Savings: How much is needed?

I am not expert on retirement planning and have many years to go before readers of this blog would need to worry about "withdrawal" rate. However it's never too early to plan. Thanks to one of the friend, I came across few articles on "withdrawal" rate and how much one needs to save to maintain decent living standards.
Here are few assumptions to make:

• "Safe or risk-free" rate of return is about 3% (equivalent of coupon on 30 year US treasury)
• Protect "principal" as many years as possible
• Mortgage is paid off
• College expenses are over (and kids have settled down)
• No major health care expenses

With these assumptions, one could assume that $100K per year income is sufficient to live in areas like Bay Area (which is one of the costliest but most cosmopolitan areas to live in USA).  Assuming about $25K in social security benefits, one would need to create $75K per year in additional income from retirement savings. That would mean one needs close to $2.5M in savings to maintain the "principal" and still maintain a decent life-style. Of course many of these assumptions would change if one moves to less costly area or assumptions change.

If you are interested further, read on following.
https://www.thebalance.com/how-much-can-you-withdraw-from-your-retirement-portfolio-453997

https://www.fool.com/retirement/2017/07/02/3-serious-problems-with-the-4-retirement-rule.aspx

http://money.cnn.com/2017/04/12/retirement/4-percent-rule/index.html

https://www.financialsamurai.com/the-ideal-withdrawal-rate-for-retirement-doesnt-touch-principal/

Well if these are the savings one need, it's good to know now! As I mentioned, this is just my interpretation of various articles. One should consult proper financial advisor to plan!

Coming to Trump drama, there is never a boring week. Only President Trump has skills to antagonize NBA, NFL players, Obamacare supporters (including some GOP senators) and North Korean dictator Kim in same week. Despite all this drama, I am surprised that stock markets are making new highs every week. So are there any good "picks" in these frothy markets? Given that oil market is holding up well, I am still staying with my hypothesis on "energizing" portfolio.

Crypto-currencies: Fad, Fraud or Frontier?

As of last count there are more than 800 crypto-currencies and more are coming every few days. And unless you are hiding on another planet, you must have heard about BitCoin. Since then there are other "credible" (if you can call any of these) alternatives like Ethereum, LightCoin, Dash have come. Most of these are based on underlying technology called blockchain While the blockchain technology has tremendous potential and could at some point match buzz created by cloud, AI, VR, BigData, currently it is "(in)famous" for it's main application of digital currencies . So let's discuss if these crypto-currencies are Fad (aka bubble), Fraud (like Ponzi scheme) or New Frontier of Investing (like dot-com companies including Amazon in late 90s).
Let's understand basics of "money" or "currency". Why do humans need "currency"?
Currencies serve multiple purposes like:

• Medium of exchange (makes bartering much easier and friction-less)
• Storage of value (one can't store farm-output like grains or fruits to be consumed few years later)
• Investment (GOLD as investment)
• To finance countries/governments (ever heard of "printing money" by Federal banks)
• Movement of wealth (e.g. convert pesos into US $)

History of currency has evolved from stones, grains, commodities (salt, gold, oil) to most widely used  "paper" or "fiat" currency. Governments print these paper currencies, put a value on it ($1-$100) and put it in circulation. Before Nixon ended Bretton Woods International Monetary system in 1971, printing of money was tied to value of gold governments held. After this link was nixed, there is no reference to value of "paper" printed by any government other than what people believe it. This one move by Nixon helped US $ to become reserve currency of world since there was no other country which could match might of United State of America (which could change  in second half of 21st century). Now that we understand basics of currency, let's look at crypto-currencies. 

During financial crisis of 2008-2009, some people realized that money is not safe in hands of biggest (and supposedly safest) financial institutions of the world. And to save these banks from going under, governments would go to any distance and run printing presses to full capacity to flood the market with paper currencies. So some techies decided to come up with what they do best. Apply technology to create a solution. That's how BitCoin was created in 2009. Compared to gold which has been used as currency for more than 5000 years, BitCoin is only 8 years old.

Last few weeks BitCoin has been in discussions. First due to technology split (which created BitCoin Cash), then crackdown by Chinese authorities on digital currencies and now Jamie Dimon calling BitCoin as worst bubble than tulip mania. 

So coming to my original question: What are these crypto-currencies? Fad, Fraud or New Frontier of Investing?

In my opinion, they are bit of all three. 

Fad: Every few decades there have been new fad of investing. In 17th century, Dutch went crazy with their investing in tulip bulbs, In 18th century, genius like Newton lost significant savings in south sea bubble. Recently in 20th century, we saw dot-com bubble and 21st century started with housing bubble. This decade we are seeing bubble of "coins" with some of these gaining from 300% (bitcoin) to over 1000%.

Fraud: Out of 800+ crypto-currencies, very few would still be around 5-10 years from now. Some crooks are issuing "coins" and raising millions of $ without anything to support. These are equivalent of dot-com companies which raised billions just based on website. We all know how that ended. So be careful!

Frontier: Out of every bubble, some value gets created. From dot-com bubble, we saw survivors like Amazon, Netflix and few others. The investments also created massive fiber-optics infrastructure on which today's cloud movement is built. So there would be survivors coming out of crypto-currency bubble and surviving currencies could have multiples of value they are fetching today. Also block-chain technology would have lot more commercial applications. 

So as I said it's mix of all three and that's what makes it interesting economic, technology and behavioural investing topic. 

Preparing for "taxing" Times!

One would wonder why am I writing about taxes right now when there are more than 3 months left for year-end and another 7 months before tax-filing deadline. But that's the whole point. There is still some time left in 2017 to take advantage of some interesting tools available. In my previous blog After-tax 401K to Roth IRA I had written about how one could maximize savings in 401K by making after-tax contributions and how these after-tax contributions could be converted into ROTH IRA. Many folks call this as "back-door" mechanism to contribute to ROTH IRA (even though it is completely legal unless tax-reforms in discussions closes this backdoor).
Good news is that overall limit has been increasing over last couple of years as evident from following table. This means one could contribute upto $54K (or $60K if you are over 50) to 401K. After full contributions of $18K and your employer's match, it would still give you an opportunity to contribute 25K or so for after-tax contributions (which could be converted to ROTH IRA).

	Tax Year 2017	Tax Year 2016	Tax Year 2015	Tax Year 2014
Elective Deferral Limit	$18,000	$18,000	18,000	$17,500
Overall Contribution Limit	$54,000	$53,000	$53,000	$52,000
Catch-Up Contribution	$6,000	$6,000	$6,000	$5,500

Table courtesy of Motley Fool Article

In addition to this, there is another "hidden" but equally beneficial savings tool called HSA. Most big companies now offer these Health Savings Accounts. For all practical purposes, these work like 401k for medical expenses. You can read extensive details on how these accounts work in well-written Barron's article. Hope these articles would give you insights into various tools available to maximize your savings and make "taxing" times less "taxing"!

President Trump and team have finally realized that sometimes its better to work with your opponents than your own party leaders. In two weeks, he seems to have negotiated two deals with democrats. Trump, Shumer and Pelosi seems to be best buddies in these days and that may be good for America. Ryan and McConnell must be fuming in their chambers but they had it coming their way. Trump being Trump, no one can predict what he would do next but for now, he seems to have realized that to get anything done, he better work with democrats. If this continues, we may see long awaited tax-reforms before year-end. Would be good for companies (due to repatriation holiday and lower corporate taxes) and individuals with lower taxes. Let's hope 2017 ends with new less complex tax regime!

/Shyam