Tag Archives: Retirement

Monthly Investing Recaps: March 2014

At the start of each month I plan on detailing all my buy/sell activity for each of my 3 individual stock portfolios: Loyal3, Roth IRA, and Taxable Brokerage accounts. It’s just one way I am chronicling my journey to financial independence here at Starting From Zero.

In addition to these 3 accounts, I also started investing in my Thrift Savings Plan (TSP) again this month to help put more of my money in tax advantaged accounts. Right now I’m contributing 4% of my base pay but may adjust this in the future. The majority of my investing will still be in my taxable and Roth accounts. The TSP is basically a 401k plan for federal employees including the military. It only offers index funds but does have probably the lowest expense ratios around, even lower than Vanguard. 😉 Right now I’m putting my contributions in the C Fund which mirrors the S&P 500 and the S Fund which is a small cap index fund. Since these deposits typically take a while to reach my account, I won’t be detailing those transactions here but will now be including a total on my portfolio page.

I also received a surprise check from my college late in March with a tuition refund of $721.50 which was from me overpaying my tuition bill for the last 3 semesters before some of my scholarships were deposited. I knew I was getting a refund at some point but had completely forgotten about it. 🙂 I put this money to work immediately, combining it with most of the cash in my Roth to initiate a new position in Kinder Morgan Inc (KMI) which was one of the stocks on my buy list that I highlighted here.

Loyal3 Account

Buys: 03 Mar: 7.6296 shares of Coca-Cola (KO) @ $38.01 per share.

19 Mar: 2.0854 shares of Target (TGT) @ $59.94 per share.

19 Mar: 3.0985 shares of McDonald’s (MCD) @ $96.82 per share.

19 Mar: 1.297 shares of Coca-Cola (KO) @ $38.55 per share.

Quick Hits: Similar to last month as I continue dollar cost averaging into both Coke and Target. Looking to diversify a bit more this month I added McDonald’s, a dividend champion with 38 years of dividend growth. With a P/E of 17, I consider the stock to be fairly valued and will likely continue to add to my position in the coming months.

Roth IRA

Buys: 31 Mar: 33 shares of Kinder Morgan Inc (KMI) @ 32.13 per share.

Quick Hits: I combined some fresh capital this month with the cash I had just sitting idle in my Roth and finally pulled the trigger on KMI with the energy giant trading at an attractive valuation relative to its 52 week trading range. At current prices the stock boosts a dividend yield of 5.10% and is expected to be able to grow that dividend by 8% annually. Like all of my Roth holdings, the dividends received will be automatically reinvested. I plan on doing a full blog post on KMI here soon.

Taxable Brokerage: No buy or sell activity this month.

Overall a pretty solid month of investing. Combined all of my purchases this month added $78.62 to my projected annual dividend income. With the purchase of KMI, this puts me slightly overweight in the energy sector and will most likely be my last energy pick-up for a while. (Unless of course, another bargain presents itself next month. 😉 ) With a relatively small portfolio, I’m comfortable being overweight in certain sectors or stocks (like Realty Income) at the moment knowing future additions will help balance it out in the coming years. Once I get closer to financial independence, portfolio allocation is going to become more important. Until then, I plan on continuing to add whatever stocks are trading at fair value (or below) and meet my guidelines.

 

Full Disclosure: I am long KO, MCD, TGT, and KMI. This post is not intended to be a buy or sell recommendation on any stock mentioned and is designed for educational/entertainment purposes only. Only you are responsible for your investing and I always encourage you to conduct your own research prior to investing. Please see my disclaimer page.

How was your March for investing? What do you think of the additions to my portfolio? Share with a comment below and thank you for reading.

Why Are IRA Contribution Limits So Low?

When I first started learning to invest, one of the first things that I learned about when it came to retirement accounts was the Roth IRA, mostly from the teachings of my father. Sounded like a really good plan at the time and I couldn’t think of any drawbacks to it. Although my contributions would be taxed prior to going into my account so that I could withdraw money tax free in retirement, I was and still am in a low enough tax bracket where it seemed like a great trade-off. Plus I could get to put in $5500 a year which I assumed would be plenty to save for retirement. As I progressed in my investing and embraced the dividend growth strategy I decided achieving financial independence would become my new goal instead of a “normal” retirement age. The key to this I quickly learned, by way of reading great blogs such as Mr. Money Mustache and Dividend Mantra was that saving and investing a high percentage of my income, 50% or more, was really the key to achieving this goal.

Once I got my spending under control and began this new frugal lifestyle completely, I realized how quickly I was going to max out my Roth each year, leaving me to have to invest the rest of my savings into taxable brokerage accounts. While having a large chunk of my investments in taxable accounts will allow me more flexibility in early retirement, I would still like to take full advantage of my Roth as I’ve learned more about being able to withdraw contributions (principle) from these accounts before 59 1/2 years of age without penalty. I tried to figure out any other way of contributing more to a tax-advantaged account. I looked into maybe opening a Traditional IRA, I figured if I did that, maybe I could contribute $5500 to both? 😉 After a very short google search I quickly realized that this would not work. The $5500 limit is for all the IRA’s you own, regardless if you have multiple accounts or account types. 🙁

What’s the point of the government trying to give incentives for people to save for their own retirements and be self-sufficient if you are going to limit how much they can save? Shouldn’t ol’ Uncle Sam allow people like me, who despite their relatively low income want to put away large amounts of money each year for their retirement? Plus, I imagine a majority of the individuals out there with IRA’s probably invest in mutual funds and probably don’t have the investing itch that I do, investing the rest of my money in a “non-retirement” account. So what did I do? I did what any good citizen should do, write my Congressman.

Figuring I had a better shot at getting a response if I diversified a little, I sent the same e-mail to both the Representative from my district and both of my state’s Senator’s. A staff member of one of the Senator’s actually called me to discuss my proposal to increase the limit for at least for those in the lower tax brackets but he didn’t seem to really understand what I was asking for and just gave me a lot of political bullshit. The second sent me an e-mail which you can see below explaining how the government can’t afford to raise contribution limits to tax-advantaged accounts like IRA’s and 401k’s due to the potential lost revenue.

Dear Mr. SFZ,

Thank you for sharing your views on the system of retirement tax incentives. I agree with you about the importance of encouraging Americans to save for their retirement, particularly given employers’ increasing shift from defined-benefit pension plans to defined-contribution plans, and many Americans’ concerns about whether they will outlive their savings. 401(k) plans and IRAs serve a crucial role in facilitating retirement savings, and I will carefully consider the effects of any proposed changes to these incentives in upcoming tax reform efforts and budget negotiations.

While retirement tax incentives like IRAs undoubtedly benefit our society by encouraging people to plan ahead for their future financial needs, I cannot commit to expanding their reach. As it stands, these tax incentives will cost the Treasury approximately $117 billion this fiscal year in forgone tax revenue, and in a time of tightened budgets and growing national debt, we must be cautious about increasing this figure, whether by raising allowable contributions or by reducing penalties for early withdrawal. That said, I remain open to tax reform proposals that tweak this system in fiscally responsible ways.

Once again, thank you for being in touch with me. I will be sure to keep your thoughts in mind while I work on the wide range of issues that come before the Senate. Please feel free to contact me in the future on other matters that I can bring to the Senate’s attention.

 

Best Regards,

ANGUS S. KING, JR.
United States Senator

This is the actual e-mail, copied and pasted directly from my g-mail account with just one minor name change. 😉

So basically I have to hinder my investing, impacting my retirement goals because the government can’t afford any additional lost revenue. If a 21 year old can get his financial house in order and develop a long-term approach to his financial management practices, why can’t the government?

In the mean time until our country can get it’s massive spending habit under control so it won’t “need” all this tax revenue and contribution limits can be raised I plan on continuing to max out my IRA(s) and investing the majority of the rest of my monthly savings in my taxable brokerage/Loyal3 accounts. I’m also starting up my Thrift Savings Plan contributions this month which although will not allow me to invest in dividend growth stocks, will allow me to put more money away in a tax-advantaged account on top of my $5500 IRA contribution.

What are your thoughts on IRA and 401k limits? Do you believe they should be raised? How about for individuals with lower incomes? Share your thoughts and opinions below with a comment. Thanks for reading! 

Why Do People Not Save Enough for Retirement?

Good evening!

One of the websites I frequent a lot when just surfing the web is FoxBusiness.com. I enjoy reading some of the investing and personal finance articles on their and usually learn something new when it comes to finance. Since I plan on owning my own business someday, I also like to read up on posts in the small business section.

Earlier this week I came across an article titled “34% of Workers Have Less than $1000 for Retirement.” Yikes! Only $1000!? And that’s for just over one third of workers here in the U.S. That’s just crazy. I know retirement savings can be difficult, but I would have never guessed 34% have this amount or less.

Granted, this takes into account all workers so we’re counting a lot of people just starting out in their working careers in this figure and those in every income bracket. But as I continued in the article I found a more troubling statistic: “More than 70% of workers without a retirement plan like a 401(k) or IRA have less than $1000 to fund their golden years. If workers don’t have something provided by their employee, this means that they are saving virtually nothing on their own.

Hmmm. Seems to me the problem we have in this country when it comes to saving for retirement is the idea of self-sufficiency or lack thereof. If our employer doesn’t offer a retirement plan, it seems we are much more likely to not take the initiative to start a retirement savings account on our own such as a traditional or Roth IRA.

Why is this? Do most people not think they don’t need to save for retirement and that they will be able to depend on social security? Or is it a bigger problem? I think the main reason people don’t start saving or barely save like the $1000 statistic, is the lack of financial education we have. While I know some high schools offer financial education as part of their curriculum a lot of them don’t. Mine certainly didn’t. If it wasn’t for all the old Peter Lynch books and the Rich Dad, Poor Dad books that my Dad had on the book shelf in our living room growing up, I probably would be part of the people with less than 1k saved up.

I think one of the requirements to graduating high school should be learning the basics of personal finance including the various ways to save for retirement and the importance of starting early. If kids today could learn the basics of what an IRA is and the difference between stocks and mutual funds, they would be much more prepared to enter the real world than someone with no financial education. While learning advanced algebra and calculus is cool and all, it only helps people move on to higher levels of education like college (unless you happen to use it in your job). It doesn’t prepare them for real life which personal finances is a big part of. While I’m not saying we should get rid of these classes altogether, I think there should be more of an emphasis on practical skills included as well. You would be much better off figuring this out when you are young and don’t have a lot of expenses so you can pack away a lot of your income to set yourself up with a nice foundation for your retirement. The earlier you start, the more you can take advantage of compound interest and the great long-term growth of the stock market.

 

What do you think? Did your high school offer personal finance courses? If not, how did you start learning about the topic, was it books like me or other sources like the internet? 

 

Cash Flow, Retirement, and Dividend Growth Investing

“Age doesn’t retire, your cash flow does.”

Yes!!!

Finally a retirement article in the mainstream media that gets it. This quote is from an article I read on the Fox Business site the other day (link here) that explains how while a savings goal is important for retirement, you also need to figure out a way to produce reliable cash flow from those savings so as not to run out in retirement. How much passive income (cash flow) your investments produces really does determine when you are able to retire.

There are many ways to achieve reliable cash flow to pay for your living expenses and while the article doesn’t really get into any specific strategies, I would like to talk about one today.

Dividend growth investing.
So what is dividend growth investing? D.G.I. as it is commonly called is investing in blue chip companies that have long track records of paying out part of their earnings in the form of dividends to their shareholders. The best of these also steadily increase the amount of the dividend each year, often at paces above the rate of inflation.

Creating a reliable stream of dividend income by accumulating shares of stock in some of America’a greatest companies that also give you annual raises above the rate of inflation is how I plan on being able to retire and hopefully be financially independent before I’m 40. Companies that fit this profile include Coca-Cola, Chevron, Procter and Gamble, General Mills, Wal-Mart, and Johnson & Johnson.

Your investments grow in two ways when investing in dividend growth stocks. First like other stocks you enjoy rising share prices as companies grow and when the overall market does well. Second you get dividends deposited into your brokerage account every 3 months (or monthly for some!). Unlike the first type of gain which you can only actually use when you sell, the dividends you receive do not require you to sell anything. You are simply being paid to own the stock and be a part-owner of these companies.

So should only retired people invest in dividend growth stocks?

Not at all! Personally I believe it is a great strategy for anyone who is investing, whether that be somebody already retired looking for dependable cash flow in retirement, those in the work force looking to pack away for retirement or another long-term saving goal, or millennials like myself just starting out.

So what are the downsides to dividend growth investing?

Like any investment strategy investing in dividend growth stocks can have some downsides. If you are investing for total return, that is growing your investment total value as much as possible, you are not really focused on how much income your investments are producing for you. With dividend growth investing, the opposite is true. While total value is a nice way to measure your progress, I do it every month in my Balance Sheet Updates, the important metric is how much income you are making from dividends. When starting out, it takes a long time to build up a portfolio that creates enough dividend income.

For example if you buy stocks such as the aforementioned Coke, Chevron, P&G, General Mills, Wal-Mart, and J&J you are going to end up with a portfolio that yields around 3% for your initial yield on cost (dividend yield you will receive based on purchase price, as you get dividend raises, your yield on cost grows). This means for every $1000 you have in your portfolio you’re only getting 30 bucks back in dividends. Blah. If your only investing a hundred bucks or less like I was when I was first starting out, it seems like it will take forever to get to a point where your dividend income can cover all of your day to day expenses.

Ok, I’m getting a little off track here, but my main point is that the biggest downside to dividend growth investing is being able to weather through the days of small dividend checks, avoid getting discouraged, and staying on track with your strategy. That means no going and chasing the latest hot stock (Facebook anyone?) and abandoning your plan.

Dividend growth investing takes a long time before you start to see meaningful results but once you do, it becomes clear how this type of investing will allow you to be able to earn a reliable stream of income when you retire. As the article linked above explains, it’s all about the cash flow!

Full Disclosure: I am long Coca-Cola (KO), Chevron (CVX), and Wal-Mart (WMT). This post is simply my own opinions on investing and should not be taken as professional financial advice. Only you are responsible for your investing. Good luck and please share your thoughts below with a comment. Do you practice D.G.I. and how do you like it?

Thoughts on the MyRA

In his State of the Union address in January President Obama introduced a new retirement account type called MyRA (My Retirement Account). It’s designed to allow individuals to invest small amounts of money ($25 to start, $5 minimum contributions thereafter) into a retirement account similar to a Roth IRA except that it invests in U.S. Treasury Bonds instead of stocks/mutual funds. Like a Roth IRA, all contributions are from after-tax dollars, meaning you won’t pay taxes on your distributions when you retire. The current annual contribution limit for Roth IRA’s ($5500) also applies to the MyRA. Since it is set up as a Roth, you cannot contribute to both a separate Roth IRA and the MyRA at the same time.

Once your MyRA’s account balance hits $15,000 (about 2.75 years of investing if you contribute the max) or the account is active for 30 years (which ever happens first) you must roll the account into a regular Roth IRA where you will then have the freedom to invest in better investments such as stocks/mutual funds.

The money you contribute to the MyRA is invested in the “G” Fund from the federal government’s Thrift Savings Plan (similar to a 401k) and you are limited to just that fund. The “G” Fund has average annual returns of:

1 Year: 1.47%

3 Year: 2.24%

5 Year: 2.69%

10 Year: 3.61%

Since fund inception (April 1987): 5.69%

While there is a guarantee that you will never lose your principle, the average annual returns are not nearly as good when compared to the stock market. Take the “C” Fund for example which is included in the TSP for federal employees but will not be available for the MyRA. The “C” Fund is an index fund that invests in the 500 companies that make up the S&P 500, a popular index to compare investment returns to.

1 Year: 16.07%

3 Year: 10.90%

5 Year: 1.71%

10 Year: 7.12%

Since fund inception (January 1988): 9.50%

As you can see, the “C” Fund as performed quite better than the “G” Fund. However there always exists the possibility of recessions, bear markets, and crashes such as in 2008-09 where the S&P 500 declined considerably but the “G” Fund held its value and continued its slow growth.

In conclusion while I think the MyRA is a good choice for those individuals who have no retirement savings at all or work at jobs that don’t offer 401k’s, for the majority of people I don’t think it is the best choice. Unless all you have is the $25 to open an account and low amounts like the $5 a week to contribute you are probably better off just opening a regular brokerage Roth IRA account through a company like USAA, Vanguard, etc. This will allow you to have a larger variety of options to invest in such as individual stocks, index funds, and managed mutual funds.

I think the best thing to come out of the President introducing the MyRA was that it brought a lot of attention to retirement savings in the media and hopefully to many citizens here in the U.S. I think a potential negative to the low contribution requirements could be that people get used to “only” contributing small amounts and believe that this will be enough to retire on, without focusing on better controlling their expenses and thus, investing more. If people realize that it truly is just a starter account to save up $15,000 in order to invest in other retirement investing vehicles and use it in that manner, than I think it will be successful program.

What are your thoughts on the MyRA? Do you plan on contributing and if so what are your plans for after you save up the max of $15k? Please leave a comment below and continue the conversation. Thanks for reading.