The JP Morgan Guide to Retirement slide deck is provided to its advisors to discuss retirement planning with clients. Updated annually, they kindly share this document publicly and it contains many useful charts and graphs, like the one above that reminds us to focus on what you can control, and to not waste time and energy on what you can’t. Below are a few more highlights from the 52-page 2022 edition that I found most helpful.

How does everyone else manage given all the news of low savings balances? Well, the reason it is called “Social Security” is because without it, there would be widespread poverty amongst seniors. The higher your spending, the more you must rely on your other assets to replace your current income in retirement.

You may have seen variations of this chart elsewhere, where “Quitter Quincy” who starts early but completely stops after only 10 years ends up at the same place as “Late Lyla” who starts late but contributes for another 30 years (triple the time).

How the average household spending changes by age (amongst relatively well-off households).

How to prioritize your savings.

Look how “Escalating Ethan” does nearly as well by allowing a 1% auto-escalation once a year.

You might think that because you pay 401k loans back into the original account plus interest that it won’t hurt your final retirement balance, but the missed compounding growth can really impact things.

Vanguard recently released the 2022 edition of their annual How America Saves report, a 110-page report targeted at industry insiders which looks at the nearly 5 million 401k, 403b, and other defined-contribution retirement plans. If you wish to geek out on 401k stats, there is a great deal of information in this report. Here are a few highlights based on 2021 data:

Employee contributions. The average/median employee contribution rate amongst participants was 7.3%/6.1% in 2021. Median means that half of people were saving more, while half were saving less. Average is weighted more by absolute dollar savings. (Click to enlarge.)

Employer contributions (company match). The total average/median contributions by year was 11.2%/10.3% (employer and employee combined). This means that the average/median employer/company contribution was about 4%. (Click to enlarge.)

How much does Vanguard think we should be saving? I found this quote noteworthy:

We believe participants need to reach a total saving rate of 12% to 15% or more to meet their retirement goals.

Maxing it out! Overall, 14% of participants saved the maximum annual amount of $19,500 ($26,000 age 50+) for 2021. However, 58% of those with incomes of $150,000+ maxed out their contributions. Here is the full breakdown by income:

(Not really sure how the folks earning under $15k per year are doing it… maybe these income numbers are after subtracting the contributions?)

How are people investing? Asset allocation. This chart shows the trends in asset allocation as the participants age. The increased use of Target-date funds and other professional management options has changed it so that young people are less likely to hold cash. (Click to enlarge.)

Account balances. The average account balance was $141,542 for 2021; the median balance was $35,345. This disparity means that a small number of plans with very high balances skews this often-quoted average upward. (Click to enlarge.)

I don’t pay much attention to this stat because the average includes workers across different age groups, income levels, job tenures, and so on. If I just switched jobs and rolled over my old 401k into an IRA, technically my balance is zero no matter what.

Jim Otar is a retired engineer-turned-financial-planner who has written many books and articles about retirement income. I recently found an old bookmark and reread his article Lifetime Retirement Income: The Zone Strategy from RetirementOptimizer.com. One core principle of his retirement advice that you don’t plan using averages:

The averages don’t cut it. For proper retirement planning, you must base your retirement solutions and strategies on adverse outcomes and not average outcomes.

For example, you don’t plan for average life expectancy. You plan for reaching age 95 for both you and your spouse/partner if applicable.

Green Zone: You have enough money that you can simply live off a balanced portfolio of stocks and bonds, even if returns are on the unlucky side of history and much lower than average. Here are the numbers for his calculated sustainable withdrawal rate until age 95:

For example, if you are 65 years old and need $40,000 of annual income from your portfolio (above Social Security and other income sources), then you would need a portfolio balance of $40,000 divided by 3.8% = $1,052,631. (Alternatively, multiply $40,000 by 26.3.) If you have more than this, you are in the green zone. You’ll have enough money even after a market run that is bad historically, and you’ll probably end up leaving a decent estate or be able to spend more later on.

Red Zone: You need guaranteed income. You don’t have enough to live off of a portfolio of stocks without a decent chance of running completely out of money. The most prudent advice is to buy annuities that will provide a guaranteed level of income and stretch your limited assets for the rest of your lifetime, no matter how long that is.

The advice is then to use your money to buy a single premium immediate life annuity with payments that are indexed to inflation (CPI). At the time of writing, such an inflation-indexed SPIA would pay more that the sustainable rate above. The effective “safe withdrawal rate” for the same 65-year-old above would be 4.5% to 4.9%. Unfortunately, this article was written back in 2007 and as of 2022 there are zero insurance companies that offer inflation-indexed immediate annuities.

However, the same overall concept still applies. The Red Zone means you need to take critical action. You should see how much guaranteed lifetime income you can receive from a single premium immediate annuity (SPIA), perhaps with an escalation rider that increases your payout 1%-3% every year. You will need to consider reducing expenses somehow (downsize home, relocate to lower cost-of-living area). You may need to find additional income (keep working, rent out property). You might need to do all three.

Grey Zone used to mean that you were between the 3.8% withdrawal rate of the Green Zone and the 4.5% withdrawal rate of the Red Zone. Today, I assume it simply means you are close to green, but not quite. You should take some of those Red Zone actions listed above.

I found the Green/Grey/Red Zone concept to be an interesting retirement planning framework to consider. If you don’t have enough, you shouldn’t just wing it with stocks and hope for the best. SPIAs can help you stretch your money for a more secure retirement. I believe that SPIAs aren’t discussed enough in personal finance, and if there were more demand, perhaps the competition would create better and higher-yielding SPIA products. The problem is that non-transparent products like indexed annuities that promise things like “market-linked returns with no downside risk” are both better sellers and offer higher commissions to most insurance salespeople.

At the top of many personal finance “To-do Lists” is to max out the employer match offered in your 401k/403b retirement plan. It’s usually the first “savings” step after paying down high-interest debt and keeping up with your bills. Here’s a screenshot from the Standardized Personal Finance Advice Flowchart via Reddit:

And here it is again from JP Morgan Asset Management, right after building up an emergency fund:

I’ve read this advice so many times, but how many people even complete this Top 3 item on the list? To be clear, this is just contributing enough to maximize your employer match contribution, not maxing out your allowable employee contribution. (That’s on the list of standardized advice as well, but at a slightly lower priority level.)

Vanguard recently released its How America Saves 2022 report with tons of data about the retirement accounts that they help manage. Let’s see what they found.

First of all, what does it take to max out your 401k company match? Roughly a 6% contribution rate over the years.

So… how many people actually max out their 401k company match? Roughly 70% of participants contributed at least the max match rate in 2021. For participants in plan with an auto-increase feature, this number goes up to 77% overall after three years.

If you aren’t at least maxing out the company match and getting your “free money”, hopefully this stat provides some peer pressure. Over 2/3rds are doing it! You don’t want to be below-average, do you?? 😱

Fidelity just announced a new feature called Fidelity Solo FidFolios. You can make a custom index with up to 50 individual stocks, or a custom asset allocation portfolio using ETFs. You can then buy into your custom portfolio all a once using flat dollar amounts and Fidelity will juggle the fractional shares. For example, your $50 purchase could be split into 50 different individual companies.

“Now more than ever, investors want the peace of mind of trading, monitoring, and rebalancing custom stock portfolios in a simple way,” said Robert Mascialino, head of Fidelity’s retail brokerage business. “With the ability to align to a specific theme or individual values, Fidelity Solo FidFoliosSM helps leverage the power of direct indexing to build a customized portfolio while simplifying how investors manage what they own.”

Costs. Flat $4.99 per month, with a 90-day free trial. No stock commissions. Works within your usual Fidelity brokerage or IRA account. If you stop paying the fee, you just end up holding those individuals stocks and/or ETFs.

Note that this is different from their Fidelity Managed FidFolios, which is professionally managed by Fidelity and more about using tax-loss harvesting to gain a slight after-tax advantage. The cost for Managed Fidfolios is 0.40% annual management fee with a $5,000 initial minimum.

This may sound familiar, as it is pretty much what the start-up M1 Finance first introduced years ago, with the important distinction that M1 Finance is free (so far). Motif Investing also ran something similar before they shut down and their technology was acquired by Schwab.

I believe that a “custom robo-advisor” feature is going to be widespread in the future. Many DIY folks would like the ability to make your own customized all-in-one Target Retirement Fund. It’s really not that technically difficult to allow everyone to create their own custom glide path. I explored this with a small investment in M1, but in practice I have found it trickier to implement if you have to rebalance across various 401k plans, IRAs, and taxable brokerage accounts. Still, I’d rather use M1 Finance or this Solo Fidfolio over another robo-advisor that changes their model portfolios every few years to match up with whatever is currently trendy.

via GIPHY

Schwab has agreed to pay a $187 million SEC settlement due to being sneaky about the fees charged by their robo-advisor product, Schwab Intelligent Portfolios (SIP). Schwab used “free” but quietly forced its own customers to hold a lot of cash in an high-cost form where they can skim off fees (and you get paid less interest). It was a relatively open secret in the financial planning industry, as noted in my own Intelligent Portfolios review:

Schwab makes a ton of money on your idle cash, and it is NOT an accident that they force you to own cash in their automated portfolios.

However, the details of this SEC settlement show that their behavior was even worse than I initially thought. As explained by Matt Levine in Money Stuff, Schwab literally decided how much profit they wanted first, and then worked their model asset allocations around that number. The technical version:

Each of SIP’s model portfolios held between 6% and 29.4% of clients’ assets in cash. The amount of cash that each SIP model portfolio contained was pre-set so that Respondents’ affiliate bank would earn at least a minimum amount of revenue from the spread on the cash by loaning out the money. …

In order to offer SIP without charging an advisory fee, Schwab management decided that the SIP portfolios would collectively hold an average of at least 12.5% of their assets in cash. To meet that goal, management set the exact amount of cash in each of SIP’s model portfolios, with the most aggressive portfolio containing 6% cash and the most conservative portfolio 29.4%, based in large part on its analysis that Schwab Bank would make a minimum amount of revenue at these levels. Management then provided these pre-set cash allocations to CSIA. In building the SIP model portfolios, CSIA treated the cash allocations provided by management as constraints and did not alter or adjust the cash allocations in any way. …

On February 18, 2015, weeks before the SIP launch, two articles were published in the media that were critical of SIP, claiming that the drag from the high cash allocations was a hidden cost of the program. In reaction to these articles, Schwab management directed that the SWIA ADV brochure be re-written, and that a public relations campaign be launched to explain the SIP cash allocations. …

While the ADV brochures disclosed that Schwab Bank earned income from the cash allocation for each investment strategy, SWIA’s and CSIA’s ADV brochures stated that the cash allocations in the SIP portfolios were “set based on a disciplined portfolio construction methodology designed to balance performance with risk management appropriate for a client’s goal, investing time frame, and personal risk tolerance, just as with other Schwab managed products.” This was false and misleading because the cash allocations were actually pre-set in order to reach minimum revenue targets for the Respondents.

Here it is more accurately summarized in this Reuters quote:

“Schwab claimed that the amount of cash in its robo-adviser portfolios was decided by sophisticated economic algorithms meant to optimize its clients’ returns when in reality it was decided by how much money the company wanted to make,” SEC enforcement chief Gurbir Grewal said.

Here’s what Schwab says in their press release:

We are proud to have built a product that allows investors to elect not to pay an advisory fee in return for allowing us to hold a portion of the proceeds in cash, and we do not hide the fact that our firm generates revenue for the services we provide.

Really, you don’t hide the fact? Let’s look at your product page now as of 6/15/2022. This is what you see without clicking further:

We believe cash is a key component of an investment portfolio. Based on your risk profile, a portion of your portfolio is placed in an FDIC-insured deposit at Schwab Bank. Some cash alternatives outside of the program pay a higher yield.

What else is not mentioned on their product page? The actual interest rate paid. The APY is not mentioned anywhere on that page, even through a link or fine print. You must go searching for this link, where you will find that SIP actually holds special “Sweep Shares” of the Schwab Government Money Fund (SWGXX) with a annual expense ratio of 0.44% and SEC yield of 0.38% as of 6/15/22. In comparison, Vanguard’s default cash sweep is the Vanguard Federal Money Market Fund (VMFXX) with a net expense ratio of 0.11% and SEC yield of 0.76% as of 6/15/22.

If you click further, you find their new fine print:

Assume a $100,000 account with a 10% Cash Allocation ($10,000), which would be a moderate—aggressive investment portfolio allocation. Using market interest rates from the first quarter of 2022, Schwab Bank earned about 1.03% on an annual basis on the cash it invested net of what it paid to clients in the Program. Schwab Bank would have received about $103 ($10,000 x 1.03%) on that cash deposit, annualized, which equates to 0.103% or 10.3 basis points ($103/$100,000) of the total client investment of $100,000.

However, the true cost to investors is not just the fees that Scwhab gets. Cash is not necessarily ideal for long-term portfolios. By dictating cash, you ignore other higher-yielding and arguably more appropriate options like their own Schwab Short-Term U.S. Treasury ETF (SCHO, 0.04% ER, 2.60% SEC yield) and Schwab Short-Term Bond Index Fund (SWSBX, 0.06% ER, 2.98% SEC yield).

Schwab customers are at this very moment, losing significant money from their high-cost cash drag instead of a low-cost, high-quality money market and/or short-term bond fund. Schwab customers should note that this quiet profit via cash holding motive runs throughout the company. The Schwab Bank “High Yield” Investor Savings account pays 0.05% APY. Uninvested bank sweep cash in your Schwab brokerage and retirement accounts pays a measly 0.01% APY.

I would bet that if you did a poll of all Schwab IP customers and asked them about it, a majority would have no idea about this arrangement.

Bottom line. After reading the details of this SEC settlement, the fact that Schwab put profit first and the actual design of the product second is the most offensive. I’d much rather you sell me a great product at a fair price. Schwab’s reputation is now lower in my mind. They have some good products, but I would not recommend Schwab Intelligent Portfolios (or any Schwab managed product based on their behavior here) for my family or friends.

Even though I don’t check my retirement account balances daily (or weekly, or often monthly) it can still be nearly impossible to tune out all the market noise. I was promptly notified via e-mail press release that the S&P 500 index officially reached “Bear Market” status today 6/13/2022. A bear market is defined as a 20% drop from previous high, ending when the index reaches a low and subsequently rises by 20%.

The email also included this handy list of every bear market in the history of the S&P 500 index (since 1928). Credit to S&P Dow Jones Indices:

Takeaway: You should always be prepared for a drop of 50% in your stock holdings. Enduring such uncomfortable volatility is the price of investing in stocks, and if you don’t pay it, you don’t get the full returns.

I’ve yet to find anyone with a clear way to avoid these swings. Beyond buy-and-hold, perhaps the only thing is to wait only for the “fat pitches”, which are rare and far between. Even then, will you have the guts to swing? This is why I think of my primary portfolio as the “Humble Portfolio”.

Here is list of every bull market in history. A bull market is defined as 20% rise from the previous low, ending when the index reaches a high and subsequently drops by 20%.

Takeaway: The bull markets more than make up for the bear markets over the long run. At some point, you will be reminded that in order to make up for a 50% drop, stocks would have to go up by 100% just to break even again. That’s sounds like a lot, but in fact that has happened repeatedly and then some. You can see in the chart that this most recent bull market was a +400% change, and that doesn’t even include dividends.

Every one needs to find a good balance through education and experience where they can hold the risky stuff through the bad times, while also be happy holding the boring stuff through the “but my neighbor got rich daytrading crpyto” times. We are currently going through another period of heightened uncertainty. How do you feel about your portfolio today?

“History doesn’t repeat itself but it often rhymes.” – attributed to Mark Twain

Photo credit: Unsplash

A satoshi, or “sat” for short, is the smallest unit of the cryptocurrency bitcoin. “Stacking Sats” is a popular term for gradually accumulating bitcoin by purchasing small amounts of bitcoin at a time. (100 million sats = 1 bitcoin.) The idea is that you should be excited about adding any amount to your stack, focusing on that forward progress instead of the current market price.

If only it would be as trendy for folks to “stack VOO” or “stack VTI”. A low-cost S&P 500 or US Total Market index ETF is a tax-efficient way to build up your ownership of a share of excellent American businesses. Unfortunately, there is always something shinier next to this vanilla product. Factor ETFs, themed ETFs, sector ETFs, and so on. John Rekenthaler of Morningstar has an interesting series of articles comparing the long-term returns of various alternatives to Vanguard index funds. See Vanguard’s Other Index-Fund Invention.

Even way back in 1992, Vanguard started offering “Value” and “Growth” index funds, essentially splitting the US stock market into two halves based on price/book ratios. Essentially, these were the first variation on the plain S&P 500 index fund. You might think one was better than other. (Most academics would have guessed Value would win.) So what happened over the next 20 years? Not very much! (Plus Growth won slightly.)

Of course, I would not be surprised at all to see Value squeak out a slight win over Growth after another 10 or 20 years. One is always going to be winning slightly, but take a step back and you can argue they are effectively tied. Why not just own the S&P 500 index fund and get the average?

(Quick reminder: The Rule of 72 says that 10% annualized means your money will double every 7.2 years. That means $10,000 will have doubled three times in about 21 years. $10k doubled to $20k, then doubled to $40k, then doubled to $80k!)

What if you rebalanced regularly between Value and Growth? If you rebalanced between the two funds every single month, your annual return would have increased by 0.10%. If you rebalanced between the two funds only once every 5 years, your annual return would have increased by 0.28%. But really, who rebalances only once every 5 years? In view, these numbers are still low enough to be in the noise range, and the extra return is not dependable.

What if you bought a low-cost actively-managed fund from Vanguard instead? Due much to Vanguard’s extremely low costs on their active funds, some actively-managed funds did do better, but others did worse. If you chose to buy the funds with the highest trailing returns, or the best Sharpe ratios, or the most popular funds (most assets), all that Ivy League brainpower and decades of investing experience would have still lagged behind a simple index fund portfolio. Only with the power to see the future would you have picked the index-beating funds.

As the saying goes, don’t let the pursuit of perfect be the enemy of the good. As someone sitting on a relatively big pile of VTI after 15+ years of stacking it share by share, I am certainly relieved that I didn’t get too distracted by all of the other shiny objects out there. Instead of remembering your highest portfolio value ever from your monthly statement, remember the number of shares of VTI or VOO that you own. Every $200 saved = 1 share of VTI. But in the end, as long as you get excited about stacking something of high-quality with long-term productive value, you’ll likely end up in a good place.