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How the 4% Rule Works

December 7, 2020 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.

The 4% rule is a rule of thumb that can help you figure out how much money you can spend each year in retirement without going broke. If you're many years away from retirement, you can also use it to figure out just how much money you'll need to actually retire. This article is the first of a series exploring the 4% rule, how to apply, its limitations, and alternatives to retirement spending methodologies.

Table of contents

  • My Experience with the 4% Rule
  • How the 4% Rule Works
    • Step 1: Add up your retirement savings
    • Step 2: Multiply your retirement savings by 4%
    • Step 3: Beginning in year 2 of retirement, adjust the prior year's spending by the rate of inflation
  • Where did the 4% Rule Come From?
  • How to use the 4% Rule for Retirement Planning
    • Step 1: Estimate your yearly expenses in retirement
    • Step 2: Determine amount of yearly expenses covered by retirement savings
    • Step 3: Multiply results from step 2 by 25
  • How the 4% Rule can Lead to Bizarre Results
  • How the 4% Rule Works–Video

My Experience with the 4% Rule

The 4% rule hit home for me two years ago at the age of 51. I had just sold my business, an online media company that owned a number of finance blogs. And I retired. Yes, I'm part of the FIRE (Financial Independence, Retire Early) crowd.

At the time, I did all the calculations using the 4% rule on a very conservative basis. My wife and I had more than enough to retire. But actually doing it is a lot different than thinking and writing about it. After I sold the business, I was scared to spend the money. In fact, I was so scared, I took a full time job.

I know that doesn't make a whole lot of sense. But that's what I did. Now, in fairness, I worked at Forbes and enjoyed it immensely. It was lifestyle friendly. However much I enjoyed the work, it doesn't change the fact that I built a business, sold it, and retired at the age of 51, only to go back to work out of fear of running out of money.

Now, the good news is it forced me to really take a deep dive into the 4% rule. I've read dozens of papers on the 4% rule. I have read books, I've studied dynamic spending plans, things called guardrails.

I've even looked at how institutional investors like the Yale endowment figure out how much money they can spend each year from the endowment without running out of money. There are a lot of parallels between how an endowment functions on the one hand, and how you and I should think about spending in retirement on the other.

What I learned from studying the 4% rule is that it's a really good rule of thumb. It still works today. Second, almost no one should actually follow it in retirement. I know those seem to contradict each other, but they don't, and I'll explain why as we go along in this series.

In this article we're going to look at four things. First, we cover a high level view of what the 4% rule is and how it works. Second, we're going to look at who created the 4% rule. Third, we'll cover how to use the 4% rule to estimate how much you need to save to retire. Finally, we're going to look at some very bizarre results that can flow from actually following the 4% rule. So let's get started.

How the 4% Rule Works

The 4% rule is simple to apply in retirement. It takes just 3 steps.

Step 1: Add up your retirement savings

The first step in using the 4% rule is to add up all of the money you've saved for retirement. This can include both retirement accounts as well as taxable accounts you expect to use to fund expenses in retirement. For example, you would include any money in a 401k or other workplace retirement plan, any IRAs that you have, and any money in taxable investing accounts, or savings accounts, certificates of deposit, or checking accounts.

Include anything you've saved, that's going to be used to fund your retirement. Typical accounts include the following:

  • 401(k)
  • 403(b)
  • 457
  • TSP
  • IRA
  • Roth IRA
  • HSA (if used for retirement)
  • Taxable investment accounts
  • Savings accounts
  • Certificates of deposit

There are a few things you don't include. You don't include social security, annuity income or pension payments. You're only factoring in money you've saved and accumulated for retirement. If you use a tool like Personal Capital to track your investments, this step is easy.

That's step one. Let's imagine that you've saved $1 million just to use a round number to make the math a little easier.

Step 2: Multiply your retirement savings by 4%

The second step is to multiply the results from step 1 by 4%. With $1 million, 4% would be $40,000. That's the amount of money using the 4% rule that you could spend in the first year of retirement.

Step 3: Beginning in year 2 of retirement, adjust the prior year's spending by the rate of inflation

It's the second year that trips some folks up. The way you calculate all the years in retirement after year one is different. Beginning in year two, you do not use 4%. Instead, you take the amount of money you were able to spend the prior year and adjust it for inflation.

So in our hypothetical we spent $40,000 in year one of retirement. Let's assume inflation is 2%. In year two, we could spend $40,800. To calculate this number, we simply add 2% to the amount we were able to spend in the previous year. Two percent of $40,000 is $800. Added to our first year spending brings us to $40,800. The following year we'll increase $40,800 by the rate of inflation (or decrease it by the rate of deflation).

The 4% rule and the bucket strategy can lead to
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Where did the 4% Rule Come From?

The 4% rule dates back to 1994. It comes from an article published in the Journal of Financial Planning by William Bengen, a certified financial planner. He is the father of the 4% rule. The article–Determining Withdrawal Rates Using Historical Data.

Bengen's primary focus wasn't actually the 4% rule as we know it today. In fact, that term doesn't appear in his paper. What he was more concerned with was how you go about calculating how much a retiree can safely withdraw each year from retirement accounts.

At that time, a lot of advisors would use average market returns and average inflation rates to determine the initial withdrawal rate. For example, they might explain to a client that a typical portfolio consisting of 60% stocks and 40% bonds has returned about 8% over the last 100 years. At the same time, inflation has averaged about 3% a year. Based on these averages, financial advisors would tell clients that they could withdraw 5% (8% average return – 3% average inflation) the first year of retirement, and then adjust that by the average rate of inflation. 3%

Bengen's concern was that actual stock market returns and actual inflation rates might not support an initial 5% withdrawal rate. Even if the averages proved to be accurate over a 30-year retirement, really bad markets and high inflation in the early years of retirement could cause a retiree to run out of money before retirement ended.

And that's in fact exactly what Bengen's paper concluded. If you wanted to be completely safe, the most you could take in your one of retirement was 4%.

Now, we will look at the methodology behind the 4% rule and the assumptions he used in later articles. Both are extremely important to understanding how we can and cannot, and how we should and should not, apply the 4% rule.

How to use the 4% Rule for Retirement Planning

You can use the 4% rule to estimate how much you'll need to save before you can retire.

Step 1: Estimate your yearly expenses in retirement

The first step is to estimate your yearly expenses in retirement. If you are near retirement, your current budget may suffice. Just remember to make adjustments if necessary to account for the transition from work (e.g., commuting costs go down, but retirement hobby or travel expenses may go up). If you are many years from retirement, taking a percentage of your current income (say 80%) may be sufficient for a rough estimate.

Step 2: Determine amount of yearly expenses covered by retirement savings

Next, estimate how much of your yearly expenses will be covered by retirement savings. For most people, social security and perhaps a part-time job will cover some portion of expenses in retirement. You can get an estimate of your social security benefits directly from the Social Security Administration.

Others may have a pension, an annuity or both. Subtract these other sources of income from your estimated yearly expenses. What is left is what must be covered by retirement savings.

Step 3: Multiply results from step 2 by 25

Multiply the results from Step 2 by 25. Note that this is the inverse of the 4% rule. If your expenses covered by retirement savings total $40,000 a year, multiplying this number by 25 gives us $1 million. Taking 4% of $1 million brings us back to $40,000.

How the 4% Rule can Lead to Bizarre Results

Now let's underscore some of the difficulties with the 4% rule and why we need to be so careful with it.

Let's imagine two couples are thinking about retiring. They're good friends, and so the four of them go to a financial advisor together. The financial advisor explains the 4% rule–they can spend 4% of their portfolio in the first year of retirement and then adjusted for inflation every year thereafter.

One couple, we'll call them the Retired Couple, decides to retire. They have a million dollar portfolio. They take out $40,000 in the first year, which leaves them with $960,000.

The second couple, will call them the Working Couple, decide to hold off for a year. They're not going to add to their retirement portfolio, but plan to use the next year to pay off some debt before they retire. So they just leave the $1 million in their portfolio.

Now, let's imagine that over the next year the market doesn't do so well. Both portfolios fall by a total of 20%. So where do we stand after the first year?

  • Retired Couple: $1 million – $40,000 spending = $960,000 – 20% = $768,000
  • Working Couple: $1 million – $0 = $1 million – 20% = $800,000

Now let's imagine the four of them go back to the advisor to find out how much they can spend in year two.

For the Retired Couple, they don't look at their balance to determine how much they can spend in year two. Recall under the 4% rule that beginning in the second year, you simply take whatever you spent the previous year and adjust it for inflation. So if we assume a rate of inflation of 2%, the Retired Couple could spend $40,800 ($40,000 + ($40,000 * .02)).

In year two, the Working Couple who are now retiring for the first time, however, have to take whatever their balance is and multiply it by our familiar 4% number. Since they're down to $800,000, 4% is $32,000.

Now if you think these results seem a little bit odd, it's because they are. Our Retired Couple has a portfolio that's lower than the Working Couple. They're down to $768,000 compared to $800,000 for the Working Couple. Yet they can take out over $8,000 more–$40,800–compared to just $32,000 for the Working Couple. That seems like a pretty bizarre result to me.

Portfolio BalanceSpending AllowedCalculation Method
Retired Couple$768,000$40,800$40,000 + 2% inflation
Working Couple$800,000$32,000$800,000 * 4%

Now, what do we do with this? Does this mean the 4% rule is invalid? Does it mean it contradicts itself? Is it difficult to apply? Well, not exactly.

It does underscore the difference between theory and reality. And in fact, we're going to cover a lot of realistic scenarios in this article series where the 4% rule, while it's a good planning tool, and it's a good rule of thumb, may not make a lot of sense when you go to actually apply it.

The good news is, I've got a number of alternatives that I'll share with you that I think can be just as effective, but maybe a bit more practical to apply. So in the next article, we're going to look at Bengen's methodology–how he actually went about calculating what we now know is the 4% rule. Once we understand that we can begin to apply this information in a practical way to both retirement planning and retirement spending.

How the 4% Rule Works–Video

Filed Under: Retirement Tagged With: 4% Rule

Has Warren Buffett Lost the Midas Touch?

June 26, 2020 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.

Investors and analysts have fallen out of love with Warren Buffett. At least that's the claim by some as reported by Business Insider. The story claims that Berkshire has suffered from “chronic underperformance.” A MarketWatch piece piled on, describing what it called a “vast underperformance.” Later the same article said Buffett is “profoundly underperforming” the market.

Chronic. Vast. Profound.

Combining all three, are we to believe that Warren Buffett has fallen into an intense, persistent, and immense underperformance? We'll answer that question in this article. The answer, as it turns out, teaches us four important lessons about investing.

Let's start with the claim of underperformance.

Has Berkshire Hathaway Underperformed the Market?

Howard Gold of MarketWatch never seems to miss an opportunity to take a shot at Warren Buffett. His latest missive claims that “Dud stock picks, bad industry bets, vast underperformance — it’s the end of the Warren Buffett era” (Source).

Gold claims Buffett has “profoundly” underperformed the S&P 500 during the “entire 11-year bull market.” The math backs up Gold's claim. From 2009 through 2019, Berkshire Hathaway has indeed trailed the S&P 500. By my calculations, Berkshire's Compound Annual Growth Rate (CAGR) during this time was 12.10%. Respectable, but well below the S&P 500's 14.69%.

To put these numbers into perspective, let's assume we invested $10,000 at the start of the 11-year bull market. An investment in Berkshire would have grown to just over $35,100. An investment in the S&P 500, including dividends, would have grown to more than $45,000. And this brings us to lesson #1.

Lesson #1: Always question the numbers and underlying assumptions

In this case one has to ask why Gold selected the 11-year period. Yes, it represents the last bull market, but so what? Why does that make it a meaningful period to evaluate? What if we shave off a couple of years or add a couple? What happens then?

Well, If we look at the last decade, 2010 through 2019, the numbers are almost identical. Berkshire enjoyed a 13.09% CAGR; the S&P 500 came in at 13.57%. The S&P 500 still edged out the Oracle of Omaha, but one can hardly call that vast, chronic or profound.

And if we go back to 2007 to capture both the market collapse and bull market, Buffett comes out on top: 9.05% vs 8.82%. As it turns out, Buffett has underperformed the market, but only if you are very selective in the time period you chose to consider.

Complaints About Warren Buffett's Investments

There have been several complaints leveled against Buffett recently. Generally speaking, they fall into one of three categories: (1) he's made some bad investments, (2) he's allowing Berkshire to hold too much cash, and (2) he missed out on the Coronavirus sell-off. We'll start with the first complaint and then we'll look at the other two together because they are related.

Bad Investments

There's no question that several Berkshire investments have not done well.

Airlines

Berkshire invested about $7 or $8 billion in airlines, amassing sizable positions in four airlines:

  • Delta Air Lines (DAL): 11%
  • American Airlines Co (AAL): 10%
  • Southwest Airlines Co (LUV): 10%
  • United Airlines (UAL): 9%

(Source)

Following the fallout from COVID, Berkshire exited this positions.

According to Warren Buffett:

When we sell something– when we sell something, very often, it's going to be our entire stake. I mean, we don't trim positions or– that's just not the way we approach it, anymore than if we buy 100% of a business we're going to sell it down to 90% or 80%. If we like a business, we're going to buy as much of it as we can and keep it as long as we can. But when we change our mind . . . Well, when we change our mind, we don't take half measures or anything short. So I was amazed at how we frankly, now, we sell– we were selling them at far lower prices than we paid. But I was amazed at the volume. Now airlines always trade in large volume relatively, but– but we have sold the entire positions. (Source)

Why did Buffett sell? In addition to the complete collapse in demand for air travel, it's likely due to the industry's need to borrow billions of dollars to keep planes in the air. (Source) This money will be paid back out of future earnings, substantially reducing the enterprise value of each airline. Selling equity to raise capital is no better, as the new shares dilute the ownership interest of existing owners.

According to MarketWatch, Berkshire lost $5 billion. (Source).

Kraft Hines

According to a Harvard Business Review article, “Earlier this year, the company suffered a massive loss in less than 24 hours — $4.3 billion, to be precise. And over a two-year period, the fiasco cost Berkshire Hathaway $20 billion, possibly its worst loss ever.” According to MarketWatch, Berkshire has lost $2 billion on its $10 billion investment. (Source). However you do the math, the investment has not been a winner.

Occidental Petroleum

In 2019, Berkshire invested $10 billion in Occidental preferred shares to help the company in its $38 billion acquisition of Anadarko Petroleum. At the time, Buffett called the investment a long-term bet on oil prices (Source).

Oil prices then crashed, and Occidental was saddled with a debt. In April, Berkshire agreed to accept stock in lieu of a cash dividend. (Source)

Lesson #2: Make sure you get all the facts

Yes, these investments have not performed well. Still, the investments in Kraft Hines and Occidental may prove over time to do just fine. The story there is not over. More importantly, those who focus just on these investments don't tell the whole narrative. For example, they conveniently leave out the fortune Berkshire has made on its Apple investment or the remarkable cashflow it enjoys from its wholly owned business.

The point: Be sure you get all the facts.

No Coronavirus Investments & Too Much Cash

“I am nervous that he may have missed this whole rally,” James Shanahan, an analyst at Edward Jones, told the Financial Times. “That's frustrating.” “A lot of retail investors were plowing money into the market and doing better than professional investors,” he continued. “I think you can include Buffett in that.” (Source).

Billionaire investor Ken Fisher made a similar claim. He claimed that Buffett's failure to take advantage of the coronavirus sell-off was due to his advanced age (Source). Buffett turns 90 in August.

Lesson #3: Don't confuse price movement with value

While it's a common mistake, I was surprised to see the likes of Ken Fisher make it. Just because stocks have fallen by 30% doesn't mean they are a great buy. Yes, they are a better buy then they were before the fall. But they could still be overvalued. Indeed, the S&P 500 as measured by the P/E Ratio is still overvalued by a wide margin based on historical standards.

Furthermore, the story is not over. We aren't through the first wave of Covid-19, never mind a second wave. Buffett buys based on his evaluation of value, not the recent price movements of a stock or index. We would do well to follow his example.

Warning for Investors in Actively Managed Mutual Funds

Even the best investments and investment strategies will underperform from time to time. Berkshire is no exception.

  • In 1974 it lost 48.7% while the S&P 500 lost just 26.4%
  • In 1990 it lost 23.1% while the S&P 500 lost just 3.1%
  • In 1999 Berkshire lost 23.1% while the S&P 500 GAINED 21% thanks to the tech bubble.

The same is even true for index funds. There will be markets where actively managed funds, on the whole, outperform passive investments. And that brings us to our last lesson.

Lesson #4: Choose an investment strategy you can stick to even in bad years

It's for this reason that I favor low cost index funds. When they are down I know it's not because a money manager has lost his or her touch. No mistakes have been made. No bad investment decisions. It's just the market.

As for Berkshire, I'll keep my shares in the company, thank you very much. I view it like a low cost, extremely tax efficient large cap mutual fund. Even better, it's not limited to publicly traded companies; it can buy whole companies.

New to investing and managing your money? Check out my book,
Retire Before Mom and Dad.


“This book is a must-have for anyone, regardless of age, to understand how to grow and protect our money over the course of our lives.” — Adrienne


Buy on Amazon

Filed Under: Investing

How the Bucket Strategy and 4% Rule Work Together

June 15, 2020 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.

Investing in retirement is scary for the most experienced investor. Combining the bucket strategy and 4% rule can help any retiree weather a bad market. Here's how.

The Bucket Strategy and 4% Rule

I retired (the second time) at the age of 51. Having just sold my online business, my wife and I went from earning and saving money to living off of our investments. And even though we could live comfortably on about 2% of our nest egg, I was scared to death of running out of money.

It felt like I was on a life boat in the middle of the ocean rationing what little food we had left.

So a recent article in the WSJ—Investors Approaching Retirement Face Painful Decisions (paywall)—didn't surprise me. According to the article, nearly a third of investors age 65 or older sold ALL of their stockholdings between February and May.

The news saddened me. Having spent years studying retirement investing and spending, I know that market timing is a recipe for retirement disaster.

Fortunately, a combination of the bucket strategy and the 4% Rule can save the day.

Table Of Contents
  1. Retirees are Long-Term Investors
  2. The Bucket Strategy and 4% Rule
    • The Bucket Strategy
    • The 4% Rule
  3. Putting it All Together

Retirees are Long-Term Investors

The WSJ article featured 62 year old Dr. Craig Sklar. COVID had caused a decline in his medical practice, forcing him to furlough staff and take on emergency loans. At the same time, his portfolio fell during the March Madness, as I like to call it.

So it's understandable that he sold much of his stock investments. Understandable, but probably a mistake. He explained his decision saying, “I don't have 10 to 15 years left to recover my losses.” Actually, he has more like 30.

Retirees are long-term investors. If we assume Dr. Sklar lives to the age of 95, he still has 33 years left on this rock. That's more than 3 decades of investing, long-term by any definition.

Of course, he will be spending some of his investments along the way. As he pointed out to the WSJ, “I'll need my cash to live on.”

And that raises an important question—how does a retiree reconcile the current need for cash with the long-term need for market returns that only stocks can provide?

The Bucket Strategy and 4% Rule

The answer is a combination of two retirement money management frameworks—the Bucket Strategy and the 4% Rule.

The Bucket Strategy

The Bucket Strategy helps us divide our retirement money between short-term spending needs and long-term investment needs. In its simplest incarnation, we use just two buckets—Cash and Investments.

Cash Bucket: This bucket holds three to five years worth of living expenses in cash (checking, savings, CDs, short-term bonds). Remember to deduct from your living expenses any other types of retirement income (e.g., pension, social security) before calculating your cash bucket needs. For example, if you need $75,000 a year before taxes, and social security provides $25,000, a 5-year cash bucket would hold $250,000 (($75,000 – $25,000) x 5 years).

Investment Bucket: Here we hold the remainder of our retirement funds in a diversified portfolio of low-cost index funds. The question we have to answer, however, is exactly what asset allocation to hold in this bucket. Is it 100% stocks? A 50/50 portfolio of stocks and bonds? Something else?

To answer these questions, we turn to the 4% Rule.

The 4% Rule

The 4% Rule arose from the work of financial advisor William Bengen. In a 1994 study, he found that a retiree could spend 4% of his nest egg in year one of retirement, adjust that amount by the rate of inflation each year, and not run out of money for at least 30 years (and in most cases, 50 years or more).

What doesn't get as much attention is the asset allocation Bengen assumed in his study. His primary assumption was a portfolio of 50% stocks (tracking the S&P 500 index) and 50% intermediate term treasuries. Further, he assumed the retiree rebalanced the portfolio annually.

What they didn't do was sell all their stocks in a bad market. And his study covered some really bad markets—1929 stock market crash, the final years in the 1930s, the stagflation of the 1970s. Through all of these difficult times, the 4% Rule survived.

Bengen did look at other asset allocations, ranging from 100% bonds to 100% stocks. What he found is that portfolios with a stock allocation between 50% and 75% lasted the longest. Add more stocks and the market volatility would hurt the unfortunate retirees who retired just before big market declines (particularly if inflation spiked). Hold less than 50% stocks and the returns were not sufficient to sustain a 30-year retirement in many cases.

So just like Goldilocks and The Three Bears, a 50% to 75% stock allocation is “just right.”

Putting it All Together

If we follow the 4% Rule, we want our overall portfolio to consist of 50% to 75% stocks. Here we combine both of our buckets (cash and investments) to determine our overall asset allocation. There are several ways to track our asset allocation across all our accounts.

The most effective tool and the one I use is Personal Capital. It's free and it enables you to link all of your investment accounts (retirement and taxable) as well as all of your cash accounts. Once linked, you can see your asset allocation with a click of the mouse.

It's here that the Bucket Strategy and the 4% Rule work together. The Bucket Strategy serves two critical roles. First, of course, it assures we have the cash we need for everyday expenses. Second, by having a cash bucket of three to five years, we are better positioned to handle the fear of market declines in our investment bucket.

This second objective cannot be overstated. Fear is what often drives any investor to sell during sudden market drops. It's exactly what more than 100 years of data and experience tell us we shouldn't do. If five years of living expenses in cash isn't enough to calm your fears, than make it six or seven.

As you make these decisions, be sure to keep an eye on your overall asset allocation. So long as your stocks don't drop below 50% of your portfolio, you're still following the 4% Rule as envisioned by Bengen.

How Retirees Can Survive a Bear Market [Video]


New to investing and managing your money? Check out my book,
Retire Before Mom and Dad.


“This book is a must-have for anyone, regardless of age, to understand how to grow and protect our money over the course of our lives.” — Adrienne


Buy on Amazon

Filed Under: Retirement, Investing

Morningstar User’s Guide

May 10, 2020 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.

Welcome to the Morningstar User's Guide. We're going to cover everything you need to know about using and getting the most advantage out of Morningstar. In this first article and video, we'll cover an overview of Morningstar. We will also look at some resources you'll need as we work through this guide.

It's my hope that this will help you become a better, more confident investor.

Table Of Contents
  1. Morningstar User's Guide Video
  2. Morningstar Overview
  3. Issues with Morningstar's New Website
  4. This Morningstar User's Guide
    • Part 1: The Data
    • Part 2: Using The Data
    • Part 3: Portfolio Manager
    • Part 4: Morningstar Tools
  5. Morningstar Resources You Need Handy for this User's Guide
    • Membership
    • Snapshot and Glossary
    • Morningstar Search Tool

Morningstar User's Guide Video

Morningstar Overview

Morningstar was founded in 1984. Before the internet as we know it, by Joe Mansueto. The story is that he started it in his apartment in Chicago with about $80,000. I don't know if that's true, but regardless, he started Morningstar in 1984. Today, it's a publicly traded company trading under the ticker MORN. It went public in 2005.

Last year, Morningstar generated about $1.2 billion in revenue. By my calculations, individual investors who pay for the premium version of Morningstar accounted for only about $22 million. Most of the revenue comes from tools designed for professional money managers and investment advisors. Some of these tools can cost tens of thousands of dollars a year.

The good news is that Morningstar made a lot of its data available for free to individual investors. And its premium version, which offers additional tools, is only $199. So that's the good news.

Issues with Morningstar's New Website

Now, there is some bad news. Last year Morningstar made some substantial changes to its website. They launched the new website in July 2019. The look of the new site is an improvement, sort of.

Here's what the old site looked like:

Morningstar old website

And here's the current website design:

Morningstar new website

The problem is that the functionality took a big hit for several reasons.

First of all, they took away a lot of the tools and data that were available in the old version of the site. For example, the removed the after-tax returns of mutual funds, which I thought was a very helpful data point. There are ways to get at that information, and we will cover that when we get to it in the series. That's the good news, we can still get back to this old version, for now.

Second, they haven't bothered to update the user guide. The Premium User Guide for paid members still reflects the old website design and functionality. I reached out to Morningstar support, thinking I just couldn't find the new guide. Nope. They haven't updated it. I guess that makes this User's Guide all the more important!

Finally, many of the tools that still exist are really hard to find. In the old version they had a menu item called “Tools.” Seems simple enough. That page now no longer exists. So there's no one page to go to to see all of the tools Morningstar offers investors.

This Morningstar User's Guide

This guide will be divided into four parts.

Part 1: The Data

The first part is going to be simply understanding the data. It'll be creating a number of videos that walk through all of the data about mutual funds, ETFs an stocks that Morningstar offers.

Part 2: Using The Data

Now that we have all this data from Part 1, how do we actually use it to make important investment decisions? That's what we will cover in Part 2. First, we'll figure out of all of the data you get from Morningstar, what pieces of it are really important. And then once we know that, we'll cover how to use the data.

How do we use it to pick a mutual fund in our 401k? How do we compare two mutual funds? So we'll be looking at that in part two.

Part 3: Portfolio Manager

In Part 3, we're going to be looking at the portfolio manager in Morningstar.
We will walk through the Portfolio Manager, showing you how to set up your own portfolio, how to add new holdings, and then the different ways you can use the tool to evaluate your investments.

Part 4: Morningstar Tools

In Part 4 we will look at Morningstar Tools. These include fund and stock screeners, calculators, and the X-Ray tool.

Morningstar Resources You Need Handy for this User's Guide

To finish out this brief overview, I want to talk about some things that that you want to keep in mind that are important as we move through the series.

Membership

The first is the Morningstar membership options. For individual investors like you and me, there's are two options. At a minimum, you'll want the Morningstar basic membership. It's free, and you will need it to create and monitor your portfolio. If you want the premium version, it costs $199 per year.

Here's what the two options cover:

Morningstar Membership Options
Try Morningstar for Free

While I'm a Premium member, it's not necessary for most people.

Snapshot and Glossary

Two more things briefly, that I think you should focus on, or at least have handy. The first is Morningstar Snapshot definitions.This gives you the definitions of key terms and concepts that we will encounter throughout this series.

For example, Morningstar categorizes mutual funds as a stock, bond or balanced fund. One might think that a bond mutual fund invests in bonds. Well, it does, but Morningstar categorizes a fund as a bond fund if at least 80% of its assets are on bonds. As a result, a “bond” mutual fund could also have a not insignificant amount invested in equities.

As another example, consider Morningstar's definition of an international stock fund. According to Snapshot, it's a stock fund that has invested 40% or more of its equity holdings in foreign stocks. So don't assume you know Morningstar's definition of these terms.

A similar tool is the Morningstar Glossary. It offers a wider range of investing terms.

Morningstar Search Tool

The last thing I want to show you in this overview is the search box on Morningstar. This really is the door through which you'll find a lot of the things that you need on Morningstar. For example, you can you the search box in several ways to find key information on Morningstar:

  • Ticker: Search an investment by its ticker symbol
  • Name: Search a mutual fund or stock by name
  • Screener: Search the term “Screener” to find Morningstar's stock and fund screeners
  • Tool: Search the term “Tool” to find Morningstar's calculators and other investment tools

Filed Under: Investing, Tools

12 Personal Finance, Investing and Retirement Tools

May 9, 2020 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.

Personal finance, investing and retirement planning tools can help you make the most of your money. From budgeting to investing, saving to improving your credit, the resources below will empower you to take back control of your finances.

Unless noted otherwise, I use each of the tools listed below:

Tools I Use

Empower

Update

Personal Capital is now called Empower, and the free tool is now called the Empower Personal Dashboard. Nothing about the tool has changed, and it's still free.

Empower is a comprehensive free financial management tool. It can do just about everything. You can connect your bank accounts, credit cards, and investment accounts. Once you link your accounts, Empower can track your budget, cash flow, and upcoming bills. But it's much more than a budgeting app.

The app tracks your net worth over time. It also tracks all of your investments, including retirement and brokerage accounts. Empower then provides automated analysis of your asset allocation, investment fees, and retirement planning.

Empower also offers a high-yield cash account. It's FDIC-insured and offers a competitive rate.

I've used Empower for years. Based on my experience, I created a Empower Review and User's Guide if you want more details.

New Retirement

Unlike Personal Capital, New Retirement is a paid tool. It's worth every penny. In my opinion, it is the most robust retirement planning software available directly to consumers. You can use the tool to model everything from retirement spending to Roth conversions to social security and medicare premiums.

There is a learning curve to New Retirement, but it's worth the time and effort. They also give you a free 14-day trial to check it out.

You can also check out this Q&A session I held where we walked through many features of the software.

Wealthfront

Wealthfront is an automated investing service often referred to as a robo-advisor. It's similar in theory to a target date retirement fund, however, it gives you more control over your asset allocation. It also offers excellent tools to understand your investments.

Wealthfront also offers a high-yield cash account, which is what I use Wealthfront for. I don't use its robo-advisor services (see Betterment below).

I should add, however, that Wealthfront doesn't offer the absolute best rates. Today, the best deposit rate I can find is through SaveBetter. This company partners with FDIC-insured banks to allow its customers to pick and choose from multiple banks all through one account.

Vanguard

Vanguard is a mutual fund company that popularized index fund investing. You can set up just about any type of account, including IRAs and taxable accounts. From there, you can invest in target date retirement funds and low-cost index funds. I've used Vanguard's funds and brokerage services for years.

Fidelity

Fidelity also offers low-cost index funds and any account type you'd need. If I had to pick one broker to use, it would be Fidelity. There are several reasons for this:

  • Technology: Fidelity's website and app are easy to use and provide a wealth of information about your accounts and the markets.
  • Full View: Powered by eMoneyAdvisor, Full View is a free tool that enables you to track all of your accounts, including those held outside of Fidelity. While it doesn't compare to Personal Capital, in my opinion, it's still a useful tool.
  • Customer Service: I've never had a bad experience with Fidelity. No company is perfect, but Fidelity offers some of the best customer service I've experience with any investment platform.

Betterment

Betterment is a robo-advisor, similar to Wealthfront. They both offer a simple way to start investing, but they both do charge a fee. While the fee is modest, we know from Retire Before Mom and Dad that every basis point in fees costs us a lot of money over our lifetimes. Still, I think robo-advisors are a reasonable choice for those who want a service that can handle your asset allocation and rebalancing.

I use Betterment to invest our credit card rewards. You can check out my video on Betterment, which shows you my account and some of Betterment's features.

Portfolio Visualizer

This free tool is one of the best I've found at evaluating the historical performance of a portfolio. You can add specific investments (stocks, ETFs or mutual funds) and Portfolio Visualizer will return the historical returns of the portfolio along with a wealth of data (e.g., CAGR, standard deviation, worst drawdown). You can also evaluate portfolios using asset classes rather than specific investments.

Another feature I use is its Monte Carlo simulation. It's particularly useful for modeling retirement spending scenarios, like the 4% Rule.

Here's a video guide to Portfolio Visualizer.

FI Calc App

FI Calc is a free tool that models retirement spending based on a specific drawdown strategy. You can easily set your years in retirement, nest egg balance, first-year spending, and select one of several drawdown strategies. The tool also allows you to model other retirement income and one-time large expenditures.

The results, based on historical data, show by year (from 1926 to the present) whether your money would have lasted through retirement. Importantly, it also shows those years when you would have almost run out of money.

Morningstar

Morningstar is arguably the best source of information on stocks, mutual funds and ETFs. Enter a ticker and Morningstar returns a wealth of information including a fund's expense ratio, investing style, historical performance and volatility, and top investments.

Morningstar Investor is its new portfolio tracking tool. I'm still testing it, but my initial impression is that it is a step in the right direction but still needs a lot of work.

Tiller Money

Tiller Money combines an automated budgeting app with the power of a spreadsheet. Once you connect your bank and credit card accounts to Tiller, it downloads your transaction data and balances into either Google Sheets or Microsoft Excel. From there you can evaluate and categorize your spending.

1Password

A password manager is a must. It enables you to use complex, lengthy passwords without have to remember them. I used LastPass for years, but after its data breach issues, I switched to 1Password. It's very easy to use, works on all my devices, and I can share passwords with anybody I choose without actually revealing the password to them.

Other Tools Worth Considering

YNAB

YNAB, short for You Need a Budget, is the budgeting tool I use every day. It automatically downloads all of your transactions from bank accounts (checking and savings), as well as credit cards. You can categorize your expenses, run reports, and understand where your money is going.

It is a subscription model, but the cost is reasonable. I've found it to be the best tool to manage your money.

Mint.com

I used Mint for many years. It's a free online money management tool. You connect your financial accounts to Mint. The app then downloads your transactions and categorizes them for you. It's not perfect, but it's right more often than not. You can then see where your money has gone and plan your budget going forward.

While Mint offers a decent product, there are some really good Mint alternatives worth checking out.

Filed Under: Tools

The Rob Berger Show

May 1, 2020 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.

Welcome to the Rob Berger Show (RBS), the podcast edition. The show goes hand-in-hand with the YouTube channel. Both offer content designed to help you make the most of your money. Why? Because the best thing money can buy is financial freedom.

Filed Under: Personal Finance

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