Tuesday, April 28, 2020

A 401k Match is part of your compensation

Throughout our careers we have always saved a little from each paycheck towards retirement, mainly using our company sponsored 401(k) plans. Having studied Finance in college, I knew the importance of starting to save as soon as possible, but didn't really have much to save until I graduated and started working.

When choosing which type of account to use when investing for retirement, companies will often provide an incentive to do so by matching employee contributions to the company sponsored 401(k). We've been fortunate to have had employers with some very good matching programs and have always taken full advantage of the match.

While searching for jobs coming out of college, whether the company had a good 401(k) honestly wasn't that big of a factor for me in evaluating a job offer. I mainly just wanted to get a job, and frankly was just lucky that the job I got had a much better retirement savings plan that other companies that friends and family members work for.

The young me wouldn't have thought to ask for details about a 401(k) program before joining a company, but now I would never accept a job offer without knowing all the details about the company 401(k). At the end of the day, I know that I'll always contribute enough to get the match - so it's really part of my compensation. I don't know anyone who would accept a job not knowing the salary, and this is all part of that discussion.

Growing up my parents were either self-employed or worked for small businesses, so I wasn't as familiar with things like 401(k) matching programs. What I've learned as I've now worked for a few large companies is that finding a good match isn't as hard as I would have thought. Where it can be difficult though, is if you work for a small company as it is harder for them to offer costly perks

You can go to sites out like Brightscope to search for a company to get high-level stats on their 401(k) program, but it won't get you the specifics of the match. To give a sense for what we've seen throughout our careers, here are some details on plans we have participated in:

Company Employee Contribution Company Match Company Contribution
Job 1 5% 5% 0%
Job 2 6% 6% 10%
Job 3 7% 7% 10%
Job 4 5% 5% 5%
Job 5 5% 5% 2%

As you can see, we've been fortunate to always have a company match at least equal to what we put in. I've seen friends with as low as 25% match up to 4% (i.e. if he put in 4%, the company would put in 1%), and some with no matching whatsoever. We've never had a match less than dollar for dollar, and in all but one instance have had our company put money into our 401(k) even if we didn't put in anything.

Recently there have been companies making headlines for eliminating their 401k matching programs during the COVID-19 pandemic. Make no mistake, this is a pay cut. It may not feel like it right away, but it is. Hopefully these things come back quickly. If this does happen to you, go see what this does to your long-term retirement plan using something like the free tools on Personal Capital. At least half of our portfolio is directly attributable to 401(k) matching, so cutting this would have huge long-term consequences.

If you happen to find yourself looking for a new job, be sure to know the details of the 401(k) program and factor that into your total compensation when evaluating an offer.

Friday, April 10, 2020

March 2020 Net Worth Update - Millionaires no more

March was a doozy for our Net Worth, like it was for pretty much anyone else I know. It was also our first month of not having a mortgage payment though, and I was repeatedly surprised at how many times I found myself comforted during the market downturn because we had no mortgage. We ended the month with our net worth down nearly $67k, ending at $961,700

Having a >$1M Net Worth was nice, but just like our lives didn't change when our net worth went over $1M, nothing has changed now that it's back under $1M. Eventually the market will find a bottom, stabilize, and begin to recover. Meanwhile, we'll be dollar cost averaging into the market with each paycheck, so it's only a matter of time before we are back over $1M. 


Now with the house paid off, our next financial goal is to get our liquid net worth up to $1M. We've got a long way to go, but this new view for our household balance sheet breaks up our assets slightly differently to help me better see how we're tracking towards that goal. Here's a run-down of the different areas:

CASH

Our cash balance crept up this month since we didn't have a mortgage payment to make, and would have gone up more but we started a long awaited bathroom remodel and spent about $3k on some of the new materials. This total includes our checking and savings accounts, minus our credit card balance that we pay in full each month.

We should see our cash balance go up again in April as we're now expecting a refund for a cruise we paid for that we were going to go on in April, and like much of America we're holding off on large purchases (other than the bathroom remodel) until we have more information on the economic implications of COVID-19. I also have had my pay cut by a significant percentage for the foreseeable future, but will still be able to save money as we've been living on much less than the remainder of my income. 

PRE-TAX INVESTMENTS

This category includes all of our traditional IRA's and the pre-tax portion of our 401k's. Each year we convert funds from pre-tax to Roth, but not enough to actually bring down the balance of these accounts after earnings. These accounts are invested exclusively in broad based index funds.

While I have had a few years of my 401k contributions being pre-tax, over time we have done more Roth contributions than not. But because employer 401k contributions can't go in as Roth even when my own contributions are going in as Roth, we have ended up with more money in pre-tax accounts than after-tax accounts with the majority being the accumulation of years of generous employer matching contributions and the associated growth of those assets (with one short exception, every employer we've had has provided an employer match greater than 100% of our contribution).

ROTH INVESTMENTS

Our Roth Investments include each of our Roth IRA's and the Roth portion of my 401k. Typically I hold funds in our Roth accounts with higher long-term expected returns than the holdings in our pre-tax accounts to take advantage of the tax-free nature of the account. This means that in our Roth accounts we lean a little more towards international equities, hold absolutely zero bonds, and have done the occasional options trade or individual stock (I currently hold Amazon stock in my Roth IRA). 

My 401k contributions are currently going in as Roth, and new contributions are invested the same way for the Roth or Pre-tax funds. I don't quite max out my contributions, but with employer match will contribute over $20k/yr in total. Even though our cash flow would allow us to max out my 401k, I am choosing not to in order to build assets that are accessible before age 59 1/2. 

TAXABLE INVESTMENTS

The past several years we have been focused on paying off the house and only investing enough to get the company match in my 401k and haven't really invested outside of retirement accounts. We would like to be able to retire early so we'll need investments outside of our retirement accounts, which get penalized for withdrawals before age 59 1/2.

We have a long term investment account where we are investing in index funds, and another account designated as my trading account where I trade individual stocks. I'd like to be able to trade more actively, but my job doesn't allow me much time during the day to keep track of markets.

RESTRICTED STOCK

My job gives me restricted stock grants that I am including in our total net worth, but excluding from liquid net worth until they vest. Since I don't have plans to leave the company any time soon, I'm assuming that I'll be there long enough for the shares to vest. Upon vesting, my plan is to immediately sell since I don't believe in holding too much stock in the company I work for. I have seen far too many cases where people were heavily invested in their employer stock and it didn't end well. 

COLLEGE SAVINGS / 529s

We started these accounts a few years back but decided put a hold on contributions after only a year or two to focus on paying off the house quicker. To make up for lost time, we've now starting adding back to these accounts 3x what we were doing before. We received very minimal financial support from our parents in college and want to provide more for our kids than we got, but don't plan on fully funding their educations. We're still ~10 years away from needing to worry about this, so aren't too concerned about saving the amounts we're planning to provide. 

HOUSE / CARS

As I mentioned earlier, this month we started the demolition of our master bathroom and the associated remodel. We've basically gutted the bathroom down to the studs, but have decided to not do some of the bigger floor plan changes we originally envisioned that would have involved a lot more plumbing and framing changes. We're doing pretty much all the work ourselves and only have 1-2 days a week that we can actually dedicate to the project, so it may be a few months before everything is all put back together.

The value of our cars doesn't seem to change much anymore, since they are old enough to where they will mostly hold their value as long as we take care of them. I had to get a new battery for my car this month, but other than that we haven't been driving much and are lucky that our auto insurance company is giving us a 'shelter-in-place' rebate since so many fewer people have been on the roads recently and accidents are way down. 

So there you have it. Our net worth grow over $1M, we paid off our mortgage, and then saw our net worth drop back below $1M all in the span of just a few months. Paying off the house truly has given me such a different attitude in the midst of all of this uncertainty. Our investments lost more in March than the total value of all of our investments in 2008, and I haven't lost a wink of sleep over it. 



Sunday, April 5, 2020

March 2020 Reading Review

Like many of you, I've spent most of the month of March working from home. My workload is a bit heavier than normal as my company has been heavily impacted by the COVID-19 outbreak and I have been doing a lot of financial scenario analysis. Nevertheless, I still was able to finish 7 books in the month of March and wanted to document them here.

I have gotten to the point that if a book truly isn't good, I don't finish it. So the fact that I finished all 7 of these is a sort of recommendation for any of them. There are, however, some that were better than others and I've broken them out below.

My Best 3 Books of the Month:

Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits - Kevin Roose.
If you know a young person considering a career on Wall Street, this is a good recommendation. When Michael Lewis originally wrote Liars Poker, he says he thought it would have been a rebuke of the industry and was later surprised to see that it actually caused many people to flock to it. This book shows another side of the coin that reflects the reasons I chose to avoid this particular career path, mainly mental health and work/life balance. 

Where are the Customers Yachts?: Or a Good Hard Look at Wall Street - Fred Schwed Jr
Written back in 1940 yet remarkably still applicable, this book takes shots at Wall Street banks, the ways they make money, and the relationships they have with their customers. I enjoyed it and it was a fairly quick read.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution - Gregory Zuckerman
This was a fascinating view into one of the most successful hedge funds that you've probably never heard of (their flagship Medallion fund had 30 year average annual return from 1988-2018 was a whopping 39% after fees!). One part that repeatedly stood out to me is how the personalities in the book differ so much from the stereotypical trader and align with engineers, coders, or mathematicians. If you're looking for a more 'Wall Street' book, check out 'The Greatest Trade Ever', by the same author.

Other books I also read in March:

The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters - Gregory Zuckerman.
I didn't realize until I was going through this that I had actually read two books from the same author in the same month. Coincidentally I also happened to be reading this book when oil prices plummeted to their lowest point in years. When I first saw the drop in oil prices, my mind immediately went back to an article I read that caused me to want to learn more about the players in fracking and having now read this book, it further reinforces my belief that we're likely to see a lot of bankruptcies in the fracking space.

How Full is Your Bucket - Tom Rath
This was a really quick read and gave me a few things to think about but wasn't exactly life changing. I tend to be a pretty upbeat person already, and this caused me to think about how my attitude influences others. This is especially important in the workplace right now during uncertain economic times, and I have to try especially hard to brighten anyone else's day since my entire team is working from home 100% and has been for the last few weeks.

We Were the Lucky Ones - Georgia Hunter
This book follows various peoples lives and stories throughout the horrors of WWII, all based on true stories. I've read many similar accounts, and each one causes me to be thankful to live in the time and place that I do and to do my part to not allow the mistakes of prior generations to repeat.

Conquistador: Hernan Cortes, King Montezuma, and the Last Stand of the Aztecs - Buddy Levy
This one came recommended from a friend living in Latin America and dove into details of the Conquistadors I never knew about, but also hadn't ever thought about.

I welcome any recommendations you might have as I am plowing through my 'to-read' shelf and always need to be adding new titles.