Wednesday, October 29, 2014

How to Fund Retirement

Now that I am semi-retired, I was curious about how my retirement plan works - what are the sources of income to pay for my retirement?  Recall that my plan assumes that we keep living approximately the same lifestyle in retirement as we did when I worked.

My wife and I do not have a company or union pension plan.  I cashed out my pension from Nortel when I left, which was fortuitous as the company went bankrupt and some of the pension plans were underfunded and not government insured.  All of our retirement income has to be paid from our retirement assets or by the government.

My first question was: What are the sources of my Retirement Assets or savings?  I have IRAs and RRSPs that had contributions from my employers as well as some where I was the only contributor. The cashed out pensions were entirely paid by my employers.   In addition, we saved after tax money from salaries, bonuses, etc.  The answer was that we saved about 80% of our assets, and employers contributed about 20%.  This was a revelation, I thought my employers were more generous.

My second question was: What are my sources of income after retirement?  For this, I looked at a year in my retirement plan when both my wife and I are collecting Canada Pension Plan (CPP) and US social security.  The answer was that about 16% of our income came from government pensions, and 84% from our retirement assets.  Not as much of a revelation as I assumed the government was not too generous.

So my conclusion is that if you do not have a generous company pension, you need to save a lot of your own money to maintain your standard of living.  Your situation will be different as you may choose a different lifestyle or you may get more or less from the government, but I think the basic conclusion still holds - you need to save a lot of your own money.

You should consult a professional for retirement advice, the information above is not warranted in any way to be correct.

Saturday, October 25, 2014

Money Saving Tips for the Week

This is my third post on saving money, so I am running low on ideas.

  1. This being America, it turns out that many prescription medicines for man and beast have coupon/rebate offers.  These offers are usually for brand-name (non-generic) prescriptions and you can use Google to find them.  We currently get money back on the dog's arthritis medicine, along with some allergy and eye medications.  This can save you 10 to 50%.
  2. If you are traveling from the USA to other countries, maybe somewhere in West Africa, you can save money when using credit cards.  Find a card that does not charge you a foreign transaction fee like the Capital One World Mastercard.  You will save about 2% per transaction, which can add up.
  3. When traveling, you can also save money by using Skype or Facetime or other VOIP service to make phone calls on your mobile when you are in a wifi hotspot.  This saves money over using your regular mobile where you will get hit by $1 a minute roaming charges. The voice quality of Skype on a modern smartphone is very good.  Also make sure you use a VPN in a public hotspot for security.

Thursday, October 23, 2014

US Bond Market Confusion

The US bond market still seems to be confused.  How else to explain that tax-free municipal bond funds yield more than taxable bond funds?

VWIUX - Vanguard Intermediate Term Municipal Bond Mutual Fund (Adm) yields 3.19% non-taxable, which is equivalent to a 4.1% taxable yield if you are in the 28% federal tax bracket.
VBMFX - Vanguard Total Bond Market (Adm) yields 2.48% taxable.

They both invest in intermediate term bonds.  I know that people worry about municipal bonds and the percentage of AAA bonds in the taxable bond fund is higher, but does it really justify a 65% premium after tax over the municipal bond fund? Maybe people still remember Meredith Whitney's prediction of massive municipal bond defaults in late 2010 - a universally ridiculed bad prediction.  I don't know what causes this strange yield divergence, but it does make sense to consider municipal bond funds in taxable accounts.

For Canadians reading this blog, ignore the above, there are NO tax free bonds in Canada to my knowledge, this is a US-Only offer, kind of like the miracle diet pills and self-coiling-hose that get advertised late at night on sparsely watched cable TV networks.

Monday, October 20, 2014

My First Second Career - Consulting

A Successful Consultant with a Mobile Office that is very environmentally friendly. (1)

After months of probing, false starts, and inquiries, I now have my first second career.  It sounds strange, kind of like the "Fifth Third Bank", a real bank with a weird name.

A partner and I have started a consulting business and have an initial client who needs us to do some work based on our experience and skills in telecommunications in Latin America.  Unlike our consultant depicted above, we will work out of our homes and will use more traditional methods to provide recommendations, rather than Tarot Cards.

Stay tuned for further details.

(1) Photo credit Flickr

Friday, October 17, 2014

Staying Upbeat with Ebola, ISIS, Stock Market Correction

One of the downsides of not working is that you have lots of time to follow the news on TV, print, Internet, and paper.  One of the prime objectives of American media is to scare the living daylights out of you.  It is Armageddon every day in the US, with terrorists, viruses, mass murderers, zombies, criminals, and greedy financiers swarming through the streets of our suburban paradise to kill, maim, and bankrupt our innocent neighbors.

Aside from drugs, there are some techniques to stop you from digging a shelter in the backyard and buying a 50 gallon drum of rice at Costco:

  1. Don't watch too much news TV or spend too much time on Internet news websites.  There is plenty of diverting TV entertainment and the Internet contains plenty of porn and other info you have not found yet.  Avoid the modern equivalent of tabloids.
  2. Think about the facts.  Is ISIS the first organization to engage in terror and genocide or are they just the latest incarnation?  They are unfortunately just the latest - think of Rwanda, Yuogoslavia, Cambodia. How many people have caught Ebola in the US and died? - none yet.  Is crime increasing or decreasing?  It is actually decreasing steadily over the last 20 years.
  3. Exercise and get out and do things.  Use your common sense and wash your hands often, avoid leaving your Iphone on the table in the bar while you go to the restroom, and lock your car when you park it.
  4. Avoid friends who pay attention to all this stuff.  I am thinking about your buddy who, once he has a couple of beers, talks about his gun collection, his vast quantity of ammo, and the place in West Virginia where he will take his family when the financial system melts down and zombies are released from the graveyards.
I hope this is helpful.  Have a nice and carefree day.

Thursday, October 16, 2014

Money Saving Ideas for the Week

A few tips for saving money this week.

  1. If you have credit cards with a yearly fee (airline miles cards) that you do not use often, phone the credit card company and ask to cancel them.  They will generally waive the fee or offer a credit equal  to the fee if you make 5 or 10 purchases.  At worst they will cancel the card and refund the fee.
  2. Close your low interest savings accounts at your bank and open higher interest accounts at "Internet Banks".  My local bank savings rate is 0.01% and the rate at Ally Bank is 0.90% (90X better), 
  3. If you have a traditional brokerage account where they charge you 1 or 2% of assets per year ("wrap account") or $15 a trade (regular account), close it immediately.  Discount brokerages will charge $2 to $8 a trade for a regular account with no yearly fee.  If you are buying and holding index funds as the majority of your investments as you should, the 1% wrap account fee is buying you nothing - you don't need investment advice, you are not trading frequently, and all you are getting is the fancy newsletter and a nice Christmas card from the broker.
  4. If you are going South for a month or two during the Winter, you can usually ask your cable or satellite TV company to hold your service for the time you are away so you are not paying for service you do not use.  This could save you $100 to $200.

Friday, October 10, 2014

Now that the Market is Down, How is the Protective Put Strategy Working?

Recall that I was going to use a "Protective Put" option strategy in the rebalancing of my portfolio back in the Summer.  The reason was that I had excess small cap stocks (ETF) in my portfolio and I did not want to sell until next year for tax reasons.  The Protective Put allowed me to protect against the downside that small cap stocks decline before I sell next year, effectively allowing me to sell this year without actually selling.

Here is the status of the strategy, which seems to be working.  The small cap ETF has gone up (9/16), then down (10/10) with the market, the PUT first declined in value, then rose above the purchase price.  Net of all this, I am down $1016, but without the put my loss would be higher at $1604.  The PUT does not track its intrinsic value that well because the volume is low, so it may increase in future.

Protective PUT for Vanguard Small Cap ETF (VB)
Before Option PurchaseOption Purchase 8/159/6/201410/10/2014
200 shares VB$22,712.00$22,702.00$23,354.00$21,098.00
200 PUT options (Dec2014)$0.00$800.00$500.00$1,388.00

So I am still satisfied with this strategy, it has allowed me to delay the sale of these ETF shares with much lower downside risk than just holding until next year.