Retirement Planning V: Retirement Debt Vs Selling Alphabet
Seeking Alpha Analyst Since 2017
NOTE: For those looking for the DGI Chit Chat Blog here's the link: https://seekingalpha.com/instablog/48196727-cemanuel/5208606-dgi-chit-chat-successor
I recently sold a bunch of real estate (first purchase was in 1986 when I was 23) and am investing in stocks - have gone with mutual funds for a couple of decades and formerly traded grain commodities but opened my accounts to trade individual stocks on March 8, 2017. The longer I have been in the market the more convinced I have become that Dividend Growth Investing (DGI) is the best method for building income.
I am retired, effective 12/31/21.
I have three accounts; a Taxable Account, a Roth IRA, and a Traditional IRA. I also have a small HSA I can invest with but have index ETFs in it and don't discuss it on SA.
I am managing my separate accounts as follows:
Taxable: Main purpose - to live off in retirement. Most of this will come from dividend income which will be about 70% of what I need. Beyond occasional sales to make up my dividend income gap I will do little trading in this account.
IRAs: Total return. I like dividends but as I don't expect to need to withdraw from these until RMD time I will look for more rapid dividend growth and non-dividend payers are not automatically excluded. I take dividends as cash to buy more stocks with. I will likely be more active in these accounts though I never expect to be a frequent trader.
Buying for the IRA began on 2/22/22 and was completed on 3/7/22. I am doing Roth conversions, trying to be close to the 24% tax bracket limit each year. The first was on 6/17/22.
I ended my accumulation phase of investing on 7/1/21 to build cash for retirement.
Here are my current holdings, last updated 3/2/23:
- Taxable Account: ABBV, BBY, BLK, CVS, GD, ITW, LMT, LYB, MO, MSFT, NEE, PM, T, TROW, UNH, WHR, WSM
- Roth: AAPL, ABBV, AMD, AMZN, BBY, BMO, CHWY, CM, CRM, DG, GOOGL, KLAC, LCID, LOW, LRCX, META, MSFT, MU, NVDA, PYPL, QSR, SBUX, TGT, TSLA, WSM
- TIRA: AAPL, ABBV, ADBE, AMAT, ANTM, AOS, BBY, BMO, CM, CMI, DG, DT, F, FAF, GM, GOOGL, KLAC, LOW, LRCX, MU, PYPL, QSR, RY, SHW, TD, TGT, TROW, TSCO, TXRH, UNH, WMS, WSM
2017 Total Return: 16.2%.
2018 Total Return: 1.58%.
2019 Total Return: 31.63%
2020 Total Return: 13.57%
2021 Total Return: 32.63%
2 year/24 month return on 3/8/19 - 18.87%
3 year/36 month return on 3/8/20 - 39.61%
4 year/48 month return on 3/8/21 - 78.02%
5 year/60 month return on 3/8/22 - 113.39%*
I calculate the returns after subtracting new money added into the account however I do count reinvested dividends. For example, if I have an account worth $100,000 at the start of the year, I add $10,000 in new money and the 12/31 balance is $112,000 my return would be 2%, not 12%. With withdrawals, conversions, taxes, etc., tracking returns for 2022 and beyond is enough of a headache that I've quit doing it. Things seem to be holding up well for funding my retirement.
*Does not include the IRA
Summary
- I have a HELOC with a current 3.75% interest rate.
- My single non-dividend-paying stock is Alphabet (GOOGL).
- The pros and cons of selling GOOGL to pay off the HELOC.
Introduction
This is my Fifth Blog Post about retirement planning. These aren't a series or anything. I don't have a mental plan of what I'll be talking about or how often I'll post.
Retirement is starting to seem like a reality. After over 30 years of working for someone else my planned retirement date is now less than 2 years in the future. This morning I re-did my retirement budget and have a retirement expense that I could easily eliminate by selling Alphabet (GOOGL). Here are my first thoughts on this.
Budgeting for Retirement
Because I haven't done this in a while, this morning I re-did my retirement budget. Things are looking even better than they did last time due to my continued increase in dividend income. My dividends from my taxable account now easily cover my "core" expenses - food, shelter, health care, transportation, etc. They do not - yet - cover my entire budget which includes discretionary spending and a $10k/year vacation/travel expense. But once I rollover my retirement to an IRA - let's just say I'd have to do something really goofy to not get there.
For the purposes of this post I am going to focus on one component of my "core" retirement budget - a $500/month payment for a Home Equity Line of Credit or HELOC.
HELOC Background: I built a new home in 2014, located on the same 10-acre property I've lived on since 1994. This home is 2,000 square feet with a full basement and located about 600 feet off the road compared with the previous 900 square foot home located maybe 50' from the road. At the time I built it I knew that my next major decision would be what to do with my old (built in 1920's) barn. In early 2017 I had two separate individuals in to give me an estimate on what it would cost to repair it and in each case they said, "About $75,000 without considering the roof."
So I built a new pole barn for roughly half that, and took out a HELOC to finance it rather than pull money from my investment accounts.
Self-pity note - I love that old barn, a lot of memories and adds character to the place. But it's sinking.
The current HELOC balance is about $42,000, current interest rate is 3.75% - it's variable based on the Federal Funds rate - and I'm making a $500/month payment on it, right now $135 of that is interest, the rest is principle.
GOOGL in my Portfolio
If you've looked at my portfolio over the last year or so, you may have noticed that one company is not like the others. GOOGL is unique as it pays no dividend. Do I think it will eventually? Yes, but who can say when?
Page 26 of the latest 10-K, including the 2020 Annual Report, has the following:
"Dividend Policy
We have never declared or paid any cash dividend on our common or capital stock. The primary use of capital continues to be to invest for the long term growth of the business. We regularly evaluate our cash and capital structure, including the size, pace and form of capital return to stockholders."
I first noticed a change a year ago - prior to this they included in the statement that they had no intention of paying a dividend in the future. This wording change may mean something or it may not - at one time I thought it did. Now I've decided I'm not psychic and until GOOGL pays a dividend it doesn't pay a dividend.
I have been looking at GOOGL as something of an in-account emergency fund. If for some reason I end up short of cash I could periodically trim it to cover expenses during my expected 18-month Social Security gap. This isn't a terrible strategy. The problem is, I'm becoming more and more certain that once I roll my retirement over to an IRA I'll be able to easily meet my dividend income requirements. So that particular strategy is looking like it will be meaningless.
Plus I have cash outside of my accounts in an emergency fund, enough to cover two years' worth of expenses though to me poor planning isn't an emergency but dumbassedness. I've managed to avoid serious dumbass moves for the past couple of decades, why start now?
GOOGL vs the HELOC
Even though I'll have enough dividends to cover the monthly $500 payments without much trouble, not having to cover them and having extra dividends to reinvest (and fewer T-IRA withdrawals) is an attractive thought. There really is only one criteria that would cause me to sell GOOGL in order to eliminate the HELOC payment:
Interest rates would need to rise enough to where I would not want to keep a HELOC balance. I don't know what that rate would be. At the time I took it out I was paying 5% and that wasn't high enough for me to use investment cash to build my barn with. So I suspect the Fed rate would need to go to at least 3%, driving the HELOC rate over 6%.
How I would structure the sale: My current plan is to retire on January 1, 2023 at the latest (could be as early as 1/1/22). I'll have two months' worth of vacation days so my official retirement will be in early March. I would sell GOOGL in early 2023 as the cap gains would offset the income decline from my previous years' full employment, minimizing the tax impact. There would be some numbers-crunching needed but this would be the plan. And I wouldn't need to sell all of it, about 60% at today's price. It would reduce the amount I'd need to withdraw from my T-IRA by $500/month so a side benefit is a portion of my annual income being taxed at a lower rate.
A question to answer is, "If you're going to do this, why not do it now and get it over with?"
There are three reasons I won't be doing that.
- Taxes. The tax hit today from capital gains would be profound. Now maybe I could figure out a way to offset that between now and December 31 but right now I am not down anywhere near enough on anything else to make up for it through tax-loss sales.
- HELOC Interest Rate: Paying 3.75% for the use of someone else's money does not bother me one bit. While my current dividend yield is not above that level (unlike my fixed-rate mortgage), my annual portfolio value gains have been, easily. And GOOGL gains have been WAY over that - at its core this is exchanging an asset for a liability. The asset is great and as liabilities go, this one isn't bad.
- GOOGL: I like Alphabet and I like owning it. I think it has a lot of run left in it. No, it doesn't pay a dividend so in that sense it doesn't serve a purpose in my portfolio however there are a variety of ways, beyond increasing my portfolio value, where it could.
Another tax item: Right now I'm still itemizing my deductions for my taxes. This includes HELOC interest. I expect, mainly due to less going toward mortgage interest, that this will end before I retire. But this is another number to incorporate into the returns calculation.
Summary
This does not mean I'll sell Alphabet in 2023, even if interest rates do spike. I like GOOGL, great company, and it could be paying a dividend by then. I could just double my monthly HELOC payment if rates rise, something I could do now but have been resisting the urge to do. Financially it would make sense today to go in the opposite direction by making monthly interest-only HELOC payments and put more money into my investments. But seeing the balance decline, if slowly, is emotionally gratifying. And thinking longer-term, rates have to go up sometime don't they? This reduces my balance for when that happens.
I've run numbers on refinancing my mortgage and rolling the HELOC into it. I don't gain by doing this. My mortgage is at 3.125% fixed. Though hypothetically everything fixed vs 1/3 of the balance being variable could pay off - or not. And yes, I know you can get a 10-year mortgage at under 2% but those aren't with companies I want to be in a business partnership with. I'm seeing 2.75% as my likely rate and once you add in refinancing costs and points I just don't see the gain, plus even a 10-year would push the maturity back 2 years.
I have roughly two years to fine tune these initial thoughts and come to a decision. At the moment selling GOOGL to pay off the HELOC once I retire is a possibility, nothing more. It's not necessary but if interest rates rise it may make financial sense.
While every one of the 106 blog posts I've made (this will be 107) touches on retirement, here are the previous 4 that I consider primarily about it. I like tracking how my thoughts have changed over time. I also find it interesting that this is the first time I've mentioned the HELOC. I know it's small but it's always been there.
- January 12, 2019 - Retirement Planning I
- January 20, 2019 - Retirement Planning II
- January 12, 2020 - Retirement Planning III
- August 15, 2020 - Retirement Planning IV
Happy Investing Everyone!
In case you're wondering, the old barn is still standing. It needs to come down and once I retire I'll likely rent an excavator and make that happen. I can think of a lot of uses for the old wood, particularly using the siding for woodworking.
Analyst's Disclosure: I am/we are long GOOGL.
I am not a professional investor and do not offer investing advice. I have a college degree in Animal Science and used to train horses for a living. Would you really want to tell a loved one you invested based on something an ex-horse trainer/animal scientist wrote? I didn't think so. Please perform your own due diligence when making investing decisions.
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