Financial Update – Nov 2019

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • WSJ opinion piece on the state of income inequality in the U.S. (link).
    • The authors claim that, on an after-tax-and-transfer basis, the five quintiles of income earn a net of $50k, $55k, $65k, $80k, and $190k.
    • While the ratio of gross incomes of the top and bottom quintiles is is 60, on an after-tax-and-transfer basis it’s only 3.8 (=$190k/$50k).
    • Harvard econ professor Greg Mankiw wrote a blog post about this a decade ago (to the month!), which remains one of my favorite blog posts of all time (link).
    • My 7 years of “poverty” in grad school echo the above sentiments. On an after-tax and after-transfer basis, it was remarkable how similar my $25k/year grad school stipend was to my $90k/year engineering salary.
  • I stumbled across a Bloomberg article describing how Vanguard utilizes their ETFs class to avoid capital gains distributions on the equivalent index fund (link).
    • No real news here, but it’s the first time I’d seen the mechanics explained so clearly.
  • EconTalk interview with Anaesthesiologist who started a free-market surgery center in Oklahoma City (link).
    • They freely publish prices online and accept cash only (no insurance companies).
    • Apparently, due to the efficiencies of avoiding insurance companies, they can charge below-market rates yet provide above-market compensation to docs.
    • This business model would seem to pair well with the Christian healthshares (not formally discussed in the interview…just my incoherent thoughts). It’s my understanding that health-shares require you to pay up front and get reimbursed later. If I were on one of these plans and faced a major surgery, I’d probably use this group (or one similar) to get an all-in cash price up front. Worst case scenario, the ministry wouldn’t reimburse and you’re left with a reasonable price.
  • I binge-watched Breaking Bad for the second time (link).
    • The first time I saw it was 4 years ago. I’m not sure what prompted me to watch it again.
    • It’s certainly not a show for the faint of heart (graphic violence, etc), but it’s a damn compelling drama. I can’t tell you how many times I promised myself I’d only watch one episode only to repeatedly break that promise for several more episodes.
    • It’s currently ranked #4 on the best TV shows of all time, behind both Planet Earth series as well as Band of Brothers. Chernobyl is ranked #5.
  • I updated my 2019 tax model to fix the CTC errors (link). 
    • A huge thanks to reader Scott for alerting me about the issue & MDM for helping resolve it.
    • MDM is a spreadsheet savant (link). 
  • The Inventor: Out For Blood In Silicon Valley (link).
    • This is an HBO documentary about the rise and fall of Theranos.
    • It reminded me a lot of the Fyre documentary (link).
    • The founder, Elizabeth Holmes, reminded me of a cult leader. Charismatic, visionary, fostering a culture of fear and paranoia. She hoodwinked investors out of $400M of cash.
      • If I had 1/100th of Elizabeth’s charisma, I’d have non-zero charisma.
  • Speaking of movies about cults, here are some cult classics (literally) I saw some years back and really enjoyed:
    • Holy Hell (link).
      • Absolutely fascinating.
    • Going Clear (link).
      • Documentary about scientology. 
    • Prophet’s Prey (link).
      • Documentary about the polygamous FLDS church (offshoot of the LDS/Mormon church) and the capture of Warren Jeffs.
    • I watched the above movies in close succession some time ago. What struck me as interesting is the commonalities across the three different cults: 1.) charismatic leader, 2.) creating an intensely strong sense of belonging/community, 3.) limiting access of information to the outside world, and 4.) vilifying those that leave.


The key figure from the WSJ article (link). Notice now flat the slope of the net income line is going from quintile 1 to quintile 4. It seems like the optimal strategy over one’s lifetime would be to avoid the 2nd-4th quintiles and only spend time in the 1st and 5th. I violated this rule during my four years as an engineer, but have followed this rule well during grad school + after. The entirety of our retirement will be spent in the bottom quintile, perfectly adhering to the strategy. Under the current system, the incentives are quite perverse. I can only imagine how amplified these distortions will become in the future under the leadership of far-left politicians.

 

Life

  • We got our first call from a school administrator this past month. The assistant principal called us telling us that FC4, our 2nd grade daughter, had been involved in an altercation during recess. Apparently she was annoying her “boyfriend/fiancé” during recess. FC4 can be quite annoying, so I immediately sympathized with the boy. The boy asked her to stop and threatened to “put her in a sleeper hold” if she didn’t. She didn’t stop, he put her in a sleeper hold, and she ended up hitting her head on the ground (luckily not seriously). When Mrs FP told me about it over the phone we had a good chuckle. She ended up going to his birthday party that same evening (the irony!). The principal is making him seek regular counselling for anger management.
    • If this is any indication of the drama that lies ahead while raising 5 soon-to-be-teenage children, I am screwed.
  • The weather in November was absolutely glorious. It was in the 60s for much of the month. We enjoyed lots of bike riding, time at parks, etc. It was a great month.
  • We tried a 7-day Disney+ trial. I didn’t really see the appeal, given that every Disney movie is freely available at the library (or our personal DVD collection). Mrs FP pointed out that we incur many dollars per month in late fees at the library, so it’d probably be a financial wash. She has a good point, but I think the strategy going forward is to be more disciplined on our DVD returns. Perhaps we’ll reconsider going forward?
  • The great dog experiment continues. We have the dog mostly house trained except for when she urinates on our carpet. We have the dog mostly obedience trained except for when she mauls our kids, jumps on the couch, jumps up to the table, and runs around the house like a possessed demon. We have the dog leash trained except for her trying to chase every car, chase every smell, and jump up on strangers. The best part of my day is kenneling the dog and subsequently collapsing on my bed in a state of utter exhaustion. She’s 4 months old or so. We’ve been warned that we have a good 1.5 years left of this behavior remaining….

 


$20 nose-bleed tickets. It was a glorious November day. We enjoyed a fun 1.5 mile razor-scooter ride from off campus to save on parking fees. We walked to my office during half time to snack on sandwiches and brownies. It was a fun memory.

 


Mrs FP saw this on facebook. I found it amusing.

 

This month’s finances

  • The good:
    • No catastrophes.
  • The bad/abnormal:
    • Spent $1,764 on “other expenses.” Damn.
      • $270 in climbing gear.
      • $200 in piano lessons.
      • $188 for 6-months car insurance at Geico for 2 cars. $2.5k deductible on the minivan. Zero comprehensive coverage on beater sedan which we drive about a thousand miles per year.
      • $95 annual BoA premium rewards card which will subsequently be recouped via AA gift card thing.
      • $62 on 3 college football tickets with my boys. I don’t think I’ll feel the need to repeat any time soon, but I was trying to replicate the magic I experienced as a child going to Stanford football games with my dad & brother.
      • $49.99 one-time charge for premium version of WP Fastest Cache to speed up this blog. From what I can tell, it seems to have worked pretty well. One of these days I’ll blog about my misadventures into blog technologies (Cloudflare CDN, cache plugins, themes, etc). Today is not that day.
      • A few Christmas presents.
    • $1,319 on groceries. I must have eaten too much turkey.
    • $33.41 in vet bills. Rather than fill the pet prescriptions (worm & flea meds) at the vet, we filled them at Costco for about a 50% discount. These tiny expenses are buried somewhere in our grocery spend (much like our clothing purchases, etc).

Full version is 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).
  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. 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. 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 0.29%. 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. CA’s 529 plan has the lowest expense ratio US equity index fund of any in the US (link). I’d have 100% of my money here if not for the state tax deduction I receive in my own state.
  12. I own one share of Berkshire Hathaway (B Class) for the sole purpose of getting 4 free tickets/year to Berkshire’s annual meeting.
  13. I bought 100 shares MoviePass for $0.0127/share to be able to tell my students that I held a stock that went to zero. So far, the stock price stubbornly remains above zero.

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13 thoughts on “Financial Update – Nov 2019”

  1. Piano lessons: have you tried the Simply Piano app? We use it with our electronic keyboard at home and our daughter is hooked on it. It’s about $10/month I believe, and she can practice whenever she wants, no need to attend a scheduled lesson.

    Income Quintiles: For the majority of our careers (after I started freelancing), we lived in #5. Now we’re retiring in #1. The dream of “perpetually living like grad students” is finally coming true 🙂

    Reply
    • Thanks for the recommendation on the piano app!!! I’ll certainly check it out. $200 was unusually high this month; I think we didn’t pay last month or something like that. It’s usually very reasonably priced for the 4 kids we have in it.

      As the chart indicates, quintile 1 is certainly an optimal place to spend a lot of time. Eventually I’ll join you and the other quintile 1 retirees.

      Reply
  2. Thanks for your blog. I see you approximate income under different SWR scenarios. I’m also a prof, and have come to believe artificial SWRs aren’t useful. I can’t imagine retiring early (I’ve seen what happened to those who did), so instead I model my expectations under different RMD scenarios (including unfortunate early retirement scenarios like a head injury). It’s helped me see the tax consequences of pre-tax versus Roth contributions to 403b/457s, and I’ve adjusted accordingly. Just wondering if you have done that kind of strategizing?

    Reply
    • Thanks for the comment. If you click on the Draft of “Book” link on the top menu of the website, you’ll see my thoughts on the US tax code beginning at page 11.

      I’m of the opinion that I’ll pay $0 in federal taxes for life post-retirement, similar to GoCurryCracker: https://www.gocurrycracker.com/never-pay-taxes-again/. As a result, I put 100% of the money I can in pre-tax buckets (trad 401a, 403b, 457) and only utilize Roth accounts when forced to (i.e. backdoor Roth due to exceeding income limits).

      Regarding RMD’s, I’ll likely have converted all of my holdings from Trad to Roth before they kick in. GCC has written this strategy here: https://www.gocurrycracker.com/gcc-vs-rmd/. If not, no big deal. It’s just taxable income.

      The SWR indeed may be arbitrary and somewhat off, but at least it’s a general framework for translating wealth to recurring income – something 99% of the public is oblivious to. It disciplines me into realizing that $1 not spent translates to $0.035/year (or whatever) of income for life.

      If you think I’m full of crap on any dimension, please let me know. I love learning how I’m wrong so I can adjust my worldview accordingly.

      Reply
      • I think your book draft does a good job of setting out the problem for most people. I suspect my situation is fairly unique so it’s hard for me to think in those terms. For example, I plan to work past 70, leaving no window for Roth conversions pre-RMD and allowing accounts to grow much larger. Modeling the expected tax buckets suggests I would shift at least a bracket (or possibly two?) by maximizing pre-tax instead of Roth. (As you know, academia can have different career longevity than some other sectors.) In addition, the TCJA creates a marginal benefit given current brackets.

        Not to pry, maybe you plan to retire at a much younger age?

        Reply
        • Happy to fill the role of person who gets crazy thoughts into other’s brains.

          Academia is great. I’m untenured, so the publication stress is quite high. In your shoes, I can imagine it’s a great gig.

          I’m not sure when I’ll end up retiring, but the incentives (tax, transfers, etc) are such that it rewards early retirement. Given this, I’m leaning towards that some day.

          Reply
          • I understand. Tenure changes a lot; promotion to full is even better.

            I used your analysis to rebuild part of my decision model about Roth vs pre-tax, and it revealed interesting effects of length of career. Pre-tax works better for me if retiring before 69. Roth works better if retiring after that. There’s an interesting transition in the strategy.

            There are also interesting “insurance” aspects of the choice. Pre-tax is good if the possibility of forced early retirement is a real concern. Roth has advantages if one person in a couple dies early and the brackets shift from MFJ to single.

            Our personal choice is to hedge, which is easier if able to maximize 401a, 403b, and 457 after the age bonuses kick in.

          • Life of an untenured professor = real concerns for hedging against “forced early retirement”!

            The nice thing about choosing Trad initially is that you can relatively easily undo your position by converting from Trad=>Roth. The reverse cannot be achieved.

            I like your thoughts on the insurance aspects of Roth and shifting to MFJ to single. Roth is definitely great for hedging for tax uncertainty; all uncertainty is presumably resolved because the taxes are paid now but never again (unless, of course, laws change in the future…like the introduction of a wealth tax or the repeal of the Roth).

    • Thanks for the suggestion! I do use Jetpack, but I use the free version. It was my understanding that the free versions CDN wasn’t great, but perhaps I’m wrong.

      I’ve been really pleased with Cloudflare CDN’s free plan with WP Fastest Cache. If you think I’m doing something wrong, I’m happy to learn more.

      Reply

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