The Financial Flu Shot: Using Bond Ladders

Take a moment to log into your investment account and write down the balance.  In late 2017, you probably feel pretty good about it if you have diligently saved over the years and participated in the long bull market that has propelled financial assets upward since the end of the 2008-09 financial crisis.

Now take the balance and divide it by two.  Actually write it down on a piece of paper.  Suppose that a year from now, this will be the new value of your portfolio.  How do you feel now?

For nearly everyone, the answer is obvious.  You will probably feel rotten and suffer from a sense of loss and regret.  Why didn’t you see it coming and take actions to prevent the damage!  These are natural gut-level reactions to a sudden shock.

But are you in a state of panic as well?

Individuals will react differently to market fluctuations and it is impossible to predict how someone will react until faced with adversity.  Establishing a portfolio “on paper” and pretending that it has declined is completely useless when it comes to understanding your own psychology.  Even reading about psychology is not adequate preparation.  Some things must be directly experienced to be understood.

Know Yourself

For those of us who have experienced financial market declines, it is possible to have a direct understanding of how we would react to a severe correction in security prices.  The most recent period of sustained declines was, of course, the 2008-09 financial crisis.  To say that this period was stressful would be an understatement but two factors kept me from descending into a state of panic and “selling everything” at depressed prices.  First and most importantly, I had a significant reserve of cash and would not be in a position to need to sell securities in order to fund expenses for several years.  Second, as a full time investor, I was excited about the opportunity to deploy funds in stocks that were trading at very depressed valuations.  I also understood what I owned and had a sense of the value of these businesses independent from momentary changes in stock prices.

The situation would have been far different if I had been in the position of needing to liquidate stocks in order to fund expenses the next month.  In such a situation, anyone would probably go into a state of panic and sell at any price in order to ensure that enough money was available to pay the ongoing expenses of daily life including housing, food, utilities, and so on.

For those of us who rely on investment returns to fund ongoing expenses, it is vital for our mental and financial health to have a strategy in place that does not subject the need for ongoing cash flow to the vagaries of short term financial market fluctuations.  This article covers strategies that will help to ensure adequate cash flow and prevent panic in the event of a financial market meltdown.

The Three Percent Rule

Let’s take a step back and consider how much of a portfolio can be safely tapped for income each year.  In a previous article, I outlined a number of concepts related to financial independence and suggested that one should be very conservative when drawing down a portfolio in today’s environment.  For many years, it was conventional wisdom that one could withdraw about four percent of a portfolio’s value and be confident in not running out of money.  However, this advice was formulated at a time when interest rates were at higher levels and it was easy to purchase high quality bonds with nominal yields in the mid-single digits.  With the ten year treasury note yielding around 2.5 percent as of December 2017 and the Federal Reserve dead set on devaluing the U.S. dollar by 2 percent per year, there are scant returns to be found in the safest investment choices.  In addition, stock valuations are historically high as one can see from the Shiller PE ratio in the chart below:

No one can accurately predict stock prices or interest rates over the next year, despite the many charlatans who claim to be able to do so.  However, it is quite apparent that today’s environment is one in which caution should be exercised especially when it comes to decisions that could prematurely deplete an investment portfolio.  For this reason, I would be hesitant to deplete a portfolio by four percent per year.  Even three percent might be considered a little too aggressive but by choosing a withdrawal rate that is far too low, it is possible that you may not enjoy the fruits of your work and savings sufficiently.  Running out of money is a major risk but so is living so far below your means that you forego things that you want to do for no good reason.

The Financial Flu Shot

The question of how to construct your portfolio during retirement is important but can be complex.  The proportion of assets invested in various asset classes, such as stocks, bonds, and real estate, will drive the majority of returns for most investors.  The decision regarding whether one should invest in broad based index funds, in funds run by managers seeking better than average returns, or through direct investment in securities will also have a major impact on results.

Rather than discussing overall investment strategies for retirement, I would like to emphasize the need to “immunize” yourself against the psychological perils associated with fluctuating financial markets.  The price of longer term financial assets, such as stocks and longer term bonds, can move around a great deal in short periods of time.  It can be more than mildly disconcerting for most people to watch these types of fluctuations.  More accurately, people do not mind upward fluctuations in price but become concerned and can even panic when fluctuations are negative, as they inevitably will be from time to time.

What is needed is the equivalent of a financial flu shot.  Like an annual shot to help prevent influenza, a financial flu shot may not be 100 percent effective but can go a long way toward limiting risk.

Essentially, a financial flu shot requires an investor to ensure that a significant amount of money is held in assets not subject to significant market price fluctuations.

These funds will likely earn only small returns but will prevent the individual from entering a state of panic if his or her other assets decline in price.  Some people may panic anyway and act irrationally, such as selling all stocks after a steep market decline, but for most people, having a significant amount of solid assets that do not fluctuate greatly in price will have a calming effect.

Using Bond Ladders

Over long periods of time, investing in high quality businesses via the stock market will almost always exceed returns available from investing in high quality bonds.  However, in the short run, bonds are a more reliable option for those seeking regular income.  A “bond ladder” involves purchasing bonds at maturity dates that coincide with a need for funds.  In the context of retirement, an individual might decide to establish a ladder consisting of equal amounts maturing 1, 2, 3, 4, and 5 years from now.  This five year ladder will ensure that funds are available when they are needed, assuming of course that the bond issuer does not default.  The risk of default can be effectively eliminated by using only United States Treasury obligations.

Let’s say that an individual requires $40,000 per year in cash flow to consider herself financially independent and has accumulated a portfolio of $1,350,000.  This implies a withdrawal rate of just under 3 percent (40,000/1,350,000).  Establishing a five year bond ladder would involve buying bonds with the following maturity profile:

This also assumes that approximately $40,000 in cash is available to fund expenses between now and the maturity of the first bond a year from now, in January 2019.  By having this portfolio of bonds that are solely dedicated to funding expenses for the following year, there is no rational reason to panic if longer term assets, such as stocks, suffer a major decline.  One can rest easy knowing that funds will be available in due course to pay for ongoing expenses for up to half a decade.

Of course, holding $40,000 in cash plus $200,000 in the bond ladder comes at a cost.  These funds are no longer available for longer term growth and will likely earn very low returns.  But is this a major problem?  In the context of a $1,350,000 portfolio, holding $240,000 in low return assets is less than 18 percent of the overall portfolio.  This leaves 82 percent to be invested in assets that could potentially earn higher returns over the long run, although at the risk of potentially suffering short term declines in value.

A bond ladder is easy to maintain over time.  The only task is that every year a new five year bond must be purchased to replace the one that is maturing.  In January 2019, a bond will mature and will be used to fund ongoing cash expenses in 2019.  However, if a new bond is not purchased, what is now a five year bond ladder will become a four year ladder.  The fifth year of the ladder must be replenished by purchasing a new five year bond.  Unless security prices are massively depressed (such as in early 2009), the task is to simply liquidate $40,000 worth of securities and purchase a new five year bond.  However, the individual does not need to do so immediately if markets are in the midst of a panic driven sell off.  In such a case, it would be acceptable to simply wait because there are still four years of cash expenses available in the ladder. Obviously, this cannot be taken too far because eventually the four year ladder will shrink to three, then two, and then one year if it is never replenished but the point is that a five year ladder leaves quite a bit of room for intelligent action if markets have declined temporarily.

Selecting Bonds for the Ladder

Assuming that the concept of a five year bond ladder makes sense, the next question is what bonds to select for the ladder.  My view is that this part of an investor’s portfolio should not attempt to do anything heroic in terms of squeezing out a small amount of additional returns.  Safety should be paramount and that means using United States Treasury securities to build the ladder.  Despite occasional reports of government shutdowns and potential debt defaults, the reality is that the federal government is not going to default on its debt.  The U.S. dollar is a fiat currency that also serves as the world’s most important reserve currency.  A sovereign state that controls the supply of its own currency is not likely to default on its debt, although inflation could very well be a concern.  For our purposes, we can consider treasury obligations to be “risk free” in terms of risk of default.

Treasury Notes

The next question involves what type of U.S. Treasury obligations to use for the ladder.  The most straight forward option involves using treasury notes.  The U.S. Treasury holds weekly auctions for a variety of treasury bills, notes, and bonds.  These instruments can be purchased by anyone at auction either through Treasury Direct or any discount or full service brokerage.  Using Treasury Direct is free of charge and could be a good option for many people. However, large brokerages such as Fidelity and Vanguard offer clients the ability to participate in treasury auctions at no charge.  For those who have existing brokerage accounts, it is worth checking whether it is possible to purchase treasuries at auction with no commissions. Although the design of a bond ladder assumes that bonds will be held to maturity, the ability to easily sell bonds through a brokerage is a distinct advantage.  Treasury Direct no longer facilitates the sale of treasuries.

The Treasury publishes a listing of upcoming auctions.  Let’s take a look at the auctions that are coming up for the month of January 2018:

From this schedule, we can see that it is possible to purchase the following securities for four of the steps of the ladder:

  • Purchase $40,000 of the 52 week Treasury Bill at auction on January 30.
  • Purchase $40,000 of the 2 year Treasury Note at auction on January 23.
  • Purchase $40,000 of the 3 year Treasury Note at auction on January 9.
  • Purchase $40,000 of the 5 year Treasury Note at auction on January 24.

We are missing a four year note because the Treasury does not directly offer four year notes.  However, one can easily purchase a Treasury Note with four years left until maturity by purchasing in the secondary market (that is, from another investor).  Treasury notes are extremely liquid securities and there is a large secondary market.

What are the yields one can expect by investing in this ladder?  The Treasury publishes what is known as a “yield curve” at the close of trading every day.  The exhibit below shows the yield for various maturities over the course of December 2017:

If rates are approximately the same as they are today when the securities in the ladder are purchased in January, one can expect to earn from 1.75 percent on the 52 week Treasury Bill to 2.25 percent on the five year Treasury Note.  During normal conditions, the longer a bond’s maturity, the greater the yield will be.  In today’s low rate environment, these yields will barely cover expected annual inflation.  The Federal Reserve has a stated goal to devalue the U.S. dollar by 2 percent annually.  If we’re very lucky, the pre-tax yield from the bond ladder will just cover inflation.

A few words on mechanics:  Treasury bills are purchased at a discount to par value of 100.  If current rates hold, the $40,000 52 week bill will cost the investor around $39,300 when it is purchased at auction.  It will mature one year later at $40,000 with the $700 difference representing the interest.  The 2, 3, 4, and 5 year Treasury Notes pay interest semi-annually.  Taking the three year note as an example, one would pay close to $40,000 at the auction and receive payment of approximately $400 twice a year.  Note that these funds should not be spent but kept in cash or a short term Treasury Bill since the funds barely make up for inflation.  The $40,000 drawdown in Year 5 will really need to be somewhat more than $44,000 in 2023 dollars if the Federal Reserve keeps its promise to devalue the currency by 2 percent annually.

Treasury Inflation Protected Securities

The U.S. Treasury has been offering Treasury Inflation Protected Securities (TIPS) for over two decades.  The purpose of these securities is to generate a “real return” – that is, a return in excess of whatever inflation proves to be over the term of the security.  However, do not get too excited.  The real yields are very small as shown in the real yield curve table below:

We can see that the real yields range from just under 0.5 percent all the way up to a whopping 0.83 percent.  Real yields have been depressed in recent years, as The Wall Street Journal noted in a recent article.  Before the financial crisis, real yields on longer term TIPS were often in the 2 percent range.  On the bright side, at least real yields are in positive territory again after dipping below 0 percent earlier this decade.  The chart below, from the Wall Street Journal’s article, shows how low real yields are today:

The mechanics of building a bond ladder using TIPS is slightly more complicated than using regular Treasury Notes because the shortest term TIPS is five years.  One can build a TIPS ladder in the secondary market (buying from other investors) at any time or slowly over time by using regular Treasury Notes initially but purchasing a 5 year TIPS at auction every subsequent year.  Eventually this will result in TIPS with remaining maturity of 1, 2, 3, 4, and 5 years but it will take four years to get there.

The mechanics of TIPS work differently from regular Treasury Notes.  The U.S. Treasury’s full explanation is required reading for anyone seriously considering these securities.  The short version is that returns from TIPS are provided in two “buckets”.  First, one receives interest payments based on the “real” yield – these are the yields shown in the table above.  Second, the value of the TIPS principal is adjusted periodically based on fluctuations in inflation.  When the note matures, you will receive the principal adjusted for reported inflation.  One catch is that investors holding TIPS in taxable accounts must pay annual income taxes on both the actual cash received from interest payments and increases in the value of the TIPS due to inflation.  In other words, you will be required to pay tax on cash that you will not see until the TIPS actually matures.  This is probably only a minor annoyance for most investors and a non-issue for those holding TIPS inside a tax deferred account such as an IRA.

Regular Treasury Notes vs TIPS

Should you use regular Treasury Notes or TIPS to form your bond ladder?  The question boils down to inflation expectations.  Ignoring tax issues, if you purchase a five year TIPS with a real yield of 0.5 percent instead of a regular 5 year Treasury Note yielding 2.25 percent, you are implicitly saying that you expect inflation to exceed 1.75 percent.  If inflation stays below 1.75 percent over the next five years, you would have done better by purchasing a regular Treasury Note.  If inflation exceeds 1.75 percent, the TIPS will be the better choice.  Remember that the Federal Reserve has a stated goal of causing inflation of 2 percent annually.  Clearly the market does not believe that the Fed will achieve this goal, but remember that the Fed directly controls short term interest rates and the money supply.  “If there’s a will, there’s a way” comes to mind.

My view is that taking the inflation protection offered by TIPS is worth the slightly more difficult process of building a five year bond ladder and dealing with the tax quirks.  Remember that the goal of the bond ladder is to supply yourself with cash for ongoing expenses for the next five years.  What you should care about is purchasing power.  As long as the TIPS offer some real yield (above 0 percent), at least in theory the $40,000 our fictional investor puts into a 5 year TIPS today should hold its purchasing power when the note matures in 2023.  There are all sorts of reasons to doubt official inflation statistics, but that’s beyond the scope of this article and there isn’t much an investor building a bond ladder can do about it.  If you insist on total safety, you simply have to choose between Treasury Notes and TIPS.

Price Fluctuations

Treasury Notes are not immune from price fluctuations but these should be steadfastly ignored by an investor who is using these instruments to build a bond ladder.  The only thing the investor should care about is that the note will mature and pay 100 cents on the dollar at maturity.  If interest rates suddenly shoot up between now and when the note matures, the market value of the note will temporarily decline.  However, it will still pay out 100 cents on the dollar at maturity.  By investing in TIPS rather than regular Treasury Notes, the investor would also gain some level of protection if interest rates jumped up due to much higher than anticipated inflation.  My recommendation is to not even check the market value of the bond ladder.  Simply ignore all price fluctuations.

This Is Too Complicated!

Although setting up the ladder might seem a little complicated, it is important to note that once it is set up, there is only one step that needs to be taken annually:  purchase a new five year Treasury Note (or TIPS) using the proceeds from selling securities in your longer term investment portfolio.  This can be handled in a mechanical way by simply selling down everything you own in your longer term portfolio in equal proportions or selecting securities to sell that seem overvalued.  If market prices are severely depressed, like in early 2009, it is possible to just skip buying the new 5 year note for a few months or even a year since there will still be four years of bonds in the ladder.

However, if this still seems too complicated, you may want to consider using mutual funds rather than individual bonds.  Mutual funds do not “mature” so you would not purchase five mutual funds.  Instead, you would most likely purchase just one short term bond fund.  You would still have to replenish this fund annually by selling down securities in your longer term portfolio but you would not have to identify a specific bond to purchase.

There are two problems with mutual funds that one must consider.  First, even the cheapest mutual funds charge management fees.  This will be a drag on your returns especially given how low interest rates are today.  Second, a bond mutual fund never matures.  If interest rates increase, the price of the mutual fund will decline and you cannot deal with this psychologically by knowing that the fund will mature at a specific date.  It is true that the mutual fund will benefit from purchasing new bonds at higher rates and, in the long run, the fact that a fund doesn’t mature should not be a major issue.  Still, some investors might be more comfortable in individual bonds with set maturity dates.

For those interested in bond funds, the Vanguard Short-Term Treasury Fund has an average duration of 2.4 years and has an expense ratio of 0.2 percent.  Those who are investing over $50,000 can purchase the admiral class of this fund which carries an expense ratio of 0.1 percent.  If TIPS seem more compelling to you but you want a fund rather than individual bonds, consider the Vanguard Short-Term Inflation-Protected Securities Index Fund which has an average duration of 2.5 years and an expense ratio of 0.16 percent.  Those who are investing over $10,000 can purchase the admiral class of this fund which carries an expense ratio of 0.07 percent.


If you have never experienced a severe bear market, it is not possible to know in advance how you will react.  You may react with equanimity or you may panic.  The odds of acting in a rational manner will increase if you are not relying on the longer term portion of your portfolio to fund your living expenses next month.  By keeping a significant amount of money in cash and a bond ladder, you can stack the odds in your favor.  You are more likely to stay the course in your investment portfolio and avoid costly mistakes such as selling everything at the low point of a bear market.

Even those with more experience who have navigated past bear markets well do not know with certainty how they will react in the future.  Bond ladders will provide some level of protection but the concept is not a panacea.  Just like a flu shot might be only 60 or 70 percent effective, a bond ladder will only stack the odds in your favor.

Setting Up Your Bicycle as a Car Replacement

One of the first posts on this blog was How I Escaped the Car Clown Habit and there was a good reason for that.  Driving absolutely everywhere in a two ton metal box on wheels is fundamentally wasteful and irrational – the exact opposite of the Spartan lifestyle that this blog is all about.  The rational way to think about automobiles is that they serve very useful purposes when one needs to accomplish very specialized tasks.  If you need to transport a cord of wood from the forest to your home, you probably need to use a full size pickup truck.  If you are building a concrete patio and need to haul sacks of concrete mix from Home Depot, maybe you need to rent a small truck.  Long road trip to a remote beach to go camping?  A car is probably the way to go.  There are plenty of other examples, but I would argue that cases where you actually need to use an automobile are quite specialized.  Most people use cars for all kinds of things that could be better accomplished on foot, on a bicycle, or using public transportation.

If one accepts the idea that the automobile is a tool best used for specialized and rare tasks, the irony of how most people view bicycles becomes quite apparent.  Most people view bicycles as the specialized tool and the automobile as the general purpose tool, not the other way around.  In fact, a bicycle is a very useful tool for getting around most of the time – it is a general purpose tool, not something to bring out only on a sunny weekend.  However, in order to get the most utility out of a bicycle, it is necessary to spend some money up front to make sure that it secure and has the carrying capacity to meet your daily needs.  If you consider your daily routine, you might realize that you need to carry your laptop and other materials to work, you’ll need some carrying capacity for groceries, maybe you will need a child seat, and so on.  In my case, a typical trip might be to a local cafe or to the grocery store.  About once a month, I usually go to Wal-Mart to stock up on household supplies.  Almost everything is within a five mile radius of my home.

My Bicycle

I have owned a Specialized Rockhopper mountain bike for over twenty years which I purchased new for around $700, a substantial amount of money for a bicycle at the time.  It was a fairly high end model that I actually used for mountain biking for many years but it has long since been surpassed technically by more sophisticated mountain bikes.  Nevertheless, it remains in good condition and completely functional.  It also has very simple parts that I have no problem maintaining myself.  For the past decade, the bike has had very little use.

When I moved to a new city in late May, I had to adjust to new ways of getting around.  I have been car free since 2014, but in my old city I primarily relied on getting around by foot or on the extensive subway system.  I lived in a high rise and stored my bicycle in an out-of-the-way storage room.  I used it recreationally a few times a year, at the most.  My new city has a bus system and limited streetcar service but there is no extensive subway system.  Although I can walk to a Whole Foods easily from my apartment, I find the prices ridiculous even after Amazon cut a few items after acquiring Whole Foods earlier this year.  The regular grocery store is about a mile away and requires walking through some neighborhoods that don’t seem all that great.  I prefer biking through those areas rather than walking.  I used to go to coffee shops (where I often do some reading or work on my laptop) primarily by subway and now prefer to use my bike most of the time.  I can store my bike securely inside my first floor apartment which makes it easily accessible.

Securing the Bicycle

Although I feel quite safe in my new neighborhood, crime statistics suggest that I should be worried about theft.  For the limited recreational use of my bike in my old city, I had a cheap lock that I purchased at a CVS for $10.  Any competent criminal would laugh at that lock and defeat it in seconds.  Clearly, I needed a new way of securing the bike.

In general, you have a choice between securing your bike with a cable lock or a U-lock.  A cable lock can easily be cut using bolt cutters and isn’t really a good option in urban environments with any significant level of crime.  A U-lock is harder to defeat but there are a large number of models at various price points to choose from.  Although my bike is not very valuable, losing it would be a huge hassle for me and I wanted to seriously deter criminals.  After doing a lot of research on U-Locks, I decided to opt for a Kryptonite New York Fahgettaboudit Lock which, as the name implies, is intended to deter serious criminals.  This lock is expensive and very heavy at over four pounds but looks bombproof and is visually distinct from lesser locks and (hopefully) looks intimidating.

Anyone who has seen bikes locked securely from the frame to an immovable object but missing wheels and saddles knows that thieves are willing to rip off anything that is attached to the frame.  I have “quick release” hubs for both the front and rear wheel which is great for easily removing a wheel to change an inner tube or to perform other service but is also an invitation for a criminal to steal the wheel.  My saddle is also secured with a quick release.  When I go to the local grocery store and will be in and out in a few minutes, I sometimes take a risk and just use the U-Lock.  However, if I’m going to spend any time in a cafe or if I’m going to Wal-Mart, I also use a Kryptonite KryptoFlex Cable to secure the wheels.  I loop the end of one cable through the rear wheel, then loop the other end through the first loop, secure the front wheel, and finally loop the cable through the U-Lock.

I have no illusions that my bike is perfectly safe, but I try to secure it to very immobile objects such as lamp posts or stop signs and I am hoping that the U-Lock is intimidating enough to make a thief think, “This isn’t a very valuable bike and it would take a long time to defeat the lock so I’m going to move on to something easier.”

Carrying Items on the Bicycle

Some people are satisfied with carrying what they need in a backpack but this gets very old and very tiring quickly, especially in the summer heat.  A backpack is not a great way to carry anything on a bicycle and fortunately there are much better ways to secure many things to a bike.  For those who use a bike both for recreational purposes as well as getting around town, it is important to come up with a strategy that doesn’t encumber the bike with permanently attached accessories that would weigh down recreational rides.

Cargo Racks

For those who have very limited needs, a front basket might be sufficient but most of these baskets can only carry small and relatively lightweight items without making the bike handle poorly.  Also, having a front basket on a mountain bike that might occasionally still go off-road would make very little sense.  I clearly preferred the idea of carrying items on the back of the bike and doing so requires buying a cargo rack.  Although a rack is permanently fixed to the bike, a good one should not add too much weight or be noticeable when riding recreationally.

One of the key goals of setting up my bike was to keep things very simple and easy to use.  The idea of spending a lot of time securing things to my bike was unappealing and would make me less likely to use the bike.  I decided to look for a high quality cargo rack that would support “quick release” accessories such as panniers.  Many lower end racks do not support “quick release” products.  In such cases, straps and bungees are used to secure things to the rack.  I wanted no part of using straps and bungee cords on a daily basis so I decided to purchase the Ibera Cargo Rack which supports a variety of Ibera quick-release accessories.  At around $25, the rack wasn’t particularly expensive and it was very easy to install in about ten minutes.  It is rated to support up to 55 pounds which seemed adequate for my needs.

Cargo Trunks

When I first purchased the cargo rack, I started looking at all kinds of Ibera accessories that I could attach to the rack using the quick-release feature.  However, I wanted to start slowly and experiment with one of their products before purchasing all of the gear that I would eventually require.  I decided to outfit the bike to make quick trips to my local grocery store as well as trips to a coffee shop about three miles from my apartment.  A cargo trunk appeared to be the perfect first accessory to purchase for my new cargo rack.

A cargo trunk rides directly on top of a cargo rack.  Most trunks on the market appear to be intended for commuting and have a large inner compartment with several side pockets.  What I really wanted to do was to be able to go to the grocery store and load up a basket with perishable items and then bike home.  This was during the height of summer with typical ambient temperatures in the 90s.  I decided to go with the Ibera Insulated Cooler Trunk Bag.  This product has proven to be perfect to carry a limited amount of groceries.  It contains an inner insulated compartment that has a zipper enclosure.  This compartment can be removed from the trunk to create more capacity and to clean, if necessary.

How much can you really carry in this trunk?  I’ve been able to carry about five days of groceries for one person in this bag without any difficulty. Sometimes, I have strapped an additional bag with a light item (like a loaf of bread) on top of the cooler and this has proven secure and reliable.  I walk through the grocery store with this bag and items are placed directly into it at checkout which eliminates the need for paper or plastic disposable bags.  At slightly under $50, this isn’t a cheap bag by any means but it is reliable, clips on in seconds, and seems durable after several months of use.  I’ve also been able to carry a number of books, my iPad, and other items when I go to a coffee shop.  However, the bag is not large enough to accommodate my 15 inch laptop which I continued to carry in a backpack.


A few months ago, I borrowed a car to make a large Wal-Mart run and purchased enough household supplies and non-perishable food for several months.  But this was just a stopgap step that I took knowing that I would not have regular access to a car and that my bike was not yet set up for larger loads.  I could continue borrowing a car but living the car-free lifestyle implies that regular tasks should be done without a vehicle.  In order to carry larger loads, I needed to consider buying a pannier.

Panniers ride on each side of a cargo rack and, ideally, do not prevent the use of a cargo trunk.  Since I’ve been satisfied with the Ibera trunk bag, I decided to purchase a set of Ibera quick-release panniers.  These panniers cost about $80 and have a very large capacity on each side with a secure quick-release attachment system.  Each pannier has a rigid back, side, and bottom making it easy to fill up the bag with various items.  At Wal-Mart earlier today, I was able to place a large container of oatmeal, two jars of pasta sauce, two jars of salsa, four cans of beans, and several other items into just one of the two panniers.  The panniers and the rack appeared more than capable of handling whatever I threw at it.

Each of the panniers can also accommodate my 15 inch laptop, although I have yet to use the panniers for this purpose.  Some care needs to be taken to ensure that a laptop is not damaged by bouncing around the pannier.  I plan to put the laptop in a sleeve, then in a small backpack, and finally in the pannier.  Hopefully this will protect my laptop and eliminate the need to use my backpack.  In terms of durability, both the bag material and the quick release mechanism seems robust but only time will tell how well the bags hold up.  They seemed to carry well on the bike with no excessive movement when loaded or unloaded.

There are many types of specialized panniers on the market.  For example, you can purchase the Banjo Brothers Grocery Pannier or the Bushwacker Omaha Pannier, both of which are sized to perfectly fit a paper grocery bag.  For someone who is only going to use the pannier for grocery store runs, this could work very well.  Alternatively, one can purchase a simple metal rack such as the Wald 535 Rear Carrier Basket.  The advantage of the basket option is that it doesn’t have to be removed from the bike like panniers because criminals are unlikely to be interested in it.  Panniers have to be removed and carried into stores.  However, I would hate to have a metal rack attached to my bike at times when I don’t need the capacity.  The Ibera panniers did not cost much more than these less desirable options and should provide more utility in the long run.

Riding With Heavy Loads

Some people might object to riding a bike under heavy load but this has never been a problem for me.  Thinking back three decades to my days as a newspaper carrier, the main thing to remember is that it takes longer to stop and it is a good idea to keep your momentum while moving, as long as this can be done safely.  I probably had 50 pounds in my trunk bag and panniers today at Wal-Mart (see the picture at the start of this article) and the bike did not handle poorly or feel unsafe.  It was also not hard to get moving when using a low gear and I just rode home relatively slowly.

Did I buy absolutely everything that I would put in my shopping cart if I had a car in the parking lot outside?  No, I did not, but mainly because this was my first run to Wal-Mart using my new system.  I also obviously kept an eye on the total volume in my cart to ensure that it would fit into the panniers and the trunk.  It would have been ideal to load these items into the bags while shopping but that would probably have looked like shop lifting to security personnel.  As it was, security asked me about the bags at the bottom of my cart as I was leaving the store.  So I just kept an eye on total volume and then packed up the panniers and the trunk bag in the parking lot.

Although the roads are bumpy around here, the dozen eggs in my trunk bag and the light bulbs I purchased survived the trip home perfectly intact.  One good tip is to by frozen vegetables (corn is ideal) and put that at the bottom of the trunk bag.  It serves as a substitute for ice and keeps everything in the bag very cold.  Surround the eggs with something soft that you’re buying anyway, like tortillas or bread.  Some common sense goes a long way to ensuring a successful shopping trip.


For my particular needs, a bicycle, walking, and occasional bus and streetcar use is perfectly adequate.  In fact, owning a car would be a hassle in terms of parking and maintenance and the DMV around here is a nightmare when it comes to registration.  The city also requires periodic “safety inspections”, no doubt for the benefit of politically connected local mechanics.  Insurance rates are sky high compared to my old city due to higher catastrophe and theft risks.  I have rarely felt like I would prefer using a car and have found Uber to be a good solution for those rare occasions.  If I really needed to use a car, I could borrow one or rent a car at one of various locations in the downtown area about four miles away.

There are obviously people who either want to own a car for recreational purposes or are convinced that they need to own a car for daily use.  There’s nothing wrong with owning a car but I would say that for most people, it is a luxury item best suited for specialized uses, not a necessity needed for daily life.  I have considered the merits of an electric bike, like one of the attractive models made by Juiced Bikes, but  I live in a flat city and I’m in very good shape.  My 20 year old bike is fine.  But one of the electric cargo bikes offered by Juiced or other manufacturers might be a great option for people who have more intense needs such as safely transporting children or heavy loads.  If you’re not in great shape and feel like a car is a necessity, consider an e-bike as a compromise.  In most cases, insurance and registration are not required.  I don’t need an e-bike, but I’m tempted.  If I end up moving to an e-bike, I will review it on this site.

Making Sense of Obamacare Open Enrollment

“I know that there are millions of Americans who are happy, who are content with their health care coverage — they like their plan, they value their relationship with their doctor.  And no matter how we reform health care, I intend to keep this promise:  If you like your doctor, you’ll be able to keep your doctor; if you like your health care plan, you’ll be able to keep your health care plan.”

President Obama, June 11, 2009

Health care is a big business in the United States. This sector of the economy consumes over 17 percent of Gross Domestic Product, a figure that has crept up steadily over the past few decades.  The health insurance system in the United States is a mishmash dominated by private insurance provided by companies to their employees as fringe benefits and government programs designed to insure the poor, the elderly, veterans and other groups.  Individuals who are not covered by their employers and do not qualify for government programs have often had difficulty obtaining health insurance in private markets.  Those who obtained coverage before encountering major medical issues could generally find affordable coverage but those who attempted to buy coverage only after getting sick typically could not buy coverage at all or only at high cost.  This caused a great deal of social dislocation for individuals facing steep medical bills and for hospitals required to provide care to all who requested treatment, even those with no ability to pay for services.

The Affordable Care Act, popularly known as “Obamacare”, became law in 2010 and has taken effect over the past several years.  Obamacare attempts to provide access to health insurance to individuals regardless of pre-existing conditions by eliminating medical underwriting.  In other words, insurance companies are required by law to accept all applicants.  Premiums are regulated and cannot vary based on health risks, with the exception of surcharges for smokers.  All insurance plans are required to cover a set of “essential benefits” and are further divided into various “metal categories” such as bronze, silver, gold, and platinum based on the level of coverage provided, deductibles, and other key variables.  A very complex system of subsidies was put in place to help individuals and families with incomes up to 400 percent of the federal poverty level pay for premiums and new taxes were imposed through payroll taxes and investment taxes on higher income taxpayers.  Obamacare has survived numerous legal challenges and attempts to “repeal and replace” the law have failed.

It appears that Obamacare is here to stay and whether one supported or opposed it, coming to terms with it is no longer optional.  The law includes an individual mandate requiring one to purchase insurance or to pay a penalty.  Although the Republican tax proposal that passed the Senate recently eliminates the mandate, it is doubtful that a mandate repeal will make it into the final tax law.  With open enrollment for 2018 ending on December 15, those who wish to purchase health insurance on the Obamacare exchange have only a few more days to do so.

Note that this article covers the process one would go through to purchase private insurance on the Federal Obamacare exchange and ignores the process of applying for Medicaid.  Obamacare offered partial funding to states that wished to expand Medicaid but not all states have opted in.  In general, most readers of this site will want to obtain private coverage rather than rely on Medicaid.  Also, this article only provides links to which is the federal exchange that is used for residents of states that do not have their own exchange.  Certain states have opted to set up their own exchanges.  In most cases, these exchanges should work similarly to the federal exchange but the process will vary.

Obamacare Subsidies Demystified

Obamacare includes a complex system of subsidies that are intended to help individuals and families with incomes below 400 percent of the federal poverty level afford health insurance premiums and out-of-pocket costs.  The following excerpt from explains the types of subsidies available depending on where one’s income falls relative to the federal poverty level:

The 2017 federal poverty level for an individual is $12,060 and is higher for households with multiple people (for example, a four person household has a federal poverty level of $24,600).  These levels are documented on the HHS website.  Poverty levels are uniform for all states except for Alaska and Hawaii which have slightly higher levels (long suffering residents of high costs states like California and New York might wonder why their poverty level is the same as low cost states like Arkansas and Mississippi but that’s a digression for another day … )

What is “income” for purposes of Obamacare?  One must calculate expected modified adjusted gross income (MAGI) for 2018 to determine subsidy eligibility.  This is essentially the adjusted gross income (AGI) line on tax returns plus certain additional income sources such as tax-exempt income, untaxed foreign income, and untaxed social security income.

A key point to remember is that Obamacare subsidies are triggered based on income only and have nothing to do with your net worth.  

This is particularly important for individuals in the “early retirement” community who have achieved financial independence and no longer obtain their income from traditional employment.  Your expected 2018 income is all that matters when it comes to determining subsidies during open enrollment.  This means that you have an opportunity to plan your 2018 income in order to achieve a desired level of subsidy.  The best way to view this is to consider Obamacare subsidies in the context of your overall tax and income situation for 2018.  If you have flexibility regarding legal ways to alter recognition of taxable income, this can be used to your advantage when it comes to purchasing health insurance.

There are two distinct types of subsidies provided by Obamacare:  premium tax credits and cost sharing subsidies.  Each type of subsidy has complex rules and will be discussed separately.  Before proceeding, one should visit and enter the number of people in your household and your home state.  You will then be presented with state specific guidelines pertaining to your situation.

For example, the following is presented to someone applying for coverage who lives in a household of four people in Kentucky:

Family of four living in Kentucky

Premium Tax Credits

Premium tax credits are refundable tax credits provided to help pay for health insurance premiums for those who have income below 400 percent of the federal poverty level.  These credits are “refundable” because they are paid out regardless of whether the taxpayer has any income tax liability.  One can choose whether to apply the premium tax credit directly to the monthly premium paid for health insurance or to receive it in a lump sum when filing federal tax returns.  Most individuals will opt to have the subsidy applied to reduce monthly health insurance payments.

Unfortunately, there appears to be no way to obtain a table showing the subsidy levels one would qualify for based on various income level ranges.  Instead, it is necessary to go to and enter your income repeatedly to manually generate a listing of subsidy levels for various income levels.  One can browse plans without creating an account.  You will be asked for your ZIP code and basic information such as your household size, age, sex, and whether you use tobacco.  You will also need to estimate your 2018 income.  This will be followed by results such as what appears below (for a 25 year old with $25,000 income – this will also potentially vary by state):

This indicates that you qualify for a $184/month premium tax credit as well as “extra savings” that pertains to cost sharing subsidies (discussed in the next section).  Subsequent screens will display all plans that exist within the region you live in along with subsidized premiums that you would pay after applying the $184 per month credit.

In order to determine how the credit varies based on income, you can change your income (and other details) by clicking on the “Edit” button at the top of the page where plans are displayed:

For example, how much would the premium credit be if income drops from $25,000 to $24,000 per year?  After editing income, it turns out that the premium credit increases from $183.60 to $195.15 per month.  You can repeat this process as many times as you would like to obtain a table of subsidy levels based on income.

What you really want to do is generate a table showing the level of premium subsidy for income at various levels.  It might be useful to create a table such as the one below which shows how subsidy levels vary. In this new example, we examine the level of premium subsidy available to a middle aged non-smoker living in a southern state:

Note that in this example, $16,643 is the minimum income required for premium subsidies on the exchange.  Incomes below this level would push the applicant into Medicaid which we are not considering in this article.  Note that $48,240 is the upper limit for subsidies at 400 percent of the federal poverty level.  Also note how the subsidy suddenly drops from $62.38 to zero if income exceeds 400 percent of the poverty level by even one dollar! 

What if you estimate your 2018 income incorrectly?  When you file your return for 2018, there is a reconciliation process that will ensure that any premium subsidies paid on your behalf during the year is correct based on your actual income.  If your income is higher than expected, you will have to repay the excess credits.  If your income is lower than expected, you will receive additional tax credits even if you do not have any income tax liability. For those who are totally unsure about their income, it is possible to not have any credits applied to insurance premiums during the year and settle up with the IRS when your 2018 tax return is filed.  The choice of whether to obtain credits during the year is up to the individual.

Cost Sharing Reductions

Cost sharing reductions are provided to those who have income between 138 – 250 percent of the federal poverty level and apply only to silver level plans.  These cost sharing reductions are designed to reduce out-of-pocket expenses during the course of the year by lowering the deductible and out-of-pocket maximum for silver plans.  In many cases, the lower deductible and out-of-pocket maximum makes silver plans resemble much more expensive gold and platinum plans.

These cost sharing subsidies are controversial and President Trump recently took steps to halt cost sharing subsidies paid to insurance companies.  However, for 2018 at least, insurers must still provide these subsidies whether they are reimbursed by the government or not.  As a result, individuals can take full advantage of these subsidies when making decisions for open enrollment.  Note that unlike premium credits, there is no settlement process required for excess cost sharing subsidies received in a given year if income estimates prove to be incorrect.  This means that even if your income turns out to be higher than what you specify when enrolling for a plan, you still will benefit from the lower out of pocket costs and will not be liable to pay back these benefits.  Obviously, as a matter of integrity, one should not purposely underestimate income to get these subsidies but it is good to know that an inadvertent increase in income will not result in a large bill to repay these subsidies when it comes time to file taxes.

Reviewing Subsidy and Premium Levels

There is no way to see a table listing premium subsidies, premiums for offered plans, and cost sharing subsidies based on various incomes so it is necessary to procure this information manually.  The table below is an example for a single middle aged male living in a southern state.  The table lists the level of premium subsidy based on income along with two sample plans:  one at the bronze level and the other at the silver level.  Only the silver level qualifies for cost sharing subsidies which appear as lower deductibles and out-of-pocket maximums (Max OOP).  Note that your situation is bound to be different so this table should be used as an example only.  You will have to compile similar information from for your own unique situation and then apply a similar analysis.

The following points are important:

  • Premium subsidies are only available from 138 – 400 percent of the poverty level (FPL) which is a range from $16,643 to $48,240.  Those who have incomes below $16,643 are referred to Medicaid in states that have expanded Medicaid and those who have incomes above $48,240 will have to pay full freight for health insurance with no subsidies whatsoever.
  • For those at very low incomes, such as $18,000 per year, a bronze plan is available at almost no cost but has a substantial $6,500 deductible and a $7,350 out-of-pocket maximum.  At that income level, however, a silver plan is available for $59.78 per month and has a very small $100 deductible and $1,900 maximum out-of-pocket thanks to the cost sharing subsidies.
  • For those with incomes of around $30,000, the bronze plan is $151.44 per month with the same high deductible and out-of-pocket maximum.  At this income level, which is just slightly below 250 percent of the federal poverty level, one still qualifies for cost sharing subsidies as well, although at a reduced level.  In this case, the silver plan has a premium of $201.41 per month with a deductible of $2,000 and an annual out-of-pocket maximum of $4,700.   Note what happens when income goes from $30,000 to $31,000:  the cost sharing subsidies are lost and the silver plan’s deductible rises to its “normal” unsubsidized level of $3,200 with a maximum out-of-pocket of $6,600.
  • If income is right at 400 percent of the federal poverty level of $48,240, you still qualify for a small premium subsidy but if you earn just one dollar more, you lose all subsidies!  Earning that additional dollar could cost you nearly $750/year in lost subsidies!  Clearly, caution is called for when one is approaching the income limits for Obamacare subsidies.

Selecting The Right Plan

In the example above, obviously the bronze plan will be cheaper for someone who ends up not using any health care services, or only going for an annual physical which is covered by all Obamacare compliant plans without payment of a deductible.  However, those who anticipate using more health care services would benefit from the silver plan, especially if income can be targeted to a level that results in lower deductible and out-of-pocket maximum levels thanks to the cost sharing subsidies.

Controlling Income – The Two Year Cycle

The people who Obamacare was intended to help generally cannot control their income level from year to year other than working more or less hours and, of course, seeking promotions and raises.  However, people who are financially independent and derive income from their investments generally have far more control over their taxable income in any given year.  These were not the people Obamacare intended to help since the rationale for the subsidies was to help people with limited financial means.  Nevertheless, Obamacare has no wealth test, only an income test, and anyone with the incomes specified in the law can take advantage of subsidies.  Whether you choose to do so or not is entirely up to you.

One suggestion for financially independent people with control over their income is to adopt a two year cycle.  In the first year, income is tightly controlled in an attempt to minimize taxable income as much as possible.  The goal would be to obtain a significant premium subsidy and also fall within an income range that qualifies for cost sharing subsidies.  A silver plan with a low deductible and out-of-pocket maximum should be selected.  During the year, seek as many medical services as needed including preventative services that might have been deferred.  The goal should be to end the year having consumed all plausible medical services – not wasting medical services but consuming all that is conceivably appropriate.  The following year, make no attempt to limit your reported income and reconcile yourself to not qualifying for any subsidies at all (or perhaps only a minimal subsidy).  For the second year, purchase the cheapest bronze plan that is offered on the exchange.  Go for your annual physical, available without paying a deductible, but otherwise avoid any discretionary medical services.  For the third year, again limit income and purchase a subsidized silver plan and seek out all conceivably necessary medical services.  And so on …

This process can be repeated on a two year cycle as long as one is healthy.  For those who are in poor health, it will almost always make sense to opt for a better policy (silver or above), so this strategy is only viable for those in relatively good health.

A Note on Grandfathered Plans

President Obama’s quote at the beginning of this article stated that those who liked their health care plan prior to Obamacare would be able to keep their health plan.  Politicians aren’t known for presenting a list of caveats in small print along with political statements and this case is no exception.  It is technically true that individuals who had health insurance plans prior to the passage of Obamacare could keep those plans once the new law took effect.  However, those plans were prohibited by law from changing in any material way and remained “frozen in time” in terms of benefits and deductibles, but most certainly not in terms of premiums (which could continue to increase).  Also, because pre-Obamacare plans were not eligible for subsidies, many individuals abandoned those plans in favor of plans on the Obamacare exchanges which reduced enrollment and caused many plans to be cancelled.  Finally, health insurance in the United States is highly fragmented.  If one moves away from the service area of a health plan, it is necessary to obtain different insurance coverage.  At that point, one cannot purchase an equivalent pre-Obamacare plan.  One is required to go to the exchange to purchase an Obamacare complaint policy.

In my case, I had health insurance prior to Obamacare and was able to keep that insurance through the end of 2017.  However, after moving to a different state, I was forced to change my insurance policy.  All of the Obamacare options available to me are substantially more expensive than the cost of the grandfathered policy, although adopting the two year income cycle strategy will help to mitigate the cost differential.

It should be noted that although my pre-Obamacare plan remained in force until this year, the premium dramatically increased from 2009, the last year prior to passage of Obamacare.  From 2009 to 2017, my premium increased by 175 percent, a compound annual increase of 13.5 percent. Despite that enormous increase, the grandfathered plan continued to be cheaper than the unsubsidized cost of the cheapest bronze level plan on the Obamacare exchange.  Furthermore, the grandfathered plan had a deductible and maximum out-of-pocket limit comparable to subsidized silver plans.  In addition, the grandfathered plan allowed me to contribute $3,400 per year to a health savings account (HSA) along with a direct reduction to adjusted gross income which resulted in significant tax savings.  The only HSA compliant plans on the Obamacare exchange carry much higher premiums so I will not have a HSA compliant plan for 2018.

In all respects, I would have been far better off had I been able to keep my grandfathered plan.  Although I am not one of people of limited resources Obamacare was designed to help with subsidies, I feel perfectly justified in maximizing my use of subsidies (via the two year cycle strategy) which will only partially mitigate the negative impact of being forced out of the grandfathered plan in 2018.

Hopefully readers have gained some insight into the complicated world of Obamacare after reading this article.  Good luck and remember that open enrollment for 2018 ends on December 15 – just six days from today!

Spartan Moving 101

Simply selecting the “default option” that everyone else seems to choose can be a very expensive proposition.  In daily life, most people are creatures of habit and emulators of the people around them.  If your friends and coworkers eat out for lunch every day, you’ll find yourself with a $200/month habit if you join them every workday.  If attending a spin class followed by having brunch at a restaurant every Sunday morning is your default (rather than riding outside in the fresh air and having a picnic), you’ll easily develop a $300/month habit.  But it gets worse:  the “default option” for the rare expense that doesn’t come up often is even more prone to pitfalls for anyone choosing the default without a reasonable amount of analysis.

16 Foot Penske Truck

Most people move infrequently.  And when people move, it is often in conjunction with a major life event such as a change of employment, marriage, children, divorce, or retirement.  It is tempting to call a moving company and have them handle all of the unpleasant logistical details.  However, this can be an expensive proposition with hidden minefields including bait and switch issues related to pricing, imprecision in terms of timing of the move itself, disputes regarding lost items, and possible damage to housing when bulky items are moved by men who are often in a rush to finish the job.

How can we be more intelligent about assessing our choices and making the best decision during an inherently stressful period?  I recently was faced with the question of how to handle a long distance move.  Naturally, I wanted to save as much money as possible but not to take steps that would be “false economies” and make my life more difficult for relatively meager savings.  Money represents claim checks against resources – products and services that can make our lives easier.  My goal was to use my money intelligently while also deploying my own time and labor where it made sense to do so.  In the process, I learned quite a bit about the moving industry, the inherent pitfalls facing consumers, and the balance between spending money and allocating one’s time and personal labor.


Even for someone who lives a relatively Spartan existence, it is easy to accumulate too many possessions over time.  During the ten years I lived at my prior residence, I had accumulated much that I had not used for many years.  My simple rule is that if I have not utilized an item over the past year, the default action would be to sell it or give it away prior to the move, with some exceptions for books, long held sentimental items, and things that would be expensive or impossible to replace even if infrequently used.  I ended up selling a few items and giving away dozens of boxes of items to Goodwill prior to the move.  This lightened the load considerably and also provided about $150 to offset the cost of the move.

It is best to avoid purchasing boxes and moving supplies from a moving company.  In my condominium building, there are always people discarding moving boxes near the loading dock.  But I ended up purchasing moving boxes, tape, bubble wrap, and other supplies primarily from Home Depot, Office Depot, and Target for a total cost of about $150.  Obviously, having movers pack up even a one bedroom apartment would be a very expensive proposition, so I handled all packing myself over a period of a few days.  This process also coincided with giving away and selling many items involving judgment calls that cannot be outsourced.  It is difficult to conceive of a moving plan utilizing paid help for packing that could be called “Spartan”.

Full Service or Do It Yourself?

Here we arrive at the major decision facing anyone contemplating a long distance move.  Do you hire a full service moving company to handle the loading, transportation, and unloading of your items?  Or do you rent a truck and handle the move yourself?

My move was slightly over 1,100 miles so the prospect of a do-it-yourself move would involve a commitment of two days of time to drive the truck, as well as the associated travel costs and the cost of the truck rental itself.  In contrast, hiring a full service mover would eliminate the two days of time required to drive the truck but there would be additional costs associated with flying to my new city.  One important point to keep in mind is that when you drive a truck yourself, you retain possession of all of your belongings throughout and when you arrive at your new city, you simply unload and set up your new home.  If you outsource the job to a moving company, you will be given a “window” for delivery of your belongings, not a specific day.  You will have to provide for your accommodations during the time that your belongings are in transit.  Do not ignore that very real cost.

Full Service Quotes

I obtained full service quotes from several moving companies including Bekins, Allied, and Mayflower.  Bekins provided the lowest estimated quote online.  For my one bedroom apartment, the estimate ranged between $2,066 and $2,877 after I filled out a questionnaire regarding my belongings.  This was followed up with a home visit by a Bekins representative who quoted over $3,500 for the move without any explanation regarding why it was so much higher than the estimated range.  This is a common problem plaguing the moving industry:  bait and switch tactics are rampant.  In addition, the Bekins quote could not provide any assurances regarding the specific timeframe for delivery beyond “5 to 12 days”, and there would be an extra charge to specify a date to load the truck, a necessary condition given that my high rise building requires scheduling the loading dock.

Do It Yourself Quotes

Disgusted by the bait and switch games, I obtained several online quotes for rental trucks.  Penske proved to be the least expensive at $1,150 including basic insurance coverage, unlimited miles, furniture pads, rope, and a six day allowance.  I calculated that I would need a sixteen foot truck.  With estimated fuel economy of 11 to 12 miles per gallon, I estimated that I would require around 100 gallons of regular unleaded fuel.  With the price of fuel averaging around $2 per gallon, this would add $200 to the cost of the move, for a total of $1,350 for the truck including fuel.  Be sure to search for online coupons.  The moving industry is highly competitive and I found a coupon that saved about 10 percent off the total cost of the truck.

A full service move obviously includes the labor required to load and unload the truck whereas renting a Penske truck does not.  Here we get to a classic question of spending money versus time and physical effort.  I could physically load the majority of the truck myself and probably get help from neighbors for the few larger items I could not carry.  Or I could hire moving help on both ends of the move to make my life easier.  I opted for arranging for moving help using Simple Moving Labor which is the default referral option provided by Penske.  A two hour minimum costs $269 on each end.  It turned out that the loading of the truck required three hours due to the complications of being in a high rise building which brought the total cost to about $650 plus $100 in tips for the movers – a total of $750 for about five hours of labor.

So, the partial “do it yourself” option involved total costs of $1,350 for the truck and fuel plus $750 for moving labor, or a total of $2,100.  Comparing this to the $3,500 quote for a full service move, this implies a savings of around $1,400 to pay for my time driving the truck over two days – approximately $700 per day. It is true that I had to pay for accommodations and food along the way.  However, a full service move would not result in my belongings being delivered right away and I would have also had to either rent a car or fly to my new city.  Overall, I estimate that I would have spent more on lodging and meals had I opted for a full service move due to the delay in receiving my belongings.

The Move Itself

So moving day arrived and I took a local bus to the Penske location to get the truck and was quickly faced with yet another bait-and-switch.  Rather than the $1,150 that I was quoted online (and confirmed over the phone), the hostile and unreasonable Penske employee wanted to charge almost $1,400 and it took several minutes of argument to get him to lower the cost to around $1,220.  I needed the truck and had men arriving to help load it so I paid the $1,220 and then complained to Penske over the phone and received a refund of $70.  This just goes to show that the industry seems to thrive on non-transparency and bait and switch rip-offs.  Oh, there’s one more thing:  the local Penske location wanted to give me a 26 foot truck, not the 16 foot truck I had reserved.  This would be unwieldy to drive and would consume far more fuel.  It would also require more expensive diesel.  I insisted on the 16 foot truck.

Driving a sixteen foot truck takes a bit of getting used to.  I was able to drive it to my building without issues and backed it up to the loading dock fairly easily.  I doubt that the same would have been true with a 26 foot truck.  Although I had only contracted for two men from Simple Moving Labor, three showed up but the price was the same.  They were quite efficient and had the truck loaded in under three hours.  I was on the road by around 1 pm.

Commercial truck drivers typically drive about 500 miles per day.  This doesn’t seem like that much but driving a truck is definitely more difficult and stressful than driving a passenger car.  I ended up driving about 300 miles the first afternoon, 600 miles the following day, and 250 miles on the final day.  This required two nights of accommodations ($170 – three star hotels via Priceline) as well as food and miscellaneous expenses ($80).

Unloading the truck involved parking on the street in front of my new apartment which was more challenging that backing up to a loading dock.  Driving in city and highway traffic in a larger vehicle does take some getting used to, but by the time of my arrival with 1,150 miles of experience, it was a non-issue.  Simple Moving Labor assisted with the unload in under two hours and I returned the truck, taking an Uber back from the drop off location.


I spent about $2,500 on my move in total, which is not that bad for a long distance move of over 1,100 miles.  Probably the greatest benefit of the “do it yourself” option was having control and possession of my belongings throughout the process.  Being able to simply unload and begin unpacking immediately is a huge benefit compared to waiting the five to twelve days that Bekins quoted.  I ended up saving a significant amount of money as well, although I did have to spend two days of my time driving a truck on relatively boring interstate highways.

The bottom line is that I would probably make the same choices again for a long distance move.  Hiring a full service mover does not make much financial sense and the benefits of keeping my belongings with me was an added bonus.  Whether you go with a full service or “do it yourself” approach, be sure to shop around for the best quotes and watch out for bait and switch tactics.  If you have an online quote for a truck rental, bring it with you when you pick up the truck and insist on paying the quoted amount.  Try to look at moving as an adventure and hit the open road.

Fifteen Years to Financial Independence

There are many aspects of life that seem to follow a general pattern:  What we know is good for us in the long run seems contrary to what we think is pleasant or pleasurable in the short run.  This is obviously one of the main reasons that people make poor choices regarding food and smoking on a day-to-day basis even though everyone knows, at an intellectual level, that those poor choices will eventually come back to haunt us.  Of course, the same issue exists when it comes to personal finances.  Almost everyone understands the importance of savings, but our consumer culture bombards us with constant prompts to spend in an elusive quest for immediate gratification.

How is it possible that inflation adjusted per-capita gross domestic product (GDP) in the United States has nearly quadrupled over the past seventy years, yet many people continue to struggle with budgeting to the point where accumulating meaningful savings appears to be an insurmountable task?  Take a look at the chart below from the Federal Reserve’s FRED website:

It might be hard to believe, but Americans in the halcyon days of the 1950s were somehow happy living on per-capita incomes in the $16,000 range.  To be sure, this is a per-capita number and there were large percentages of the population that were far poorer, particularly minorities suffering from institutionalized discrimination.  Nevertheless, the meaning of what it meant to be “middle class” in the 1950s and 1960s would surely be considered to be “poor” in today’s terms.

Consider the typical 70 year old individual who has lived through this remarkable period of economic progress and, assume further, that this hypothetical individual has been right at the per-capita average in terms of personal income.  The gains probably appeared to be very gradual over his lifetime, with some bumps along the way.  Most likely, he has ratcheted his lifestyle upward slowly over time, perhaps without even realizing it, so the gains never seemed that dramatic.  In contrast, let’s say that this individual had an experience similar to Rip Van Winkle and magically fell asleep in 1997 and woke up yesterday.  The 30 percent gain in per-capita GDP would likely feel much more noticeable because it was experienced all at once rather than diffused over twenty years.  We are conditioned to slow changes in our environment, and these changes blend into the background.

The Virtuous Cycle

Perhaps the most important hurdle to financial independence involves a complete rejection of the ratcheting lifestyle trap and conscious awareness of the enormous abundance of goods and services we enjoy in the United States today compared to previous generations.  There is no doubt that disparities continue to exist but, in aggregate, the United States has never been richer than it is today and per-capita incomes have never been higher than today.  Why, then, are we made to feel like we are deprived of something if we choose to refrain from continuously ratcheting our lifestyle in lockstep with real GDP?

The virtuous cycle of financial independence is simple to understand:  Consumption and savings are two sides of the same coin.  What we do not consume can be saved and invested.  The less we are accustomed to consuming, the easier it will be to accumulate enough assets to generate passive income sufficient to fund all of our consumption.  The flip side is also easy to understand.  If we consume nearly all of our income, our savings will be meager in absolute terms and will never accumulate to the point where it is sufficient to generate passive income to meet our much higher consumption requirements.

At the risk of being slightly repetitive, the benefit of a high savings rate is not only the fact that money is accumulating at a faster rate, aided by the power of compound interest.  In addition, we make it far easier to reach the day where we reach “escape velocity” and our savings produce passive income sufficient to make working for others truly optional.  And there is massive value in having that financial freedom even if one wishes to continue working for others.

The Young Married Couple

It is far, far easier to adopt a Spartan mindset early in life rather than attempting to ratchet back a lifestyle that already consumes the vast majority of your income.  The hedonic treadmill concept of psychology makes it clear that we quickly adapt to higher levels of consumption which becomes considered the “baseline”.  But the effect is not symmetrical when we cut consumption below that new baseline.  To be sure, a rationalization of spending and a reduction to lower levels can be done and has been done by many people, but it is far better to adopt the Spartan lifestyle at an early age.

Let’s assume that we are looking at the situation facing a young married couple who met in college, found meaningful employment after graduation, had two children, and are now 25 years old.  They were industrious and frugal for their first couple of years in the workforce and managed to pay off their student debt, which was modest because they attended in-state public universities and also had a little bit of help from family.  As a result of this frugality, they retained the “college lifestyle” and are still accustomed to living on a small amount of money every month (around $2,000).  The first couple of years in the workforce were successful, they had a couple of children, and they do not plan to have any more.

A good education and industrious habits have resulted in pre-tax income of $100,000 for this two income couple.  They are ready to start enjoying more of the fruits of their labor but have had a lifelong goal of achieving financial independence by middle age, not because they necessarily want to “retire”, but because they want to have the option to fully control their time.  How realistic is this goal?

Financial Freedom by Age 40

The couple is well positioned to reach their goal due to their $100,000 pre-tax income and the fact that they have diligently kept their monthly spending to around $2,000 per month.  Understandably, a couple earning $100,000 would wish to enjoy some of that income as they go through their lives rather than saving everything, but the extent to which they choose to increase spending will have a major impact on achieving their goals.

Let’s assume for the sake of simplicity that the family lives in a state with no income tax such as Texas or Florida.  Due to their married status and the benefits associated with having two children, the federal tax burden is relatively modest at around $9,400 using 2016 tax rates (CalcXML’s tax estimator was used to derive this figure).  In addition, the couple will owe Social Security and Medicare taxes of $7,650, or 7.65 percent of their gross income.  The total income tax burden is about $17,000, leaving the family with $83,000 of after-tax income to allocate.

Let’s say that the couple decides to increase monthly spending by 50 percent to $3,000 per month.  That’s a significant increase in monthly spending and should have a noticeable impact on their day-to-day lives.  This implies a savings rate of about 55 percent of their $83,000 after-tax income.  Actually, that savings rate results in $37,350 available for spending so the family can take a modest vacation in addition to spending $3,000 per month ($36,000/year) on other expenses. They have no savings to speak of today, so they are starting from scratch.

Can this really be done? 

From the standpoint of someone earning and consuming $83,000, moving to a 55 percent savings rate will seem agonizing.  But it will not be agonizing at all to this family because they are increasing their spending by 50 percent!  For them, it is a windfall and will seem luxurious in comparison to their prior lifestyle.

To be sure, spending $3,000 per month isn’t going to result in luxury living but it can go further than many people assume through intelligent and thoughtful spending. However, the upside is that this plan is very likely to result in financial independence for the couple by the time they are 40 years old.  Ultimately, it is a matter of priorities.  There will no doubt be peer pressure from coworkers and, possibly, family members to consume more given the family’s income.  That’s where self control comes into play.

A Look at the Data

Let’s get down to the specifics of this situation.  Here are the assumptions:

  • The couple earns $100,000 pre-tax and retains $83,000 after tax.
  • The 55 percent savings rate results in annual spending of $37,350 in the first year.
  • The family achieves a 1 percent real increase in income annually.  In other words, if inflation is 2 percent, the assumption is that the family’s nominal income will rise by 3 percent.  The savings rate stays constant over time, meaning that the family increases both real spending and real savings by 1 percent annually.
  • The real return on investment is assumed to approximate 5 percent.  The Standard & Poor’s 500 stock index has generated real returns of approximately 5.4 percent over the past twenty years according to an investment calculator that uses data provided by Robert Shiller.
  • Assume a withdrawal rate of 3.5 percent of savings.  Once the family reaches a savings level where a 3.5 percent withdrawal exceeds annual spending, we consider them to be financially independent.

It is important to emphasize that the figures that appear in the table below are adjusted for inflation and represent real purchasing power using 2017 dollars.  Also, note that the family is not totally deprived of increases in their standard of living which we allow to rise by 1 percent annually.

The table shows the starting balance of the family’s savings (which is initially zero), the annual investment assumed to be made in a lump sum at the end of the year, and the ending balance of savings assuming the additional investment along with the 5 percent return.  Obviously, in reality, the return will not be a smooth 5 percent but will vary along with the gyrations of the stock market.  The final two columns show the family’s annual spending along with the potential withdrawal rate based on the year-end savings balance.  The green rows show years when the potential withdrawal exceeds the family’s annual spending – that’s the point at which financial independence has been achieved.

Is it surprising that the family can achieve millionaire status (in real, inflation adjusted dollars) in just fourteen years and be financially independent in fifteen years?  Not really, because the power of saving 55 percent of after-tax income coupled with compounding of returns has combined to turbo charge the size of the portfolio.  We can see this effect accelerate further after year fifteen, should the family choose to continue working rather than retire.  Within 30 years, the family will have savings of over $3.6 million.  Even more importantly, that level of savings would allow for annual spending of nearly $127,000, far in excess of what the family is accustomed to.

The Other Path

This is a hypothetical example and the lives of real people including those reading this article will invariably be less perfect and more complex.  However, the basic principle remains valid.  The path to financial independence involves harnessing the virtuous cycle of limiting consumption and saving an unusually high percentage of income.  Doing this will almost inevitably result in financial independence due to the power of compounding over long periods of time.

But let’s briefly consider the more typical scenario where the family has taken the advice of financial planning “experts” and saved only 10 percent of after-tax income.  Ten percent is considered a “high” rate of savings, and it is compared to the majority of people, but it is totally insufficient to result in savings that will ever replace the family’s much higher level of consumption.  Leaving all other assumptions unchanged but changing the savings rate from 55 percent to 10 percent yields the following scenario:

The family is consuming nearly $75,000 per year and saving a paltry $8,300.  After 30 years, the savings balance is just over $650,000 which would support annual withdrawals of $23,000, but by that time the family is accustomed to spending over $100,000 per year.

At the age of 55, the couple is not financially independent, and not by a long shot.  They can both choose to continue the status quo and work another ten years.  At that point, they would finally reach millionaire status with savings of $1.2 million which could generate close to $43,000 in annual withdrawals, but by then they are accustomed to spending over $111,000 per year.  So, at the age of 65, the couple will have to make some tough choices.  They can cut their consumption and start taking Social Security and should be able to retire.  However, cutting consumption will not be any fun, having been accustomed to higher spending for decades, and they will have little margin for error should unexpected expenses come up.


The pursuit of financial freedom is not for everyone.  Many people will never do it because they will allow a ratcheting lifestyle to absorb all available resources.  Or, as in the “other path” scenario above, they might follow the advice of a “financial expert” and save 10 percent of income and be able to retire by age 65, but not without making compromises after a lifetime of being accustomed to much higher spending.  In contrast, thoughtful choices early in life can yield an alternate outcome – financial freedom in early middle age that allows for many additional choices later in life.

Some will inevitably object to the entire premise by claiming that the scenarios completely ignore the utility the couple would get from a higher level of spending over 30 or 40  years compared to the more restrained spending that would allow for early financial freedom.  This isn’t entirely invalid since additional spending should lead to increased utility, but beyond a certain level that spending isn’t correlated with a higher level of happiness.  Instead, the hedonic treadmill takes over.  We become accustomed to the higher level of spending and will notice it when it is gone, but will not get much out of in on an ongoing basis.

Ultimately, the choice is yours to make.  And the choice isn’t restricted to a couple that is just starting out either.  Someone who is 40 years old could employ the exact same approach to reach financial independence by age 55.  The difficulty is that a 40 year old would likely have to adjust spending downward in order to implement the strategy, but “difficult” isn’t synonymous with “impossible”.  The tangible and intangible benefits of financial freedom cannot be reasonably attained without making at least a few sacrifices.

Readers can download the spreadsheet used to develop the scenarios above and play around with the assumptions.

Disclaimer:  This article is not financial advice.  Seek the advice of a financial professional if necessary.