This week we will describe how our investment portfolio is shaping up and we’ll break it down into some basic components. We always enjoy reading how other PF bloggers talk about their portfolios so here is ours for your reading pleasure. Let’s jump right in. Enjoy!
Tax Deferred Accounts
Most of our assets are within our Tax-deferred accounts. The bulk of this particular bucket comprises Mr. and Mrs. PIE’s 401K’s
Mr. and Mrs. PIE have been contributing to these for the last 17 years and maxing out for nearly all of those years. Compound interest used to be the best friend we had yet to meet and is now part of the family. Of course during the last 17 years we had to navigate one very significant financial event of 2008 (the Great Recession), the crash being particularly painful for anybody who went through that with assets in equities. For those who remember when the proverbial crap hit the air exhaust system, the S&P 500 annual total return in 2008 was -37%. Yes, that is a large negative number for the folks who are not as long in the tooth as Mr. PIE. Over the period 2000-2016, the CAGR (Compound Annual Growth Rate) for an equity portfolio of 100% VTSAX was 5.9%, inflation adjusted at 3.75%. This data is courtesy of the very useful back-testing asset allocation and portfolio tool provided free by investing savvy friends over at PortfolioVisualizer.
The tax deferred bucket also consists of two IRA’s, Mr. PIE’s Deferred Compensation Plan and our Health Savings Account. In these tax advantaged accounts, our funds are mainly invested in REITs, an ideal place to hold REIT funds.
Finally, there are funds in a pension savings account that Mr. PIE was saving into when he was employed in the UK (1992-1998). Since they were saved while working in the UK, he can access them according to UK regulations, at age 65. Dealing with the tax situation on those funds is work for another day and perhaps a boring post on international tax law.
Vanguard Taxable Account
The majority of funds are in VTSAX and VWIAX. In 2016, these two funds have delivered YTD returns of 8.4% and 9.5% respectively. We dollar cost average into this account on a monthly basis.
Equity in Primary Home
In the summer of 2018 (our planned FIRE date), we will sell our primary residence and relocate to our mountain home. For our primary home, we are well into a 15yr mortgage at 2.75%. We bought this home in 1999 and have refinanced three times (twice at zero closing costs) to take advantage of lower interest rate opportunities. We started out at around 8% interest rate back then (with PMI!).
The proceeds of the sale of our home (minus the plethora of closing costs) will go straight to our Vanguard account and a portion to cash. We don’t pay a great deal of attention to the housing market dynamics other than Mr. PIE logging onto Zillow and Redfin twice a week and scouring the local property paraphernalia to learn which homes flew off the lot or not. Only kidding! Based on sale of comparable properties in our neighborhood, we don’t anticipate much trouble with the sale. We live in a desirable neighborhood on a quiet cul-de-sac in an affordable suburb close to a major tech and financial hub that continues to demand more talent. Time will tell if we have any hiccups with selling. We will let you all know for sure.
Our Mountain Home
This will be the home we relocate to at FIRE. We don’t have a mortgage on our mountain home so that will be one less expense to worry about. Property taxes are also low in our town, although those low property taxes are not common for the state overall. The state also does not tax sales, retirement income (social security, pension or 401K) but does tax on capital gains and dividends. You can work out the state our mountain home is in, can’t you? Or you can go here if you can’t be bothered thinking too much.
We bought this home three years ago. It is our getaway for fun family time and is used heavily all year round. Could the money that we used to buy this home been a better investment in our taxable account at Vanguard? Mr. Bogle would of course say “yes”. Mr. and Mrs. PIE would say “maybe”. As we have described before, our approach to life is to enjoy family experiences to the fullest. The opportunity to see our kids grow up with memories of the vacation/weekend home that will be our future families home are worth much more than a number in an account at Vanguard. It is not everybody’s philosophy but it is ours and that is all that matters. This home is a big part of our lives and we can’t wait to live there permanently.
We have been dollar cost averaging into two 529 plans since the boys were born (9 and 7 years ago respectively). The funds are both with Vanguard. Our goal is to continue to fund these accounts for the next two years and then let them hopefully continue to grow for the remaining years before we need to access them. We like to keep these funds separate from our withdrawal rate calculations as they are earmarked for very specific purposes. If the kids have a few brain cells more than their parents and are talented enough to choose colleges that require more funds, we will certainly help out but only up to a point. A completely free ride is not on the table. You agree or disagree?
We hold about 3% of our total portfolio in cash. When we reach FIRE, we will increase that percentage to hold about 3 years of expenses in cash. Some might argue that multiple is overly conservative given the information coming next.
Mr. PIE Company Pension – An Additional Income Stream
The percentage in the PIE chart reflects the current value of the pension. We don’t include this pension as part of our net worth. It does not show up on our Personal Capital tracking, for example. That is a sure sign we don’t track it closely. Isn’t it funny how important Personal Capital has become for the average investor? Those chaps from San Carlos, CA are onto something – except when they send you endless messages offering financial check-ups. A first step to fees, expenses and money out of your pocket into their coffers. They are indeed smart but so are we.
There is endless debate out there on “net worth” and what to include, what not to include but the pension will be a real income stream going forward. The pension is in the form of a Cash Balance so the value is “real” if you know what we mean. It is $$’s sitting in an account somewhere. Rather than cashing it out at a future date, we will be taking it in the form of an annuity. This annuity will provide an income floor for our future expenses and therefore withdrawal rate. We think of it as the floor foundation that has been 18 years in the making. Mr. PIE will start to receive this annuity when he separates from service. (**Please see footnote for an important recent update on this story).
With this partial safety net in place, we are thinking very hard about the ratio of our stocks/bonds allocation at FIRE and can probably lean toward a larger stocks allocation than is traditionally recommended for our ages and risk tolerance. “Whoa! The PIE’s are getting aggressive with investments”, we hear you cry. We have been doing a lot of thinking about this in recent months and a number of posts by the Physician on Fire and Early Retirement Now have been extremely helpful in this regard. Thanks guys for some terrific posts on the subject of bonds allocation and lively FIRE community discussion!
What’s Lurking in the PIE Investment Closet?
Eh, nothing really. No gold bullion (pet rock as Mr. Buffett playfully describes it), fancy jewelry, musty old stock certificates or pillowcases stuffed with $ bills. Now and again we find the children there playing hide n’ seek. We may keep them there if their generally good behavior ever slides. Certainly too many work shirts, suits, pants and dresses (the latter belong to Mrs. PIE in case you were wondering….) that we regularly enjoy donating to the local thrift store. Other than that, there are no skeletons.
The family PIE will continue to save aggressively into tax-deferred, taxable and college fund accounts over the next two years. Any performance bonuses, stock option grants (both are NOT guaranteed) will funnel directly to our taxable account at Vanguard. We think our portfolio is shaping up nicely for FIRE in July 2018. We have a good handle on the things we can control. The market will do what the market does. Only an epic crash of 2008 proportions would have us reconsidering the plan. If that happens, we will all have plenty material to talk about on our blogs. Let’s hope for blog material of a different variety.
** Footnote: This update reflects something that Mr. PIE has been eager to understand for some time. Suffice to say that getting to the bottom of his company pension plan has felt harder than the very long hike we completed this weekend. A number of conversations with employment benefits advisors over the last 6 months had provided mixed information to put it mildly. It was quite the kerfuffle (translation – “a commotion or fuss, especially one caused by conflicting views”) to be honest. To be fair, it is complicated with so many different plans in place in such a large organization that has acquired companies and spun out companies over the years – either that or spurious information from the buffoons who populate the help-desk of our benefits division. You decide. Mr. PIE won’t pass judgment too quickly.
Mr. PIE finally managed to speak to a very knowledgeable gentleman who walked him through all the details and a number of subtleties of his plan. It’s good when you have those helpful conversations. The bottom line is that he is able to take the pension whenever he separates from service, either in the form of an annuity or lump sum. Not at age 55 as he was previously led to believe. Based on years of service + age, Mr. PIE’s company currently adds 11% of his monthly earnings (earnings defined as base salary plus bonus) as pay credits into the Cash Balance account. Oh, please don’t think it has been 11% since he started working! Cash Balance pensions typically ramp up the pay credits based on age plus year of service and often start out at 3% or less. Interest credits are also added and are an average 30-year Treasury bond rate based on a 3-month “look back”. That means interest credits added for August are based on April. For those geeks out there, the 30-year Treasury bond rate at end of April 2016 was 2.66%. Thus 0.22% interest credit (2.66/12) was added in August on top of the 11%.
So that is how our portfolio looks today. Six slices of varying size and each slice an important piece of our overall plan. The basic ingredients are simple – saving, time and compound interest. As we said earlier, we really enjoy reading how other bloggers build their portfolios and hope this read gives you a little insight into ours.
Enough of all this, work is looming tomorrow. It is slightly less than two years before we no longer need to write the previous sentence. We’re not counting at all.
How is your portfolio shaping up? How do you consider a pension if you have one? Are all your employee benefits (now or future) transparent and easy to understand? Do these ramblings make any sense?