my brother’s former bedroom) for hours when I was a teenager.

He’s the first early retiree I knew.  So when he shared a bit of his investment philosophy with me, I listened.

In spite of being in his late 60’s at the time and retired with no significant pension, he continued to be invested very aggressively and held very little of his investments in bonds.

He said Social Security was his bond portfolio.

This approach worked well for him.  He’s now in his late 70’s and running out of money is not even possible (he was also the first frugal person I knew!).  Though he recognizes he would have been better off investing in index funds and saving the hours he pored over investment reports.

I’ve followed in his footsteps on many things and I’m following him on this one too.

I’m also invested very aggressively.  I’m 80% invested in the stock market.  More than half of my investments are in a single fund–Vanguard’s total stock market index fund (VTSAX) or an exchange traded fund that is very comparable to VTSAX.  I have about five years’ living expenses in banks and money funds and a tiny bit of bonds.  This cash helps me feel comfortable with my large exposure to the stock market–I shouldn’t have to sell stocks in a major downturn.

There are two primary reasons I’m not invested in bonds.  One is the stabilizing force my future social security payments have on my portfolio.  The other is the inherent risk long-term bonds have in the current, low interest rate environment.

The Social Security Administration tells me I should receive about $2,500 a month plus future cost of living adjustments when I reach my full retirement age of 67 (login to SSA.gov to check yours).  The actuarial tables tell me I should live to about 86 so I should receive 19 years of payments before I’m done.  The present value of those payments is over $400,000.  So I can say I have $400,000 invested in bond equivalents.  Only Social Security is even better than a bond because it escalates with inflation.

Some of you would say I shouldn’t count on receiving Social Security–the fund is running out, future contributions won’t support payments etc.  Our elected representatives will need to pull their heads out of the sand and make changes so the fund is sustainable.  Though I’m confident these changes won’t affect me significantly, I include only a reduced payment in my long-term plan.  Here’s one time when being older is a good thing–our elected rep’s aren’t likely to muck with a (voluntarily) low income baby boomer’s retirement.  We vote and being a baby boomer makes me sound even older than I am.  It won’t hurt that Mr. Ms. Liz is 8 years my senior–there’s no way they’ll be mucking with his Social Security.

Traditionally, bonds have been a low risk/low reward investment.  They act as a stabilizing force on a diversified portfolio.  Their value doesn’t tend to swing much and their value often goes up when stocks go down.

But, with interest rates currently at historic lows, I believe there are significant risks in the bond market.  A general rule of thumb is that for every 1% increase in interest rate, the value of the bond decreases 1% for every year of maturity.  If I paid $1,000 for a bond that matures in 10 years, my bond is worth only $900 if interest rates go up 1%.  With bonds paying about 2% today, the potential decrease in bond value seems to me like significant risk without adequate reward.

I prefer to invest almost fully in the stock market.  I expect sometimes scary volatility but I expect to be rewarded for the risk I am taking.

What do you think–is my Social Security as bond approach crazy?  How do you factor Social Security into your financial plan?

 

Investing is risky, this reflects my opinion and is for informational purposes only.  Proceed with caution, do your research and seek professional advice if necessary.

The Power Of One Word

I just got back from a mountain bike ride.  It’s one I do regularly because it is a good lung buster that helps me get in shape.  But I haven’t ridden this trail in six months.  Our desert trails are much flatter and I’ve only been back at altitude for a week.  So it felt really hard.  I got to the top without taking any breaks–though I felt like I might puke.

I know exercise is good for my body and my brain.  But getting out and exercising regularly doesn’t come easy for me.  And I’m especially bad at making myself do the hard stuff like I did today.

I was tempted to put my foot down, take a break and get my breathing under control. Continue reading “The Power Of One Word”

My Visit With Warren Buffett

The typical investor has no business investing in individual stocks.  Most of my investments are in Vanguard index funds–VTSAX is my favorite.  Until recently, I owned only two individual stocks.  I also own some managed funds (which carry higher fees) but I would move all of my investments to VTSAX if I could do it without paying taxes on my gains.  You can learn more about my investment philosophy here.

A few months ago I broke one of my cardinal rules. I bought another individual stock–BRK–Berkshire Hathaway.  I bought it only because I wanted to go to the annual meeting and see Warren Buffett (world’s 2nd richest person) and his partner, Charlie Munger talk about investing and life.  A trip to Omaha doesn’t sound all that exciting but this annual meeting is a real spectacle–more about that later. Continue reading “My Visit With Warren Buffett”

How Can Money Buy Your Happiness?

I’m reading the book Happy Money. It is helping me understand how we can use money to create happiness in our lives.  It’s an easy read–follow the link above to buy it on Amazon (and I’ll receive a small commission) or look for it in your library.

The research on how money makes us happy is super interesting and not always intuitive.

I always thought the more money I made, the happier I would be.  It seems like life would just get easier.  But the research shows that once you make $75,000 a year, you don’t get happier with more income.  I’m sure this number varies based on the cost of living in your area but once you reach that amount, your happiness doesn’t rise. Continue reading “How Can Money Buy Your Happiness?”

Little Decisions Help You Reach Your Dreams

It is hard to set money aside for your future.  Damn hard.

Especially when you are surrounded by people who spend money like it never runs out.

I hated being the one saying I couldn’t do something because I didn’t have the money.  Really I had the money but I didn’t have the budget.  So then I started saying those things weren’t in my budget.

But it got easier–people got used to us being more frugal and adjusted to it or they sort of slipped out of our lives. Continue reading “Little Decisions Help You Reach Your Dreams”

What Could You Do With A Million Dollars?

On the Stacking Benjamins Podcast I was listening to today, Joe was talking about the responses he received when he asked his Twitter followers what they would do with a million dollars.

He got some interesting responses.  Some were altruistic–donating the money or helping family members.  Some were realistic–like paying off debt.  And some were funny–like calculating the time it would take to count the money at the bank–in twenties.

It got me thinking.  What could each of us do with a million dollars?

I’m overly rational so I got out the calculator.  $1,000,000 invested should provide $40,000 of retirement income forever.  With Social Security providing 40% of our needs (as it does for the average recipient), we should have a stream of income of about $67,000 in retirement.  I could live a pretty nice life on $67,000.

That $1,000,000 invested in rental real estate should provide even more income.  According to Paula at affordanything.com, we shouldn’t invest in a property unless it will rent for 12% of the purchase costs per year, 6% of that goes to costs and that leaves 6% return for us.  Our retiree now has an annual stream of income of $100,000 including Social Security.

Now we’re talkin’!  With that income, we could do some really cool altruistic stuff too! Continue reading “What Could You Do With A Million Dollars?”

Fees Matter . . . A Lot

Do you know how much you are paying in mutual fund fees?  You should, because fees matter . . . a lot.

When you hear people talking about mutual fund fees, they are usually talking about the expense ratio.  This is the percentage charged against the earnings of your fund each year.  These fees pay the operating costs of running the fund and, usually, return a bit of profit to the company running the fund.

My focus in this article is going to be on this expense ratio. Continue reading “Fees Matter . . . A Lot”

Autopilot can be great . . . unless it isn’t

We are truly fortunate that we can set many of our financial transactions up to happen automatically.

Most of us have 401k contributions come out of our paycheck before we even see it.  You can’t spend what you can’t see.

My utility bills go on a credit card automatically which–you guessed it, gets automatically paid in full each month from my checking account.

When I was working, I had an amount automatically sent from my checking accounting to my investment account each month.

Now that I’m retired, my investment account sends money to my checking account–automatically.  It feels like I’m getting a paycheck–even if it is just from myself!

These automatic transactions are great when they help us achieve our financial goals–forced savings and simplification of routine bill paying are fantastic.

But automatic transactions can also derail us from reaching our financial goals. Continue reading “Autopilot can be great . . . unless it isn’t”

You Should Leave A Job With More Than Just Memories

When I retired, I rolled my 401k balances over to IRA accounts with Vanguard.

My company’s 401k plan was a good one.  They even offered my favorite Vanguard fund (VTSAX). But all 401k plans have fees in addition to the underlying fees of the funds where the money is actually invested.  This is because of the reporting requirements, paperwork and account holder support that 401k funds provide.  Those services cost money so each quarter I’d see some of my money disappearing to pay those fees.

With Vanguard, I pay the underlying fees of the funds and nothing else.

Converting my account was easy.  They even assigned an account rep. who monitored the transition and kept me updated on its progress.

I think the account rep. thought I was crazy. Continue reading “You Should Leave A Job With More Than Just Memories”

It’s Not Always Smart To Do The “Smart” Thing

It is typically recommended that we purchase insurance for catastrophic, infrequent events and we self insure for everything else.

So we should insure our lives and our ability to work if people depend on our income with life and disability insurance, our home because its loss would be difficult to recover from with homeowner’s insurance, our cars because the damage we can do to others is enormous with auto insurance, and our other assets if they are significant with an umbrella policy.

But we should not insure things that are relatively easy to replace or dollar amounts that are small relative to our net worth.

Using that rule, it would not make sense to insure my wedding ring.  While it is valuable to me, it isn’t valuable compared to our overall net worth.  It was when we got engaged but it isn’t now.  For $35 to $50 in premium each year, we’ve had the peace of mind that comes from not worrying about replacing my ring.  We’ve paid that premium for 28 years.  We filed a claim once and may be filing another claim Monday. Continue reading “It’s Not Always Smart To Do The “Smart” Thing”