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7 Simple Calculations that Show the Awesome Power of Compound Interest

November 12, 2021 by Rob Berger

Some of the links in this article may be affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase or open an account. I only recommend products or services that I (1) believe in and (2) would recommend to my mom. Advertisers have had no control, influence, or input on this article, and they never will.

Albert Einstein purportedly said “compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” The question is how do we understand it? We can start by running 7 calculations that demonstrate the power compounding.

What is Compound Interest?

Compounding occurs when investments grow in value based on their original investment and any interest, dividends or other earnings they’ve generated. For example, savings accounts typically pay interest on balances each month. If the starting balance is $1,000 and the first interest payment is $10, the next month’s interest payment will be made on the new balance of $1,010. This repeats indefinitely. Stocks and bonds take advantage of this favorable math, too.

Compounding starts off slow. Even after a few years of saving and investing, most of the balance comes from the money you’ve saved, not compounding. Give it some time, however, and compounding will generate far more in wealth than the actual dollars saved. Here are 7 calculations that demonstrate this power.

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7 Compound Interest Calculations

For these calculations we’ll use  a compound interest tool I created in Excel that you are welcome to use. For these calculations we’ll assume the following:

  • We earn $50,000 a year for our entire working life. A generous salary for a 20-year-old but it evens out since their salary is remaining constant for decades.
  • Our savings rate will also stay constant at 5 percent. That works out to $208.33 in monthly investable savings.
  • We save for 45 years, a typical working career.
Compound interest Calculator

Now if we saved this money but never invested it, we’d end up with a total retirement fund of $112,500. That’s only $4,500 in yearly retirement income assuming a 4 percent withdrawal rate. Not exactly living high on the hog. The following 7 calculations will make this story more encouraging.  

Calculation One: We earn a 9.8% return

The only variable we’re going to change for the first calculation is the rate of return on our savings. Instead of zero percent appreciation, we’re going to assume a 9.8% compounding return on their money. Why 9.8 percent? Vanguard studied market data from 1926-2020 and found that a portfolio of 80 percent stocks and 20 percent bonds returned an annualized 9.8 percent. The best way to achieve the kinds of returns Vanguard studied is to invest in low-cost index funds. A 3-fund portfolio is one approach.

Hitting enter on the tool shows that investing the same savings from the control example yields an end balance of $2,035,947. A healthy return considering monthly contributions can be completely automated through brokerages like M1 Finance. The real work is in diligently saving and patiently waiting for compound interest to do the rest.

Calculation Two: We save for 44 years instead of 45

What happens if we change the time horizon for retirement? Changing the contribution timeline from 45 years to 44 years might have a larger impact than you might think. 

Instead of an ending balance of $2,035,947 we get $1,844,252. That’s a difference of $191,695. So shaving even one year off of an investing time horizon can cut out exponential gains. How should this realization fit into financial planning?

Some personalities in the investing space advocate paying off all debt before investing, even considering the boost tax-deferred accounts and company matches give. The math behind compound interest makes that advice seem rather tenuous.

Calculation Three: Invest for 38 years instead of 45

Let’s assume a scenario in which our worker pours all their investable savings into paying down low-interest student loan debt before investing. If it takes them 7 years to pay off their school loans, it cuts their investing timeline down to 38 years instead of 45 years.

The loss of those seven years cost them more than $1 million in lost wealth.

Calculation Four: We earn 9.7% instead of 9.8%

If time horizon is so important, how important are fees? If we reduce our expected returns by subtracting just 10 basis points (0.10%) in fees from the yearly return expectation, we can see just how important fees are.

Almost $70,000 less for retirement. There’s no way of telling what the market will return over the next 45 years. On the other hand, we can choose exactly what amount of fees we pay. And that brings us to the next calculation.

Calculation Five: We earn 8.8% instead of 9.8%

One-tenth of one percent in fees docked us $70,000. Now let’s assume our worker pays the market rate for a fiduciary. Fiduciaries typically charge one percent of a portfolio’s value for their services. That brings our expected return down from 9.8 percent to 8.8 percent.

It turns out that one percent in fees equates to almost $600,000 in lost retirement assets. That’s a big price to pay for peace of mind and a strong case for DIY investing.

You can use the free tools offered by Personal Capital to determine what fees you are paying on your investments and how those fees will affect your wealth over time.

Calculation Six: We get a 3% company match

We’ve explored the role expected returns have on compounding. Savings rate plays a large role as well. Let’s assume that an employer agrees to match 3%of our worker’s annual salary. That bumps up the savings rate from 5%to 8%. The monthly contribution jumps from $208.33 to $333.33. $125 more going into the market every month. 

Best of all, that extra $125 is essentially free money, with no additional sacrifice needed. Saving that extra 3%could require noticeable belt-tightening without the aid of an employer match.

The employer match changes a $2,035,947 retirement nest egg into $3,257,515. That’s an increase of $1,221,568 and more math to support taking advantage of employer contribution matches even if low-interest debt could be paid off instead. 

Calculation Seven: Saving early versus saving late

Let’s put it all together and find out where exactly the awesome power of compounding interest is. Cutting the investing window down to 10 years yields a $42,191 portfolio. That’s only a $17,191 return on $25,000 invested. Investor.gov provides a calculator that shows the tight grouping of invested money and total portfolio value in the early decades of investing.

Let’s assume that after reaching 10 years of contributions, our worker stops adding to their portfolio. The $42,191 continues to grow for another 35 years without being touched. Compounding alone carries the portfolio to a value of $1,284,684, all from just $25,000 in invested savings.

Contrasting that happy scenario with a different approach should be telling. In our second example, let’s say our worker waited 10 years to start investing. That cuts their investing window down to 35 years instead of 45 years. But we’ll assume they save and invest for the remaining 35 years. 

Their contributions over those years add up to $87,500. That’s $62,500 more savings invested than our first example. However, their portfolio only reaches a value of $751,263. Over $500,000 less than our start early, set-it-and-forget friend.

Final Thoughts

We managed to avoid any theoretical physics thankfully. All the compound interest insights we needed were from some basic arithmetic. Compound interest is a powerful force so it’s best to work with it rather than without it. To best capture its potential, investors should take care to make a few key choices.

For starters, invest. Money can’t compound if nothing is being reinvested over time. Second, start early. Gains grow exponentially. The latter years of investment gains will far exceed whatever principle was contributed in early years. 

Third, consider contributing to retirement even while carrying low-interest debt. Being debt-free might seem psychologically appealing, but the math behind compounding begs that we invest early and often. Fourth, fees can stunt returns. Be wary of investing in funds or with advisors that charge fees well beyond what you would pay by investing in low-cost index funds. 

Fifth, take advantage of employer matching programs. More money being contributed is more money to be compounded. Finally, money investing in your twenties is markedly more valuable than money investing in later decades. But, as they say, the best time to invest was twenty years ago, the second-best time is now.

Filed Under: Personal Finance

VOO vs VTI: An Easy Way to Choose Between an S&P 500 and Total Stock Market Index Fund

November 3, 2021 by Rob Berger

Some of the links in this article may be affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase or open an account. I only recommend products or services that I (1) believe in and (2) would recommend to my mom. Advertisers have had no control, influence, or input on this article, and they never will.

I've been investing for over 30 years. I've been writing about investing for the past 15 years. One of the questions I get the most is whether you should invest in an S&P 500 Index fund or a total stock market index fund–VOO vs VTI (ETFs) or VTSAX vs VFIAX (mutual funds).

Table of Contents
  • VTI vs VOO
    • Portfolios
    • Holdings
    • Cap Weighted vs Equal Weighted
    • Dividend Yield
  • VOO vs VTI Performance
  • VOO vs VTI–How to Choose
  • Final Thoughts

It's an important question that torments a lot of investors. It shouldn't. The answer answer is really, really simple. It doesn't matter. But the explanation takes a little bit of explanation. We're going to walk through that today using Vanguard ETFs (VOO and VTI), although the same rationale applies to any fund family.

First we'll compare the portfolios of the S&P 500 index with the total stock market index. We'll look at both the differences and the similarities. Second, we'll look at the historical returns and volatility of both indexes. Finally, I'll offer a simple approach to deciding whether VOO or VTI is best for you.

VTI vs VOO

Both VTI and VOO are lost cost index funds. Vanguard currently charges just 3 basis points (0.03%) in fees for both funds. As ETFs, they don't have minimum purchase requirements (Vanguard mutual funds do, typically $1,000 or $3,000). They are also both very large funds, each with more than $250 billion in total assets.

Portfolios

The investing style of both an S&P 500 and total stock market index fund are similar. They both portfolios heavily weighted to large U.S. companies. Using Morningstar's style box, we can see that both funds are classified as large-cap blend (i.e., core) funds.

VTI Stock Style
VTI–Total Stock Market Index
VOO Stock Style
VOO–S&P 500 Index

If you're new to Morningstar's tools, check out my Guide to Morningstar.

What these charts tell us is that both VOO and VTI are large cap funds (see the blue dots in the top row). They also tell us that both funds' investment style is a blend of value and growth companies (blue dot is in the middle column).

Now they are not identical. The S&P 500's Style Box shows that the average company's market capitalization (market cap) is a bit larger (the blue dot is a bit higher). We can see this more clearly by looking at what Morningstar calls the “Weight” style box.

VTI weight
VTI–Total Stock Market Index
VOO weight
VOO–S&P 500 Index

The weight style box shows us the percentage in each fund invested in small, medium and large companies, organized by value, blend or growth. As you can see, the S&P 500 is predominately large companies, with 14% in medium size companies and nothing allocated to small cap. In contrast, VTI has more allocated to medium companies and 7% allocated to small cap companies.

The big question for us is whether these differences should matter. Before we answer that question, let's take a deeper dive into the actual companies these funds hold.

Holdings

If we go to the actual holdings, this is where things get interesting. Using Morningstar, we can see the top 10 holdings in each fund.

Here are the top 10 holdings for VOO, followed by the top 10 for VTI:

VOO top 10 holdings
VOO top 10 holdings
VTI top 10 holdings
VTI top 10 holdings

As you'll see, the top 10 holdings are identical for both funds. Apple is the current #1 holding (this may change to Microsoft soon) with Berkshire Hathaway holding the #10 spot. What is different is the percentage that each fund holds of each of these stocks.

You can see that for the total stock market index, Apple comprises about five percent of the fund, whereas for the S&P 500 index, it's just over six percent (these percentages can change daily as the price of each stock changes).

To understand why there's a difference, we need to understand cap weighted versus equal weighted indexes.

Cap Weighted vs Equal Weighted

Most index funds are market cap weighted. That means that the more valuable a company is the more it represents in the particular index. Since Apple is the most valuable company in the world at the moment (actually, Microsoft took the lead, but the change hasn't been reflected yet in the Morningstar data), an index fund allocates more of each investment in Apple than it does smaller companies.

There are equal weighted index funds, too. These funds divide investors' money equally among all of the companies in the index. This type of index fund is much less common. Both VOO and VTI are cap weighted index funds.

Thus, if we add up the top 10 companies that you see for each fund, we'll see similar but not identical results. With VOO, the top 10 companies represent about 26% of the fund. For VTI, the top 10 comprise about 21%. Again, these percentages do change as company market caps change.

VTI's percentage allocated to the top 10 is less than VOO because it must allocate its assets among all publicly traded companies headquartered in the U.S. (about 3,700). VOO only allocates its capital among 500 companies.

Dividend Yield

It's worth noting that the dividend yield is different for these funds as well. VOO has a trailing twelve month (TTM) yield of about 1.25%. In contrast, VTI's yield is 1.20%. The difference isn't significant in my view, but for some it's a critical factor.

VOO vs VTI Performance

Now we move to what really matters, performance. Using Portfolio Visualizer, we can see how the S&P 500 has compared to a total stock market index over several decades.

First, let's see how a $10,000 investment in each of these asset classes beginning in 1972 (that's as far back as Portfolio Visualizer goes) would have performed:

S&P 500 vs Total Stock Market Returns

Note that I'm comparing asset classes, not VOO and VTI. I'm doing that because we get more data. As you can tell, the performance has been almost identical. The Compound Annual Growth Rate (CAGR) was just 8 basis points higher for total stock market. The S&P 500 had slightly less volatility as measured by standard deviation. For all practical purposes, the investments were identical.

If instead of investing one lump sum, we start with $100 and add $100 every month, the results continue to be nearly identical:

Total Stock Market vs S&P 500 DCA

During shorter periods of time, VOO or VTI might outperform the other by small margins. Over the long term, however, they've performed very similarly.

VOO vs VTI–How to Choose

Given the nearly identical performance and volatility, how do we decide between VOO and VTI? I'm going to suggest three factors to consider.

First, in a 401(k) or 403(b), you may not have a choice. The 401(k) I currently have offers an S&P 500 index fund, but doesn't offer a total stock market index fund. In this situation, take whichever one your workplace retirement account offers. It doesn't really matter and you shouldn't view that as a problem or something to worry about.

Now, if you do have a choice or you're investing in an IRA or a taxable account where you absolutely do have a choice, then I'd suggest one of two approaches.

If simplicity is your goal and you want all of your U.S. stocks in a single fund, go with VTI or another total stock market index fund. For example, if you invest in a three fund portfolio, I prefer a total stock market index fund. It's not because I think it'll outperform the S&P 500. We just saw that the performance numbers are pretty much identical. What VTI does give you, however, is added diversity. If the volatility or risk is effectively the same, and the performance is effectively the same, why not get greater exposure to the equities market.

On the other hand, if you want to slice and dice your portfolio into several U.S. asset classes, as I tend to do, I prefer the S&P 500. Why? It gives me more control over the specific asset allocation I'm trying to achieve.

Final Thoughts

So there you go. There are some of the key differences between an S&P 500 index fund and a total stock market index fund. We specifically looked at VOO versus VTI, but these considerations apply to similar funds from Fidelity, Schwab or other investment companies. The good news is that while there are differences between the two types of investments, both are excellent options for U.S. equity exposure.

I use Personal Capital to track all of my investments. The free tool shows me my asset allocation, total costs, and even retirement projections. Check out my Personal Capital Review and User’s Guide to learn how it can help you, too.

Filed Under: Investing

Capitalize Review–A Free 401k Rollover Service

October 19, 2021 by Rob Berger

Some of the links in this article may be affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase or open an account. I only recommend products or services that I (1) believe in and (2) would recommend to my mom. Advertisers have had no control, influence, or input on this article, and they never will.

Rolling over a 401k to an IRA is a hassle. I know from personal experience. Capitalize, a venture capital backed technology company, looks to take the hassle out of 401k rollovers.

The company offers a free service that handles all of the paperwork to safely transfer a 401k to an IRA. It never has access to your money and can help you choose an IRA if you want. In this review of Capitalize, I'll look at the details of how the service works and how they manage to offer it for free.

Capitalize QuickTake

Get Started
  • Free 401k rollover service
  • 4.9/5.0 Trustpilot Rating
  • Works with most IRA providers
  • Capitalize never has custody of your money

About Capitalize

Co-founders Gaurav Sharma and Chris Phillips launched Capitalize in 2020. The mission of the company is simple–to make the 401k rollover process easy. It raised $12.5 million in capital earlier this year. It has 17 employees and a TrustPilot customer rating of 4.9 out of 5.0.

Capitalize Review

How Capitalize Works

Capitalize follows a simple 3-step process.

Step 1: Locating your 401k

While this may seem odd to some, many people have long forgotten about an old 401k account. Or perhaps they don't know how to access it. In step 1, Capitalize will help you locate your 401k if you need the help.

I searched for an old company that no longer exists (they went bankrupt). Capitalize found the company's 401k plan, to my surprise.

Step 2: Choose an IRA

Here you can use an existing IRA if you have one. Otherwise, Capitalize can help you choose a new IRA. To help you pick an IRA, the tool walks through a number of questions:

  1. Whether you want to manage your investments or have them managed for you
  2. What factors are most important to you, including low fees, long standing brand, easy to use, and access to a human advisor.
  3. How much money you have in your 401k (some IRA accounts have minimum deposit requirements).

Based on answer these questions, Capitalize suggests a number of IRA providers. For me, the top choices were Betterment, Wealthfront, Fidelity and Vanguard, among others.

At this step in the process, you create a Capitalize account with an email and password. Once created, you can click a link to open an IRA account at your chosen firm

Step 3: Submit 401k Info

Finally, you submit information about your existing 401k. This allows Capitalize to initiate the 401k rollover process. I found this process to be extremely quick and easy as I walked through it as part of this review.

What 401k Accounts Does Capitalize Worth With?

Capitalize works with all major 401k providers, as one would expect. This includes Fidelity, Empower, Vanguard and T.Rowe Price. For those with smaller providers, Capitalize allows you to search for your retirement account by your former employer's name.

How does it do this? Workplace retirement accounts like a 401k must be registered with the federal government. In fact, you can search what are called Form 5500 returns yourself here at the Department of Labor's website. The search feature is a bit hard to navigate. Fortunately, Capitalize makes it much easier.

If your 401k provider is not listed, just search for your company. Capitalize will then track down the 401k plan for you.

In addition, Capitalize works with both traditional and Roth 401k accounts, as well as 403b accounts.

What IRA Accounts Does Capitalize Work With?

If you need to open an IRA, Capitalize offers a variety of options. These include traditional brokers (Fidelity, Vanguard, Merrill, ETrade, TD Ameritrade), robo-advisors (SoFi, Betterment, Wealthfront), and some newer brokers (Ally, TradeStation).

You can also use your existing rollover IRA account if you have one.

How Long does a 401k Rollover Take with Capitalize?

It depends. It can take from a few days to a few weeks. The time varies because the processes that must be followed vary from one 401k provider to another.

How is Capitalize Free?

Capitalize makes money if a customer opens a new IRA account through its platform. This raises an important question. Does Capitalize's revenue model influence the IRA accounts that it recommends? According to Capitalize, the answer is no:

If you choose to open up an IRA with one of the providers on our platform then we may be compensated. This helps us keep the service free for users, but none of those providers is ever allowed to impact the content on our site. It also never affects the fees you pay as a customer. If you’ve ever used a site like Nerdwallet, Credit Karma or Lending Tree then you’ll be familiar with this model. Our reputation depends on you feeling like we provide an honest, independent product. 

I can add to their list of sites that earn money through partners RobBerger.com. My site makes money from some of the tools and services discussed on this site, including Capitalize.

My approach to this is simple. I'll only recommend a product or service that (1) I use or (2) would feel comfortable recommending to my mom or my children. However, you should always be aware of a company's financial incentives and undertake your own due diligence to make the best decision for you and your situation.

Capitalize Alternatives

At the moment, the only alternative to Capitalize that I'm aware of is to do it yourself. If you take that route, one tip is to contact your IRA provider first. They can often help you through the process, although you'll have to do all of the legwork.

Final Thoughts

I've rolled over 401k accounts a number of times. Fortunately, I've never encountered significant issues, but it is a hassle. The last rollover a few months ago required a lot of paperwork, faxing and scanning. It would have been much easier if I had help.

I'll be rolling over another 401k in December. I'll definitely be using Capitalize. Why not take the free help?

Filed Under: Retirement

5 Best Dividend ETFs and 3 to Avoid

October 1, 2021 by Rob Berger

Some of the links in this article may be affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase or open an account. I only recommend products or services that I (1) believe in and (2) would recommend to my mom. Advertisers have had no control, influence, or input on this article, and they never will.

Dividend investing has become an obsession. Books have been written about. YouTube channels have been dedicated to it. Some have an almost cult-like attachment to the Dividend Aristocrats.

Many investors flock to dividend ETFs because of their higher yields. In contrast, I like dividend ETFs for their lower valuation metrics. Given the high valuations in the S&P 500, an argument can be made to add a dividend ETF or mutual fund as a way to bring down the P/E ratio of a portfolio.

In that light, we'll look at 5 excellent dividend ETFs to consider. We dive into each to understand how the portfolio is constructed and how each has performed over the past decade. We also look at three dividend ETFs we should avoid.

Table Of Contents
  1. What is a Dividend ETF
  2. How to Compare Dividend ETFs
  3. 5 Best Dividend ETFs
    • 1. Schwab US Dividend Equity ETF (SCHD)
    • 2. Vanguard Dividend Appreciation ETF (VIG)
    • 3. Vanguard High Dividend Yield ETF (VYM)
    • 4. iShares Core Dividend Growth ETF
    • 5. SPDR S&P Dividend ETF
  4. 3 Dividend ETFs to Avoid
    • 1. SuperDividend ETF (SDIV)
    • 2. SuperDividend U.S. ETF
    • 3. Invesco High Yield Equity Dividend Achiever ETF
  5. Final Thoughts

What is a Dividend ETF

Virtually all stock ETFs generate dividends. Even an S&P 500 index fund has a yield (about 1.2% for those keeping score at home). The payment of a dividend, by itself, does not qualify a fund as a dividend ETF. Rather, a dividend ETF is a fund that invests in companies that pay a higher than average dividend yield.

Such a broad definition leaves room for a wide variety of investment strategies. Some funds focus on companies with high yields, while others focus on companies that are growing their dividends at a high rate. Still other ETFs limit their portfolios to companies that have increased their dividends each year for a set number of years (typically 5 to 20).

While each of these funds are rightly described as dividend funds, they couldn't be more different.

How to Compare Dividend ETFs

To compare one dividend ETF with another, here are the factors I consider:

Dividend Yield: As I've stated repeatedly on my YouTube channel, total return should be an investor's north star. That said, in evaluating a dividend ETF, the yield is an important factor. Here I'm more concerned with yields that are too high than too low. I've yet to find a dividend fund with yields 3x or more the market's average that have performed well over long periods of time.

Dividend Growth: Beyond yield, look at how quickly the companies in a fund grow their dividends. Such companies often offer the best combination of returns–a dividend along with excellent growth prospects.

Dividend Stability: A high yield doesn't help an investor if the company paying it is on shaky ground. Here I want to understand what percentage of a companies profits go to paying the dividend (i.e., Payout Ratio). A red flag would be a company who is borrowing money to meet the dividend expected by investors.

Fundamental Factors: One of the benefits of a dividend ETF is that a value approach to investing. Many dividend ETFs have P/E and P/B ratios well below the market average.

Expense Ratio: As with any investment, we need to understand the costs. An expense ratio above about 15 basis points requires scrutiny.

5 Best Dividend ETFs

1. Schwab US Dividend Equity ETF (SCHD)

The Schwab U.S. Dividend Equity ETF (SCHD) easily takes the #1 spot on my list. It has a yield about 2x the market's average. It requires companies to have 10 consecutive years of dividend payments to make the cut. And most importantly, it has relatively low valuations. It's P/E ratio is about 19. While that's still high based on historical standards, it's well below the valuations of the S&P 500 (currently more than 30).

The fund tracks the Dow Jones U.S. Dividend 100 index. The index screens companies based on the following criteria:

  • Minimum 10 consecutive years of dividend payments
  • Minimum float-adjusted market capitalization of US $500 million
  • Minimum three-month ADVT of US $2 million

What makes SCHD a winner, however, is the fundamental analysis used in stock selection. Factors include return on equity, free cash flow to debt and the five-year dividend growth rate. The result is a fund that has performed well over the years.

Tracking Index: Dow Jones U.S. Dividend 100 Index
TTM Yield: 2.82%
Dividend History: 10 consecutive years of dividends
Expense Ratio: 0.060%
AUM: $27.8 billion

2. Vanguard Dividend Appreciation ETF (VIG)

The Vanguard Dividend Appreciation ETF (VIG) tracks the S&P U.S. Dividend Growers Index. Unlike SCHD and the Dow Jones U.S. Dividend 100 Index, this index requires companies to have increased their dividend in each of the last 10 years. It then excludes the top 25% based on yield.

The result is a fund that's closer to a blend fund than value. It valuation metrics are higher (it's P/E ratio is about 25) and its dividend yield is lower. In addition, it has underperformed SCHD by about 1% over the past 10 years. Of course, who will win the next 10 years is anybody's guess.

Still, it's a sold choice for those who want a dividend focused ETF that slightly tilts toward growth.

Tracking Index: S&P U.S. Dividend Growers Index
TTM Yield: 1.48%
Dividend History: 10 consecutive years of dividend growth
Expense Ratio: 0.060%
AUM: $61.3 billion

3. Vanguard High Dividend Yield ETF (VYM)

The Vanguard High Dividend Yield ETF (VYM) tracks the FTSE High Dividend Yield Index. Good luck finding details on this index. The best I could find comes from Morningstar:

The fund tracks the FTSE High Dividend Yield Index, which captures the highest-yielding half of the universe of dividend-paying stocks in the large- to mid-cap U.S. equity market. The index starts with the FTSE USA Index and ranks its constituents by their projected 12-month yield. It then adds stocks by descending rank until 50% market-cap coverage of the universe of dividend payers is reached. As it aims for 50% market-cap coverage of this cohort, the fund tends to sweep in 400 to 450 stocks. Companies that have not paid dividends in the past 12 months or are not expected to pay one in the next 12 months are not eligible. REITs are also left out.

It's noteworthy that the index doesn't apply qualitative factors to its stock selection. Companies in the top 50% based on yield make the cut.

While the fund has trailed others on this list over the past decade, its portfolio could do well as we rotate from growth to value.

Tracking Index: FTSE High Dividend Yield Index
TTM Yield: 2.72%
Dividend History: 12 months
Expense Ratio: 0.060%
AUM: $38.0 billion

4. iShares Core Dividend Growth ETF

iShares Core Dividend Growth ETF (DGRO) tracks the Morningstar U.S. Dividend Growth Index. The index screens for companies that–

  • pay qualified dividends
  • have a minimum of five years of uninterrupted annual dividend growth.
  • have a significant margin to continue growing dividends.

It excludes the top 10% of qualifying companies.

Tracking Index: Morningstar US Dividend Growth Index
TTM Yield: 2.00%
Dividend History: 5 years of uninterrupted dividend growth
Expense Ratio: 0.080%
AUM: $20.1 billion

5. SPDR S&P Dividend ETF

SPDR S&P Dividend ETF (SDY) tracks the S&P High Yield Dividend Aristocrats Index. While the Dividend Aristicrats include companies that have increased their dividends for the last 25 years, this index limits the screen to 20 years. With this adjustment, it adds about 50 companies to its portfolio.

SDY has been the worst performing ETF in our list over the past 10 years. Its dividend has also been inconsistent. It dropped significantly in 2016 and again in 2018. Keep in mind that companies get cut from the index if their dividend payments can't keep up, while new companies join who meet the criteria. One does wonder, however, if the fund is poised for a turn around as interest rates rise.

Time will tell.

Tracking Index: S&P High Yield Dividend Aristocrats Index
TTM Yield: 2.60%
Dividend History: 20 consecutive year history of increasing dividends
Expense Ratio: 0.35%
AUM: $19.0 billion

3 Dividend ETFs to Avoid

Just because an ETF pays a high dividend doesn't mean it's a good investment. In fact, a yield significantly above the market's average should serve as a warning to stay away. Here are three dividend ETFs I wouldn't recommend.

1. SuperDividend ETF (SDIV)

The SuperDividend ETF (SDIV) invests in the 100 companies that pay the highest dividend yield. The result is a portfolio consisting of 30% U.S. companies and 70% international companies. While its current yield is above 7%, its annual returns over the past decade barely exceed 3%.

Beyond performance, the fund has a turnover ratio of more than 124% according to Stock Rover. This increases costs. And its standard deviation is near 30 according to Morningstar.

In short, to sacrifices total return for yield, has high turnover and is volatile, resulting in a very poor investment.

Tracking Index: Solactive Global SuperDividend Index
TTM Yield: 7.19%
Dividend History: Top 100 global dividend yield companies
Excluded: Companies excluded based on certain qualitative screens
Expense Ratio: 0.590%
AUM: $948.9 million

2. SuperDividend U.S. ETF

The SuperDividend® U.S. ETF (DIV) is the U.S. only version of the above fund. While its yield is lower, it still comes in above 5.5%. And like SDIV, its total returns were just about 3% over the past decade. Not only does the fund suffer from poor returns, its volatility is significantly higher than an S&P 500 fund.

As with SDIV, DIV has a turnover percentage of near 100% and a standard deviation of 28. In short, investors are paying 45 basis points for an underperforming fund that comes with more risk.

Tracking Index:  Indxx SuperDividend U.S. Low Volatility Index
TTM Yield: 5.61%
Dividend History: 12 month
Excluded: Dividend yields below 1% or above 20%
Expense Ratio: 0.450%
AUM: $655.8 million

3. Invesco High Yield Equity Dividend Achiever ETF

The Invesco High Yield Equity Dividend Achiever ETF (PEY) tracks the NASDAQ US Dividend Achievers 50 Index. The index in turn is comprised of the top 50 securities by dividend yield from the NASDAQ US Broad Dividend Achievers Index. The result is a focused fund that has significantly underperformed the S&P 500 while exposing investors to greater risk.

Tracking Index: NASDAQ US Dividend Achievers 50 Index
TTM Yield: 3.77%
Dividend History:
Expense Ratio: 0.520%
AUM: $936.7 million

Final Thoughts

Dividend investing can be a part of a reasonable investment plan. Dividend ETFs give investors exposure to value funds. Taken to extremes, however, a dividend focused investment strategy can result in lower total returns. As a result, care must be taken not to reach for yield, even in retirement.

Filed Under: Investing

10 Ways to Protect Your Financial Accounts from Hackers

September 27, 2021 by Rob Berger

Some of the links in this article may be affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase or open an account. I only recommend products or services that I (1) believe in and (2) would recommend to my mom. Advertisers have had no control, influence, or input on this article, and they never will.

According to one study, cybercrime will cost the world $10.5 trillion a year by 2025. Today, every financial account from banks to credit cards to investments offer online access. For investors, the risk of loss from cybercrime ranks as the #1 concern.

Fortunately, there are steps we can all take to increase our online security. For very little money, we can significantly reduce the likelihood that a computer hacker will gain access to our financial accounts. Here are 10 steps you can take to help secure your online accounts.

10 Tips for Securing Your Online Accounts

1. Use a Password Manager

I have four rules when it comes to passwords:

  1. Change passwords regularly
  2. Never use the same password twice
  3. Use 16 character passwords (or longer)
  4. Passwords should contain upper case letters, lower case letters, numbers and symbols

LMG Security, a cybersecurity and digital forensics services company, notes that an 8-character password can be cracked in about 8 hours, while a 16-character password would take 6.5 trillion years.

The problem with the above rules is that it makes it impossible to memorize all of your passwords. The answer is to use a password manager. My tool of choice is LastPass.

With LastPass you can create widely complicated passwords for all of your online accounts. The passwords are never saved on the LastPass services (they encrypt and decrypt them at the local level–your computer). It can be used on mobile devices, and it even enables you to share sign-on credentials with friends and family (if you want to) without revealing your password.

2. Use VPN

VPN, short for Virtual Private Network, does two really important things to you secure when browsing the internet. First, it encrypts the data sent to and from your browser or app. Second, it hides your IP address. These two features allow you to surf the internet securely and anonymously.

Using a VPN is a must on any public network (coffee shop, hotel, etc.). I use it at home as well. There's no need for my internet service provider to harvest my internet data. Internet service providers are allowed to sell data about our internet usage. A VPN blocks that data.

My VPN of choice is NordVPN. NordVPN can be used on any device, is easy to set up, and is reasonably priced.

NordVPN: Save 73% w/ 2-Year Plan

3. Set Up Two-Factor Authentication

Two-factor Authentication (2FA) adds an extra layer of protection to your username and password. To log into an account, you'll need to enter a secure code, sometimes referred to as a one-time password (OTP). The OTP is sent via text or email, or through an app such as Google Authenticator, depending on how the financial institution has set up its 2FA.

I use 2FA on every online account that makes it available, including email accounts. While it adds an extra step to logging into an account, the security it provides is priceless. According to a 2019 Microsoft study, 2FA blocks 99.9% of the attacks on an account.

4. Change your Security Questions

Many websites use security questions to verify your identity. Many of these questions ask for information that in theory only you would know. Common examples include your mother's maiden name and your place of birth. The problem is that hackers can get this information, too.

A good friend of mine recently had $150,000 taken from his line of credit. The hackers called the bank and “verified” their identity by correctly answering his security questions. They found the information online. The only thing that saved him was a call from the bank when the hackers tried to wire the money out of his account.

For this reason, I no longer use common security questions. I make sure that the question and answer include information that cannot be found online. If need be, I make up the answers and keep the information stored securely at home (LastPass can store this information for you as well).

5. Set up Alerts

Financial accounts allow you to set up text or email alerts. I use this for any transactions on bank accounts and investment accounts. In this way, I get an instant alert any time money is transferred from an account. On investment accounts, I get notice of a transaction before it's completed. This gives me time to contact the brokerage firm if I didn't authorize the transaction.

6. Don't Click Links in Emails

Be very suspicious of links in emails. If I receive an email purportedly from a financial institution, I rarely click the link. Instead, I'll log into my account to deal with whatever the issue is. And if need be, I'll call the bank or brokerage firm.

7. Don't Call Phone Numbers in Emails

Speaking of calling a financial institution, I never call the number in an email. Instead, I call the number on the bank of my credit or debit card. For brokerage firms, I call the number on my statement or the firm's website. A phone number in an email may not be legitimate.

8. Only Download Apps from App Stores

For apps on a smartphone or tablet, only download them from the Apple or Android app stores. This insures you are downloading legitimate apps that have been approved by the respective platforms.

9. Set up Ability to Track and Wipe Your Phone

Make sure you have the ability to locate your phone and wipe the data from it. This is important if your phone is ever lost or stolen. I had my phone stolen at a chess tournament of all places many years ago. Fortunately, I was able to wipe the data from the phone. It's also important to password protect your phone, too.

10. Use Antivirus Software

Finally, it's important to use antivirus software on your PC and, yes, even your Mac. These tools help detect and remove any malicious code on your computer.

For PCs, my favorite is NortonLifeLock. You can purchase just the Norton Antivirus software, or add LifeLock protection as well. For Macs, Norton also offers an antivirus solution. There are other options, some free. Whatever you choose, it's important to project your computers with antivirus software.

Bonus Tip: Consider keeping your investments in more than one brokerage. If you have a 401k, it's likely at a different financial institution than your IRA, although not always. And when you retire, it's common to consolidate all of your assets at one place. While this is convenient, I'm much more comfortable splitting our assets among two or more brokerage firms.

Final Thoughts

Computer hacking is a reality we all confront. By tacking a few simple steps, however, we can significantly increase the protection of our online accounts, making it much harder for hackers to gain access. A password manager and VPN are a must, as is setting up 2FA. These steps along can prevent the vast majority of problems.

Filed Under: Technology, Personal Finance, Tools

5 Best Retirement Planners and Apps (#1 is Free)

September 18, 2021 by Rob Berger

Some of the links in this article may be affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase or open an account. I only recommend products or services that I (1) believe in and (2) would recommend to my mom. Advertisers have had no control, influence, or input on this article, and they never will.

Retirement calculators can help us plan and prepare to retire. When we are years away, these online tools can help us determine how much we should be saving. As we approach our time to retire, they can help us understand how much we can spend each year and which accounts should fund that spending.

Not all retirement tools, however, reach the same result. They take different approaches to what is a complex series of calculations and assumptions. One study examined five popular retirement planning software packages and found stark differences in outcomes. As a result, it recommended that individuals use “multiple programs before implementing an action plan based on the results.”

To that end, here is a list of the best retirement calculators, planners and software tools.

Editor’s Top Picks

Of all the retirement planners available today, two stand out among the rest:

  1. Empower–Previously called Personal Capital, it’s both free and comes with a robust set of features. Its retirement planner enables you to model everything from social security to pensions to one-time income (e.g., inheritance) and expenses (e.g., home renovation) during retirement. You can create multiple scenarios and run Monte Carlo simulations to see your chance of financial success (i.e., not running out of money).
  2. New Retirement–This tool allows you to model virtually every aspect of retirement. It projects future income, expenses and net worth. You can set income and expenses on a monthly, yearly or one-off basis. It can model social security, pensions and even Roth IRA conversions. There is an annual fee, although New Retirement does offer a free trial.

Best Retirement Calculators

What follows are my top 5 picks. The first three are retirement planners, allowing you to enter detailed information about your finances both before and after retirement. The final two options are more of retirement calculators. The inputs are much more limited, but these tools give you a quick estimate of when you can retire.

1. Empower

Best all around retirement planner

Empower is my favorite investing and retirement tool. In addition to being totally free, it's extremely easy to use and rich in features. Once a user connects their 401k, IRA, and other investment accounts, Empower pulls all the data from the accounts into its Retirement Planner.

Empower Retirement Planner

The Retirement Planner then allows users to model both income events (e.g., savings, sale of real estate, social security, pensions) and spending goals (e.g., retirement spending, travel, education). Users can also set up multiple scenarios to compare, such as retiring at different ages. Empower then runs the data through a Monte Carlo simulation and reports the likelihood of the plan's success.

Unique Feature: Users can create multiple scenarios (e.g., different retirement dates, different social security strategies) and compare how successful each will be.

Try Empower for Free

2. New Retirement

Most detailed retirement analysis

New Retirement is not for the faint of heart. The tool, which has both a free and paid version, enables users to model just about every aspect of retirement. For example, users can model social security claiming strategies, medicare coverage, annuities and pensions.

New Retirement Planner Dashboard

New Retirement handles the complexity of retirement planning in two ways. First, users can follow a quick start guide, answer a few simple questions, and have a complete snapshot of their retirement readiness in under five minutes.

Following that, users can dive into the details of everything from future healthcare costs to retirement savings contributions. New Retirement enables users to link investment and retirement accounts or enter them manually.

New Retirement offers three plans ranging in cost from free to $396 a year.

Unique Feature: New Retirement includes a Roth IRA conversion calculator to help users determine when and how much of a traditional IRA should be converted to a Roth IRA.

Try New Retirement

3. OnTrajectory

OnTrajectory is quickly becoming one of my favorite retirement planners. Like New Retirement, it allows you to map out just about everything related to both saving for retirement and spending during your golden years.

OnTrajectory Retirement Planner

It takes just seconds to get started. You'll answer a few questions, and OnTrajectory will set up a projection of your future savings and spending. From there you can begin to enter data to fine tune every aspect of the plan.

The tool is divided into three sections–Income, Expenses and Accounts. You can link your accounts so they automatically update, or you can enter balances manually. For income, the tool accommodates everything from work to pensions to rental properties. Expenses include every type of expense imaginable, and you can group expenses to make reporting easier.

As for accounts, you can link or manually create 401k, IRA, HSA and taxable accounts. It covers 457B plans (which have specially rules), as well as 529 plans and both traditional and Roth accounts.

Once you've entered the data, OnTrajectory uses both Monte Carlo Analysis as well as historical market returns and inflation data to calculate the chances of retirement success. Finally, you can create and compare multiple retirement scenarios.

Unique Feature: You can change the order of accounts withdrawals are taken during retirement or let OnTrajectory calculate the most tax efficient order.

Try OnTrajectory

4. NetWorthify

NetWorthify is designed for those wanting to retire early, although it works with traditional retirements, too. Simply enter your income, annual savings and total savings, and NetWorthify estimates how long until you can retire. It's free to use.

NetWorthify early retirement calculator

5. cFIREsim

Another free option that I like a lot is cFIREsim. You enter some basic information such as when you plan to retire, current savings, income, asset allocation of your investments and social security values. cFIREsim then calculates the likelihood of your success.

cFIREsim retirement calculator

Retirement Calculators Worth Considering

The following retirement tools didn't make are list, but still may be worth checking out. In some cases, I'm continuing to evaluate them, and some make make the “best of” list in the future.

  • FireCalc
  • T. Rowe Price
  • MaxiFi Planner
  • Fidelity Retirement Score
  • Ultimate Retirement Calculator
  • Vanguard Retirement Nest Egg Calculator
  • ESPlanner
  • AARP
  • Fidelity Full View
  • Betterment Retirement Savings Calculator
  • Charles Schwab Retirement Calculator
  • Dave Ramsey's Retire Inspired Quotient Tool
  • Stash Retirement Calculator
  • The Complete Retirement Planner

Retirement Calculators Not Worth Considering

Here are retirement tools that I believe aren't worth our time. I list them here to keep a record of what I've looked at and so that readers know I've considered and rejected these options.

  • Flexible Retirement Planner–Too many ads on the site and planner must either be downloaded (Windows only) or used Java Web Start.

Filed Under: Retirement

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