Financial Update – Jan 2022

Another month, another update. A few random comments.  

Good Reads/Listens/Watches

• Vanguard hosed their retail Target Date customers with large capital gains distributions.
  • MyMoneyBlog
  • WSJ
  • Lesson learned: Don’t hold funds-of-funds in a taxable account.
• Beau Miles made some great videos:
  • Planting a tree a minute for 24 hours.
  • Running a half marathon with a wheelbarrow.
    • I love this man. Whenever I’m presented with a choice in life, I should ask myself “what would Beau do?”
• Sandy Munro started tearing town a $130k Model S Plaid a week ago (link).
  • I don’t think I’ll ever buy another gas vehicle (including hybrids). I’m hoping that our two ten-year-old vehicles will hang on for another decade to give EV technology time to continue to evolve.
• Mr Clipping Chain reflects on his first 2 years of early retirement (link).
  • I’m not one of those bloggers who shares all the intimate details of our personal finances, but I’ll show you a little cleavage, all right? Maybe the top of a butt cheek if you ask nicely.
  • By the way, if you want the full frontal of someone else, I’d happily point you toward The Frugal Professor. Professor Frugal is a husband, father of five, and posts each month about the intimate details of his personal finances. It’s kind of the Hustler of personal finance. We also traded interviews, which was really fun, and those can be found here and here.
    • When I started this blog 6 years ago, I can’t exactly say that I exactly aspired to be known “the Hustler” of personal finance. But here we are…
• OchoSinCoche became an Uber Eats driver for 24 minutes to chase a $250 bonus (link).
  • I liked his assessment of the “externalized costs” model of the gig economy:
    • Having driven Uber Eats for less than half-an-hour, I believe I’m fully qualified to make broad generalizations and opine about the gig economy. The whole model seems built on trying to externalize as many costs as possibly, including:
      • Health insurance of the driver
      • Wear and tear on the driver’s vehicle
      • Social security and Medicare taxes
      • Liability and safety
      • Probably a billion others that I’m not considering
  • It reminded me of when Mr Money Mustache did a similar experiment becoming an Uber driver (link).
    • My favorite quote from this post that has stuck with me 4.5 years later:
      • Imagine developing a company specifically to take advantage of people’s ignorance of how expensive it really is to drive their own car. What would this company look like? (the answer is of course that it would look like very much like Uber or any other ridesharing company)
• I enjoyed this article expressing skepticism of the long-term viability of crypto (link).

 

Life

• Despite being fully vaccinated (& boosted in the case of Mrs FP and me), the seven of us got Covid.
  • It knocked me out for a day or two, but thankfully the recovery went fine.
  • I have a (vaccinated & boosted) friend who intentionally got Covid from their (vaccinated) kid, just to get it over with.
• I found a Chrome plugin that seamlessly restores the “dislikes” feature within YouTube (link).
  • It is my new favorite thing. I’m disappointed in YouTube for removing that feature.
    • Also, friends don’t let friends watch ads on the internet. Use this Ublock Origin plugin (link).
• I played a lot of frisbee golf. I love that sport.
  • A new course opened by my house and it is a blast.
• Luckily, my university’s leadership has accepted our committee’s proposal to dramatically improve our retirement plans (401a, 403b, & 457). It seems that our plan is on track to join the ranks of best designed/governed plans in the country by the end of the year.
  • Our Vanguard Collective Investment Trust (CIT) Target Date Funds will have an all-in expense ratio of 0.045% (that pricing tier kicks in at $2B of assets in the TDF). We’ll have a fixed recordkeeping fee < $30/head. Normal index funds will be the institutional plus share class (e.g. 0.02% for VG total US stock fund, etc).
  • Further, I’m close to getting buy-in to introduce the mega backdoor Roth to our 403b (and maybe 401a!?!?), assuming congress doesn’t shut it down…thank you Manchin!!!.
    • If true, that’ll be an extra $40.5k/year of Roth space in my 403b and an extra ~$26.5k/year Roth space in my 401a. So, $67k/year of potential backdoor space at play here!!!!
  • The value added of a well-designed retirement plan is not lost on smart employees (who also have the cash flow). The comment section of a recent WSJ article demonstrates that quite nicely.
  • I’ve had a lot of fun being involved in this project. I think it would be fun to do some consulting in this area, but I have no idea how to start. As I’ve mentioned before, I recently helped a buddy who owns a 30-employee business set up a 401k with Employee Fiduciary: https://www.employeefiduciary.com/401k-plan-pricing (essentially $30/head + 0.08% + underlying expense ratio of Admiral Vanguard share class). They are loving their new plan.
  • I have no tolerance for poorly run retirement plans (or 529s, for that matter). Mrs FP’s newly discovered 403b is one such poorly run plan. Despite having ~$100 million in assets across thousands of employees, my wife’s 403b charges $20/head/year + 0.28%/year in fees (+ underlying expense ratio of the funds). Surely my wife’s employer followed a well-governed procurement process to select the local bank headquartered in our back yard (almost literally) to recordkeep after a thorough and exhaustive search of potential recordkeepers across the country! What a coincidence!
    • With $0 in prior plan assets, my friend’s 30-employee firm has a much better 401k than my wife’s. I’ve reached out to HR several times to voice concern, but nothing has changed so far. Fixing this is my next crusade.

 

 

 

Some friends convinced us to join them for a picnic dinner/fire at the nearby lake. It was not ugly. I should invest in a pair (or seven) of ice skates…

 

The new frisbee golf course has many of these trees from hell, with 10-inch spikes protruding from the trunk. They give me nightmares.

 

This Month’s Finances

With the recent market decline, I was sitting on several thousand dollars of unrealized capital losses for several tax-lots of VTSAX purchased in late 2021. Rather than do a conventional tax loss harvest (e.g. exchange security within my brokerage account for a similar-but-not-identical security), I ended up liquidating $20k of funds to front-load my $10k 529 & $12k IRA contributions for the year. I realized about $1.6k of losses in the process.

The act of liquidating taxable brokerage index funds at Vanguard was quicker than I’d anticipated. I put in the “sell” order before 3pm EST on a Thursday, and the cash had hit my Fidelity CMA/brokerage account by the close of business the following day.

I spent a good amount of time thinking about whether to do a conventional Roth contribution or a backdoor Roth this year. Thanks to our tax sheltering (me: 401a, 403b, 457, HSA + Mrs FP: 403b), our 2022 income is projected to be just under the Roth IRA contribution income limits. Despite projecting income under this threshold, there is a risk for unexpected income to push us over (e.g. Vanguard hosing its clients with unexpected capital gains, or this blog being acquired for the WSJ for $1B). So I opted for backdoor contributions (again) this year. While there is generally no harm in doing a backdoor Roth unnecessarily, there is a small risk that 2022 legislation could not only shut down the backdoor Roth, but implement retroactive clawbacks of 2022 contributions. However, this Morningstar article convinced me that this risk was pretty low. I guess the tradeoff for me was: the probability of unexpected income pushing us over Roth IRA income threshold vs. the probability of legislation changes with clawback provisions. Given the uncertainty, perhaps the more rational approach would have been to wait until the end of the year for the uncertainty (income + legislation) to resolve itself, but I figured that the probability of legislation change with clawback was low enough to not worry about it for now.

• The good:
  • Still employed.
  • Thanks to the liquidity provided by the sale of $20k of brokerage assets, our 529 + IRAs are fully funded for the year. 
• The bad/abnormal:
  • $420 in contact lenses (somewhat arbitrarily categorized as “healthcare”).
    • Our vision insurance (and mail-in-rebate) will eventually reimburse some of this.
    • The 1800Contacts purchase did not code as “online” for my BoA credit card. Bummer.
  • Unfrugal dog strikes again:
    • $50 grooming
    • $30 food

Interestingly, the federal poverty level for a family of 7 increased 4.5% from $40,120 in 2021 to $41,910 in 2022. I would have expected a bigger jump, though I guess this number is close to the average inflation of 4.8% over 2021 published by the Minneapolis fed.

I continue to benchmark our family’s spending relative to FPL because it provides a nice reference point that adjusts with inflation. Also, for incomes below 138% of FPL, most states will give people free healthcare through Medicaid. For incomes below 100% of FPL, the government will give households free food ($1,316/mo for a family of 7).

Full version downloadable here (link).

 

 

Footnotes:

1. Fidelity unambiguously has the best HSA on the market. $0 admin fees + $0 expense ratio funds.
2. I lazily approximate home value as my historical purchase price.
3. I have a 15Y mortgage which results in much larger principal payments than a 30Y mortgage. Since principal payments are simply transfers from one pocket (assets) to another (debt reduction), I treat such cash flows as savings.
4. ~$0 cell phones described here.
5. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, medicine, toys, etc).
6. 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). If you prefer to DIY (as I do), then a three-fund portfolio is great (link).
7. 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.
8. ETF’s are slightly more annoying to hold relative to index funds. With ETF’s, you must deal with bid-ask spreads as well as the inability to buy partial shares (Fidelity now offers fractional shares). With a simple index fund, you don’t have to deal with either of these issues. Bogleheads discussion here (link).
9. I continue to own VTSAX rather than FZROX and in my taxable brokerage account because it is more tax efficient due to lower capital gains distributions. Bogleheads discussion here (link).
10. CA’s 529 plan has the lowest expense ratio US equity index fund of any in the US (link). I’d have 100% of our 529 money there if not for the state tax deduction we receive in our own state.

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