retirement

Apache is functioning normally

You’ve been investing in your 401k for quite some time and are probably still clueless in where your money is going.  (Don’t worry…you’re not alone)

But you’re thankful that they offer these “target date” or “life cycle” funds that make investing in your 401k so easy.

What are target date funds? You know… the funds where all you have to do is choose the year you plan on retiring and voila – you’re all set.

Winner, winner, chicken dinner…..how easy is that?

Here’s the BIG problem.  Target date funds, although easy, can sometimes eat away at your returns.

Or stated just a bit more bluntly– They suck!

*You know I hate Target Date Mutual Funds when I take the time to record a video.

Target date funds were created to take away the hassle of having to research the mutual funds in your 401k and build and construct your own portfolio. But in my experience, taking the time to do the research and, essentially, build your own target date funds in your 401k, is a much better option.  It’s this “a la carte” approach that can potentially give you much higher returns over your working life.

 What Makes Target Date Funds so Bad?

First, let’s understand how they work.   Most often these funds are created by a specific mutual fund company.   Then that mutual fund company will take 12-18 of their mutual funds and create this diversified portfolio on your behalf.  As you age towards your “target date” of retirement, the 12-18 funds will start shifting to something more conservative (movi.ng from less stocks to more bonds)

Sounds like win-win, right? You would think.  Here’s the problem….

When you start breaking down the individual mutual fund options inside these target date funds, you start to uncover that there are some or several of these funds that are just plum horrible.

 What I’ve Seen With Target Date Funds

Over the years, I’ve seen countless target date mutual funds that my clients have brought in and thus far, I haven’t seen one that I’ve been impressed with.

Recently, I had three different clients bring in their 401(k)’s, all of which having target date funds.

The common theme was…..you guessed it…. they suck.

Show Me Some Examples

Here’s some examples of three clients’ 401(k)’s where we compared the target date portfolio and looked at their ten-year returns, we adjusted that for inflation, and see how that compared with the new portfolio.

Now, keep in mind, the new portfolio consisted of the mutual fund options that were available to them in their 401k.

See, whenever you have a 401k, the target date fund is usually the easiest option, and sometimes your default option, but you typically have the ability to go in and create your own portfolio.  Most people don’t because they simply just don’t know and don’t feel comfortable doing it.

I can’t blame people for not feeling comfortable or qualified to do so.  I’m hoping by showing you some numbers below that you’ll at least consider it.   Let’s take a look…..

Sample Client One

With each client we kept the ratio of stocks and bonds relatively the same.   As you can see,  the first portfolio netted a 3.61% more return over a 10 year period.  3.61%!  Remember, we are just using other mutual funds that are already in the 401k.

Portfolio 10Yr Return Adjusted for Inflation
Assumed(3.4%)		 10Yr Beta
Target Date Portfolio 4.22% .79% .90

New Portfolio 7.83% 4.28% .76

Difference +3.61% +3.49% -.14

For the super analytical people, I had to include other factors as beta, standard deviation and alpha.  If you don’t know that means, it’s OK.   You don’t need to.   What you may be more interested in dollars.

Portfolio 10Yr Standard Deviation 10Yr Alpha
Target Date Portfolio 14.83 1.33

New Portfolio 12.80 4.79

Difference -2.03 +3.46

What does 3.61% really mean over the long term? Well, let’s just say… A LOT. As you can see below, in 5 years on a $100,000 portfolio, it’s over $22,000. Wow! And as you can see it only gets bigger and BIGGER….

Portfolio of $100,000 5YR 10YR 20YR
Target Date Portfolio $122,958 $151,186 $228,571

New Portfolio $145,780 $212,518 $451,640

Difference $22,822 $61,332 $223,0069

Those numbers don’t really reflect what happens in a 401k. If you have a 401k, then most likely you’re adding to it on per paycheck basis.

Using the same returns, I wanted to demonstrate if you were adding $5,000 per year into it. As you can see the 20 year number is a $295,000 difference. Okay, that deserves a special call out……

The 20 year difference is $295,000! Wowzers.

Still think you’re target date fund is good enough for your retirement?

Portfolio of $100,000 with $5,000 per yr contribution 5YR 10YR 20YR
Target Date Portfolio $150,159 $211,832 $380,907

New Portfolio $175,014 $284,369 $676,186

Difference $24,855 $72,537 $295,279

Sample Client Two

You can go through the rest of the examples and see more of the same. What’s the recurring theme? You guessed it. Target date funds suck.

Portfolio 10Yr Return Adjusted for Inflation
Assumed(3.4%)		 10Yr Beta
Target Date Portfolio 7.00% 3.48% .69

New Portfolio 9.80% 6.19% .72

Difference +2.80% +2.71% +.03
Portfolio 10Yr Standard Deviation 10Yr Alpha
Target Date Portfolio 11.71 4.04

New Portfolio 12.57 6.66

Difference +.86 +2.62
Portfolio of $100,000 5YR 10YR 20YR
Target Date Portfolio $140,255 $196,715 $386,968

New Portfolio $159,592 $254,697 $648,704

Difference $19,337 $57,982 $261,736
Portfolio of $100,000 with $5,000 per yr contribution 5YR 10YR 20YR
Target Date Portfolio $169,009 $265,797 $591,945

New Portfolio $189,996 $333,624 $928,656

Difference $20,978 $67,827 $336,711

Sample Client Three

Different Client. Different 401k. Different target date mutual funds. Same sucky results….

Portfolio 10Yr Return Adjusted for Inflation
Assumed(3.4%)		 10Yr Beta
Target Date Portfolio 5.55% 2.08% .98

New Portfolio 7.78% 4.26% .89

Difference +2.23% +2.18% -.09
Portfolio 10Yr Standard Deviation 10Yr Alpha
Target Date Portfolio 15.96 2.59

New Portfolio 14.80 4.72

Difference -1.16 +2.13
Portfolio of $100,000 5YR 10YR 20YR
Target Date Portfolio $131,006 $171,626 $294,554

New Portfolio $145,442 $211,535 $447,470

Difference $14,436 $39,909 $152,916
Portfolio of $100,000 with $5,000 per yr contribution 5YR 10YR 20YR
Target Date Portfolio $158,939 $236,153 $469,828

New Portfolio $174,647 $283,215 $670,779

Difference $15,708 $47,062 $200,951

Managing Your Own 401k

Now, I understand that most people don’t know what the heck they’re looking at in their 401k, so it’s hard for them to do their own research, but that’s where a financial planner comes into play.

Find an advisor that knows that they’re doing and have them construct you an optimized 401k  portfolio.  Even if you have to pay that person $1000 to help with your 401k, that $1000 is nothing, especially when you look at the numbers above.

401k Review Service

Since I realize people need help with their 401k, it only made sense to include that as a part of my practice.   Don’t worry, it’s not $1000.  🙂 If you need help with your 401k, check out my 401k review service.

Need help with your 401k?

If you’re struggling to make sense with your 401k, stop going at it alone.  Read more about my 401k review service to get your retirement on track.  Click here to learn more.

Source: goodfinancialcents.com

Apache is functioning normally

To qualify for Medicare under age 65, you generally need to have a disability that makes you unable to work for at least a year. Examples include certain cancers, respiratory illnesses and musculoskeletal disorders.

The Social Security Administration, or SSA, calls its definition of disability “strict.” But there still are some options if your condition doesn’t appear on the official list to qualify for SSDI.

🤓Nerdy Tip

The Social Security Administration administers two income assistance programs for people with disabilities: Social Security Disability Insurance, or SSDI, and Supplemental Security Income, or SSI.

While they have similar names and purposes, the two programs don’t work the same when it comes to Medicare. SSDI can qualify you for Medicare under age 65. In most states, SSI can qualify you for Medicaid, instead.

What medical conditions qualify for Social Security disability?

There’s no exhaustive list of conditions that do or don’t qualify for SSDI. For adults, the SSA has a list of impairments in 14 categories that might qualify for SSDI if they’re sufficiently severe.

Examples of individual impairments on the list include limb amputations, post-traumatic stress disorder, chronic heart failure, loss of speech and chronic liver disease. Meeting certain clinical and functional criteria on the list is one way to qualify for SSDI.

Not having a condition on the list doesn’t mean you can’t qualify. There’s also a process to determine whether other conditions are severe enough to meet the SSA’s requirements.

How to determine whether your condition qualifies

There’s a five-step process to determine whether your condition meets the required definition to qualify for the SSDI program. If you qualify for SSDI, you can later become eligible for Medicare based on disability.

Here are the five questions the SSA uses to evaluate the disability status for SSDI applicants

:

1. Are you working?

If you’re working, there’s an income cap to qualify for SSDI. In 2023, you generally can’t make more than $1,470 per month. If you’re blind, it’s $2,460 per month

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2. Is your condition “severe?”

Your condition must significantly limit your ability to do “basic work activities” for at least 12 months because of changes to things like strength, mobility or memory.

3. Is your condition found in the list of disabling conditions?

If your condition is on the list and you satisfy the first two questions, you have a qualifying disability. The next questions don’t apply.

If your condition isn’t on the list, you’re not necessarily disqualified. The SSA has to determine whether your condition is as severe as those that are on the list. If so, you will continue through the process.

4. Can you do the work you did previously?

If your condition isn’t on the list, the SSA considers whether it prevents you from performing any of the work you’ve done in the past. If so, you continue through the process.

5. Can you do any other type of work?

If your condition prevents you from doing work you’ve done before, the SSA also considers whether there are other kinds of work you could still do.

Your medical condition isn’t the only factor here. The SSA also considers age, education, work experience and skills.

If there’s no other work you could do, then you have a qualifying disability.

Medicare disability work requirements

You must have a qualifying disability to receive SSDI benefits, which can make you eligible for Medicare based on disability. But having a qualifying disability isn’t enough on its own. SSDI also has requirements for your work history.

The SSA measures work history with the same Social Security work credits needed for Social Security retirement benefits.

Most people applying for SSDI need 40 work credits, or 10 years of work, to qualify. A work credit is a metric used by the federal government to measure time in the workforce; one credit is equal to a quarter of work, subject to certain income minimums. Half of that qualifying work — 20 credits’ worth, or five years — needs to have been within the 10 years before the year your disability began

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You can earn a maximum of four credits per year. In 2023, you earn one credit for every $1,640 in wages or self-employment income. You would need to make $6,560 to earn all four credits in 2023.

The number of work credits you need depends on your age. If you’re under 60, you can qualify for SSDI with fewer than 40 work credits.

How long does it take to receive benefits?

For most applicants: 24 months after qualifying

After you become entitled to SSDI benefits, there’s generally a 24-month waiting period before you qualify for Medicare based on disability

.

There are special exceptions for people who receive SSDI benefits and have certain conditions.

For those with certain conditions: Sooner

Lou Gehrig’s disease, or amyotrophic lateral sclerosis

If you have amyotrophic lateral sclerosis, or ALS, you become eligible for Medicare the first month you receive SSDI benefits.

End-stage renal disease

If you have end-stage renal disease, or ESRD, you generally become eligible for Medicare on the first day of the fourth month of your dialysis treatments. It could be sooner if you undergo training for home dialysis.

Kidney transplant due to ESRD

If you have ESRD and you’re getting a kidney transplant, you become eligible for Medicare the month you’re admitted to a Medicare-certified hospital for the transplant. You’re covered for a maximum of two months before the transplant takes place, so your eligibility might change if the transplant is delayed or rescheduled.

Source: nerdwallet.com

Apache is functioning normally

When I picked up The 4-Hour Workweek, I was worried it was some sort of “get rich quick” book. The first few pages didn’t do much to change my mind. The author, Timothy Ferriss, makes a lot of bold claims, such as: “How do you create a hands-off business that generates $80,000 per month with no management? It’s all here.”

But something happened during the first few chapters. When I read a book, I use small sticky notes to mark interesting passages. After the first 100 pages of The 4-Hour Workweek, the book was thick with stickies. By the time I was finished, I had used an entire pad!

Ferriss does make a lot of bold promises, and some of the details along the way do read like the confessions of a get-rich-quick scammer. But I believe that an intelligent reader can easily extract a wealth of useful ideas from the book. For me, it’s a keeper. I’ve read it three times already, and will probably read it again before the end of the year.

Let’s Make a Deal

After college, Ferriss took a soul-sucking sales job at a tech firm. He left to start a soul-sucking business of his own. He went from working 40 hours a week for somebody else to working 80 hours a week for himself. He hated it. The pay was good, but the business left him drained.

After learning about the Pareto Principle (more commonly known as the 80-20 Principle), Ferriss had a revelation: he streamlined his business, eliminating distractions and automating systems until it was not only more profitable, but also took less of his time. Much less. He took a “mini-retirement,” and then decided to write a book about “lifestyle design,” about creating a life that balances work and play, maximizing the positives of both.

The 4-Hour Workweek is divided into four sections, each of which explores one of the components to lifestyle design:

  • Define your objectives. Decide what’s important. Set goals. Ask yourself, “What do I really want?”
  • Eliminate distractions to free up time. Learn to be effective, not efficient. Focus on the 20% of stuff that’s important and ignore the 80% that isn’t. Put yourself on a low-information diet. Learn to shunt aside interruptions, and learn to say “no.”
  • Automate your cash flow to increase income. Outsource your life — hire a virtual assistant to handle menial tasks. Develop a business that can run on auto-pilot. (This is the weakest section of the book.)
  • Liberate yourself from traditional expectations. Design your job to increase mobility. This could mean working from home, or it could mean using geographic arbitrage to take mini-retirements in countries with favorable exchange rates.

The 4-Hour Workweek describes the specific actions Ferriss took to implement these steps. Sometimes these specifics aren’t particularly useful. However, I think it’s a mistake to let the details get in the way of his broader message. If you’re able to look past the details, to look at their meaning, you may discover principles that can change your life. For example, I don’t like much of what Ferriss has to say about automation. I question the virtue of virtual assistants, and I think that his business model works for his business, but probably isn’t applicable to most others.

However, it was while re-reading this section the other night that I began to think about automating my personal finances, about making them paperless. By absorbing Ferriss’ ideas and not his specific details, I was able to apply this to my life.

A Kick in the Head

Most of the time, The 4-Hour Workweek is like a kick in the head. The flow of ideas is relentless. Here’s one of my favorites:

Emphasize strengths, don’t fix weaknesses. Most people are good at a handful of things and utterly miserable at most. […] It is far more lucrative and fun to leverage your strengths instead of attempting to fix all the chinks in your armor. The choice is between multiplication of results using strengths or incremental improvement fixing weaknesses that will, at best, become mediocre. Focus on better use of your best weapons instead of constant repair.

Maybe this is obvious to most of you, but it’s a revelation to me. I spend a lot of time worrying about my weaknesses. Yet when I look at my life, it’s clear that everything rewarding and profitable comes from enhancing my strengths. Here’s another example:

Relative income is more important than absolute income. Absolute income is measured using one holy and inalterable variable: the raw and almighty dollar. Jane Doe makes $100,000 per year and is thus twice as rich as John Doe, who makes $50,000 per year.

Relative income uses two variables: the dollar and time, usually hours. The whole “per year” concept is arbitrary and makes it easy to trick yourself. Let’s look at the real trade. Jane Doe makes $100,000 per year, $2,000 for each of 50 weeks per year, and works 80 hours per week. Jane Doe thus makes $25 per hour. John Doe makes $50,000 per year, $1,000 for each of 50 weeks per year, but works 10 hours per week and hence makes $100 per hour. In relative income, John is four times richer.

Of course, relative income has to add up to the minimum amount necessary to actualize your goals…

I want to believe that if I had to choose between $70,000 per year earned with 70 hard hours per week, or $42,000 per year earned with 37 easy hours per week, I’d choose the latter. I’m not there yet.

A Garden of Tips

I don’t buy into everything that Ferriss writes, but I love how he shatters conventional wisdom. I love that he makes me think. Even if you reject his central thesis, there are dozens of tips and tricks here that can be extracted and used to optimize your life. Here are a few:

  • Ask yourself, “If this is the only thing I accomplish today, will I be satisfied with my day?”
  • How to double your reading speed in ten minutes.
  • Why it’s more productive to carry around a written to-do list than to keep one on your computer.
  • Learn the art of non-finishing. This is all about the sunk cost fallacy: just because you paid $10 to see Pirates of the Caribbean 3 doesn’t mean it’s a good idea to watch the entire thing.
  • How to be more efficient with e-mail.
  • How to reduce clutter from your life.
  • If you can’t define it or act upon it, forget it.
  • Life exists to be enjoyed — the most important thing is to feel good about yourself.
  • Why geographic arbitrage is a great way to enhance your relative income.
  • The value of a virtual assistant.

Related >> Why Smart People Make Big Money Mistakes — And How to Correct Them

My Recommendation

Despite its flaws, The 4-Hour Workweek is a great book. I think that most people can draw something useful from it. Borrow it from your public library. If you like it and think you’ll re-read it, then wait for it to come out in paperback. I’ve already read my copy three times, but that’s because it’s perfect for when I am in life; I’m not convinced that others will extract the same value.

A final note: perhaps best of all, this book has a 10-page index. Why don’t more books do this?

Source: getrichslowly.org

Apache is functioning normally

Something amazing has happened in the past eighteen months. While I’ve been learning about personal finance — and sharing my knowledge with you — Get Rich Slowly has grown from a small site with a couple hundred readers into a real-life business. GRS currently has 35,000 subscribers and generates $5,000 in monthly revenue. It also takes most of my time. This is a blessing and a curse.

The Blessing

As my income from this site has grown, I’ve been able to achieve my financial goals more quickly. In two weeks, I’ll be debt-free except for the mortgage. I have an emergency fund. I’m maxing out my Roth IRA every year. Get Rich Slowly has also put me in touch with a lot of great people: readers, colleagues, and media contacts. Most of all, I’ve learned tons about personal finance. I’m still a novice when it comes to investing and retirement planning, but I’m a novice who knows how to find the information he needs, and who is willing to share it with others.

The Curse

As wonderful as this site has been to me, it’s not without its drawbacks. Chief among these is that it takes time. Kris and I used to do more things together. I used to have spare time to read books and to play games and to hang out with my friends. Though I still do these things whenever possible, more of my time is devoted to providing quality content. Writing Get Rich Slowly is literally like having a second full-time job.

The Decision

After months of deliberation, I’ve decided to quit my job at the family business.

Yes, having two sources of income provides a tremendous sense of security, but I cannot continue at this pace. Lately I’ve struggled to squeeze Get Rich Slowly into the cracks of life: evenings, weekends, down-time at the box factory. As the site has grown, so has the workload. In order to make Get Rich Slowly everything I want it to be, in order to provide the best personal finance information, this site must be my top priority.

Quitting the day job scares me. My web income can support my lifestyle, especially if I’m frugal. But I had developed grand plans of accelerated savings, of paying off my mortgage in just a few years, of traveling around the world. When I quit the day job, I’ll be sacrificing:

  • The second income.
  • An additional retirement plan (about $5,000/year).
  • Daily contact with co-workers and colleagues.

I’ll be trading these sure things for an uncertain future. What guarantee do I have that Get Rich Slowly can continue to produce enough income to support me? What guarantee do I have that I’ll still want to do this three years from now? There are no guarantees.

The Plan

And so I am making a leap of faith. Or, more precisely, several “hops of faith”. In order to provide myself and the business a smooth transition, I’m going to reduce my hours gradually over the coming year.

  • Beginning 01 January 2008, my Tuesdays will be spent working on Get Rich Slowly.
  • Beginning April 1st, I’ll drop Thursdays at the box factory.
  • On July 1st, Mondays will be spent writing.
  • Next October, I’ll be down to only Wednesdays at the day job.
  • Finally, on 01 January 2009, I will be an official real-life full-time blogger.

I’ve always wanted to be a professional writer. I just thought I’d write science fiction novels. Or the sorts of short stories you find in Harper’s and The New Yorker. I never imagined I would one day make my living by writing about personal finance.

The Preparation

Now that I’ve committed to taking this leap, I’m scared. I’ve become a master of the worst-case scenario. Yes, Get Rich Slowly has generated enough revenue to support me during the past few months, but what if something goes wrong? What if I run out of things to write? What if Google or FeedBurner cancel their ad programs? What if I lose my thumbs in a blogging accident? What if all these things happen at once?

I’ve had people ask me how to prepare for a potential job loss, or how to make the transition to self-employment. My answers have always been theoretical. Now that I’m facing this situation myself, however, I can tell you the sorts of preparations I made. I think all of these are important:

  • Crunch the numbers. There are many good reasons to track every penny you spend — potential job loss is one of them. Sit down and go over your records. How much do you spend on food every month? What do you spend on utilities? What could you sacrifice if needed? Run the numbers for a variety of “what if?” scenarios. I’m fortunate to have health insurance through Kris’ job — if I didn’t, the numbers tell me I couldn’t make this leap yet.
  • Manage your money. You should always be smart with your finances. But when you’ve lost your job, or are about to make a career change, this becomes even more important. I can’t imagine making the move to full-time writer if I wasn’t debt-free (except for the mortgage). If I still had spending problems, this transition would be even more frightening.
  • Embrace frugality. I’ve done a great job of developing frugal habits over the past two years. I need to maintain these. I need to make use of the library. I need to walk and bike on my errands instead of driving. I need to follow the tips I share with you.
  • Kill the lifestyle inflation. As my debt-free date approaches, I’ve begun to loosen the grip I’ve had on my spending. We’ve been dining out more often. I’ve been buying toys and gadgets. I had even begun planning to purchase expensive furniture for the living room. All of this needs to stop now.
  • Bolster the emergency fund. I’m generally an advocate of smaller emergency funds — $500, $1000, $5000. But as I consider my upcoming transition to full-time blogging, I’ve realized I want to have more in savings. Much more. Though it seems like an impossible goal, I’m going to strive to save $20,000 by the end of 2008. (My mind boggles just to type that number.)
  • Seek professional advice. Consult with an accountant, and maybe even an attorney. There are tax and legal implications that come with starting your own business. Take the time to speak with somebody who knows the rules. Get things right from the start.
  • Pursue multiple streams of income. Most people have a single stream of income — their job. The more income streams you have, though, the more secure you are. My current situation is a perfect example. When I leave my job at the box factory, I need to pursue other income sources as well. I might consider a part-time job. I might pursue computer consulting work. More likely, however, I’ll start additional web sites (such as Get Fit Slowly, which I hope to have ready for launch by the first of the year). The more sources of income I have, the safer I’ll feel.
  • Define goals. It’s always good to know which direction you’re headed. In the face of an uncertain future, this becomes even more important. I’ve thought a lot about this lately. Where will I be in five years? In ten? In twenty? I need to decide what my objectives are, and be sure that my other choices align with these.
  • Focus on what’s important. Because I’m placing all of my faith behind this web site, I need to work to make it the best it can be. I need to provide more useful information, offer more tips, help readers find more answers.

The moment I decided to quit my day job, my entire mindset about money changed. It was as if somebody had thrown a switch in my brain. It’s more important than ever to practice what I preach. I’ve entered Ultra-Frugality Mode. I sat down the other day and crafted a new spending plan. I listed exactly what my monthly obligations are, and what my expected income is. The surplus is earmarked to boost my emergency fund as high as it can go.

It feels good to know that I’ve made some smart money decisions over the past eighteen months. These now serve as a sort of safety net. I don’t have a lot of fixed monthly expenses. I’ve eliminated my debt. I’ve developed the saving habit. These things will help me as I make the transition to working on my own.

The Dream

This decision has been difficult. The box factory is a safe, comfortable environment. It’s a sure thing. By leaving the business, I’m sacrificing stability.

On the other hand, I have to consider what I’m gaining: time. I’m going to gain time to exercise, time to actually respond to e-mail, time to research more extensive articles, time to begin writing the book I’ve had in mind for the past year. I’m going to have a chance to live the pastoral lifestyle I’ve always dreamed of.

I’m finally following some of my own advice: I’ve gathered the guts to pursue my dream. I’m glad to have you along for the ride.

Edit: In the comments, I answer the question, “How much time does running this blog really take?“

Source: getrichslowly.org