Update on how much do I need to stop worrying

While I was working on organizing my non-probatable assets, I read few personal finance blogs.

All say about the same:
Trinity study is obviously the best or the most popular study to determine your withdrawal rate to make sure the money will last trough the retirement time. And that is 4% withdrawal rate on $3,000,000 saved.

Some people, especially in the comments section, were concerned about market downturns which no one can ever predict.

That made me think about the market downturns.
I went to the stock charts and checked how deep did the market go while recent market "crushes".

The drawdown was about 50% for indexes. It was more variable for stocks. 

Here are some of my thoughts on how to combat that:

Option 1: The downturns are temporary. I can sit them out.
Especially if I accumulated for many years and the average price will not be the top price. The 50% decrease will be  from the top price (and not from the average price) and that will not be as critical after years of accumulating. 
   
Option 2: I can increase my magic number from $3,000,000 to $5-6,000,000. That number appears to be difficult to reach, because I don't know if I even reach the $3,000,000. And I will have to call it the "super-magic number".

But if the downturn is about 50% only from the top price and it might be only about 30% from the average, I might need only approximately 30% increase in the magic number and that will be approximately $4,000,000. This is still very far out but looks more doable.

Option 3: I could create an additional source of income. Dividends would be one option. Dividends, in most cases, are paid during marked downturns and can help to bridge that time. I can't think of any other realistic options working full time.

Working on non-probatable assets

After writing the last post end of last month about making all my assets non-probatable, I am still working on it. 

Some of the accounts I just needed to check and verify that the accounts are set up as WROS (that was not visible online or on statements and I had to call and verify).

On other accounts I had to verify all beneficiaries.


Some of the changes are taking long time and are still not completed. 
One of my accounts is TIC (tenants in common) and I filled out and mailed the paperwork to change it to WROS already twice. The first was incomplete, the second time they claim they never received my letter with completed addition which I mailed 2.5 weeks ago and asked me to mail it one more time. 
I am filling it out now for the third time but I will not mail it anymore. I suspect sloppiness on their part because I personally mailed this letter from the USPS office and the other letter mailed at the same time did arrive at other recipient. This time I will scan it to them. That all just takes time. 

We also didn't have time yet to change the title of the third cat to both of our names. Everything else is done.
One account left and one car.
That will be completed sometime soon.

The next task is working on reorganizing and updating all password data and insurance information. 

Update 02/01/2018
The only thing left is one truck. 

Update 07/09/2021

The old truck is replaced by a new one and something funny happened when we were buying it. 

All assets should be non-probatable now. 

Autopay - when is it useful?

As part of preparation for some of the adverse life events (such as death or incapacitation) I posted an article with a plan which describes the preparation steps.

Liabilities is one of the categories on that plan.

 

It is useful to have a list with all bills and corresponding payment information so if necessary, the family members can find out easily which bills are payed when and how. 

Here are some examples: 
List of all credit cards 
Electricity
Security
Internet services
Cell phone
Cable/Netflix
Car insurance
Any other services you subscribe to 

I am using a list like this one:

Almost all of my bills are on autopay. They are paid automatically either from a checking account or from a credit card. The credit cards themselves are also on autopay. 

This autopay option is great to have when we go on vacation - no need to worry about  bills becoming overdue. 

And autopay should provide you time in case you will have to reorganize the payments after an event.

Almost all my bills are on autopay to a credit card (which gives 1% back on anything). I have one particular credit card which I use for bills only. This credit card is kept safely at home. I never take it with me anywhere or use it for anything else. 
I just don't want to go trough the hassle to call up every company on this autopay list in case the number gets stolen. 

When the card is close to the expiration date, it is easy to just get out the list and to update every account on the list with the new credit card expiration date. For those updates I use a list like that:

I usually pick a day in between the due dates, activate my new card and update everything in one day. 

Do I need a trust? Are there other ways to avoid probate?

As you can see from the previous post I am in the process of organizing everything so that in case of death there is a plan instead of a confusion. 

As I was going though the assets, a question arose if I should have a trust. I know that one of my friends has a trust. He had to work quite a bit with his lawyer to set it up.  When he wanted to make some changes, he had to work with the lawyer again. 
Is this hassle worth my time and money? 

The main reason to have a trust is to avoid probate. Probate is a court supervised process at the end of which the assets will be distributed to heirs. The probate processes can be long and costly and may require a probate attorney. 

If assets are only in the deceased name, everything will go to probate. Probate takes time and money.  Depending on where you live, probate process can cost 10% or more of your gross assets. 

Having a will is not a way around it. The will has to go trough probate. 

The purpose of a living trust is to avoid probate and to reduce attorney fees. Setting up a trust requires time and attorney consultation. All accounts should be re-titled to the trust. 

It sounds like a trust is good solution, but let see first if really everything goes to probate and if it is possible to avoid probate without having a trust? 

There actually some non-probatable assets which do not go trough probate at all. 


Probatable assets: 
Property owned solely by descendant (real estate, car, bank accounts, insurance and also thighs like jewelry, collectibles, furniture).

Non-probatable assets:

1. Property held in joint tenancy or as tenants by the entirety.

2. Bank and brokerage accounts held as tenants with right of survivorship (WROS), or with transfer on death (TOD) or payable on death (POD) beneficiaries.

3. Life insurance and retirement accounts with designated beneficiaries. 

4. Property held in a trust.


Based on that, almost all my assets can be made non-probatable. 
All our insurances and retirement accounts have designated beneficiaries. 
Almost all other accounts are WROS. 
And almost all property is held joint, except one of cars which is very old. 
I would not even know which additional assets I would  put into the trust, because I don't have any other assets. 

It looks like I don't need a trust if the only reason to have it is to avoid probate. 
Few things which might still go to probate are very few like that old car. What I will do next is to make sure that all accounts and assets are non-probatable (see the to do list below).   


Here is a to do list if you want to avoid probate on most of your assets and don't want to bother with a trust:

1. Have both spouses names on all checking and savings accounts.
2. Have all brokerage accounts as Joined With Right Of Survivorship (WROS).
3. Have designated beneficiaries for all your retirement accounts (401k, IRAs, and other including HSA).
4. Have designated beneficiaries on life insurance.
5. Make sure that all property (house, cars, land) are owned jointly.
6. If you have any other assets or accounts, check if similar rules apply to those assets.


If you want to add your child to the deed of the house or as joint owner on the brokerage account, the half of the account or house value will be immediately considered a "gift" and will trigger gift tax. Since the threshold for the estate is relatively high, it might be a better decision not to add children as joined owners.


In summary,
For a childless couple to make all assets non-probatable will be enough and a trust will not be needed. Unless they care enough about the person who will inherit the estate to save him/her the hassle and costs of the probate.

For a couple with children where the child will (most likely) not be a joined owner of the assets, a probate may be useful. We have a child and later this year I will look into the trusts. 
So far I know that setting up a trust requires a lot of time for transferring all assets (including changing property deeds) into the trust and the lawyer fees of approximately $4,000-5,000.    

Planning for AFTER retirement - do I need to do anything?

Planning for retirement takes time.
What about planning for after that? 
Or what about if you die even before you get a chance to retire? 
Should you care?

You might not care very much if you should die first. But if your spouse dies first, do you have a plan? 

So again, should you care?
If your spouse dies, being organized will help you.
If you die first, being organized will help your spouse. 
If you both die at the same time, it will help your children.

The death will either come as sudden and unexpected or as slow, protracted, and expected.

For the sudden option, it is definitely good to have everything prepared and set. There will be no time to ask questions or change anything. 
For the slow option you might have time, but you may be busy with other issues related to the sickness. 


It is good to just bring everything in order as soon as possible. After that, to stay current, updates will be needed as soon as something changes or at least once a year at the time of tax preparation.

I would separate the preparation in following categories.
1. Assets (mainly property and bank accounts).
2. Liabilities (mainly recurring bills and credit cards).
The additional category which is not directly connected to money but still important is 
3. Account access (logins and passwords).


1. Assets
If assets are only in the deceased name, everything will go to probate. Probate takes time and money.  Depending on where you live, probate process can cost 10% or more of your gross assets. 

I am in process of organizing our assets. We have a will, power or attorney and the living will. 
We don't have a trust. But do we really need one? See my answer to this question here.    


2. Liabilities
Recurring bills billed to a joint checking account should not be a problem. Those which a billed to a credit card account which only one one of the spouses owns might become difficult. See how I am organizing this here.


3. Account access (logins and passwords).
With some services you may need to log in to change the billing information. Some people recommend secure or locked apps to keep all passwords. It is a good solution, but remember you will also need the password to that app to open it. I think a paper copy kept secure somewhere in the house is still a good back up option.   


It will take some time to set up everything, but slowly one thing after another, working with a good to do list it could be done. I am giving myself 2-3 months to get it all finished.   

Should I freeze my credit? Or will fraud alert be enough?

Have you tried to put a Fraud Alert on Equifax, Experian or TransUnion? 
You can put the Fraud Alert with only one of the agencies and they are supposed to communicate it with the other two.

I tried to do it with all three agencies and process with Equifax appeared to be the easiest. 
I started doing it about a year ago and I had to repeat it every 90 days. (Update: Starting in September 2018 the alert is placed for 1 year instead of 90 days). It took only few minutes online. 
I had a reminder in my phone calendar to do it. Four times I did it and then I got lazy. 


Recently, when I was on vacation, I read that Equifax was breached.


After that I started researching what I can do to protect my information the agencies like Equifax collect and hold. Many, actually the majority of the sites I checked, recommended the credit freeze. 

I tried to be thorough while researching because this issue matters to me. Below is a concise summary of what I found.

I have two options:
1. Fraud alert 
2. Credit (or security) freeze

What are the differences?

Both Fraud Alert and Credit Freeze are basically the same thing with minor differences:
Both prevent anyone from opening new accounts. With Freeze your file cannot be accessed. With Alert  a new account can't be opened without calling the phone number you provided on the fraud alert form.
Both do not prevent from misuse of existing accounts which you still have to monitor.


Credit freeze: If you are applying for something, you will have to lift it by going online before someone will request the credit report for what you  applying for (new account, insurance, apartment, job). You will have to keep safe your provided pin/ password you need for the lift.

Fraud alert: You don't need to lift it. You will just receive a call from the requesting institution. But you have to reactivate the alert every 90 days. 

My decision:
I will go with fraud alert. The freeze makes me feel uncomfortable because it limits my flexibility, it needs more planning with lifting in advance. I am not sure but there also may be a freeze gap for the time you lift it, even if very short. 

I will have to start those fraud alert every 90 days renewals again. 

8/01/18
Update:
The Fraud Alert seems to be working. I opened a new bank account and the application couldn't be finalized online. The bank had to call me and confirm the information. And I opened a new store credit card and the application also couldn't be finalized, I had to confirm information on the phone in the store during the application process. It took one day longer for the bank account to open and about 20 min longer for the credit card application. 

8/22/18
Update:
Beginning September 2018 it will be possible for parents to freeze the credit of their children until age of 16.

Challenge "Magic number"

There are many nice blogs by physicians who set as their goal to retire early from their medical carriers.  

I do have a family history of "early" retirements: my mother retired with 55 and father with 60. When they retired they found some new things to do for themselves. My father started a new business and my mother got a lot of chickens, turkeys and geese to keep herself busy. 
I don't have any particular plans yet. 


I am not in a hurry to retire and to retire early is not my goal. I like my work. After I moved to the place where I live now from a very very cold place, the weather here makes me feel like I am on vacation almost every day. When I go on vacation, it is like I am taking vacation from my vacation. 


My main motivation to reach that magic number of $3,000,000 is just to finally feel safe, because I grew up very poor and that "post-traumatic stress syndrome" of growing up very poor still doesn't let me go.  


In savings, like in other things I like to underpromice and to overachieve.
Of course I will try to overachieve here in this challenge. 

I don't know when I reach the magic number of $3,000,000 or even if I ever reach it. But I every month I will make small steps toward my goal.











    

Recalculation of "How much do I need to stop worrying" - now it looks much better and simpler.

I am not a political person but this week I attended a meeting with Congressman Phil Roe as a key note speaker. One of the things he talked about was the Social Security. 

In his opinion social security will persist but it will change. One of the things what may change is that the retirement age will be pushed further toward 70. The other is that people may be vetted in based on their available retirement resources.  
The last one, the vetting (or means testing), worries me because that will mean all the paid in money will be gone, because very likely I will not qualify if they start vetting in. 

As you see in my other post I calculated how long the retirement savings will last, the second table was calculated without social security benefits. I calculated that with very conservative 1% yearly return rate.  
It looks like it might be enough until I am 97 years old. But as you know I have a "Challenge102" going to beat my granduncle who is 102 years old. In that case the money can become tight and I don't like it. 

Somewhere I read about the risk to die without using up all your money or "outliving your money" but it doesn't concern me at all. I am generous and my daughter can have whatever is left. 

Back to the retirement calculations. There is a way to improve this situation and this is to reach a higher rate of return, 5% will probably do it. 

Now I am changing the previously very conservative return rate of 1% to more realistic return rate of 5% per year and recalculating everything.  

I used bankrate retirement income calculator with settings of 3% inflation and 5% yearly returns. Per that calculator the $3,000,000 will be enough. After 50 years the ending amount is still approximately $3,000,000 and I can withdraw about $13,000 per month before taxes for 50 years without changing the capital (it is because they use withdrawal rate of 4% which is less them my set return rate of 5%). 

With this monthly withdrawal amount the ending balance will still be $3,000,000. If I want to withdraw more, I will have to use some of the capital but it still should be enough. 

Now, after this recalculation it looks like I only need 2 things:
1. I need to reach $3,000,000 in savings.
2. I need to reach stable 5% yearly return after I reach $3,000,000 in my savings. 

This simplification is motivating.
Here are my new 2 goals which I will track and update:
1. Track the savings and see when I will reach this magic number of $3,000,000. 
2. Learn how to reach stable 5% return per year. 
(3). Beat my granduncle so all my savings efforts make sense. 

When I reach the goals I will celebrate big! 

Challenge 102 - Can I beat my granduncle?

As I mentioned before my granduncle is 102 years old. 
I want to at least become as old as he and I want to beat him. 
I will celebrate each of my birthdays as one step toward this victory.

Every April I will celebrate not just one day but the entire month. 
I will not do a countdown from 102, it is not as pleasant to see "how much is left for me". I will just celebrate that what I already have! 

Challenge "cash flow" - why?

Why do I want this challenge?


The most common advise is to do "indexing". That means to invest long term in an exchange traded fund or a mutual fund that tracks a major index like S&P500. I already do it in my 401k. 

But I don't feel like I am in charge of what is happening. It is a very passive position. I feel like I am carried by the waves on a flotation devise. 

Indexing is easy and the wave may take you up for a nice ride when the market goes up. Buth the wave can also take you down when the market goes down. 

Instead of just floating up and down with the wave I want to learn to swim by myself. I plan to add individual stocks and not be restricted to the ETFs.

So I am starting a new challenge: "Cash flow"

0. "Floating" = yearly expenses are not covered by investment income
1. "Swimming" = yearly expenses are covered ($50,000)
2. "Sailing" = double of yearly expenses is covered ($100,000)
3. "Motor boating" = anything over $500,000
4. "Cruise ship Capitan" = $1,000,000 and above (yes, as long I am dreaming why not?) 


It might not be a very wise decision to do more then just indexing. So many people support it and warn against individual stocks. 
I will carefully select stocks and keep them in a separate account where I will do no indexing. I will do that for a few years and compare the returns to the SPY. If I will not be able to beat the index within 5 years, I will just go back to indexing only. 

Rules of 72, 114 and 144

Conservative estimates of 1% per year for returns of my investments are really very conservative. I am sure they are not realistic, in a good way.

After maxing out all tax advantaged options I will have to start taxed investment accounts.


It is interesting to make some estimates for different rates of return, which are more realistic than 1%.

I found some "rules"  for quick estimates of approximate calculations.

Rule of 72

1) Estimate of time to double your money based on growth rate.
Example:
Expected growth rate: 10% per year
Time to double your money: 72/10=7.2 years.

2) Estimate of needed growth rate for purpose of doubling your money
Example:
Targeted time for doubling money: 5 years
Needed yearly growth rate: 72/5=14.4%


Rule of 114  

1) Estimate of time to triple your money based on growth rate.
Example:
Expected growth rate: 10% per year
Time to triple your money: 114/10=11.4 years.

2) Estimate of needed growth rate for purpose of tripling your money
Example:
Targeted time for tripling money: 5 years
Needed yearly growth rate: 114/5=22.8%


Rule of 144  

1) Estimate of time to quadruple your money based on growth rate.
Example:
Expected growth rate: 10% per year
Time to quadruple your money: 144/10=14.4 years.

2) Estimate of needed growth rate for purpose of quadrupling your money.
Example:
Targeted time for quadrupling money: 5 years
Needed yearly growth rate: 144/5=28.8%


Using those rules I see that with my very conservative estimates of 1% growth I will not go far.

My own conservative example:
Growth rate 1%
Time to double the money: 72/1=72 years, very long time.
If I can get at least 5% yearly growth in my "challenge" account that will double the money in 14.4 years. 





 

What to do after you maxed out all tax advantaged opportunities?

After I maxed out all tax advantaged options, there is nothing else left for me then to open a taxable investments account.

What taxes would I pay on investments in a taxable account?

A taxable account is funded with post-tax money.
The interest, dividends and capital gains are taxed every year. 

1. Interest
It is taxed at ordinary income tax rate according to you tax bracket.


2. Capital gains and Qualified Dividends (2018)
Ordinary dividends and short term capital gains are taxed at ordinary income tax rate.

Qualified dividends  and long term capital gains are taxed at reduced rates: 

There is an additional 3.8% Net Investment Income Tax (or Medical Surcharge Tax) for capital gains, and dividends.
It applies to modified adjusted gross incomes exceeding $200,000 for singles and $250,000 married filing jointly.  



I am thinking of opening a separate "challenge" account in which I will try to learn how with certainty to achieve more than 1% yearly returns on my own. In this account I will not use indexing. 
Majority of my investments is in index funds at this time. Indexing is supposed to make more than 1% returns per year with relatively high certainty. 
The "challenge" account will be for trying it on my own. I will add a link to it here as soon as I start with that.   

 

What is "Indexing"?

Indexing is a passive long term investment strategy.

Indexing can be achieved with mutual funds or exchange traded funds (ETFs) which closely tack the performance of the underlying index.


SPDR S&P 500 ETF (or SPY) is an example of an ETF which closely tracks S&P 500 index.
SPY holds 500 companies that make up S&P 500. 
People like indexing because with little effort this is a way to diversify. The 500 companies of the SPY are supposed to be approximately 80% of the overall US stock market.


With this method the investor will:
1. Achieve the same rate of return as the underlying index.
2. Will be exposed to the same risks as the underlying index.
3. Achieve a good degree of diversification.

Most of my investments are in index funds at this time. As mentioned above, it is easy, it is diversified and the return averages are acceptable. 

I have another post about how I do indexing for myself: Indexing simplified. 

How long is the list of tax advantaged retirement savings options?

The tax advantaged options are very few: 401k (and similar plans like 403(b), 457 and SEP), IRAs and HSA.

HSA is a special case: it is a health savings account but after age of 65 it can be used as an IRA.
401k and IRAs have 2 varieties: Roth and Traditional which means the contributions are post-tax or pre-tax. 

Here is this short list including contribution limits:

1. 401k (or Roth 401k) How to decide between regular 401k and Roth 401k 
    2018 limits: $18,500, catch up with 50 - additional $6,000


2. IRA (Traditional or Roth) How to use backdoor Roth IRA
    2018 limits: $5,500, at 50 - additional $1,000
      

3. HSA Why is it on this list
    2018 limits: 
    Individual $3,450, family: $6,900, 
    at age 55 - additional $1,000 (per person of age 55)


I am not counting the 529 college savings plan. Even if this account is in your name and theoretically it can be used as savings back up but the penalties are very high.



In the tables below are the maximum yearly contributions based on 2017 contribution limits. 
The first table is for a family with two working adults showing two 401k and IRA accounts and a family HSA.

You can see the added "catch-up" contributions at age 50 (401k and IRA) and at age 55 (HSA). 

The second table shows yearly contributions for a single person showing one 401k, IRA and single HSA.

The list is short and the contribution amounts are small. 
A high income professional will use up those options fairly soon. 
The rest of the savings will have to go into a taxable account. 

How does the "backdoor Roth IRA" work?

Assuming the taxes in retirement will be lower, then a Traditional IRA with tax-deductible contributions is a better choice.
 

However, not everyone qualifies for a traditional IRA with tax-deductible contributions. And not everyone qualifies for a Roth IRA either.

Still there is a way to have an IRA, which is called a "backdoor Roth IRA".

If you don't qualify for a Traditional IRA with tax deductible contributions, you still can open a Traditional IRA account. 
Your contributions will not be tax deductible but the money can be relocated from a Traditional IRA to a Roth IRA. After that the distributions will be tax-free. The money will grow tax-deferred. 

Here is how the conversion works step by step:

1. Open both, Traditional and Roth IRAs accounts with the same institurion.

2. First contribute to Traditional IRA.

3. As soon as the money comes into the Traditional IRA account convert the complete cash amount to Roth IRA (usually need to fill out a conversion form).

4. Repeat every year. 

It is convenient to contribute and convert the entire yearly contribution as lump sum due to paperwork. 
  

There are various options for IRAs accounts: from investments accounts which allow only mutual funds to brokerage accounts where you can buy stocks. 

Watch out for fees. Some offer no-fee accounts, and some have set-up, annual, termination or conversion fees. 


Contribution limit for both traditional and Roth IRA for 2017 is $5,500 ($5,600 if you 50 or older).  

In a Traditional IRA withdrawals are allowed starting age 59½ and the early withdrawal penalty is 10%. The required minimum distribution age is 70½.  

A Roth IRA is different - there is no age limit for early withdrawals. 
You can withdraw your contributions (contributions only, not earnings such as dividends, interest or capital gain) at any time without penalty.  
For the earnings there is a 5 year rule and the money have to be in the account for 5 years otherwise there will be a 10% penalty. 
Roth IRA also has no required minimum distribution rules.

The backdoor Roth IRA will close for contributions at 70½ because starting from that age no contributions are allowed to the Traditional IRA where the money has to go first.