Financial Independence April 2017 Update
Spring is upon us and so is our April 2017 update on our financial independence progress, aka “The Plan”. Big changes are beginning on our financial independence and early retirement plan, so read on for what we’ve got going on.
The overall market slowed down a bit over the last month. Returns on US equities were flat to slightly down. International equities didn’t get the memo because they were up 2-3% in March and they are about 2% in return ahead of US equities YTD. International is a small part of our overall portfolio as you can see in this pie chart on our current allocation. (We made some fairly significant changes to our allocation this month, but more on that below.) But, even that small allocation has helped keep our portfolio in positive return territory for March. Diversification works! Our bond holdings were slightly up for the month. As an ever larger percentage of our allocation, they softened the blow from US stocks and contributed a small return along with the aforementioned international equities. The bond market reacted very little to the Fed’s interest rate hike. Bond investors had anticipated the move for some time and yields already reflected the Fed action.
Market volatility is to be expected and as “investors” and not “speculators”, we’re accumulating wealth for long term financial independence. At this juncture, a cooling of the market is just more opportunity to buy at better prices for spending later. We don’t consider ourselves icons of personal finance, but there’s something for readers of all ages to learn from our success in this matter. Develop an accumulation strategy and stick to it. Our portfolio has weathered the Tech Bubble and the Great Recession because we didn’t panic and sell low. Stay the course!
March Saving and Expenses
For our saving and expense budget performance in March, I’ll give us a solid “B”. We continued to stay well within our eating out and entertainment budget, which is always a struggle for us. That savings, however, was offset by exceeding our clothing budget and our medical care budget. Remember all that sickness I had back in January and February? Well, the bills for the medical care I received came due in March. We could have tapped our HSA funds, but we are trying to build those accounts to provide a source of funds for retirement medical care. We took the expense against our regular monthly cash flow, instead. Between the saving on entertainment and the exceedance on clothing and medical, we were net zero, which is good. I would have preferred to bank the extra savings, though. I won’t be too hard on us, because we did stick to the overall budget and came out just fine.
Goodbye Car Payment!
We did make one big “expense” in March and that was making the decision to pull $5k out of the cash reserve account and pay off our car loan. Since we’ve been stacking up the Benjamins in the cash account this year, we felt it was time to pay off the last auto loan of our lives. The interest rate was very low on the loan, (interest for the rest of the year would have only been about $50), but it feels good to have it paid off and owned outright. From here on out, we’ll be paying cash for vehicles. No more car loans!
Hello Car Rental!
Speaking of automobiles, we mentioned last month that we were trying to decide between renting a car for the summer or purchasing a used car for our oldest son’s use while home from college. We’ve decided to rent a car for Jenny to drive and then our son will drive the family car. We’ll continue to do this as needed until Summer 2018 when we’ll re-evaluate. The cost of a rental was about $500 more than the cost of insurance and maintenance for a purchased used car. For $500, we get to dispense with a car sitting around most of the time not driven. And that doesn’t even address the value of avoiding the aggravation of owning yet another car. Also, it frees up about $8000 in cash that can be saved for a future expense.
Other than the allocation change we’ll talk more about below, the continued investments in our HSA, 401(k)s, and pension plan continues to be on autopilot according to our financial independence plan. That plan calls for us to max out all contributions for this and future years. We’re on track.
We are in the process of transitioning our portfolio to support a strategy for retirement income called Liability Matching Portfolio (LMP) with Risk Portfolio (RP). You’ll find more information about that here. The implication for our portfolio is to reduce our equity holdings and increase our stake in bonds. Our previous allocation of 80% equities/20% bonds has been changed to 60% equities/40% bonds as you can see in the allocation figure above. In the scheme of things, this is still an aggressive mix as we continue to accumulate funds for financial independence. The larger allocation in bonds allows us to start laying down a safe income floor for retirement. We’ve already started to build a TIPS (Treasury Inflation Protected Securities) ladder with that in mind. I’ll be authoring a specific article on that subject in the near future.
You may be interested in the timing of this change. I have been researching for some time the different options for income in retirement. LMP/RP is an attractive option for us and the strategy we decided to pursue. While I do not believe in market timing for investing, I do think making intelligent choices about portfolio re-allocation or rebalancing is possible. Noone knows in advance when a market will be overvalued. But, based on traditional metrics, one can observe when equities are currently highly valued. One can also observe when bonds are valued low compared to equities by the prevailing bond coupon rates and yield curves. It is my (and many others) observation that the equity market has become highly valued and that bonds are basically flat to down for the year. With this information in hand, I decided now is the time to sell down our equities and buy more bonds. Could April, May or some other future month be better still for selling equities? Of course. I can’t predict the future and neither can anyone else. But, now is not a bad time to sell equities since we need less volatility in our portfolio moving forward.
Looking Ahead to April and to a Busy Summer
We have lots of opportunities to spend money in the spring and summer months. Updates to clothing, vacations, and other summer fun are among the temptations. We have a seasonal budget that takes these things into account. When we put the budget together 9 months ago, we intentionally constrained spending below what we spent in 2015-16. We’ll see if we can hold the line – I’m thinking we can do it given how well we’ve done since November.
As far as major expenses go, the biggest will be summer vacation that was budgeted. We already have the money set aside for that. Our youngest son was accepted into a firefighting/EMT vocational program starting next year, so we’ll need to get him contact lenses to wear during school. The mask associated with the breathing apparatus firefighters wear won’t seal while wearing glasses, so he’ll need contacts. That’s an unbudgeted expense, but I’m hoping we can save money in other areas to keep our saving plan intact. We might simply have to put the hammer down on entertainment expenses for a month to cover those contacts.
Financial Independence Summary
Overall things are going really well on our path to financial independence? Our net worth is still rising, despite the market cooling off in March largely due to our international equities and continued contributions to our portfolio. If you take a quick look at “The Big Graph”, you’ll see that linear trend line is holding ground for us to reach our goal next year. We’ll be surprised if the market keeps going up and we get there that fast, but we’ll see. As I mentioned last month, it might be that we hit our accumulation goal before we’re ready to retire from our full time jobs. That will be completely okay with us. The more we save, the more financial independence we’ll have.
As you look to summer and beyond, are your financial independence and retirement plans in order?
Posted by Jeff