VTINX (Vanguard Target Retirement Income) vs. VWINX (Vanguard Wellesley)

Republicans have an issue ready-made for them that will secure their legacies for a generation: Social Security (and Medicare for good measure). But until Trump came along no Republican had the political sense to actually see this issue for what it is, a huge potential to expand their voting base. 

Other than some teachers in a few counties, and pre-FERS government employees, everyone receives Social Security.  A huge amount of retirees rely on Social Security for the vast majority of their retirement income. It doesn’t take a rocket scientist to see the huge importance of this issue for voters.

Add the fact that the older voter actually votes in a much higher proportion than younger voters you can quickly see why abandoning the Social Security issue is bad politics. Go to where the votes are, after all.

Okay, first off, let’s establish the fact that Social Security is NOT a welfare benefit. Since 1990, every single worker pays 6.2% of his salary into Social Security.  That 6.2% is matched by the employer’s contribution. So, 12.4% of pay is being allocated to Social Security.    

Secondly, the Social Security Administration only takes the top 35 years of INDEXED earnings into calculation to determine one’s benefit.  This means the lowest years of your earnings years are most not likely included into your benefit, yet, you did pay taxes in those years.  

For instance, in 1989 I was a Private in the Army.  I paid FICA tax on my $7,854 of earnings that year. However, because I was all of 19 then, and didn’t make much income, it’s safe to assume that year of taxation will not be used to calculate my benefit. Again, the Social Security Administration only takes the highest 35 years of indexed earnings to determine your benefit.  This means that if you had earned income for 45 years, 10 years of those earnings are not included in your benefit. 

So, let’s just nip in the bud once and for all that Social Security is a “transfer” payment similar to other welfare programs like Food Stamps. It’s not. One could make an argument about Medicare because we don’t pay nearly as much into Medicare as we do into Social Security but I’d challenge that too, as both employee and employer are paying 1.45%. (Medicaid is a whole different thing which we won’t discuss here.)

Hopefully, we’ve established that not only is Social Security important to most Americans but to treat it as a welfare benefit is not only disingenuous it is demeaning too to the voting population. Don’t do that!

However, Social Security, like most pension programs, is not on financially secure ground. It’s not nearly as bad as naysayers claim, though. Just read the Trustees report for Heaven’s sake!  The system’s projections are based on three scenarios; Low-cost, high-cost and intermediate.  The low-cost could be looked at as the best case scenario; the high-cost, the worst case and Intermediate is what we hear about when the media reports on Social Security “running out of money in year 2034.” 

Now, there is a lot that goes into the projections of Social Security; Interest rates, labor force, GDP, but probably most important is the actual unemployment rate.  The unemployment rate used in the low-cost, i.e., best case scenario, is 4.6% until 2030 and 4.5% from then until 2095. The intermediate scenario, which again, is what is reported, is 5.5% each year for the next 70 years. 

Wanna guess what unemployment is now?  3.6%.   Think that’s an anomaly? Well, let’s take a look at Japan. It’s 2.4% and it’s been under 4.5% since 2012.  Does anyone actually think Japan’s unemployment rate will breach 5% anytime soon? I don’t.  In fact, I argue our economy is likely to follow the Japanese model, low unemployment, low inflation, low interest rates and low GDP as opposed to the insanity of the Nixon years, with high interest rates, unemployment and inflation. 

What we can take away is that Social Security, in my opinion, is not insolvent by any stretch. But it can be strengthened and expanded. 

Let’s talk about how Trump and the Republicans can cement their legacies for a generation, similar to how FDR did for the Dems.  Strengthen Social Security in order to INCREASE the payout to middle and lower income retirees. It’s so easy to do this too. 

You need to understand how Social Security calculates your payout.  They take your top 35 years of Indexed Earnings, add those together and then divide by 420 to get your Averaged Indexed Monthly Earnings (your AIME).

They then divide your AIME by 3 separate bend points.  The first bend point you get 90% of your first $960 of your AIME.  The second bend point you get 32% of the next $4,825 of your AIME. Anything above $5,785 you get 15%. 

To show you how this works let’s say over the course of your top 35 years of earnings you made an index-adjusted $50,000 a year.  In that case, your total indexed earnings are $1,750,000. You then divide that amount by 420 to get an AIME of $4,166.

You will receive 90% of the first $960 of that AIME. And 32% of the remainder.  So, $960 *.90 = $864. $3,206 * .32 = $1,025. $1,025+$864 = $1,889. That $1,889 is your monthly Social Security benefit at your Full Retirement Age which will be between 66 and 67 depending on the year you were born. 

In this example, Social Security will replace about 45% of your gross income.  Given how much you and your employer actually contributed to the program over the course of your decades in the workforce $1,889 a month is not a great amount of retirement income. 

Oh yes indeed, I know “Social Security was never supposed to be the sole source of retirement income…” etc… Yeah, and that was when the taxes paid into Social Security was all of 1.5% of pay. It’s since MORE than quadrupled. In fact, for many workers FICA is the biggest tax they pay. 

So save your sanctimonious cries of people should have saved more.  They DID save! In this program called Social Security and now they aren’t getting out a reasonable benefit for the amounts they put in. 

The simple way to rectify this is to increase the 2nd bend point from 32% to 50%.  This would increase the benefit of that $50,000 worker by 30% to $2,467 a month. Social Security would then provide a much more reasonable replacement rate of nearly 60% which is actually right in line with what most people will need in retirement.  If they were able to save more, fantastic. If not, at least they’ll have a bit more comfort for all the years they labored and paid taxes into the system.

How will this be paid for? One way would be to incorporate Social Security taxation on all those with annual income over $1 million. Not just earned income but all income. Qualified Dividends and Long Term Capital Gains are still taxed preferably to Ordinary Income, by the way. So, while the extra Social Security tax would be new it won’t eliminate the huge benefit in QDI and LTCG tax rates. 

How to pay for it is something actuaries can number-crunch and the devil is always in the details anyway.  However, to focus solely on cost while avoiding the huge political benefit of the increase is just bad politics. The middle class is rapidly becoming the GOP base. /it’s the middle class who will benefit most by this proposal and that includes many groups of voters who for generations have not even given the GOP the time of day, primarily black voters. 

If the GOP were to move just 10% of black voters to, all the while retaining their grasp on middle class whites, the left would be done for. 

And how glorious that would be? To debate technical issues of a Social Security benefit increase rather than having to defend from such nonsense as “they’re gonna put you back in chains.”

It’s time the GOP take it to them. Social Security is the way to do it. Do not walk away from this opportunity. Grasp it and win, bigly. 

 

 

 

You’d like to get some income off your portfolio, be it in retirement or otherwise.  You are also a fan of Vanguard. So, you’re sitting around looking at two funds that seem appealing, the Vanguard Target Retirement Income Fund (VTINX) and the Vanguard Wellesley Fund (VWINX). 

Both have roughly the same mix between stocks and bonds.  As of this writing (2/2020), VTINX is 30% stocks and 67% bonds. Whereas the Wellesley Fund is 36/58.  Wellesley has nearly 4% cash while VTINX carries about 2.50%.

Both funds maintain the low expense ratios of which Vanguard is known for; VTINX at .11% and VWINX at .23%.  VTINX has a turnover of 10% and VWINX 28%, so both rather funds have quite low turnover rates. 

But that is where the similarities end.  VTINX is a fund of funds of sorts. It’s diversified among 5 Vanguard index funds, to include roughly 30% exposure to international stock and bond markets. 

The Wellesley Fund is all domestic positions of individual stocks and bonds.  And is actively managed. 

It appears the exposure to the international markets for the Vanguard Target Retirement Income Fund has really hurt performance. In the 16 years since inception, VWINX has beat VTINX in annual performance 14 of those years.   Wellesley has averaged 7.19% in that time period vs. 5.44% with the Target Fund. 

That difference of 1.50% annually over 16 years turns out to have been worth $72,000 MORE for someone who invested in Wellesley than someone who invested in the Target Retirement Fund.  See the two charts below.

One could explain the difference in GROWTH to the fact Wellesley does have more stocks, right? I mean the Target Retirement Income Fund is for INCOME after all.  (Well the Wellesley Fund is actually called the Wellesley INCOME fund but we’ll let that slide for a moment.)

Check out these two charts:

In these tables, I have you starting with $100,000 invested in both funds in 2004. I also have you taking 5% a year in income at the end of each year.  Notice, the Vanguard Target Retirement Income Fund paid out a total of $83,099 over the course of that time, averaging around $5,200 a year. 

Wellesley, on the other hand, paid out nearly $95,000, about $5,900 a year. So, in the Wellesley Fund you would have received an extra $700 a year, on average, in income over the course of those 16 years. Oh, but the fun doesn’t stop there. 

Even after the higher income amounts Wellesely paid out, you also had $31,000 MORE in your portfolio balance at the end of the 2019!  THe Wellesley Fund left you with $136,000. The Vanguard Retirement Income Fund $105,000, just a fraction over what your starting value was. 

Not sure I need to say more here, actually.  Yes indeed, past performance is not indicative of future results and all that.  The facts are the international markets hurt the performance of VTINX. Again, nearly 30% of the fund was invested in the Total International Stock and Bond funds. 

So, the ONLY reason I can see investing in VTINX over VWELX is if you believe the International markets will bounce back relative to the domestic markets.  Many people, it seems the vast majority of prognosticators actually, think this. I did a video on this just yesterday where we look at some of the largest firms projections over the next 10 years, from BlackRock to Vanguard.   They ALL believe international and emerging markets will dwarf the returns of domestic. 

If you agree with the professionals by all means go with VTINX.  As for me, I’d stay with Wellesely. I simply don’t trust the international markets as much as these other folks do. 

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