If you’ve spent any time on retirement planning, you’ve probably heard mention of the 4% rule. It was developed to help determine how much money retirees could safely take from retirement accounts annually, without depleting their funds.
Summarizing the rule quickly, you can withdraw 4% of your portfolio on day 1 of your retirement. You can then withdraw a similar percentage every year thereafter (the actual dollar amount will change based on remaining balances, of course), adjusting the amount to keep pace with inflation. Done properly, you will have very little chance of running out of money.
The 4% rule has been widely accepted in the early retirement community. This is in spite of the fact that early retirees have much longer retirement lengths than the 30-year assumption used in the rule’s original research. Conversely, though, there is credible new research which suggests that in low interest rate environments, as we are currently experiencing, 4% withdrawal rates are too optimistic, even for traditional retirements.
Whether the 4% rule is gospel truth, too conservative, or too aggressive for retirement planning can be debated. However, there are universal lessons hidden in the 4% rule which are valuable to anyone on the path to financial independence and retirement.
Lesson 1: The Fastest And Easiest Path to Financial Independence Is Needing Less
The 80% Salary Replacement Rule is commonly used by financial advisers to determine retirement income needs. According to the 80% rule, what you need for retirement is tied to what you earn in your working years. If you earn $50,000/year, assume that you will need $40,000/year in retirement. If you earn $100,000/year, assume that you will need $80,000/year in retirement.
The 80% rule works for many people because they spend most or all of their income. However, just because many people live this way does not mean we all should.
The 4% rule disassociates earning and spending. Let’s think of it another way: using the inverse of the 4% rule, we get the rule of 25. When your investments reach 25 times your annual spending, you are considered financially independent. Now, you would have enough money to withdraw 4% of investments and live exactly as you are.
Your spending, not what you ever earned, determines how much you need to be financially independent. This knowledge can be empowering.
Understanding how much you actually need to be financially independent can, at first, also seem intimidating. If you spend $100 monthly ($1,200/year) for cable TV, you would need $30,000 ($1,200 X 25) in investments to support this expense alone. That number can seem large and difficult to attain, and remember: this would support only $100/month of spending.
However, replacing cable with an online service for $10 monthly would cut this annual expense to $120. To support this expense with investments would require only $3,000.
Saving a few dollars a month does not seem like a big deal at first glance. With this different perspective, though, you can see that not only do you save an extra $1,080 each year. This one decision gives the double effect of reducing the amount needed to retire by $27,000. That is a big deal!
Learn More: Cutting the Cord: How to Hack Your TV Budget
The effects become quite impactful when applying this logic to bigger ticket items. Supporting a $2,000 monthly mortgage payment in retirement would take $600,000 of investments. However, choosing a home you could pay off before retiring would eliminate mortgage obligations.
Quoting financial independence blogger and writer JL Collins, “Financial independence has two aspects: How much you have and how much you need.” Understanding the 4% rule and its inverse, the rule of 25, should make this clear.
Having enough investments to support a high-cost lifestyle is very difficult to achieve, even for very high earners. However, focusing on needing (and spending) less can make financial independence achievable for nearly anyone.
Lesson 2: Investment Fees Matter
If you are a regular Dough Roller reader, this should not be news to you. It is a regular theme are here. In fact, you can check out the recent post and podcast inspired by this topic.
John Bogle founded the Vanguard investment group based on this concept. He has written entire books explaining the impact of fees on investment returns. While this lesson can be more fully explained in books, articles, and podcasts, the 4% rule allows for a simple back-of-a-napkin explanation.
Imagine that you spend $40,000/year to live. According to the 4% rule, you need to accumulate a $1,000,000 portfolio to sustain that $40,000 annual spending. However, the 4% rule is an academic exercise and does not reflect investment fees.
If you pay 2% annual investment fees, your $1,000,000 portfolio would cost $20,000. This represents half of what you could safely take from your portfolio. This would leave you with only $20,000 for your spending needs, while keeping your initial portfolio withdrawal at 4%. You would actually have to save $2,000,000, double what you would without fees, to provide your initial $40,000 and pay “only” 2% investment fees while keeping your withdrawal rate at 4%.
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If nothing else drives this point home, the 4% rule should. Investment fees matter!
Lesson 3: Many People Give Themselves No Chance At Financial Independence
In a previous post, I discussed the impact of savings rate on wealth building. The post includes a table that shows the relationship between savings rate and the approximate number of years it would take to reach financial independence. What it comes down to? Most Americans do not save nearly enough to even give themselves a viable chance. It’s near-impossible for them to accumulate 25 times their annual spending, which the 4% rule shows we need to be financially independent when investing in stocks and bonds.
Once we have the means to save enough money, there is then the assumption that we can just blindly put money in our 401(k) or hand things over to an adviser with wildly unrealistic expectations. These scenarios are seen everywhere, such as Dave Ramsey’s “12% Reality.” He writes that “you can expect to make 12% on your investments” using “an investment professional” based on “real numbers.” These ‘real numbers’ assume investing 100% in stocks while failing to account for inflation, volatility of returns, or investment expenses. It does not sound like any real world that I am aware of.
Invest Wisely: How to Determine Your 401(k) Fees
Studies show most investors get substantially less return than the funds they invest in. This occurs because investors make behavioral errors trying to time and beat the market. Adding insult to injury, they pay unnecessary fees and taxes in the process.
While not perfect, the 4% rule gives a realistic expectation of what you can expect to spend living off a portfolio of paper assets, while factoring in real historic returns and accounting for the effects of portfolio volatility. The inverse rule of 25 likewise gives a reasonable estimate of how much money it takes to be financially independent.
If you are using the assumptions of the 4% rule, you should first understand the effects of savings rate on time to financial independence. Be sure you save an amount that gives a legitimate chance at a successful outcome. Otherwise you are dead in the water before getting started.
Next, you should learn to invest in a way that makes these assumptions valid. This means learning about index investing, which aims to deliver market returns while minimizing investment fees and taxes. Even when minimized, these expenses must be accounted for. You should also learn how to avoid the behavioral errors that most investors make that prevent getting market returns.
If you are willing to make an effort to save an appropriate amount and learn to invest in a competent way, the 4% rule can be a very useful tool to help you with your retirement planning. If you are not willing to take the time and effort, the 4% rule is a reality check. It demonstrates that paper assets do not provide a viable path for many people to build enough wealth to become financially independent.
How Will You Use The 4% Rule?
The 4% rule is one of many “rules” found in personal finance. It was developed to determine how much money can be safely taken from retirement accounts annually. You can choose to follow it, modify it, or use a completely different approach for your retirement spending. However, there are some important lessons hidden in the assumptions behind the research that can help everyone that takes the time to understand them as we find our paths to financial independence.
What are your thoughts on the 4% rule and its accompanying rule of 25?In podcast 327, we address misinformation and assumptions about the 4 percent rule to give you a better understanding of how it works.
The post DR Podcast 327: What You Really Need to Know About the 4% Rule appeared first on The Dough Roller.
A Day in My Quarantined Life
Just for fun, last , I took pictures and shared in real-time on Instagram a peek into a pretty normal day in our lives. I say “normal”, but nothing is really normal right now due to COVID-19, our city’s current Safer at Home order.
But I wanted to document what this period of our lives was like — when we were home 24/7 all day, every day, as a whole family. This was two days before we brought Champ home from the NICU and it was during the few-day period when I was unable to visit him there due to the lockdown on visitors as a result of COVID-19. (In case you were wondering why I didn’t go up to the NICU on this day.)
I’ll be sharing another Day in My Quarantined Life post next week with the added addition of a newborn. That will look very different! 🙂
So without further ado, enjoy a peek into a day during this period of history when we were all self-isolating…
A Peek Into My Quarantined Life
7:30 a.m. — I switch the laundry I had started the night before into the dryer and start another load in the washer.
7:45 a.m. — I fold a clean load of laundry while listening to an audiobook.
8:15 a.m. — I picked out my new books to read for the week and hopped on the treadmill for my morning reading/prayer time (yes, I walk while I read and pray!)
9:10 a.m. — I shower and get dressed for the day. I usually pick out my outfit for the day the night before to make getting dressed a snap in the mornings.
Kaitlynn usually makes some unique breakfast for herself every morning. Today’s breakfast was strawberry/peanut butter toast.
9:35 a.m. — I eat the same thing most every day for breakfast — a big bowl of Raisin Bran. Kaitlynn and I ate breakfast together this morning (breakfast is always on your own at our house right now, but sometimes I’ll sit down and eat with one child).
10 a.m. — I lie down to rest (since I’m near the end of my pregnancy, I usually have to lie down and rest once or twice a day). While resting, I watched the local news, talked to Jesse, and answered Instagram messages.
11 a.m. — Still resting. I go through my email inbox and answer all of the urgent messages.
11:45 a.m. — I took a break from business work to do my hair and makeup. (I usually have to lie down after my morning walk and shower because doing both of those things back to back wear me out for awhile!)
12:15 p.m. — Made Red Raspberry Leaf Tea, talked to Jesse, and checked my messages on Instagram.
12:45 p.m. — I sit with Silas while he works on his school for the day. I work on chapter 8 of my manuscript for my upcoming book. (I’m over 75% done with the rough draft!) (And yes, we allow PJ-wearing in our homeschool right now… provided you take a bath and put on clean PJs. :))
1:30 p.m. — I eat lunch and work on final edits to chapter 7 of my manuscript before I submit it to my editor who is working with me in the book-writing process.
The girls have been doing various creative projects since they are home 24/7. I love seeing the unique ideas they are coming up with. Kathrynne’s project for today was hand-drawing this coloring page to color in (the girls have also been super into making friendship bracelets right now — and you can see all their embroidery floss in the photo above).
Here’s a better photo of the coloring page she drew.
4 p.m. — Time to take my prenatal vitamins. (I spent the last two hours working on my book and working on foster care related phone calls + talking to Jesse about some decisions we needed to make there.)
5 p.m. — Snack time — dates with peanut butter (dates are for labor prep). I worked on getting my Hot Deals enewsletter ready to go + the blog post for the day and worked on some projects for my Mastermind group.
7 p.m. — Finished with my work projects for the day! And it’s onto making dinner. I used some bread crumbs, spaghetti sauce, mozzarella cheese, and chicken. I dipped the chicken in egg mixture and then in bread crumbs and browned the chicken on the stove top. Then I put it in a pan with sauce and cheese and baked it. It was a Chicken Parmesan dish of sorts — using what I had on hand.
7:20 p.m. — While the chicken was cooking, I unload and reload the dishwasher and listen to an audiobook.
8:15 p.m. — Dinner time! (I made mine chicken without sauce — since it gives me heartburn. We served the chicken over pasta with peas.)
After dinner: We did our before bed house cleaning (everyone cleans up their designated spaces) and everyone helped with some laundry while we finished watching a movie. I wrote out my time-blocked to do list and answered a few emails and then went to bed at 10:30 p.m.
When Will I Receive a Coronavirus Check? Here’s What IRS Says
There’s a good chance you’ll have your coronavirus stimulus check in your bank account by April 14, according to a report by The Washington Post.
The first direct deposits will be made April 9, according to an IRS draft plan obtained by The Post. Most payments would be available by April 14 at the latest, though the exact date will vary based on how quickly banks can process them.
Paper checks would be mailed beginning April 24, at a rate of 5 million per week, according to the plan. Those with the lowest adjusted gross incomes would receive the first payments.
Most single adults who aren’t claimed as dependents on someone else’s tax return will receive stimulus payments of $1,200, while married couples will get $2,400. Families with children 16 or younger will receive a $500 credit per child.
Benefits for single people with AGIs over $75,000 and married people with AGIs over $150,000 are reduced by 5 cents for every $1 they earn above these thresholds.
For more information about how the payments will work, check out our coronavirus stimulus checks FAQ.
When Will I Receive My Coronavirus Check?
OK, so the big question on your mind is probably: When will I receive my coronavirus check? Here’s the timeframe for payments, as reported by The Post:
April 9: The first direct deposit payments will be made. The majority of these deposits will be available by April 14 at the latest.
April 24: Paper checks will be mailed out to people with adjusted gross incomes (AGIs) of $10,000 or less who don’t have direct deposit information on file with the IRS.
May 1: Checks will be sent to people with AGIs of $20,000 or lower. Each week, another round of checks will go out to those whose incomes are within the next $10,000. So on May 8, checks will be mailed to those with AGIs of $30,000 or less. On May 15, they would go to those whose AGIs are $40,000 or less, etc.
Sept. 4: The final checks would be mailed to eligible taxpayers with the highest AGIs.
Sept. 11: Checks will be mailed to people who need to apply for payments because the IRS doesn’t have tax information available for them.
How Do I Sign Up for Direct Deposit?
If you haven’t signed up for direct deposit via the IRS or Social Security — or if the information they have on file is for a bank account you’ve closed — there’s no easy way to do so at the moment.
The IRS is building a web portal that would allow you to set up and update that information. The feature will probably be available by the end of April to early May, according to a memo from the House Ways and Means Committee.
If you haven’t filed your 2019 tax return yet, you could do so ASAP so the IRS has your updated bank account information.
If you’ve closed your bank account and the IRS tries to deposit your payment to that account, the funds will ultimately be sent back to the IRS. The IRS will eventually mail your check to your last known address if you don’t update your account information in the portal once it’s available.
Is There Anything I Can Do to Get My Check Faster?
There are really only two things you can do to speed up this process:
1. File a 2018 or 2019 tax return if you’re not receiving Social Security benefits.
2. Sign up for direct deposit or update your bank account information if you haven’t already once the IRS makes its portal available. Check https://www.irs.gov/coronavirus frequently, as that’s where the IRS is posting all key information related to coronavirus relief.
If you’ve done those two things, the only thing you can do is sit back and wait.
Robin Hartill is a senior editor at The Penny Hoarder and the voice behind the Dear Penny personal finance advice column.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Best Interest Rates on Cash – April 2020
The Federal Reserve further cut their target Fed Funds Rate to zero in March, so we continue to see a steady stream of rate drops on cash savings. I hope that some of you got a nice rate locked-in if you tried to refinance your mortgage.
Here’s my monthly roundup of the best interest rates on cash for April 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 4/2/2020.
High-yield savings accounts
While the huge megabanks make huge profits while paying you 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.
- Prime Alliance Bank is at 1.85% APY. CIT Bank Money Market is at 1.80% APY ($100 min to open). There are several other established high-yield savings accounts hovering slightly below these top rates.
Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.
- No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 1.70% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 1.55% APY with a $25,000 minimum deposit. CIT Bank has a 11-month No Penalty CD at 1.70% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
- CIT Bank has a few competitive term CDs at similar rates: 12-month CD at 1.86% APY ($1,000 min), 13-month at 1.82% APY, and 18-month at 1.85% APY.
Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.
- Vanguard Prime Money Market Fund currently pays an 1.07% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.68%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
- Vanguard Ultra-Short-Term Bond Fund currently pays 2.08% SEC yield ($3,000 min) and 2.18% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
- The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 2.57% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 3.16% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that the higher yield came from a drop in net asset value during the recent market stress.
Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!
- You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 4/2/2020, a new 4-week T-Bill had the equivalent of 0.09% annualized interest and a 52-week T-Bill had the equivalent of 0.14% annualized interest.
- The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 1.42% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 0.88% SEC yield. GBIL appears to have a slightly longer average maturity than BIL. Expect these yields to drop significantly as they are updated.
US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.
- “I Bonds” bought between November 2019 and April 2020 will earn a 2.22% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
- In mid-April 2020, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore.
- The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.
Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore.
- Consumers Credit Union Free Rewards Checking (my review) still offers up to 5.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. Elements Financial has dropped to 2% APY on balances up to $20,000 if you make 15 debit card “signature” purchases or other qualifying transactions per statement cycle. Find a locally-restricted rewards checking account at DepositAccounts.
Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.
- Pen Air Federal Credit Union has a 5-year certificate at 2.20% APY ($500 minimum). Early withdrawal penalty is 180 days of interest. Their other terms are competitive as well, if you want build a CD ladder. Anyone can join this credit union via partner organization ($3 one-time fee).
- You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard and Fidelity both have a 5-year at 1.60% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.
- Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. Vanguard has a 10-year at 1.50% APY right now. Watch out for higher rates from callable CDs from Fidelity.
- How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. You could also view it as a hedge against prolonged deflation, but only if you can hold on for 20 years. As of 4/2/2020, the 20-year Treasury Bond rate was 1.04%.
All rates were checked as of 4/2/2020.
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