With Q2 just behind us, it is time for a portfolio update. This time, I am getting the update out in a time-frame consistent with the end of Q2.
As a reminder, our goal is to achieve FIRE in July 2018. At that point we will have sold our long-term primary residence (sigh) and relocate to our mountain home (yay!). The kids will be 11 and 9 at that point and will move to a new school.
This portfolio update provides an assessment of how our various investment strategies have performed over the second quarter of 2016. Please note that the % change in the table below reflects our contribution and investment fund growth combined. I will showcase some of our investment vehicles in a bit more detail within each section.
Overall, Q2 was a pretty good quarter for us despite the hiccup of Brexit and subsequent market correction. It turned out to be more of a financial blip in contrast to the media madness that surrounded the whole thing. Let’s see what the next 6 months brings to the global market as the uncoupling process of the UK from the EU begins in earnest.
Bottom line: Our investment portfolio of assets increased in size by 4.5% in Q2, 2016. That is something we are very happy to see and report, and adds some pzazz to our summer sizzle. Here are the details in good old tabular format.
*Non-contributory for Mr. PIE. Employer provides all contributions.
Mr. PIE’s 401K is a simple allocation of two funds, a stock fund (65%) and a bond fund (35%), reflecting his age and our risk tolerance. The performance of the two funds is summarized below:
VIIIX tracks the performance of the S&P 500 Index which measures the investment return of large cap stocks. JCBUX is primarily a domestic bond fund, dominated by US Treasury and Corporate bonds. The bond fund beat out the stock fund so far in 2016. Who knew?
Mrs. PIE’s 401K is a mixture of four funds. Three of them are focused on stocks (75%) and are overall cap weighted (large, mid, small) according to the classical value tilt weighting. The fourth fund is a bond fund (25%). Again, the allocation (stocks vs bonds) is weighted according to Mrs. PIE’s age and our risk tolerance. Mrs. PIE’s 401K options are rather limited and this allocation is our best effort at matching a total stock market fund. The upside to Mrs. PIE’s 401K is very low expense ratios across the board.
457 (Deferred Compensation Plan)
For those not familiar with it, a 457 plan is a supplemental tax-deferred plan similar to a 401K. The employer provides the plan and Mr. PIE defers compensation into it. Unlike a 401K plan, there is no penalty to remove funds prior to age 59 1/2. The 2016 maximum contribution to the 457 on an annual basis is $18,000 for persons below age 50. Like the 401K, there is an additional catch-up bonus of $6,000 allowed for persons age 50 and over. In theory, a 50 year old whose employer offers a 401K and 457 plan could sock away $48,000 (18 + 18 + 6 +6) dollars in 2016. We knew there had to be some benefits to being 50!
Mr. PIE has had the opportunity to add to both a 401k and 457 plan for some time now. Although we are very happy with how our tax-deferred savings looks, we elected to start putting 5% of Mr. PIE’s salary on a biweekly paycheck basis into this investment vehicle, starting this year. Yeah, we are conservative. The large % change merely reflects that this is only the second quarter of investing in this plan. The fund allocation within the plan are a large cap stock fund (VIIIX), a total international stock fund (VTSNX) and a bond fund (JCBUX).
The 529 plans (for each of the small PIEs) through Vanguard produced a nice growth in the second quarter. We expect to continue to contribute to these funds for the next two years until FIRE in July 2018.
We have been maxing out our HSA for a couple of years now, and this year we have actively chosen not to use this fund to cover medical costs, but to pay these costs out of pocket instead. This will allow our HSA to grow tax free and we’ll withdraw funds tax free much later down the line. The HSA really is a beautiful thing when it comes to taxes: it goes in tax free, grows tax free and comes out tax free! We currently have the majority of the assets invested in a low cost Vanguard REIT Index fund, albeit with a very small, fixed monthly fee from the Credit Union for the pleasure of being able to invest at all. A small portion of cash has to remain in the savings account portion of the HSA, per the rules of the Credit Union. We look forward to watching the HSA grow over the next two years, and will consider continuing to fund it after that if doing so presents an appropriate tax advantage.
We make no regular contributions to our IRA’s. Within each IRA are non-traded REITs, a legacy from our days with a financial advisor. Each has provided a modest gain (~2.5%) during the quarter. As we have described before, these REITs are performing pretty well for us over the last three years.
Our other REIT – again a financial advisor legacy – had a meager gain of 1.6%. Note that we are not allocating any money to this REIT on a monthly basis.
Mr. PIE’s Pension (UK)
Mr. PIE contributed to a savings plan when he was gainfully employed in the UK. Of course, he makes no contributions to that plan now. The plan had a meager gain of 1.0% over the quarter. Funds from this plan will be accessible at Mr. PIE age 65.
Mr. PIE’s Pension (US Employer)
This fund grew by 2.7% thanks to contributions from Mr. PIE’s employer. At separation from service in 2018, Mr. PIE will elect to take this pension at age 55 in the form of an annuity for each year he continues to walk the planet.
This account will ultimately be enhanced by the significant equity we have in our primary residence. Proceeds from that sale in the summer of 2018 will boost our taxable account enormously.
How did our taxable account grow so much in Q2? It was primarily due to a combination of the following:
- Mrs. PIE’s 2015 performance bonus and a portion of stock options that were provided in May 2016. It is a quirk of her company to pay the previous year’s bonus in the middle of the subsequent year as they use an April to April financial year. The additional quirk is that further stock payments come in mid July. Confused yet? We are!
- Aggressive savings. We have ratcheted down our spending significantly. Additional savings have gone directly to our taxable account at Vanguard. Recent pay raises have also gone directly to Vanguard.
- We reduced further our cash allocation (emergency fund) and moved this money to our taxable account at Vanguard.
The decrease here merely reflects movement of money as we actually reduce further our over-sized emergency cash fund and diverted it to the taxable account. It’s counter-intuitive that our former financial advisor encouraged us to hold so much cash. Even the ultra-conservative PIEs can change philosophy on the concept of an emergency fund!
Overall Asset Allocation
How do the funds described above look within the context of our overall asset allocation? The PIE chart below shows our allocation across the different asset classes.
Some highlights to note are as follows:
- Our overall stock to bonds allocation is approximately 65:25, again reflecting our average age and risk tolerance. Some adjustments were made to our overall portfolio in the last quarter, most notably some simplification of each 401k (some re-balancing of stock vs bonds) and movement of money from our over-sized and very conservative cash account to our taxable account. We don’t anticipate any significant changes to this allocation for a long time. At FIRE, our 401k’s will be rolled over into Vanguard but the basic percentage asset allocation will likely remain the same.
- Alternatives are REITs (Non-traded REITs in our IRA’s and Vanguard REIT in the HSA)
- Cash allocation is 6% and acts as our emergency fund. This % allocation will be considerably higher when we reach FIRE.
The figure below displays the growth of our portfolio over the last three quarters. The green shaded bar is our investment portfolio (not including the 529 plans) and the yellow bar is the equity in our primary home. As we have described before, the proceeds from the sale of this home will supplement our growing taxable account as we move into FIRE and relocate to our mountain home.
Based on the following assumptions:
- FIRE date remains unchanged at July 3, 2018 (ain’t nothing changing that one)
- Our strong savings rate continues unchanged for the next two years (we control this!)
- The market returns 4% each of the next two years (a conservative estimate)
- Mr. PIE’s company pension starts to pay out in July 2022 (fully expect this to happen)
We expect to have a withdrawal rate of 2.9% from 2018-2022 and a withdrawal rate of 1.5% beyond 2022. Social security, in whatever form it exists, will further reduce the withdrawal rate as we age.
Overall, Q2 was a good quarter. Summer is in full swing, the BBQ is sizzling and life is good. And we still have a week of our summer family vacation to go! For all that, we are very thankful.
Have you been happy with your portfolio performance year to date? What performed well or not so well? Are you still on track to meet your goals?