Recreating target retirement date funds taking into account other positions

F

Free-quent Flyer

Blogger
I wrote a post a few months back trashing Future Advisor because they don't take into account interest earned on FDIC-insured savings accounts. I highlighted how their studied ignorance of the interest earned on my FDIC-insured 6% APY Mango Money savings account meant that they wanted to invest that cash in non-insured bonds with a TARGET yield of 5% (i.e., not guaranteed), when it was already invested in an insured account with a higher yield. I concluded that post saying:

"The same criticism of Future Advisor could be applied to the target retirement date mutual fund my Roth IRA is invested in: since that target retirement date fund also has a bond component (10.1%), I would logically be better served by replicating the stock holdings of the target retirement date fund, while using my high-yield savings account to replicate the bond component with higher yield and lower risk.

I'm not going to do that, but it's a legitimate suggestion."

It's not the purpose of my blog, but I thought it might be interesting to get a discussion going on that topic here. Here's the premise of my suggestion:

VTIVX, the Vanguard 2045 Target Retirement Date fund, is composed of:
  • 62.6% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
  • 27.2% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
  • 8.2% Vanguard Total Bond Market II Index Fund Investor Shares (VBMFX)
  • 2.0% Vanguard Total International Bond Index Fund Investor Shares (VTIBX)
If you already have $15,000 in Mango Money savings accounts (my understanding is that you can have up to 3 Mango prepaid card accounts, and each can have a linked savings account), you can split up to $132,059 (89.8% of 147,059) between VTSMX and VGTSX in the same 2.3:1 ratio and replicate the upside (stocks) performance of VTIVX, while putting a floor below the performance of the target retirement date mutual fund.

In my post I made it sound like this would be laborious, but upon reflection it's actually fairly trivial, and I will probably do it the next time I reallocate my investments.

Interestingly, this is also true of any other risk-free investment we have access to as travel/personal finance hackers. Our glorious leader @Matt is always hammering the fact that someone may be "diversified" into the same stocks and bonds throughout their portfolio, and I think there are a lot of other risk-free investments that replicate bond holdings in diversified mutual funds, dragging down overall long-term returns.
 
Matt

Matt

Administrator
Staff member
I'm not sure how to say this but....You sound poor.

I'm sure that sounds insulting, so to clear that up I've been thinking for a while now, and this post backs it up-- that you 'get' money better than anyone else I see in my blogosphere circuit. Including the CPAs and CFPs.

The bigger picture, that I am wrestling with now is the interplay between concepts like this post and broader wealth management. It seems as though your are creating more efficient ecosystems for money from a 'working your way up' perspective. Which is, in itself awesome. However, it doesn't really work in a number of examples simply due to the time/complexity discount.

Something I've been wondering a lot about recently is building a wealth roadmap. IE what are the steps from poverty/in debt to financial independence. I feel like posts like this tie into that deeply.
 
F

Free-quent Flyer

Blogger
It doesn't sound insulting in the slightest; it's no crime to be poor (which I am — very).

I would say I "argue," but I actually find it self-evident, that poor people need better financial management skills than people with wealth. You make a mistake and your kid (mazel tov!) gets a slightly smaller inheritance. I make a mistake and I starve.
 
Matt

Matt

Administrator
Staff member
Free-quent Flyer said:
It doesn't sound insulting in the slightest; it's no crime to be poor (which I am — very).

I would say I "argue," but I actually find it self-evident, that poor people need better financial management skills than people with wealth. You make a mistake and your kid (mazel tov!) gets a slightly smaller inheritance. I make a mistake and I starve.
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I've starved, and stolen food because I've had no money to buy it. Felt pretty good.
 
MickiSue

MickiSue

Level 2 Member
LOL. I guess it depends on the topic, doesn't it? It could be starvation, from the direction this is going...

Or Mango accts, just as easily.;)
 
F

Free-quent Flyer

Blogger
Haley said:
Just reminding @Free-quent Flyer to tell us about how he stole an education.
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Just like travel hacking or personal finance hacking, it's possible to take advantage of the fact that our higher education system is sloppily composed of a series of poorly-designed, interlocking parts.

To steal a college education, all you need to do is identify colleges and universities that (1) guarantee to meet full demonstrated financial need with grants and federal student loans and (2) exclusively use the FAFSA to determine financial need (and not the College Board's supplemental application, which requires parental income information for all applicants).

The FAFSA doesn't require any parental income or wealth information if you're "independent," which is a status that can be achieved in several ways (these are the relevant ones, though there are others):

1) Be 24 years of age or older by December 31 of the award year;
2) Be an orphan (both parents deceased), ward of the court, in foster care or was a ward of the court when 13 years or older;
3) Be a veteran of the Armed Forces of the United States or serving on active duty for other than training purposes;
4) Be a married individual;
5) Have legal dependents other than a spouse;

The public university systems of California and Washington were two I found which qualified, but there are others. The simplest method for anyone to receive a free education at an elite university is be 23 or 24 (depending on birthdate), move to California or Washington for a year to establish residency, then apply for admission and financial aid. Getting married is another cheap option, having kids a very expensive one (but mazel tov!).
 
Matt

Matt

Administrator
Staff member
I've wondered what I might be eligible for as I have never studied (other than professional certs) in the US.. I'm ready for some free education...

Aaand a quick call to FAFSA managed to clear up nothing at all.
 
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Franklin's Dad

Franklin's Dad

Level 2 Member
To piggyback on this post and Matt's idea of building a "wealth roadmap," I am very interested in learning as much as possible about investing/financial planning, but from a hacker's perspective. But maybe that's just learning about investing and financial planning in general (and I'd say I'm relatively uninformed about this stuff), and then using my hacker's instinct to do it better than most.
 
Matt

Matt

Administrator
Staff member
Franklin's Dad said:
To piggyback on this post and Matt's idea of building a "wealth roadmap," I am very interested in learning as much as possible about investing/financial planning, but from a hacker's perspective. But maybe that's just learning about investing and financial planning in general (and I'd say I'm relatively uninformed about this stuff), and then using my hacker's instinct to do it better than most.
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I'd focus on a refinement concept if you are jumping in from a place of little knowledge- start out with 'good enough' and then tweak. In terms of actionable, in terms of investments, start out with a boring Vanguard target date fund, then as you learn more about things, make necessary adjustments.

I say this so that you aren't sitting in an ill thought out position while trying to make it into a perfect plan.
 
F

Free-quent Flyer

Blogger
Franklin's Dad said:
To piggyback on this post and Matt's idea of building a "wealth roadmap," I am very interested in learning as much as possible about investing/financial planning, but from a hacker's perspective. But maybe that's just learning about investing and financial planning in general (and I'd say I'm relatively uninformed about this stuff), and then using my hacker's instinct to do it better than most.
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I second what @Matt said, start with Vanguard target retirement date fund, refine from there (that was actually the original premise of this thread all the way back when), but one "hackery" thing that's important to keep in mind is that a lot of the work of savings calculators is being done by compound interest, so when you're hacking personal finance you need to make sure your interest is actually compounding.

So for example, once a Mango 6% APY account is maxed out at $5k, the balance in excess of $5k isn't compounding at 6% APY. You're earning $5k * 5.xx% plus the amount in excess of $5 * 0.1% APY, minus the $3 monthly fee on the prepaid account.

That means in order to achieve the beneficial effects of compound interest over time, you need to be moving the amount in excess of $5k each month into the linked prepaid account and ACH'ing it into another account where it'll continue to compound.

In my case, I have a student loan accruing 5.6% APR, so each month I move the amount in excess of $5k from my Mango savings account to the Mango prepaid and use it to make a student loan payment. Lowering the balance on my student loan accruing interest at 5.6% APR is (very) roughly (without digging into the timing of payments and interest, etc.) like earning 5.6% APY on my Mango-excess savings.

So my risk-free savings rate starts at 6% APY, then at $15,000 drops down to 5.6% APY, at least until the student loan is paid off.

Another example is when you see a brokerage (here's one: http://www.doctorofcredit.com/tradeking-10th-anniversary-brokerage-account-bonus-receive-200-cash/) offering a cash bonus when you open a brokerage account or IRA. If the bonus is $200 on a deposit of $3,000, that's a 6.66% return. But it's not a compounding return if you take the $200 and buy a new ipad (or in Matt's case, hookers and blow); it only compounds if you invest it in an appropriate instrument.
 
Franklin's Dad

Franklin's Dad

Level 2 Member
My struggle right now is trying to a find a balance between keeping enough free cash for MS vs. getting started investing in essentially non-liquid funds. Basically, I have about $8k in cash right now, with zero investments (outside my 401k). And for the past 3 years, I haven't really been able to save any extra money because my wife is in grad school and my meager salary pays all the bills. In fact MS is helping to supplement our bills. I like having enough cash around in case of a doomsday float situation, and MS is so profitable that it's worth putting a lot of CC spend in play at once and taking shutdown/float risks (with a safety net, of course).
 
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