Financial Update Aug 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

Life

  • The kids are in school, so we’re back to the grind. We have 4 of the 5 kids in school. Our poor 3 year old has no idea what to do with himself without his siblings.
  • I’m coaching my 5-year-old daughter’s soccer team, which is hilarious. The best part about coaching is choosing the time and location of practice. I chose the school next door and walk/bike there. Beats the heck out of driving 20 min one way across town for a practice.
  • I was reluctantly interviewed by a local news-station doing a story on the $700M Powerball lottery. A young woman came to my office with a video camera and asked questions like:
    • Should a person quit work after winning $700M?
    • How much of the money should a person spend/save after winning $700M?
    • How should a person who has won $700M invest the money?
      • Needless to say, the conversation was of the least productive uses of time I’ve ever experienced. The obvious answer to the above inquiries is to not buy a Powerball ticket which has negative expected return. Lotteries and casinos are a regressive tax (disproportionately affecting the poor) on the ignorant. The sure path to wealth is lowering your expenses (particularly recurring expenses), lowering your taxes, and investing the savings wisely in low cost index funds.
  • One of my wife’s college friends was tragically murdered at the age of 35, leaving behind 3 young kids. At times like this it really makes you reflect on what you’re doing with your life, as any of us can go at any minute. Am I using my time productively or rotting away my life by mindlessly consuming internet drivel? Am I improving relationships with those that matter most or am I letting those relationships dwindle? Am I contributing to making the world a better place or not? Am I learning new things or letting my brain slowly turn to mush? What are my bucket list items and how do I accomplish them? Are safeguards in place to look after my family in the event of catastrophe? How do I make the most out of each day?

This month’s finances

  • The good:
    • Given that all my tax advantaged accounts are maxed out I dumped $7.7k into taxable brokerage accounts this past month. I absolutely love having this hierarchy of savings in place so that it’s a mindless exercise to shovel money into the appropriate bucket when I’m sitting on extra cash.
    • My father in law, the handiest man I know, drove out to help with some home repairs, saving us thousands of dollars in repairs. Nonetheless, we spent quite a bit of dough at the hardware store.
      • I dumped $500 into lumber and hardware for a climbing wall in our basement. I’ll post pictures next month when it’s completed, assuming I don’t die in the construction of it.
  • The bad:
    • Overall spending was higher than we would have liked. But with home repairs and climbing wall behind us, I look forward to lower spending next month (famous last words).
    • It turns out that my wife, who is 34 years old, was recently diagnosed with exercised-induced asthma. Her whole life she complained of being out of breath when exercising. I would always laugh at her and tell her it was because she was out of shape. Sure enough after the diagnosis, she got her first rescue inhaler this past month and it seems to be making a big difference. So we now have 3 people in the family on inhalers, which cost us $143 this past month. I guess it’s a small price to pay for the ability to breathe.
    • Paid $130 total for two eye exams at a local retailer. We found out our 5-year-old-daughter needs glasses. We picked up a pair for $35 after shipping from http://www.zennioptical.com/. I love eCommerce, which destroy excessive retailer margins. Zenni has glasses for as low as $12 after shipping. I love Miraflex glasses for kids, but for little kids this frame is a great cheap substitute for our 5 year old daughter: http://www.zennioptical.com/286516-children-s-plastic-full-rim-frame.
    • Our A/C crapped out, leading to a likely $6-7k replacement cost in the coming months. I’m thinking about deferring the expense until the spring because we’re almost through the hot season. + 1 for living in Seattle where they don’t have A/C.
      • My desire to throw away all of my earthly possessions and live in of a van full time peaks every time I have home repair issues.
  • Thoughts on taxable investing:
    • Taxable investing is a nuisance. Every time you receive a dividend or sell a security, this triggers a taxable event, and thus a drag on the return of the investment.
    • The nice thing about taxable investing is that capital gains can be deferred by simply holding onto stocks for decades without selling. I plan on holding the current shares in my taxable accounts until I die.
    • I put a lot of thought this month as to what investments to hold in a taxable account. This wiki article at Bogleheads was helpful: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement. It says that both domestic and international stocks are efficient to hold in taxable accounts. However, I dug deeper this past month and found this post: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=137580&p=3508650#p2033033 as well as the QDI tables from Vanguard: https://personal.vanguard.com/us/insights/taxcenter/yearend-qualified-dividend-income-2015 and https://personal.vanguard.com/us/insights/taxcenter/qdi/yearend-qualified-dividend-income-2016.
      • The dividend yield on total US stock market fund = 2%. All of which tend to be qualified dividends (this past year was a slight exception), meaning they are taxed at 15% for me at the federal level + 7% at the state level.
        • My annual tax drag on the US stock portfolio = 2%*(15%+7%)=0.44%
      • The dividend yield on total international stock market fund = 3%. Only 70% of which are qualified dividends, being taxed at 15%, with the remainder taxed at my marginal tax rate of 45% (37.5% federal + 7% state). Assume 6% foreign taxes (In other words, 3.18% yield, of which 0.18% is foreign tax withheld).
        • My annual tax drag on the International stock portfolio = 3.18%*70%*(15%+7%) + 3.18%*30%*(37.5%+7%) – 0.18%=0.73%.
          • The 0.18% is subtracted from the above because it represents the taxes that have already been withheld by foreign countries on the dividends.
      • As shown, the annual drag on the total international stock portfolio is about 0.3% higher than that of the domestic stock. This is due to higher dividend yield on international stocks, lower proportion of qualified dividends (QDI), high state income tax, and very high effective marginal tax rate.
      • As a result of the above analysis, I’m going 100% domestic in my taxable accounts from here on out. I’ll get my international exposure through my retirement accounts and avoid the extra tax drag.

Full version is downloadable here (link).

 

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value as my historical purchase price.
  3. I have a 15Y mortgage; which results in a faster rate of repayment. The true cost of the mortgage should exclude repayment of principal, which I show above.
  4. $15 internet and $0 cell phones as described here.
  5. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, etc).
  6. I prefer Vanguard funds but my employer offers Fidelity instead.
  7. Nobody knows the perfect asset allocation. Just pick one and run with it. Use a target date retirement fund as a benchmark if you want some guidance (link).
  8. My low portfolio expense ratio is the primary reason why I don’t hold target-date funds, which have expense ratios anywhere from 0.16% to 1%. I can achieve a much lower expense ratio on my own due to Admiral shares, etc. And it’s not hard. Plus, a DIY portfolio allows one to tax-loss-harvest more easily.
  9. ETF’s are a pain to own relative to holding index funds directly. You have to deal with bid-ask spreads as well as the inability to buy partial shares. With a simple index fund, you don’t have to deal with either of these issues. I am currently invested in VTI b/c it’s $10/year cheaper than VTSAX in my Saturna HSA.
  10. The one blight in my expense ratio analysis is my 529 plan. The underlying Vanguard fund is almost free to hold (0.02%), but the high administrative fees bring the total cost of holding the fund to 0.32%. I abhor fees and would likely avoid 529 plans if I didn’t get to deduct up to $10k of contributions per year on my state return, saving myself $700/year in state income taxes.
  11. The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital ($15 per transaction + 4*$1/dividend reinvestment).

Disclaimer:
This site is for entertainment purposes only, as disclosed here: https://www.frugalprofessor.com/disclaimers/

10 thoughts on “Financial Update Aug 2017

    • Thanks. I’ll be hundreds of thousands of dollars richer in retirement thanks to tax optimization. It’s not rocket science, but tax arbitrage is basically a legal way of minting money.

  1. Your poor wife! I was diagnosed in my late 30s with “seasonal asthma” which solved some of my health issues. But then I got pregnant and developed “pregnancy asthma” which does not go away and now I suffer asthma year round. But at least knowing what I have helps me to maintain it. Now if my doctor could just remember that I haven’t had it all my life and it still causes issues…ha! Anyway, best of luck to your wife on navigating life with an inhaler. 🙂

    • Sorry to hear about your asthma. My wife is pretty happy with the diagnosis because she can finally breathe during exercise. I had no idea that exercise induced asthma was an actual thing until now.

  2. Hey Frugal Professor, great update, once again. Just as an editing comment (because you love when I correct you), your months and years for Where Did Savings Go? And Portfolio allocation may be a little off. Or, we’re older than I thought we were.

    Thanks for being so awesome at all of this stuff. You’re the best! 🙂

    • Mrs. Frugal Professor strikes again!!!

      I caught those typos as well but was too lazy to update the image. Maybe I’ll do that now. I did a massive edit to my sheet as Yodlee died and I replaced it with Personal Capital. Looks like a few things got jumbled up.

  3. Frugal Professor, I noticed that you maxed out your employer sponsored retirement plans (403b and 457) in July yet in August you still received employer contributions to those plans. Does your employer contribute to your retirement plans even if you don’t?

    In my experience, companies won’t contribute unless they are matching a contribution and they do it on a per paycheck basis. I looked into this earlier this year when I was planning to max out my 401k early, but had to stick to a schedule to max it out over 26 paychecks or I would not get the employer contribution.

    • Good question.

      My 401a is much like your 401k, except for that it’s mandatory for me. I contribute X%, my employer contributes Y%. I can’t front load it like you can in your 401k.

      I can, however, front load my 403(b) & 457.

      If front loading a 401k screws up your company match, then definitely don’t front load b/c you’ll throw away free money. It’s weird that firms allow this to happen.

  4. Wondering if you have some room to harvest free tax gains in your taxable account this year? I have found it difficult to estimate due to mechanics (see Kitces article), so I use tax software to figure it out.

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