Schwab, Vanguard or Fidelity?

[RunningwithScissors]

Thank you @LilAlex and @diamondseeker2006.

I apologize for only now getting back to you after you so thoughtfully answered my questions. I read your responses when you first posted them, but then my life got frantically busy (I'm a caretaker) so I wasn't able to process your responses fully and circle back until now.

I've been reading the Boglehead books (not done yet, but making progress). I understand the gist of their philosophy, and it strongly fits what I have always intuitively felt to be true. I abhor things like day trading and get rich quick schemes. I've always been happy when the market is down because I've viewed it like shopping when the staples that I'd buy anyway are on sale.

Still there are many aspects of investing as well as retirement planning that I'm trying to learn. It can feel like learning a different language and at times I feel like an idiot.

I have many questions to ask, but I feel shy taking up your time.

Here are a few, and if you don't have time to answer, please don't feel obliged. Or, if it takes a month to respond that's totally okay too.

1. How do you feel today about the original 3-Fund portfolio that the Boglehead book recommends? (My understanding is that it is basically one index fund containing all of the US stock market, one international fund that is almost as equally broad, and one US bond fund.) Is that still the going advice, regardless of which platform you use (Schwab, Fidelity, Vanguard)?

2. For mutual funds, not ETFs, do you have or recommend a threshold for assets under management?

3. How do you feel about some of these zero expense ratio funds (for example at Fidelity) now being advertised? (How can a fund have zero expenses? That seems strange to me to not have any.)

4. What is meant by a "Fundamental" Fund in layman's terms? I've googled it, but I still don't quite understand: "A fundamentally weighted index is a type of equity index in which components are chosen based on fundamental criteria as opposed to market capitalization." Fundamental funds seem to have expense rations higher than other index funds, but not nearly as high as managed funds. How do you feel about them in general? Worth it to have in a portfolio or not?

5. Is the long-held bond advice being revised at all after what has happened this past year? (In terms of ratios in one's portfolio going forward, I'm not talking about selling already-owned funds.)

6. I think I am too heavy on S&P 500-type funds. How can I expand this US segment of my portfolio without too much overlap? For example, in Schwab (which is the platform I use) the other Vanguard-esque index funds are things like their SWTSX Total Stock Market Fund and SNXFX Schwab's 1000 Fund. But these have a tremendous amount of overlap with the 500 I already have. What other good options are there, or do I just go with those broader funs I mentioned that have overlap?

Sorry if these questions are too much. Again, don't feel like you need to answer if you don't have the time, I totally understand.

 

[Mrsz1ppy]

You didn’t ask me, but I’m an autodidact so I’m going to make a few suggestions And comments.

Of course the no fee funds get paid. Many times they sell their order flow. That is how no commission brokerages get paid too. If you really want to know, read the fund documents.

Seeking Alpha can be educational. I like Investment Pancake‘s articles. He sells nothing.

I have seen SPY and QQQ used for broad market coverage. Russell 2000 too.

What is up varies. So many variables—stocks up, bonds down. Small caps hot, now not.

Everytime you buy or sell someone makes money on the trade.

Fidelity did a study on individual investors’ rate of return. The highest was on dormant accounts where the owner was deceased.

My personal accounts are in CEFs for income and because I like buying at a discount and top credit risk individual stocks for my savings/growth.

Hope you enjoy your investment journey. I’ve enjoyed the process.

 

[LilAlex]

1. How do you feel today about the original 3-Fund portfolio that the Boglehead book recommends? (My understanding is that it is basically one index fund containing all of the US stock market, one international fund that is almost as equally broad, and one US bond fund.) Is that still the going advice, regardless of which platform you use (Schwab, Fidelity, Vanguard)?

My time is worth nothing so no worries there. It's a good distraction for me!

Congrats on reading the BH stuff! I share your investment philosophy. And I have had a long-enough investing life now to know that the most successful things I have ever done were not reacting (staying the course) and the least successful were my "great ideas."

Three-fund is a good idea. It is close to what we do and what my kids do. I would not use one single index fund for this because your preferred ratio may (and perhaps should) change as you age, win the lottery, support an ill relative, have kids, get divorced, etc. So I would have separate ETFs or MFs for each leg of that (lop-sided) tripod. And, if they are not in retirement accounts, you can then tax-loss harvest as various things go down and then up. You can also re-balance with ease as stocks skyrocket and so forth.

One huge issue with the otherwise-great "target retirement date" funds is this lack of flexibility. You can of course swap them into another all-in-one fund of your desired composition, but there could be enormous tax consequences. I have made this mistake (and most others).

2. For mutual funds, not ETFs, do you have or recommend a threshold for assets under management?

Way less critical for MFs than for ETFs since they trade at the end of the day and that is the price you (and everyone) will get. I will generally not buy anything that is < $1 billion in AUM. There are many reasons but virtually no top, low-cost funds fall below this threshold. Anything below is either new or shunned for some other reason. Most new funds are new flavors with a new strategy -- that is not what you want. (That said, if a Schwab opens a new true index fund in some market space they have not previously competed in, it may take a year to get to a billion in AUM and still be fine-ish at the outset; it's not a perfect proxy for good vs. evil)

For ETFs, small size is absolute poison and I collected all the data for every equity fund in the Fidelity brokerage universe on two separate days (maybe 2,000 separate ETFs, IIRC) to prove it. It is not invariably the case, but many small ETFs have spreads that are 100X higher (!) than their big-brother funds. (Meaning: you are paying 100X as much to buy or sell as a heavily-subscribed fund.) In one teeny, tiny ETF that I serially TLH'ed my way into, my one big sale was 10% of the day's volume -- my order sold in tranches and I could watch the price go up in real-time as I personally moved (this tiny corner of) the market.

3. How do you feel about some of these zero expense ratio funds (for example at Fidelity) now being advertised? (How can a fund have zero expenses? That seems strange to me to not have any.)

Fine for retirement accounts; awful for taxable accounts. Because they are "proprietary" to a custodian (e.g., the ZERO funds at Fidelity) so when you go to move them to another custodian -- and you or someone else surely will -- they can not be accepted at the destination brokerage and must be liquidated. And there can be a huge tax hit. I use them in a retirement brokerage account (no tax consequences when it moves) but would never use them in taxable. They are a loss-leader. A huge push in the industry is to keep you forever (post-retirement) once you start an employer retirement account -- this sort of golden-handcuffs approach helps; they know exactly what they are doing.

4. What is meant by a "Fundamental" Fund in layman's terms? I've googled it, but I still don't quite understand: "A fundamentally weighted index is a type of equity index in which components are chosen based on fundamental criteria as opposed to market capitalization." Fundamental funds seem to have expense rations higher than other index funds, but not nearly as high as managed funds. How do you feel about them in general? Worth it to have in a portfolio or not?

Not sure. Do you mean "factors"? Most of the "fine-tuning" that active managers try to sell you on are intrinsic properties of the companies they select to invest in. Examples are value (companies selling at a discount), volatility (how much does the share-price bounce around), momentum (going up because it has gone up), quality (more attractive corporate balance sheet), size (big vs. little company), etc.

They can use any existing factor or make anything up. Someone showed that if you had only invested in companies that started with the letter "A," you would have done really well (i.e., mostly because of Amazon, Apple, Alphabet, and a few others). In "back-testing," it is a brilliant strategy. It is a dumb strategy to apply in the forward direction and I think most of us can see this!

All index fund are "market-cap weighted" -- you are buying every company in the stock market (or that part of the market) in proportion to how valuable the company is. So if you buy an SP500 fund, you will be buying an awful lot of Tesla and Apple, say. A few (and this is no longer index investing) may try equal-weighting -- same dollar-amount of each company in the index -- so you are not buying an excess of the "successful companies" and too little of the "up-and-comers" (or so the thinking goes). This is basically active management ("I know better than the market how these companies should be prioritized for your future gains.")

5. Is the long-held bond advice being revised at all after what has happened this past year? (In terms of ratios in one's portfolio going forward, I'm not talking about selling already-owned funds.)

No, AFAIK. The advantage of the simple strategies is that you do not need to fine-tune -- apart from periodic rebalancing. (And by that I mean if stocks go wild and your target 60% allocation goes to 80%). My household is still ~ 35% bonds and a mix of short-term and intermediate-term. Even the short-term took a 10% hit but that was way better than the equity hit and way, way better than large-cap growth got hit. (With small balances, you can play around with I-bonds and CD ladders, but this is not suitable/scalable for most folks with bigger account balances.)

Everyone knew that interest rates would go up and everyone knew there would be some pain. (I know the "duration" of all my bond exposure so I knew almost exactly how vulnerable I am.) But attempting to market-time around this is way less successful than riding it out.

6. I think I am too heavy on S&P 500-type funds. How can I expand this US segment of my portfolio without too much overlap? For example, in Schwab (which is the platform I use) the other Vanguard-esque index funds are things like their SWTSX Total Stock Market Fund and SNXFX Schwab's 1000 Fund. But these have a tremendous amount of overlap with the 500 I already have. What other good options are there, or do I just go with those broader funs I mentioned that have overlap?

I felt the same some years ago and made some changes (see below). Back in the day, smaller companies' returns were less well correlated with that of the big companies and offered -- at the cost of a lot of nerve-wracking volatility -- a better long-term return. For a few decades, it has not been clear that this is correct. But, nonetheless, I much prefer a total-stock-market portfolio to a SP500-only one -- even though the latter is what, 75% of the stock market? When using a backtesting tool like (the free, online, and Google-able) Portfolio Visualizer, it is hard to show that the former is superior to the latter. All my young-adult kids also use total stock market. (That said, if your only low-cost investment option in your workplace retirement plan were a SP500 index, it would be way better to go with this than pay a 1% fee to use a bad total-stock-market fund.)

For our own stuff, we overweight small-cap in general and small-cap value in particular. This "tilt" is favored by many index-fund aficionados who still crave a little excitement. Our tilt -- deviation from total market composition -- is maybe only 10 - 12%; I would never go "all in" on the small companies and neglect the big market-movers.

The performance of small, mid-size, and large companies is quite highly correlated now over the long term. What is amazing is that on any given day, they can be wildly different. Download the free Morningstar app and there is a color-coded nine-box diagram you can look at each day that shows wild swings in all the "corners." It is fascinating -- but I do not know how to leverage this to get rich.

Oh, if you want to retrofit some extra small- and mid-cap exposure, I will look and see what Schwab has to offer. You are not wedded to Schwab, of course, but some MFs have transaction fees there. This is why I love ETFs -- but I can not convince you. Do you know what you want to sell to make room? Do you know what the tax hit will be to selling maybe 10% of your equity holdings?

EDIT: I searched all of the Schwab One Source funds -- all their no load/no transaction fee funds (n of 5,000 or so?) for small- and mid-cap index MFs. The only viable ones are SWSSX (Schwab Small-cap index with ER of 0.04% and AUM of $6 billion and benchmarking [mirroring] the Russell 2000 Index) and SWMCX (Schwab Mid-Cap Index with ER 0.04% and AUM ~ $1 billion and benchmarking the Russell 1000 Index). These both seem fine and I would have no reservations about using them if I were targeting their respective market segments. The small-cap one is "pure-play" small-cap -- almost no large or mid. The mid-cap has a little more spillover in the large and small directions.

So you could, for example, put 10% of your equity holdings in a 50/50 split of SWSSX and SWMCX -- or just SWSSX. For the record, it looks like 27% of the total US stock market now consists of mid-cap and small-cap.

 

[RunningwithScissors]

My time is worth nothing so no worries there. It's a good distraction for me!

Congrats on reading the BH stuff! I share your investment philosophy. And I have had a long-enough investing life now to know that the most successful things I have ever done were not reacting (staying the course) and the least successful were my "great ideas."

Three-fund is a good idea. It is close to what we do and what my kids do. I would not use one single index fund for this because your preferred ratio may (and perhaps should) change as you age, win the lottery, support an ill relative, have kids, get divorced, etc. So I would have separate ETFs or MFs for each leg of that (lop-sided) tripod. And, if they are not in retirement accounts, you can then tax-loss harvest as various things go down and then up. You can also re-balance with ease as stocks skyrocket and so forth.

One huge issue with the otherwise-great "target retirement date" funds is this lack of flexibility. You can of course swap them into another all-in-one fund of your desired composition, but there could be enormous tax consequences. I have made this mistake (and most others).



Way less critical for MFs than for ETFs since they trade at the end of the day and that is the price you (and everyone) will get. I will generally not buy anything that is < $1 billion in AUM. There are many reasons but virtually no top, low-cost funds fall below this threshold. Anything below is either new or shunned for some other reason. Most new funds are new flavors with a new strategy -- that is not what you want. (That said, if a Schwab opens a new true index fund in some market space they have not previously competed in, it may take a year to get to a billion in AUM and still be fine-ish at the outset; it's not a perfect proxy for good vs. evil)

For ETFs, small size is absolute poison and I collected all the data for every equity fund in the Fidelity brokerage universe on two separate days (maybe 2,000 separate ETFs, IIRC) to prove it. It is not invariably the case, but many small ETFs have spreads that are 100X higher (!) than their big-brother funds. (Meaning: you are paying 100X as much to buy or sell as a heavily-subscribed fund.) In one teeny, tiny ETF that I serially TLH'ed my way into, my one big sale was 10% of the day's volume -- my order sold in tranches and I could watch the price go up in real-time as I personally moved (this tiny corner of) the market.



Fine for retirement accounts; awful for taxable accounts. Because they are "proprietary" to a custodian (e.g., the ZERO funds at Fidelity) so when you go to move them to another custodian -- and you or someone else surely will -- they can not be accepted at the destination brokerage and must be liquidated. And there can be a huge tax hit. I use them in a retirement brokerage account (no tax consequences when it moves) but would never use them in taxable. They are a loss-leader. A huge push in the industry is to keep you forever (post-retirement) once you start an employer retirement account -- this sort of golden-handcuffs approach helps; they know exactly what they are doing.



Not sure. Do you mean "factors"? Most of the "fine-tuning" that active managers try to sell you on are intrinsic properties of the companies they select to invest in. Examples are value (companies selling at a discount), volatility (how much does the share-price bounce around), momentum (going up because it has gone up), quality (more attractive corporate balance sheet), size (big vs. little company), etc.

They can use any existing factor or make anything up. Someone showed that if you had only invested in companies that started with the letter "A," you would have done really well (i.e., mostly because of Amazon, Apple, Alphabet, and a few others). In "back-testing," it is a brilliant strategy. It is a dumb strategy to apply in the forward direction and I think most of us can see this!

All index fund are "market-cap weighted" -- you are buying every company in the stock market (or that part of the market) in proportion to how valuable the company is. So if you buy an SP500 fund, you will be buying an awful lot of Tesla and Apple, say. A few (and this is no longer index investing) may try equal-weighting -- same dollar-amount of each company in the index -- so you are not buying an excess of the "successful companies" and too little of the "up-and-comers" (or so the thinking goes). This is basically active management ("I know better than the market how these companies should be prioritized for your future gains.")



No, AFAIK. The advantage of the simple strategies is that you do not need to fine-tune -- apart from periodic rebalancing. (And by that I mean if stocks go wild and your target 60% allocation goes to 80%). My household is still ~ 35% bonds and a mix of short-term and intermediate-term. Even the short-term took a 10% hit but that was way better than the equity hit and way, way better than large-cap growth got hit. (With small balances, you can play around with I-bonds and CD ladders, but this is not suitable/scalable for most folks with bigger account balances.)

Everyone knew that interest rates would go up and everyone knew there would be some pain. (I know the "duration" of all my bond exposure so I knew almost exactly how vulnerable I am.) But attempting to market-time around this is way less successful than riding it out.



I felt the same some years ago and made some changes (see below). Back in the day, smaller companies' returns were less well correlated with that of the big companies and offered -- at the cost of a lot of nerve-wracking volatility -- a better long-term return. For a few decades, it has not been clear that this is correct. But, nonetheless, I much prefer a total-stock-market portfolio to a SP500-only one -- even though the latter is what, 75% of the stock market? When using a backtesting tool like (the free, online, and Google-able) Portfolio Visualizer, it is hard to show that the former is superior to the latter. All my young-adult kids also use total stock market. (That said, if your only low-cost investment option in your workplace retirement plan were a SP500 index, it would be way better to go with this than pay a 1% fee to use a bad total-stock-market fund.)

For our own stuff, we overweight small-cap in general and small-cap value in particular. This "tilt" is favored by many index-fund aficionados who still crave a little excitement. Our tilt -- deviation from total market composition -- is maybe only 10 - 12%; I would never go "all in" on the small companies and neglect the big market-movers.

The performance of small, mid-size, and large companies is quite highly correlated now over the long term. What is amazing is that on any given day, they can be wildly different. Download the free Morningstar app and there is a color-coded nine-box diagram you can look at each day that shows wild swings in all the "corners." It is fascinating -- but I do not know how to leverage this to get rich.

Oh, if you want to retrofit some extra small- and mid-cap exposure, I will look and see what Schwab has to offer. You are not wedded to Schwab, of course, but some MFs have transaction fees there. This is why I love ETFs -- but I can not convince you. Do you know what you want to sell to make room? Do you know what the tax hit will be to selling maybe 10% of your equity holdings?

EDIT: I searched all of the Schwab One Source funds -- all their no load/no transaction fee funds (n of 5,000 or so?) for small- and mid-cap index MFs. The only viable ones are SWSSX (Schwab Small-cap index with ER of 0.04% and AUM of $6 billion and benchmarking [mirroring] the Russell 2000 Index) and SWMCX (Schwab Mid-Cap Index with ER 0.04% and AUM ~ $1 billion and benchmarking the Russell 1000 Index). These both seem fine and I would have no reservations about using them if I were targeting their respective market segments. The small-cap one is "pure-play" small-cap -- almost no large or mid. The mid-cap has a little more spillover in the large and small directions.

So you could, for example, put 10% of your equity holdings in a 50/50 split of SWSSX and SWMCX -- or just SWSSX. For the record, it looks like 27% of the total US stock market now consists of mid-cap and small-cap.

Thank you so much for this wealth of info! Its going to take me time to digest it all. I will circle back with follow-up questions when I do. You rock!

(And thank you for being patient with me and not judging me for being new at this! Some questions may be stupid but I'm trying and very determined to learn. I've been lucky so far, but I'd much rather be knowledgable than lucky.)

 

[RunningwithScissors]

You didn’t ask me, but I’m an autodidact so I’m going to make a few suggestions And comments.

Of course the no fee funds get paid. Many times they sell their order flow. That is how no commission brokerages get paid too. If you really want to know, read the fund documents.

Seeking Alpha can be educational. I like Investment Pancake‘s articles. He sells nothing.

I have seen SPY and QQQ used for broad market coverage. Russell 2000 too.

What is up varies. So many variables—stocks up, bonds down. Small caps hot, now not.

Everytime you buy or sell someone makes money on the trade.

Fidelity did a study on individual investors’ rate of return. The highest was on dormant accounts where the owner was deceased.

My personal accounts are in CEFs for income and because I like buying at a discount and top credit risk individual stocks for my savings/growth.

Hope you enjoy your investment journey. I’ve enjoyed the process.

Thank you! I enjoy reading everyone's experiences. With each new post I learn about new concepts, different viewpoints, and even new terms/vocabulary words. So yes, feel free to jump in, I appreciate it!

 

[RunningwithScissors]

@diamondseeker2006 @LilAlex @Mrsz1ppy @missy and anyone else who wishes to add their opinion.

If this is too personal of a question, feel free to not answer.

Do you and your families have annuities as part of your retirement plan?

I've heard that they are often maligned in the industry. However, they seem attractive to my husband and me because we like the idea of guaranteed income to cover our core necessities in retirement -- food, shelter, transportation and healthcare. (What one retirement planner calls "The Minimum Dignity Floor".)

Neither my husband or I have pensions, (which would be another form of secure income) and while we will both supposedly will get a decent chunk of social security, neither of us 100% trusts the system or that it will be as much as promised, and the amount won't cover our core necessities anyway.

So, have annuities factored into your personal retirement (for those of you retired) or retirement plans (for those not yet retired)? If yes, or no, why? What are your thoughts and experiences with them?

Thanks in advance for your time!

 

[Mrsz1ppy]

My MIL, who died in 2007, had an annuity. I have considered getting one for my adult disabled daughter, as part of my estate plan. It’s a trade-off, like anything else. You are giving away the upside on your principal in return for a guaranteed income, that is as guaranteed as the solvency of the insurance co. who offers it.

If that helps you sleep soundly, then do it. I don’t know what the cost of my MIL’s annuity was, but my husband got a nice check for the remainder, so it worked as promised.

Personally, I have different sources of income and classes of investments because when one does poorly, another outperforms. I would consider putting a small amount in an annuity (10% or less of my investment assets) for peace of mind.

Just my quick thoughts on the subject.

 

[LilAlex]

If this is too personal of a question, feel free to not answer.

Do you and your families have annuities as part of your retirement plan?

Only the dollar amounts are personal; the qualitatives are all fair game!

This is adapted from an email I wrote to a family member last year who asked me the same question (trying to save some time here):

They have a bad rap because they are pushed to the wrong people and there can be a high commission (= aggressive sales tactics). But in the right context, they can be very helpful.

Some random thoughts:

When interest rates are low, annuities are expensive to buy (because the company can not safely earn much with your up-front payment). When inflation is high, they should be more reasonable (assuming that there is no built-in inflation adjustment). In early 2022, we were in a "worst case" time since inflation was high and interest rates were low so you would pay a lot for an annuity that may not give the needed future benefit. (Eventually if inflation stays high, annuity costs should adjust down since they expect to be paying out with much cheaper dollars over the long term -- but I don't know if this has happened yet since no one knows if this inflation spike is a bump in the road or the start of a secular trend.)

The only annuity that we currently have is a MYGA, which has a finite term and is kind of like a juiced CD that is run through an insurance company (instead of a bank) and therefore carries extra risk (and hence extra reward). [Spouse]'s MYGA gives her ~ 4% per year x 6 years and then she gets the principal back. It is part of our (mental) "bond" allocation, although it is not technically a bond. But it is not like the type of annuity you are looking for. [This lives inside a retirement plan and is a small part of our assets and we had a very specific reason for this at the time when bank rates were 0.01%.]

Everything is potentially on the table in annuities. Single-life or does it keep paying until the second of you passes? Inflation-adjusted? Deferred start or immediate-start? Minimum payout (like guaranteed five or ten years at a minimum)? Think about what is important to you and make sure you are comparing apples to apples. I expect that all will be pretty similar, cost-wise, across the various insurers (I do not know this for a fact) -- there will be no bargain unless it is a terribly risky insurer, etc. The main cost factors are your age/demographics/health, payment needed ($2,000/mo vs. $3,000/mo, etc.), and current interest rate environment.

So this is not like buying a CD where you just have to compare rates, or even like a bond where you have to compare a few parameters; there are lots of variables with annuities. Every time you check a box to make it more attractive for you -- double-life for you and spouse, immediate start, inflation adjustment of the monthly payment, guaranteed payout for some minimum term even if you both die on Day 1 -- the projected monthly payment goes down [i.e., the annuity becomes more expensive per unit of coverage]).

The safety/solvency of the insurer matters a lot. There are agencies that rate insurers and you will want a policy with an insurer that has a very good to excellent rating. It was less critical for our six-year CD-like one (I think we dipped down to a B+ rating) but for a 20-30 year horizon, you want some assurance that the company will be around and has a track record of decades of decent management.

I do not know how to set this up ahead of time so that it is in place upon your passing. [This is what this relative wanted to do for their surviving spouse.] Not sure you can do that; it would seem to depend upon economic conditions then so spouse would generally need to purchase. You can definitely buy one that will start paying in one year or ten years, etc., but that's not what you are asking.

Play around with these calculators to see what some numbers are. You definitely want to take your time and shop around.

This is a quick and dirty calculator; it does not tell you what you would get (necessarily) since you have to put in your investment return:

https://www.bankrate.com/calculators/investing/annuity-calculator.aspx

Here is another estimator at Schwab:

https://www.schwab.com/annuities/fixed-income-annuity-calculator

 

[LilAlex]

^ A few more thoughts...

Best use-case is longevity insurance -- safeguarding against insolvency if you were to both live past 100, say. What do you family histories tell you?

You can always buy it but you can never un-buy it. Is future-you generally pleased with the financial decisions made by past-you? If yes, that's a good sign.

Sometimes people compare the "better" return they can get with an annuity without mentally factoring in the consumption of the principal. Of course you can get a higher monthly payment if you are not living off just the investment return.

The loss of flexibility in spending is real. With a nest-egg, you can ratchet down expenses during lean times and withdraw more during periods of good investment returns. With an annuity, you lose the ability to on-the-fly support an ill or injured relative, help the next generation with college, buy that sports car when one receives some bad news about their health, etc.

 

[RunningwithScissors]

^ A few more thoughts...

Best use-case is longevity insurance -- safeguarding against insolvency if you were to both live past 100, say. What do you family histories tell you?

You can always buy it but you can never un-buy it. Is future-you generally pleased with the financial decisions made by past-you? If yes, that's a good sign.

Sometimes people compare the "better" return they can get with an annuity without mentally factoring in the consumption of the principal. Of course you can get a higher monthly payment if you are not living off just the investment return.

The loss of flexibility in spending is real. With a nest-egg, you can ratchet down expenses during lean times and withdraw more during periods of good investment returns. With an annuity, you lose the ability to on-the-fly support an ill or injured relative, help the next generation with college, buy that sports car when one receives some bad news about their health, etc.

Your reply is thoughtful as always. Thanks again for allowing me to pick your brain about all this stuff. If I ever see you at a PS GTG, I owe you a nice bottle of wine!

My husband and I are indeed worried about outliving our money; we both have/had many relatives over 100 -- a few even reached 107 - 109. So "longevity insurance" is attractive to us.

Another real concern is that without a secure, lifetime income, we won't be able to enjoy our early retirement, those first 5+ years when we'll have the energy and health to travel and go do stuff. The reason is that no matter how much money is in our nest egg, we'd be hesitant to use it, even when its set aside for fun spending.

We've seen this happen with our retired family members who relied entirely on the withdrawal method in retirement, (no pensions or annuities -- just withdrawing 4% from their egg). Once they retired, their brains switched into super conservation mode, even though their retirement nest egg was large, and they had set aside money to see the world. They worried too much about outliving their savings to go out and do what they had planned to do, the spending was just too painful for them when they knew their nest egg was finite (I've seen them do this with long-term care insurance too, but that's a different topic). These relatives missed their window of fun, and now their health has failed enough that they don't want to travel or do much at all (they are in the slow-go and no-go phases of retirement).

The opposite was/is true with those relatives who have had pensions and/or annuities, to cover their basics (food, medical, transportation, housing). They are/were able to enjoy their go-go years more and spend down their "fun" money without fear.

In terms of timing, the other thing DH and I are considering doing, but want to investigate further, is buying the annuity much closer to retirement, not this far out (we're 17-20 years out). We want all our money to grow as much as possible, and if one of us were to not make it to retirement age, etc, we are thinking it would be prudent to wait until retirement is closer. But what you were saying about price of annuities during times of high vs low interest rates is interesting, and something I didn't know but will definitely need to take into consideration. How does time left until retirement/payouts affect cost vs payout amount in general? I'm guessing insurance companies prefer long stretches between buying and payouts -- better chance of the policy holders kicking the bucket.

 

[RunningwithScissors]

Totally different question, what are your preferred bond funds at Schwab?

How many different bond funds do you recommend in one portfolio?

I have Schwab and I definitely need to beef up my bonds, I've been negligent about buying them and let my ratio become off. I mainly have SWAGX.

 

[LilAlex]

...we both have/had many relatives over 100 -- a few even reached 107 - 109. So "longevity insurance" is attractive to us.

I have not looked at this thread for almost a month but it popped into my head today because the family member with whom I have had annuity conversations will be stopping by later. And right as I was reviewing, I saw your responses appear -- very strange coincidence! But: at least it's fresh in my mind!

Yes, you personally can "win" this game; sounds like there is a good chance that one of you will make it past 100. (And 100 is a made-up number; I just used it as a proxy for familial longevity.) So, back-of-the-envelope, the concept of an annuity might make a lot of sense for you and yours.

...not this far out (we're 17-20 years out). We want all our money to grow as much as possible,

I had (have?) no idea how old you are. When you asked about annuities, I assumed that you were at annuity-seeking age. If you are instead 40-ish, it would be nuts (forgive the candor) to try to buy an annuity now since at a minimum, an insurer would be looking at 40 years of payouts for you and it would be ridiculously expensive.

My comments about the timing of annuity purchase and its relation to interest rates were more whether you gamble and wait another year or two, etc.; I did not mean to imply it's like buying a house where everyone piles in when rates are low. (And, sticking with houses for one minute, even that may not be such a great idea since home prices skyrocket when rates are low, as we just saw.)

For example, spouse had a "defined-benefit" (i.e., old-school) pension through her corporate employer and, at her recent retirement, she was given the option of starting the annuity ("pension") or taking an "equivalent-value" lump sum. We had assumed for decades that she would take the annuity; however, interest rates were so crazy-low that the lump sum was higher than expected (meaning that's what it would have cost to purchase the annuity de novo.) I think the math worked in our favor since rates did not stay low forever -- but now we need to do the hard (saving/investing) work to ensure that we continue to "win" this part of the game over the coming decades.

The downside to a projected long life is that it's also expensive. Most people who live to 100 have an excellent quality of life through their 80s (I am making this up but it's what I see, professionally, albeit not in this industry.) So you are just as likely to have a long, active retirement as you are to have a long life. It's near-impossible to limp along for decades burdened with chronic illness and malignancy and survive to 100. So, it sounds like you need to plan for "go-go" 70s (not just 60s) and so forth. I do not see "5+ years" of retirement fun; you could enjoy decades of retirement fun and adventure.

You would not look at purchasing an annuity until you were at retirement age, imo. Again, the "math" will depend upon interest rates at that time. Either way, you will need a decent nest egg to: 1) live off of; and/or 2) to devote a portion to purchasing an annuity at the right time.

Given your family history of longevity, your desire for a vibrant retirement, your concerns about having adequate resources to sustain a long retirement, and (what I infer to be) your current good health, you are not a good candidate for so-called "early retirement."

Again, I am not a financial or estate-planning professional so it would help to get independent corroboration of what I write. My best credential is that there is no way I can make any money from you.

 

[RunningwithScissors]

I had (have?) no idea how old you are

Early 50's.

you are not a good candidate for so-called "early retirement."

Don't worry, both my DH and I want to, and plan to, work until at least 70-74. No desire to stop any earlier! We're just getting rolling!

Again, I am not a financial or estate-planning professional so it would help to get independent corroboration of what I write. My best credential is that there is no way I can make any money from you.

Yes, of course! But I like how you think about these things. I've been reading the Bogleheads stuff and a few other schools of thought too. When DH and I go see a financial/estate planner, I want to go armed with as much knowledge as possible, and be aware of the different theories out there for retirement planning, so that we don't buy expensive products without needing to. Kind of similar to being on Pricescope for awhile and learning about diamonds before going to a jewelry store to make a purchase.

 

[LilAlex]

Early 50's.

Ok, was not trying to extract that but rather excuse myself for neglecting to consider that you're too young to buy an annuity. If it's 15 - 20 years away, who knows what the annuity landscape will look like then -- what with our flying cars and cities on Mars.

Yes, lots of time to think about it. But your "insider trading" dirty-little-secret is that you are genetically predisposed to extreme longevity. You of course only get one roll of the dice (i.e., one life) and you could get hit by lightning tomorrow but this knowledge tilts the house edge (meaning: insurance companies are designed to make money) in your favor.

Don't worry, both my DH and I want to, and plan to, work until at least 70-74.

Sounds good!

Priorities change. That was my timeline until my spouse said "Like h*ll you're working 'til 70!" She had some life events that made her want to do stuff while she still can -- travel, new adventures, etc. So I will probably opt for a more traditional US retirement age even though I expect to be able to be successful at my job a lot longer than that (it's indoors and not a lot of lifting).

Yes, always good to learn this stuff before you need it!

 

[LilAlex]

Totally different question, what are your preferred bond funds at Schwab?

How many different bond funds do you recommend in one portfolio?

Big questions. You can get by with one bond fund if it is a total US market bond fund (gov't + corporates), imo, and that is what most "keep-it-simple" folks would do. And that is what you are doing now.

What are your options at Schwab? I searched the Schwab "OneSource" universe of MFs. It was super-interesting in terms of the business model for these large custodians. I think you can access 7,000 - 8,000 different MFs through Schwab. If you filter on the funds that have no transaction fee or load, the total drops down to 4,400. But if you then filter on funds that have a "low" expense ratio of < 0.5%, the TOTAL number drops down to only 185!! So the overwhelming majority of the funds you have access to for no additional transaction cost though Schwab are terrible, high-fee funds. This is because Schwab makes their money by "revenue sharing": when they trick you into buying into a high-fee fund, they get to split the fee with the fund owner. It's a win-win! It should be illegal but it is not.

(And note that calling "< 0.5%" expense ratio "low fee" is like calling a 16" pizza low-calorie just because it's a healthier option than the 18" pizza! Actual low-fee is < 0.25% or similar.)

(And note that if you are making a five- or six-figure transaction, a $50 transaction fee may be palatable and even inconsequential -- but it really rankles me so I avoid them at all cost. It would be a 0.5% "tax" on a $10,000 transaction which is just kooky.)

So when I filtered further on just bond funds, there are only three (!) acceptable options in that vast universe of choices.

SWAGX (Schwab US Aggregate Bond Index), which you have, is US aggregate bond fund of intermediate term (duration = 6.25 years, and this is an index of "interest rate sensitivity" or of how much the fund will drop when interest rates rise.) It is well-subscribed with AUM of $4.3 billion. It is low risk in terms of bond credit quality (high-quality bonds = low likelihood of default = high likelihood of not losing your money because the borrowers go bankrupt) and "intermediate" risk in terms of interest rate sensitivity (this is a function of whether the bonds held are short, intermediate, or long-term). It has an expense ratio of 0.04%, which is excellent. As far as one-stop shopping, this should be as good as anything you can get from anyone (Vanguard, Blackrock, etc.)

SWSBX (Schwab Short-Term Bond Index) is the short-term flavor of the above. It is also very high-quality bonds and, because of the shorter maturity, it is much less sensitive to interest rate increases. So this is the safest slice of US government + US corporate bonds one can access -- but at the cost of having a lower yield. AUM here is $1.6 billion and the expense ratio is an excellent 0.06%.

SWRSX (Schwab Treasury Infl Protected Secs Idx) is an index fund of only TIPS of various maturities. It offers built-in inflation protection (you can Google TIPS) -- nice for the past year -- at the cost of a lower yield. It has $2.5 billion AUM and an appealing expense ratio of 0.05%.

These are your only cheap, attractive index bond funds that you can access without a fee or load through Schwab. Note that they are all "Schwab" funds. They are all proprietary, I bet, and can likely not be transferred "in-kind" when you move to Fidelity next year. This means that you would need to sell them and (potentially) take a tax hit. (No free lunch, remember.) And this is why I like ETFs...

And know this, too: the beauty of bond funds is that they spin off interest (or dividends for MFs). And the tragedy of bond funds is that they spin off interest. If you are in a high tax bracket and your bonds are in taxable, this this can get very expensive. If you are in a low tax bracket and/or your bonds are in tax-deferred, it's fine. We try to hold our entire bond allocation in our retirement accounts. This was less critical for the past couple years when yields were near-zero (no investment return = no taxes!) but will be more important going forward now that interest rates are inching back toward "normal."

Anyone could write forever on how you implement the change you want -- to increase your bond allocation. Check again -- equities are down maybe 5% last week so are you sure you need to beef up bonds now? It has been a "hold your nose" environment where you buy bonds because you have to. If you have a six- and not seven-figure portfolio (and please do not tell me), you may be better off just buying CDs or accessing a higher-rate online savings (I think there are lots of 4% returns out there). Bonds "should" go down again when interest rates bump again -- and rates will increase after the latest inflation numbers -- but, in theory, that is already baked into the price of bonds because "everyone knows" rates will go up.

What we did when we needed to achieve your same objective was to increase our short-term bond holdings and then gradually trickle that into intermediate-term. I think there are actual data that it's better to just rip the bandaid off and make your move all at once -- but I am not immune to the behavioral finance curse of muttering "stupid, stupid, stupid" when I see the value of what I just bought go down -- even if I knew "it was the right thing to do."

EDIT: meant to include this. This is how your money would have (not) grown in each of these over the past five years. You can see the beating bonds have taken over the past 18 months or so.

 

[LilAlex]

^ another EDIT but too late. I see no low-cost municipal bond fund option. If you can not keep your bonds in tax-deferred and if you are in a higher federal tax bracket, muni bond funds can be attractive. Better still if you are in NY or CA and there are options for inexpensive state-specific muni bond funds that allow you to avoid both federal and state income tax on your interest payments. (I am in a high-tax state but we are too small to have a quality single-state muni bond fund.)

 

[RunningwithScissors]

Thank you LilAlex, that was an excellent explanation and overview of the bond field, with different strategies to think about.

You've introduced me to some new ideas, things I should already have known but didn't, like weighting ones retirement accounts differently than taxable accounts. (I'm saying to myself "Duh! I couldn't had a V-8!" LOL) (You're retirement accounts then must be very high in bonds then?)

Anyone could write forever on how you implement the change you want -- to increase your bond allocation.

You asked me once before if I've ever regretted financial decisions I've made. The answer is no, no regrets in terms of investments. My regret is I should have saved more when I was under 35.

I've never tried to beat the system, because I know that I don't have the knowledge to do it and I also don't have the inclination. As long as I keep pace with the market, I'm happy. I'm the tortoise, not the hare. You are going to laugh at me, but I've only ever sold any of my holdings once, in my 30's, when an emergency arose that my emergency fund didn't entirely cover. (Taught me to have a larger emergency fund!)

I've never sold because I've always followed my old boss's advice of buy cheap and broad and then hold and hold. I think he even said something like "when you're young and the market goes down, jump for joy and then buy mutual funds." Well, I've followed that advice and held and held and held and honestly never once regretted it. I don't feel like I own any "duds" in my portfolio, just broad index funds which have weathered the storms.

So when I talk about rebalancing, I actually don't mean selling. Instead, I'm looking to add things to fill out my portfolio where it may be lacking. Additions only, no subtractions. I think of rebalancing like one would steer an aircraft carrier at sea...gradual, gradual, gradual. Thats my sleep-well-at-night strategy and it works for me.

Yes, I understand there are probably opportunity costs of me not being more active with my portfolio, not doing things like tax harvesting or other stuff I don't fully understand. I will seek professional planning help in a year or two's time, but before I do, I really want to learn, learn, learn, so I can be in a position where I'm better able to vet when the professional planner's advice. And in the meantime, hopefully, my nest egg continues to grow modestly, safely and somewhat strategically.

Hearing your thoughts and advice on these different financial topics are tremendously valuable. Thank you again for your time and willingness to share your knowledge. (I think I'm going to add those other two Schwab bond funds to my holdings, gradually of course.)

If you ever have any more thoughts about anything financial, feel free to jump on here and share them.

 

[LilAlex]

I've never tried to beat the system, because I know that I don't have the knowledge to do it and I also don't have the inclination. As long as I keep pace with the market, I'm happy. I'm the tortoise, not the hare.

Sounds like you're doing everything right! Striving to beat the market can get you a year or two of glee (and undeserved pride) but then a lifetime of disappointment and regret. Slow and steady wins this race for sure.

Some day you may need to sell to re-balance -- I understand that you don't now. Like when you're older and see that simply re-directing the new investments will not move the needle fast enough. (When your income:net worth ratio is pretty high, it's easy to change your asset allocation on the fly by just changing where your new investments go.)

Don't fret over tax loss harvesting. Unless you have a lot of capital gains and are in a high capital gains bracket, it is of limited utility (although it can be used to offset $3K in income per year).

And even when you think you are doing it all right, there are still curveballs. Looks like we will need to sell a lot of things to meet a large and unanticipated expense in the extended family -- and it is all so Jenga'ed in there that it's hard to extract without a huge tax hit on top. I've spent a decade whipping everything into shape and getting most things tucked into the "best" possible places, knowing that we could cash flow most needs going forward and use our tax-deferred in retirement and that we would never need a major expense like buying a home, etc. And then you find out that you might. Anyway, you're on a great path!