Bruce Lee, the great martial artist, once said “be like water” and I think he was talking about 2020. It forced us to be flexible in nearly everything financial (and non-financial). When COVID-19 presented itself, there were decisions to be made in all aspects of our lives.
“Be like water making its way through cracks. Do not be assertive, but adjust to the object, and you shall find a way around or through it. If nothing within you stays rigid, outward things will disclose themselves.”
Bruce Lee
We all had questions and concerns when COVID-19 hit. How would our kid finish college (online) and would she find a good job (yes)? What’s going to happen to my other kid’s job (she lost it in December)? Quick, buy some toilet paper, latex gloves, hand wipes, and hand sanitizer. Buy another freezer just in case the supply chain is disrupted.
Some significant change occurred in my financials for 2020. About halfway through the year, I felt like there was no way I’d even come close to my year-end forecast. Both my taxable account and 401(k) were in trouble. Of course, I made some changes with mixed results so let’s get into the details now.
Savings Rate
In February 2020, I wrote about the Secret to Building Wealth and I believe it now more than ever. For those of us that had jobs, the number one thing we tried to control was our savings rate. Basically, we controlled where our money was going. Of course, COVID-19 had their opinion mainly in the form of doubling my grocery bill.
At the start of 2020, I originally forecasted a 44% savings rate and ended up with a 40% rate. The lower rate occurred by design as I decided to put extra focus on my debt. I figured in the times of uncertainty, the greatest guarantee would be a reduction in debt.
So, I put an extra $21,850 toward my mortgage principle and paid off a car loan with $2,160. That’s $24,010 of extra debt reduction could have bumped my savings rate to an all-time high of 52%. As you’ll see in the 2020 Results section of this article, putting the $24,010 would have put me over my forecast.
This went by design, which meant it was in my control. For 2021, it’ll be more of the same …. becoming debt free will keep my savings rate in the 37% range. In March/April 2021, I’ll be making a $34,000 one-time extra principal payment on my loan that will set me free from debt.
Here’s the exciting part of all these personal choices. I’ll be debt-free by the end of 2021, which gives me peace of mine and reduces my risk if I were to lose my job. Additionally, 2022 and beyond are set-up to provide 65%+ savings rates my last few years of working. We’re talking saving nearly $135,000 per year my last few years. That’s exactly the kind of boost I need to finish strong before retirement.
2020 Results
As stated earlier, I thought there was no way I’d come close to my forecasted year-end results. Especially since I was putting an extra $24,010 toward reducing my debt too. Amazingly, we came very close at $603,135 versus a forecast of $609,483 … just missed it by $5,715. Given what I explained about debt reduction, I’m very happy to have just missed the forecast.
My investment portfolio consists of three major areas: 401(k), non-qualified 401(k), and a taxable brokerage account. Next year that changes and I’ll have four categories but we’ll talk about that in the next section. Let’s discuss all three areas:
- Regular 401(k) – Considered a highly compensated person at work, I’m only allowed to contribute 6% of my pay with another 3% funded by my company. I also contribute the maximum for the catch-up contributions since I’m over 50.
- 2020 Contributions = $27,218
- 2020 Total Return = -0.90%
- Results = We forecasted $378,437 in the account and achieved $368,321 by years-end, a shortfall of $10,116.
- NQ 401(k) – I’m allowed to contribute up to 9% of my compensation to a non-qualified taxed deferred account. I’ve not contributed to the account in a couple of years but that will change going forward (see 2021 Expectations section).
- 2020 Contributions = $0
- 2020 Total Return = 5.5%
- Results = We forecasted $111,873 in the account and achieved $112,141 by years-end, a surplus of $268.
- Taxable Account – Stocks and cash in a Vanguard brokerage account. We started this account from basically zero, so we have a long way to go.
- 2020 Contributions = $55,751
- 2020 Total Return = -8.40%
- Results = We forecasted $119,173 in the account and achieved $122,673 by years-end, a surplus of $3,500.
This old forecast was helpful but change now demands an update. The next section (2021 Expectations) will have the new forecast along with some changes that will occur – all very exciting stuff. That’s what you do with forecasts, you take in new information and adjust.
We all know this lesson but it’s worth repeating. My accounts felts like they were never going to meet the forecasts but I stayed invested. And presto … November was a great month for the market and I’m back on track.
My taxable account lost money in 2020 (thanks energy) but my forward dividends increased (over $6,300 in next 12 months). My taxable account was saved because I focused on contributing to my Vanguard account every paycheck. Without that, it wouldn’t have exceeded my forecast. It’s really that simple.
2021 Expectations
The biggest expectation in 2021 is that I will become debt-free. That means no mortgage or car loans after this year. Of course, that means our savings rate won’t be as high but that’s all by design. I plan to make up for the lower savings rate in 2021 by having 60%+ rates my last few years of working.
Some big changes in the portfolio in 2021 and beyond that forced me to do a create a NEW forecast:
- Roth 401(k) is finally available at my company. This will receive my full 6% max contribution plus my catch-up contributions. Considered highly compensated, I can only contribute 6% to the company 401(k).
- Regular 401(k) will only receive company match contributions going forward so that I can provide my full contribution to the new Roth 401(k)
- NQ 401(k) will receive 5% contributions from me until retirement versus a previous forecast of 0%
- Taxable Account will receive fewer contributions in 2021 and I hope to make them up with a higher savings rate my last few years of working. Because my NQ 401(k) is receiving 5% of my gross income, my taxable account will receive fewer dollars.
A quick glance shows the old forecast with a final portfolio balance of $1.317M but now $1.25M is expected. That $67,000 shortfall (though not really a shortfall) will be made up with fewer taxes (Roth 401k) in retirement and more upfront money (NQ 401k) in my first 5 years of retirement.
I’m most excited about the Roth 401(k) since I’m converting my 401(k) over to a Roth IRA after retirement. This will expedite that process since I’ll now have fewer 401(k) dollars to convert.
The old forecast showed a 401(k) balance expected to be $598,218 at retirement but the new forecast shows $476,029. The combined balances of the two (401k + Roth 401k) is $589,597 but now I’m paying fewer taxes in retirement. So, this is an overall win.
Remember, this investment portfolio will mainly be covering my discretionary expenses in retirement. My pension will cover my essential expenses. About 8 years after retirement, the non-COLA pension will be impacted by inflation so social security will cover the rest (and then some).
Summary
The pandemic has made it a tough year to be a human but I’m not complaining because others have it much worse than me. I’m healthy and employed and still on track for retirement at 62 (4 1/2 more years).
My taxable account took it on the chin due to my energy holdings. But the account is still young (about 25% of what it will be when I retire) and those energy holdings will come back. I’m still very focused on sequence of returns risk, which means my stock holdings are about 30% right now. I’m betting it will be at 40-45% by the time I retire.
“Something tells me a curve ball will come our way in this process but we’ll do our best to deal with it.”
Mr. TLR in my 2019 year-end review. That “curve ball” was the pandemic.
The pandemic is still an issue so we aren’t out of the woods yet but the new vaccines provide hope. Curve balls will always come our way … we can’t predict everything. But we can prepare by increasing the savings rate and reducing debt … that’s the goal in 2021.
Thanks for reading!
Mr. TLR