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.

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”

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”

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”

The Stock Market Seems Really High . . . Should I Sell?

Election night it looked like the stock market was going to tank.  S&P 500 futures were down about 15%.  I was scared for my country and my money.  I was preparing to write an article celebrating that stocks were on sale and telling everyone to stay the course or to buy.  Rather than crashing, we saw the S&P 500 go up over 1% the day after the election and it has only continued to rise since then.  This is a very different article but the answer remains the same.

This post-election stock run up has been amazing.  Through Christmas weekend, we hit all time highs.  My invested assets grew over 3% in November and an additional 2% so far in December–the annualized return is over 30%.   I made more these months than I’m likely to spend in all of 2017.

Price to earnings ratios are very high.  This ratio compares how much a stock costs to the earnings companies reported over the previous 12 months.  We’re paying almost $26 for $1 of earnings for S&P 500 index funds.  The historic average is under $16.

So the market looks expensive.  Does that mean this would be a good time to sell and wait for a dip in the market to buy back in? Continue reading “The Stock Market Seems Really High . . . Should I Sell?”

For Investing, You Must Know Yourself

Over a quarter of my net worth is from investment growth and at least 15% is from real estate growth.  So 40% of the wealth that allowed me to retire didn’t come from working and saving, it just came from taking some risk and letting my money work for me.

I already admitted I’m not an investing genius and I was my own worst enemy when I thought I was.

The most important thing with investing is to know yourself.  What level of risk are you comfortable with?  When will you need this money?  How will you behave in a market downturn?  There are lots of risk tolerance tools out there, this one from Vanguard is a good one.  When you complete this questionnaire, be sure to think about how you will behave, not how you should behave.

Continue reading “For Investing, You Must Know Yourself”

The Early Years Are the Hardest

After I posted my recent savings rate, I began to wonder how that savings rate changed as I got older.  In the early years, I was earning less and was paying rent or mortgage payments.  Both my earnings and my expenses improved as I got older.

So I went into the way back machine (my Excel budget spreadsheet) and calculated my savings rate each year. Then I thought it might be helpful to know my net worth each year as a percentage of the net worth I had when I retired this spring.

savings-rate-nw-accum2

Continue reading “The Early Years Are the Hardest”

Money and Marriage

Boy, this can be a tough one.

I came into marriage with some baggage from my childhood and a vision for what it meant to be a professional woman.  Both of these put me in opposition to the ways couples traditionally treat money in their marriage.

First, the baggage.  My parents fought about money . . . a lot.  It was a constant undercurrent in their marriage.  My Dad was what we’d call frugal today.  My Mom was more towards the middle on the frugal-spendy spectrum.

Continue reading “Money and Marriage”

I’m Definitely Not an Investing Genius

I’m no investing genius though I used to think of investing as a hobby of mine.  I read prospectuses (boring documents mutual fund companies prepare) and researched companies to invest in.  I purchased individual stocks and was giddy when they went up and sad when they went down.

I bought Costco before it was Costco (remember Price Club?) and I bought Exxon before oil got really expensive.  I sold Costco before it was Costco . . . at a loss.  I watched Exxon go up and now down.  Oh and don’t ask me about Good Times Burgers or Boston Chicken.
Continue reading “I’m Definitely Not an Investing Genius”