This is a stock market blog about portfolio management,foreign stocks, exchange traded funds and the occasional musing about my firefighting experiences. The point here is to share process
Actually, I don’t know if he is right but he may have a point. If you are unfamiliar with James he is an investor turned investment writer turned lifestyle guru turned social media star. James and I overlapped and if I am remembering right, had a little bit of interaction at The Street.com (both alumni of the site). James was also kind enough to mention my blog in one of his earlier books. Our paths cross every so often on social media, he seems to like a lot of my pictures on Instagram as an example.
The tone of James’ writing is to take positions on issues that are very contrarian like not going to college, quitting your job today and not buying a house. He also doesn’t believe in renting, he stays in some combination of Airbnbs, hotels and maybe with friends too. He explains his reasoning very articulately. The things he writes about in the outlandish idea category are not for me but I believe there is tremendous value in reading someone with very different ideas from your own, you either learn to think about your beliefs differently or they can solidify your beliefs.
Last week we went on a road trip to New Mexico (we live in Northern Arizona) and as is often the case when we travel we stayed at Airbnbs. We spent one night in a tiny town near Gallup that cost $99 plus a $25 cleaning fee and three nights in Santa Fe for $108 per night plus a $50 cleaning fee.
While sitting in the husband zone of some store my wife was looking through it occurred to me that James has a point with how he lives, not necessarily the solution but an interesting point. Staying in an Airbnb you don’t pay for utilities and you don’t fix anything. How much do you spend per day on your house; mortgage, taxes, utilities, repairs? There will be circumstances where the numbers of transitioning from an expensive city mortgage to smaller/cheaper AIRBNB cities could make economic sense. Business Insider reports the average mortgage payment in San Francisco is $3600 and then add on everything else compared to $109/night in Santa Fe.
I don’t read everything James writes so I don’t know if he puts in these terms but his idea makes it much easier to figure out a daily allowance; $109 for an Airbnb, $30 for food, $3 for a cell phone, $X for health insurance, $7 for gas for your car and $2 for insurance as examples.
What does that add up to and yes, I realize the list is a simplification but house expenses are off the table in this scenario. You could spend that $200 (or whatever) per day until your money runs out and that will work for some people, factor in Social Security which averages about $1200 per month or $2400 when each partner has their own benefit which works out to $80 per day or maybe 40% of the approximately $200 which makes any nest egg last longer. Next, layer in how much you might be able to earn in a day net of taxes or any other deductions. A part time income of $15,000 (so no hit to Social Security for earning too much would be about $40 per day now has a draw down from the portfolio of $80. Someone earning a full-time income can probably easy cover the $200 daily nut.
It is interesting because it is such a foreign way of thinking, too foreign for me but could makes some peoples’ lives easier including James’.
I write about these off the wall ideas, some more off the wall than other, because aside from being fun and interesting, the manner in which people will retire must change as a financial reality.
This week’s Market Update is posted and includes the following;
The title of this week’s update is a play on Monty Python and the Holy Grail describing the retail group which had been given up for dead. But when measured by one of the large industry ETFs, it has actually done quite while over the last month gaining 450 basis points more than the S&P 500. Last week the space got something of nudge when it was announced that one of the large, high end retailers was considering going private. We’ve gone over the creative destruction underway in the space and while the digital e-tailers appear to have the upper hand, it makes sense to think there will be at least a few “old line” retailers that figure out the internet to the point of being very competitive.
Please click through to read the entire update.
We took a quick road trip over to New Mexico to visit Santa Fe, Taos and a few other things including a couple of great national monuments.
The Taos Pueblo
Los Alamos County Fire Department Station 3 in Wind Rock. For fire truck nerds, this is actually a type 4 despite looking like just about every type 3 I have ever seen. Stunning rig.
We bought a highway sign from North Dakota that lends itself to doing some very neat things. The white and black in the upper left is the original picture.
Markets were lower across the board last week with the Dow Jones Industrial Average falling 0.84%, the S&P 500 giving up 0.59%, the NASDAQ slid 1.13% and the Russell 2000 dipped 0.97%.
Congress managed to get together to kick the can down the road on the debt ceiling buying three more months by lifting the limit. Oddly, President Trump appeared to side with the democrats on this issue to the frustration of quite a few in the GOP. Trump campaigned on politics not as usual and while his success in this regard is debatable, the debt ceiling would seem to fit the bill of not at usual. This news was not enough to lift equity prices perhaps for the simple reason that every politician with a microphone told us there was no way there would be a shut down and they were right.
With the back to back hurricanes and we might as well throw in the wildfires out west and the 8.2 magnitude earthquake in Mexico, the $90 billion catastrophe-bond market has drawn a lot of attention. The simplified explanation is that in the face of a catastrophe, these bonds which are issued by insurance companies have the principal forgiven, meaning investors are wiped out, in the face of a catastrophe like a hurricane. Here’s a story of a hedge fund that specializes in cat bonds. We are not aware of any ETFs that own catastrophe bonds but this provides a great example of the importance for advisors and individual investors to look through to fund holdings to know what they own and while you may not be directly vulnerable to cat-bonds being wiped out all portfolios are vulnerable to something and that needs to be understood.
The yield on the ten year US Treasury Note took another big step lower last week down to 2.06%. Barron’s blamed the drop on just about everything including North Korea, the lack of inflation, the hurricanes (we presume the weather events not the University of Miami Football team) and so on. There is an an inertia for lower yields with escalating concerns over potential external events (geopolitical and weather) and expectations for tepid economic results. The FOMC is off the table for an outright rate hike even if it does begin to shrink its balance sheet.
The euro continued to show strength against the US dollar, closing above $1.20 for the first time in almost three years. Trading-wise this has of course been the trend, also helping the euro is the very real possibility that the ECB will start to wind down its quantitative easing sooner or perhaps more deliberately than the Federal Reserve. We talked a few months ago about the dollar as measured by DXY running into meaningful resistance at 105 with no equally meaningful support anywhere close by. DXY closed Friday with a 91-handle and still no corresponding support nearby that equates to the 105 resistance. The dollar could reverse course at anytime for any reason at all (or no reason) but for now the environment for foreign equity exposure looks positive.
Barron’s had a nice primer on HSA accounts although I am not sure why the title referred to them as “hidden.” The first post I can find in my archive on HSAs was from January 2005. Side note; I’ve been blogging for an awfully long time. I’ve been a huge fan HSAs from the first time I ever heard of them.
One useful nugget from Barron’s; there is a $1000 catch up contribution starting at 55. With so many people being undersaved, the idea of starting an HSA at 55 and being able to accumulate $77,000 by 65 years old in addition to any other savings vehicles is a great thing. Assuming another $6500 per year into each partner’s IRA then a couple with nothing at 55 is looking at $210,000 at 65 plus whatever growth rate you want to assume.
We hear repeated how people have nothing accumulated to retirement. I find it very encouraging that it really isn’t too late to start. Not everyone in this circumstance would be able to start socking away $21,000 per year but those who find they can will go a long way to improve their situation. The average Social Security check is $1404, making a potential $2808 for a couple where each partner takes own benefit. That seems like a decent amount but would be tough to handle one-off, unbudgetable events that seem to come every month (last month we had a large vet bill, this month we have a bat issue to deal with). That $210,000 saved (plus whatever growth rate you want to assume) between 55 and 65 could generate $700/month (assuming the 4% rule) or simply cover those one-offs. This certainly wouldn’t be an opulent retirement but would be vastly improved. Throw in a monetized hobby that earns about $500 a month and they’re all the better off.
In past posts I’ve made the argument that HSAs should be the first thing you contribute to other than a 401k such that you at least get the most out of the employer match. One of the benefits of an HSA that most people know about is that there is no tax owed on distributions used on qualified medical expenses but the Barron’s article articulated this point very effectively by saying (paraphrased in my own words) that if you have a $10,000 medical event and you pay for it out of a traditional IRA you would need to actually withdraw $13,333 to cover the $10,000 (assuming a 25% tax rate). Withdrawn from an HSA, you’d only need to take out $10,000. Stating the obvious, that makes it much cheaper. Other important items include the contributions being tax deductible, there are no income limits, you don’t need earned income to make a contribution and there is no RMD.
In case it is not clear, starting at age 65 you can make withdrawals from HSAs for non-medical needs but there is tax owed same as a traditional IRA.
In terms of prioritizing withdrawals from an HSA versus other accounts I would start with taxable account first (capital gains may have to be managed). If the taxable account were depleted before age 70 I would take from my Roth IRA (withdrawals not taxable) until the RMD kicks in on the traditional IRA (a SEP IRA in my case). I don’t think I would ever take from the HSA except for a medical situation or if all other accounts had been depleted. Using the Roth, if needed, is a change in my thinking as opposed to going from the taxable account to the traditional IRA but why pay tax on withdrawals for a couple of years if you don’t have to?
A final point about spending down assets, in the above paragraph are two references to accounts being depleted. This is something we have talked about before and may be very uncomfortable but a successful withdrawal strategy probably includes spending accounts down to nothing and moving on to other types of accounts. A retired couple with an $800,000 nest egg implies $32,000 a year assuming the 4% rule. If that couple has $200,000 of it in a taxable account, in terms of tax efficiency it may make the most sense to take all $32,000 from that taxable account every year until depleted. No tax paid, and the other accounts have the opportunity to keep growing.
With a nod to the joke about economists, if you got ten different advisors in a room, you’d probably get eleven different opinions about withdrawal strategies and of course there are countless variables in peoples unique situations that could dictate much different courses of action.
You never slow down, you never grow old
A bunch of different snippets today. First up, my brother sent me this link from the USA Today that as Congress starts to try to figure out tax reform they might change the tax deferred status of 401k contributions. If they were to change it such that all 401ks essentially now become Roth 401ks (going forward) that wouldn’t be the worst thing in the world. Of course, some (many) would come out behind especially if their tax rate ends up being lower in retirement but it wouldn’t by itself be catastrophic (not to be taken as my supporting the idea, I don’t).
The potential catastrophe would be if would be savers are turned off by not being able to deduct their contribution and so don’t set anything aside. The article cites research from the Economic Policy Institute that the median working age family had only saved $5000 as of 2013. I actually don’t think Congress will mess with this in anyway shape or form such that the path to savings is impeded, if anything they should make it even more attractive to save money but if they are so stupid to hurt middle class savers, that is from the top down. From the bottom up, many of us still have the opportunity to set money aside to solve, or prevent, our own problem.
Over the last few years I have been very intrigued with tiny houses. One aspect that doesn’t seem to get talked about much is the extent to which they are vehicles (often having to be licensed through the DMV) and so they potentially depreciate in value similar to a vehicle. If you watch the various shows on HGTV and the like of people paying what amounts to $400 square foot you’re probably pretty skeptical about those economics but the various things I follow on social media are now starting to list used tiny houses for sale. I saw one over the weekend for about $16,000.
The context of my blogging about tiny houses is not that 224 square feet would be a permanent solution for too many people but something like a five-year stint as a young retiree, renting out a primary residence and cutting back significantly on expenses, maybe delaying Social Security, if that appeals to you, could solve retirement problems for a lot of folks. This would also apply living in a foreign country. If that $5000 number above from USA Today is anywhere close to right then a lot of Americans will need to think outside the box. Five years as a young retiree on an adventure sounds intriguing and if it is financially beneficial, all the better.
That lyric at the top of the post about not slowing down is from the song Mary Jane’s Last Dance by Tom Petty. We’ve all heard some version of that sentiment from someone who has aged successfully. Prescott, the town where we live in Arizona, is interesting for there being a mix of 80-year olds who can bench press 300lbs (slight exaggeration) and unfortunately, 50-year olds on oxygen. While there obviously some socio-economic factors at play there, I do believe that our behaviors can play a large role in determining outcomes related to aging.
We had a medical call (volunteer fire department related) over the weekend and the issue had to do with a side effect that although very common in the patient’s situation was essentially falling through the cracks medically. I don’t know whether the problem was Medicare, having too many doctors, something with the hospital or something else. I personally am very motivated to avoid that circumstance. We have talked before about trying to keep fit and make other lifestyle choices that give a good chance for staving off the need for medical expenditures. Fidelity’s well-known reports about needing to spend in the mid-$200,000’s on medical expenses keeps rising every year and obviously anything that can be done to reduce that expense directly helps those who are grossly under-saved. The takeaway here is the need to learn about exercise (aerobic and resistance), diet (especially carbohydrates), staying active (not sitting at home waiting to die, brutal but common) and supplements (turmeric, kombucha, CBD aa examples).
Part of financial planning is life planning. The value of a robust investment portfolio is diminished by not living long enough to enjoy it.