# Investing for Retirement



## dfw_pilot

*Investing for Retirement*​
_"Investment success accrues not so much to the brilliant as to the disciplined."_​
Retirement Roadmap

Getting Started
Where To Invest
What To Invest In
Indexing Benefits
Asset Allocation
Stay The Course
Live On Half
Financial Advisors
The Backdoor Roth
Every Dollar Counts
Reading and Resources

Extra Reading

Taxable Accounts
The 529 Account
The Magical HSA
Annual Contribution Limits
The Mega Backdoor Roth
The Donor Advised Fund 
Qualified Charitable Distributions

_"There are many roads to Dallas."_​Nothing I write here is earth shattering or original. Some of what I cover has exceptions, and there often isn't a right or wrong way to do all of this. However, these posts will be enough to get you started. Enjoy the journey.

dfw


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## dfw_pilot

*Getting Started​*







*Overview:* Investing for retirement is very important, but for many people, it's out of sight and out of mind. Investing isn't as hard as the finance industry has made it sound. If you do it right. Write down your goals so you have a plan. Get your finances in order so as to make investing a key component of your budget. Finally, do what so few bring themselves to do: start.

For some, saving for retirement is a fun challenge that is focused and methodical. For many others, it may seem like a distant country, rarely thought about or visited. Either way, today just brought you one day closer to the day you'll need to rely on the money you've saved and invested for retirement. So, investing intelligently and consistently are crucial for success.

Investing, specifically for retirement, doesn't have to be hard, complex, or mysterious, even if the daily talking heads try to sell it to you as such. I'm not a financial guru, but would like to simply share with you some of the things I've learned along the way, _the things I wished I knew 20 years ago._

*Write down your goals*

The first step in getting started is to make an investment policy statement, or simply, a written path for your goals. It's hard to know where you are going or where you want to end up without having a destination in mind. Things like the age you'd like to retire, how much income you would like to have, what type of investments you want to have, how you want those investments allocated, and probably most importantly: how long to wait before making any changes to your plan.

Having a plan and sticking to it are important. You won't retire rich if you constantly change plans and ideas as the wind blows. New fads and investment strategies come and go, but sticking to your plan is a safe way to proceed. People not sticking to their plan is why they buy high and sell low, it's why they add years to their retirement date, and it's why people get frustrated and make poor decisions. After careful study and planning, if you still decide to make a change to your plan, sit on your hands for three months to make sure you really want to follow through.

More reading on investing plans:
Writing an investment policy.

*Get your house in order*

Prior to saving for retirement, make sure your financial house is in order. You don't want to be putting money into a Roth IRA earning 8% if you have outstanding credit card debt at 29%. Paying off consumer debt is a guaranteed 29% return on your money, which is one of the best investments out there. Also, make sure you have a decent emergency fund. That will help you sleep at night and prevent you going into more credit card debt if trouble arises. Ideally, you should have zero debt. The next best option is to only owe money on a mortgage. If you want more of the basics on getting started, I highly recommend Dave Ramsey's 7 Baby Steps to get you on solid footing. Dave's investment advice leaves a lot to be desired, but his debt reduction methods are sound, proven, and work. They worked for me. Another good "steps" plan oriented at the beginner is here.










*Start investing*

_"The enemy of a good plan is the dream of a perfect plan."_ With a goal in mind and written out, do what so many people find hard to do: start investing. If you aren't used to setting money aside monthly, it's okay to start small and work your way up, just do what you can. Great tools like Mint, YNAB, and Personal Capital are easy ways to setup and stick to a budget while seeing where your dollars are going. It may feel painful when you send money to a 401(k) or Vanguard, at least at first. Remember that you aren't losing it, but simply setting it aside for later. As time goes by, you'll get used to living on the money you have left and it gets easier with time. Pay yourself first, i.e. your retirement and savings, then live off the remaining funds.

What most people cannot afford to do, is not start. A little bit of money invested early trumps lots of money invested later. The powerful force of compounding only works with time. Investing $2K a year from age 18 to 28 at 10% return beats investing $2K a year from age 28 to 65! Let that sink in, and then let that motivate you to start saving for retirement today.

Investing for Retirement | Table of Contents​


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## dfw_pilot

*Where to Invest​*







*Overview:* There are lots of fantastic options for investing for retirement. Always start with tax deferred options like a 401(k) or IRA. Max out those accounts before looking at more creative options like a taxable brokerage account. Pay off high interest consumer debt like credit cards with 20% interest. Doing so is an immediate 20% return on investment. Finally, don't overlook the value of a Roth IRA or even an HSA.

Once you've included a spouse or significant other to help write down your investing goals, put your financial house in order, and finalized your plan to start investing, the next question is: Where to invest?

*Where to invest*

These may not apply to everyone, but the farther down the list you can go, the faster you can accumulate what you need for retirement. A good goal is to save 20% of your monthly income for retirement.

*0) Emergency Fund* Have a steady amount of cash ready to help you out in times when you'll need it most. Once your taxable account has grown to at least twice the size of your emergency fund, consider cutting your emergency fund down.

*1)* *401(k) Match* The best place to start investing is in a sponsored plan at work up to what an employer will match. If you have a 401(k) with a match of 5%, by not putting in 5% you are losing out on free money.

*2)* *Consumer/High Rate Debt* After the free money, get rid of any high interest consumer debt like credit card balances. Get serious about dumping all of the 29% interest you are paying on short term loans and credit cards.

*3)* *HSA* If you qualify for an Health Savings account with a high-deductible insurance plan, max that out next. These are called "Stealth IRA's" by many, because they have a lot of benefits. Many employers contribute to these as well, so it's not too hard to max out.

*4)* *401(k) and IRA* Investment choices tend to be a bit better in IRA's than they do in company sponsored 401(k)s, so if that's the case, aim to max out an IRA and a spouse's IRA next. Conversely, some 401(k) plans have fantastic funds at very low institutional expense ratios, like 0.01% fees. If that's true, load up on that account first.

There is always the debate about Traditional vs Roth contributions when it comes to 401(k)s and IRA's. There is always a correct answer based on math and tax rates, but behaviors and opinions can weigh just as heavily on what we do as what a spreadsheet will tell us to do. Do the math, via TurboTax or some tax planning software, and see where the best answer fits.

Generally, with a high income, it's best to save on taxes by contributing to a Traditional source. That way, high marginal taxes are deferred, and then never paid if withdrawn in retirement in a much lower tax bracket. This isn't always the case: High earners with a pension may want to contribute to a Roth source because the pension will put them in a higher tax bracket in retirement.

Generally, with a modest income, Traditional sources work best based on tax credits, as Harry Sit explains here.

If you are in between a modest and a high income, Roth vs Traditional gets tougher, and tax planning software can tell which source is best for each year going forward.

Roth investments are great because once contributed, they are tax free. A more advanced post can discuss the Roth conversion ladder, where you convert 401(k) and IRA money into a Roth while in low tax brackets near or after retirement. Another, less advanced topic is the Backdoor Roth, a must for high income earners.

The maximum contribution limit for a 401(k) is $19,000 a year [2019] and $56,000 a year when including employer contributions. The maximum contribution to a traditional or Roth IRA is $6,000 year [2019]. If you have a non-working spouse, you can contribute one for him/her as well, for a combined yearly maximum of $12,000. Once you are 50, you can increase the 401(k) limit by $6,000 and the IRA limit by $1,000.

*5)* *Moderate Rate Debt* With your retirement accounts mostly funded, look to pay off higher interest loans like on cars, student loans, or a high rate mortgage (or refinance it). Depending on how debt adverse you are, you may want to move this higher up the list, but honestly, these loans will pay off eventually, but time is on your side when funding accounts for retirement.

*6)* *After Tax 401(k)* Circle back to your 401(k) if you have more money to invest, making after-tax contributions to your 401(k) if it allows them.

*7)* *Taxable Account* Open a taxable account at a broker like Vanguard or Fidelity. Taxable accounts often get a bad rap because they sound bad: "Taxable!" but really, they offer so much flexibility and have a lot of advantages over retirement accounts. They enjoy no early withdrawal penalties, no RMD's, and lower capital gains tax rates, to name just a few.

*8)* *Low Rate Debt/Mortgage* This is where I would pay extra toward a low interest rate mortgage, if you have one, or a low rate car loan. If it's just a couple percent, I personally think you are better off investing your money before paying these off early. Again, you can always pay down your loans, but you can never go back in time to reap the rewards of compound interest by investing early. Paying off low interest debt may feel good, but realize that you are trading a lot of future money to do so. It's a personal choice, but make sure you realize the trade offs for paying extra on a low rate mortgage instead of saving more for retirement.

*9)* *Real estate and rental properties* Finally, property would be a good option after all your retirement accounts are fully funded. Rental properties are great for passive income and can act as a diversifier for the money you have invested in the stock market.

The internet is full of opinions, mine included. This order might be controversial to some, wise to others, and abhorrent to a few others. That's okay. Don't take my word for it, do your own research and work a plan that works for you. In the end, it's better to do something, than nothing at all (except maybe get suckered into buying a whole life insurance policy. *Don't* do that.).

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## dfw_pilot

*What to Invest In​*







*Overview:* Steer clear of fancy, complicated, or risky investment options. Be happy with market returns with low investment fees. Investing shouldn't be exciting, it should be boring. Plain old index funds fit the bill.

You've written down your investing goals, you've put your financial house in order, you've decided to start investing a certain percentage, and you've found the different accounts you have access to for investing. Now it's time to think about what things you should invest in inside your 401(k) and Roth IRA.

Let me also add that investing is highly personal, and _"there are many roads to Dallas."_ There are, however, several keys to smart investments that you should look out for. Deviate from those keys, and you will most likely be paying high fees for too much uncompensated risk.

The keys: Your investments should be simple to invest in, easy to understand, low cost, tax efficient, and diversified. The best thing that fits that bill for me is: *Index Funds.*

Taylor Larimore, of Boglehead fame, has read over 250 books on investing in his 90+ years, and has reached a similar conclusion. Index funds are lower cost mutual funds that follow an index, like the S&P 500, or the US Bond market. There are hundreds of index funds to choose from. The beauty of cap weighted index funds is that they are easy for brokerage firms to manage, so they are cheap to run and therefore charge low fees for you to own. They also don't get greedy by buying up too much of a hot stock. They merely mirror the market.

Investors get burned when they pile into the next hot tech stock (Snap?) and then it implodes. By simply taking the market returns and not getting too greedy, index funds help investors diversify across the entire market. The opposite of index funds might be analogous to buying individual stocks. That is very risky business, especially for a retirement portfolio. The disaster stories of people losing their entire retirement when Enron tanked was a classic case of uncompensated risk, where too much of their holdings were tied up in one company. Had those same retirees bought VTSAX instead of Enron, they would have held nearly the entire US stock market in one fund. VTSAX holds 3,575 stocks, where Enron would be a very small percentage of the total holding, avoiding such massive losses.










Everyone wishes they had bought AMZN at $19. I'd love to go back to 1984 and buy that fruit company called AAPL. The trouble is, we don't know which stocks will be the next superstars. I take a compensated risk by owning all of them. When we drive into the Home Depot parking lot, I tell my oldest daughter that she owns part of it. Same with McDonald's. Index funds don't try to beat the market, but simply provide the market returns.

_There is beauty in simplicity._ Owning four to six passively managed index funds gives you heaps of diversification, at a low cost, that you can simply buy and hold. Allow this pilot to tell you to put your investments on autopilot. You can send your money in each month and not have to worry about which stock is hot and which is not. You don't need an advisor to send you "hot stock picks" - you can simply delete those emails because they aren't necessary.

But if index funds are so great, why is there so much talk about stocks and hot picks on all the investment programs, from CNBC to radio shows? I think it all boils down to hype, trying to fill time and sell advertising. The lack of hype over index funds shows me just how solid they really are. Bill Bernstein and others have often said that the best financial advice you can get, is to tune out the financial media. TV shows, radio programs, and countless pages in the print and digital media inundate us with news about this stock or that bond, this company or that government. Tune it out. It's all noise. All that is needed is a few good index funds, but that won't fill hours and hours of programming time or pages and pages of print. What's the fun in that? What's more to discuss? Exactly. There isn't much, so tune it out and stay the course.

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## dfw_pilot

*Indexing Benefits​*







*Overview:* Passive index funds are great. They are diversified, low cost, tax efficient, easy to buy and sell, and can be liquidated quickly. They are great for beginners. They are also great for sophisticated investors who think index funds are beneath them! 

So why do I think index funds are so great? When looking at a simple S&P 500 index fund like VFIAX, it has a lot of advantages over other options like individual stock buying, actively managed mutual funds, loaded funds, or hedge funds.

*Diversification.* Like stated in the last post, an S&P 500 index fund owns the largest 505 companies in the U.S. stock market. This provides a huge amount of diversification over owning five, ten, or twenty individual stocks. Even big blue chip stocks like Coca-Cola or GM. You can also own total stock market funds or even total world funds. When you own individual stocks, you buy some and you sell some. The problem is the _person on the other side of that trade_. They are most likely someone who lives and breathes these stocks, gets paid millions of dollars a year to watch them carefully, has a complete analysis of the company's financial data, and has access to millions of dollars worth of research tools and data points. He is the person you are volleying with in stock trades. If you aren't also a stock analyst full time, there is little chance you will be able to beat those who spend millions of dollars a month on research at the big boy level of Wall Street. You can dabble a bit in stocks if you feel like you would enjoy it, but it's not a winning long-term strategy. If it's not a long-term winner, why bother?

*Cost.* This one is Yuuge. Index funds are easy to manage and run, so their cost to own, or their ER (expense ratio) is very low. Mutual funds charge an annual expense for running the fund, expressed as a percentage. Vanguard, the king of low-cost index funds, offers VFIAX, their S&P 500 fund for only 0.04%. VTSAX, their total US stock market fund is also 0.04%. This percentage is charged yearly based on your assets in the fund. A percentage like 0.04% is dirt cheap: $4 a year for every $10,000 invested or $40 per year per $100,000! Actively managed funds, loaded funds, and hedge funds charge a lot more, in the 1-2% range or "2 and 20". I used to think that _only_ 1-2% didn't sound too bad. But a calculator will prove otherwise. 








An example: $100,000 portfolio with a 0.04% ER held for 20 years at 7% return ends up being $383,900. However, with a 1% ER, it ends up being $316,500 or $258,300 with a 2% ER! While a 0.04% fee costs $3600, a 1% fee costs $67,400 and a 2% fee costs over $125,000! Fees matter. Remember: _In investing, you get what you don't pay for._ Watch for high fees. Loaded funds also charge a high fee, usually in the 5-6% range, and that fee comes right off the top of your investment. If you send your "advisor" a check for $1,000 to invest in a 6% loaded fund, you only invest $940. You are behind right from the beginning. Hedge funds often charge a 2% fee plus 20% of the profits.

Want a quick laugh? Here are five of some of the absolute worst mutual funds when it comes to fees (over 5%!). Be smarter than the people dumping money into these funds (probably through an "advisor").

Many in the financial industry will claim that the higher fees produce higher returns. This sounds logical, as an actively managed fund is working hard to beat the stock market average, and lots of people are being paid very well to make that happen. There's a problem with that logic, though. The dirty little secret is that passive (low ER funds) beat actively managed funds over the long term. The biggest reason for this is that the expensive funds first have to overcome their higher costs. If two funds go up 2% and one charges 0.04% and one charges 1.5%, the more expensive fund has a huge hurdle, just to get even with the low expense fund.

Many investors, including fund managers (that have to earn their keep with those high fund fees) end up chasing market returns, buying high and selling low, and make bets on where the market is headed. This may pay off for a few years. However, the boring old passive S&P 500 fund just keeps chugging along slowly, and over time, comes out ahead. Because my crystal ball is hazy, I don't invest in a way that requires guessing what's going to happen in the future.

My entire portfolio is only four index funds. I'm boring at cocktail parties where finance is being discussed. No one wants to hear my riveting tales of investment vanilla. I'm happy with market returns. Investor Bob, the life of the party, jumping from one hot stock to another, chasing hedge funds and new tech stocks, looks like a rockstar. And true, his high octane, high fee excitement in investing may beat my returns four, six, or eight years out of ten. But, over the long run, too many lessons from history show that a boring index approach wins out. Out of 11,000+ mutual funds, _only four_ actively managed funds have beaten the S&P 500 eight consecutive years.

*Taxes.* Passive index funds also have a low turnover rate which saves on capital gains taxes. Actively managed funds become more tax inefficient because of the churning, or turnover in stocks within the fund. An actively managed fund manager is trying to play and beat the market, and will inevitably have to buy and sell more stocks within that fund. This selling can cause capital gains to increase, increasing your tax burden if held in a taxable account. Many of the passive index funds have a turnover of 4-5% whereas some active funds can be 250%+. That gets expensive to own.

Again, everyone wants to own the next Facebook or Microsoft. If you buy the market index, don't sweat it, you already own it.

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## dfw_pilot

*Asset Allocation​*







*Overview:* Determine your asset allocation: your stock to bond ratio. Stocks carry more risk but also more reward. Once you've decided on an allocation, stick with it. Don't plan on changing your allocation but once a decade or so. Keep your allocation consistent across your entire portfolio. A simple spreadsheet or a free service like Personal Capital can easily show you where to add or remove funds to keep your allocation within the target upon which you've decided. 

Your asset allocation is the breakdown of how your money is invested. It's generally stocks and bonds, but also includes alternatives like real estate and precious metals.

Stocks carry more risk than bonds, so investors are compensated for this higher risk with higher returns. Bonds tend to balance out the risks of your equity position (stocks) and have lower returns. Again, this is all personal, but you'll need to select a stock and bond mix that gives you both the returns you want while also allowing you to sleep at night. A common rule of thumb is "Age in Bonds". As you age, you increase your bond holdings and gradually get more conservative. People recommend this so you don't get hurt as badly by a sequence of returns risk (having a large down/bear market just prior to or right after retirement). Following the age-in-bonds method, if you are 20, have an 80/20 stock to bond split, and if you are 60, have a 40/60 split. This is fairly conservative, but probably something you should consider as it's what John Bogle (founder of Vanguard) advises. Another good rule of thumb is to never have more than 75% or less than 25% bonds.

*Target Date Funds*

A simple approach to all of this is to simply pick a target date fund. These are "funds of funds" that a broker like Vanguard or Fidelity manages for you. They get more conservative as you age. A 2050 fund will have more stocks in it than a 2020 fund, for example. They tend to have low expense ratios, but not as low as buying individual funds on your own, described below. Lot's of "pro's" might scoff at Target Date Funds, but they help people stay the course, are professionally chosen, affordable, and keep people within the bounds of normal investing lanes. When investors have 30 or 40 funds, some being very obscure, they could be helped by the simplicity of Target Date funds.

You don't have to pick a target fund based on your own retirement date. Maybe you will retire around 2050 but prefer the mix of funds offered in the 2030 fund. When you find the stock to bond allocation you are happy with, buy the fund that matches that allocation.

*Buying Individual Funds*

To lower fees even farther than the Target Date funds, you can buy individual funds. In this way, you can make up your own stock to bond ratio and control that ratio very precisely.

Once you've chosen your stock to bond split, say 60/40, an easy way to determine the rest of the breakdown of your allocation is by visualization. The Finance Buff offers this helpful chart. Of your 60% stocks, break them further down into US vs International, Large vs Value, etc. Your bond allocation helps reduce risk in your portfolio. For this reason, I'd avoid things like risky junk bonds. Take your portfolio risks in stocks, not bonds. Nominal (not indexed to inflation) bond funds, like VBTLX and a TIPS fund (indexed to inflation) are good options.

​
For asset location, keep tax efficiency in mind. Most bond funds pay dividends which get taxed at your marginal income tax rate. Those should be placed in tax sheltered accounts like a 401(k) or IRA. Some bond funds have federally tax free dividends, like municipal bonds (munis) which are good for taxable accounts. Quality stock index funds are naturally tax-efficient. They have low turnover, qualified dividends (dividends taxed at capital gains rates instead of your income tax rate), and long-term capital gain rates (LTCG) which is either 0%, 15%, or 20% based on your tax bracket.

Also, with allocation and location, it makes the most sense to have one asset allocation across your entire portfolio. If you have a 401(k), an IRA, and a taxable account, treat all of those as one account when it comes to allocating your fund percentages.

*For Example*

Suppose you have $100k in retirement savings, with $40k in your 401(k), $40k in your Roth IRA, and $20k in your spouse's Roth IRA. You'd like to invest in a high quality US stock index fund (VTSAX), a high quality international stock index fund (VTIAX), and a high quality US bond fund (VBTLX) and have decided in a 50/20/30 split. Start by "filling the 401(k) bucket" first, then fill the two Roth accounts. The 50/20/30 means you want $50K in the US stock fund, so all $40k of your 401(k) should be used to purchase a stock fund. Many 401(k)s are notorious for having poor quality funds at high ERs, but most will have a stock index fund like the S&P 500. Use all $40k to buy that fund.

You still need to buy $10k of US stock, so use the first $10k of your $40k IRA to buy the additional $10k of US stock. Your target said you'd like $30k in bonds (30% of $100k) so use the remaining $30k in your IRA to buy a high quality US bond index fund. Finally, your plan called for $20k in international stock. You can use the $20k in your spouse's IRA to buy the last $20k needed to finish out your asset allocation.

There are more in-depth examples and explanations of this here.

A final note on gold. Centuries ago, an ounce would buy a man's suit. Today? An ounce will buy a man's suit. Gold is for hedging inflation, not investing. If I had 20-30 million in investments, I might consider a monster box of gold worth about $650k. I don't, however, think it's a good investment for small time investors who aren't yet even in the two-comma club in assets.

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## dfw_pilot

*Stay the Course​*









*Overview:* The best way to attain good returns is to buy low and sell high. One can accomplish this with a buy and hold strategy. Expect volatility, major ups and downs, and large market corrections. Expecting large drops helps curb the natural impulse to sell at the wrong time. Buy and hold does as well. Stay the course and play the long game. 

Now that you have a good mix of high quality index funds that you contribute to each month as you save for retirement, it's time to _stay the course._ It has often been said that the biggest detriment to your retirement savings is staring at you each morning in the mirror.

When the market drops, emotions run high, panic sets in, fear takes over and you end up doing the worst thing you could do: sell. The buy and hold strategy is very proven, but for it to work, you actually have to buy and hold. The worst time to sell is when the market is dropping, outlooks are bleak, and the world economy is tumbling (2008). This is especially true as a new retiree. As John Bogle has said when the markets are dropping: _"Don't just do something, stand there!"_ It can be tough when your family, neighbors, and the financial media are all squawking in your ear that you are crazy to be buying. I'm reminded of Mr. Potter. "When everyone else was panicking, he was buying." Why? Because he was smart and had seen all this before.










Another good reason to buy quality index funds instead of stocks is because when the market tanks, some or many of your amazing stocks may disappear completely. Index funds get removed for poor performance too, but not nearly as many. Buy and hold works for the long run, but only if those funds exist after a market downturn. Look for passive index funds to remain when hot tech stocks have vanished into the night.

Human nature is a funny thing. We love to buy things on sale or when they are cheap, except for stocks. The next correction may be just around the corner, but remind yourself that the next correction means things are simply going on sale. Stay level headed and rational. Always look to your investing plan when times get tough. That's why you wrote it in the first place. It will remind you to sit on your hands for a few months to make sure you really want to sell that fund that is dropping. After you've settled down, remember that stocks are on sale.

Remember, too, that corrections are both normal and expected. Anticipate a 10% correction at least once a year and 20% corrections every 3-4 years. They only matter to short term investors. If you can remember to see things from a longer perspective, they aren't bad at all. In a taxable account, they offer a chance to Tax Loss Harvest (TLH). TLH is where you sell funds for losses, then buy similar funds and deduct up to $3,000 off your taxes that year. Got $18k in losses? Deduct $3k each year for six years! Uncle Sam will share the pain of your loss, but it's not really a loss if you don't cash out.

I'm actually hoping there is a market downturn in the near future. Why? Because downturns lead to larger gains. _"Trees don't grow to the sky"_ and large dips are a chance to reset and make even higher returns. Bill Bernstein reminds people of this in his excellent 42 page book The Ages of the Investor. He relays this simple example:

_Suppose someone invested $1,000 on December 31st of each year for forty years. The first 20 years had positive returns and the second 20 had negative returns. This investor would end up with ~ $160,000. Not too bad, but with inflation, the total returns would be pretty flat. Now reverse the markets. With 20 years of negative gains followed by 20 years of positive gains, the same investor would end up with over $4.3 million dollars! When investors can buy more stocks for less (down markets) they are handsomely rewarded if they buy and hold._​
Remember to be fearful when others are greedy and greedy when others are fearful. When there is blood in the streets, it's a great time to buy.

Dieting is simple, but not easy. It's the same with investing: It's simple, but not easy. Simply stay the course.

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## dfw_pilot

*Live on Half​*









*Overview:* The fastest way to retire sooner rather than later is to increase your savings rate. A solid goal is to live on half your income. If you aren't there yet, use this spreadsheet to see where you are and where you might be able to improve your numbers. Set a savings goal and move toward it every year.

I enjoy the Physician On Fire blog (FIRE = *F*inancially *I*ndependent, *R*etire *E*arly) and he has a great post called the Live on Half Challenge. I really love this stuff because it pushes me to do better with my own finances. I share it here in hopes it will push you to do the best you can as well.

The fastest and easiest way to reach financial independence is to earn a high income. However, a high income doesn't equal wealth. Orthopedic surgeons (who work on spines) earn some of the highest pay in the medical field, upwards of $800k+ a year. They aren't getting wealthy if they are spending 80-90% of that money on country clubs, car leases, and lavish vacations. Whether you earn $28k, $280k, or $2.8MM per year, the way to get wealthy is to spend less and invest more.

One of the better books you'll ever read, The Millionaire Next Door, exposes this truth when the authors set out to find out how wealthy people spend their money. One of the book's first paragraphs sums up nicely what the book finds:

_"Twenty years ago we began studying how people became wealthy. Initially, we did it just as you might imagine, by surveying people in so-called upscale neighborhoods across the country. In time, we discovered something odd. Many people who live in expensive homes and drive luxury cars do not actually have much wealth. Then we discovered something even odder: Many people who have a great deal of wealth do not even live in upscale neighborhoods."_​
You see, the guy who isn't very wealthy, but thinks he's wealthy, buys the Lexus, the Rolex, and the beach front timeshare. The truly wealthy drive an F-150, wear a Timex, and don't own timeshares. The 5th Ave. media empire convinces us to live lavishly, but it's really just a ruse to separate you from your money.

Can you live on half your income? Saving half your income is even more impressive, but living on half is much more doable, as it includes taxes, a mortgage, and charitable giving. Click on the spreadsheet below for a version you can fill out yourself.

*The safe withdrawal rate (SWR) is 4%.* This means you can draw down 4% of your retirement savings and never run out of money. If you've saved $1 million, multiply that by 4% to get $40k a year in retirement. So if you multiply your annual spending by 25, you'll get your financial independence amount. Some try to attain 40x or 50x, but 25x is considered a minimum. Challenge yourself to get as close as you can to living on half. Doing so will allow you to retire sooner. The 'years to goal' line uses compounding at the specified rates of return. Good luck!


*Inspired by the Physician on Fire. Similar, but not substantially identical ​
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## dfw_pilot

*Financial Advisors​*







*Overview:* Once you've spent more than a few weeks learning about investing, you will be knowledgeable enough to not need the expensive services of a financial advisor. They usually charge too much for the same tasks you could do on your own. They also sell products you definitely don't need or want. Complicated tax or estate planning should be left to a CPA or attorney. You can be your own advisor and save many thousands of dollars in fees!

Fred Schwed wrote a book asking, "Where are the customers' yachts?" It begins with this:

_Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said, "Look, those are the bankers' and brokers' yachts."

"Where are the customers' yachts?" asked the naïve visitor.​_Indeed. I want to be as diplomatic as possible, lest I offend some who may be in the financial "advisory" industry. However, I do want to point out to everyone else that the fees this industry takes in are enormous. Remember: "In investing, you get what you don't pay for" so limiting fees are crucial to success. Be mindful of tactics like investment churning -- the opposite of buy and hold -- where funds are sold and new funds purchased on a regular basis. This will increase your fees dramatically.

_Where are the customers' yachts?_

A typical "advisor" will have lots of alphabet soup listed after his or her name. This impresses many, but most of those credentials mean very little, or only took a few weeks of study to attain. No one watches over your own money better than you do. "Advisors" probably start out honestly wanting to help others with finances, but they have to feed their own kids too. The draw to extra fees is hard to turn down. Folks with managed funds almost always end up with high expense ratio funds, 5-6% loaded funds, funds that overlap each other, and insurance policies they don't need. That type of scenario is common, but doesn't help the investor gain wealth.

_Where are the customers' yachts?_

Many "advisors" commit the cardinal sin of mixing investments with insurance; something an investor should never do. If you have someone depending on you, have a simple term life policy and consider disability policies. However, please tune out the sales pitch on all types of whole life insurance. It comes in many forms, whole, universal, variable, indexed, and others. These policies are _expensive_, complicated, and yield low returns. These types of policies are sold, not bought; i.e. they aren't appealing without a grand sales pitch. Often times, the first year or two of premiums go right to the salesman of the policy, not your investments.

_Where are the customer's yachts?_

"Advisors" do play one important role: They can talk you off the ledge when the markets are imploding If you are a nervous investor. When they convince you not to sell low, they've earned all their fees and more. If this might be you, consider a fee-only styled manager that charges a flat fee for advice. This means they are less motivated to sell you high-fee funds and expensive whole-life policies. Advice Only styled advisors are also a good avenue to pursue when you need help initially, but feel like once you're on the right path you can do it yourself. Another good thing about "advisors" is some have access to sell DFA funds, which are great index funds like Vanguard, but aren't sold directly to the unwashed masses.

_Where are the customer's yachts?_

Remember: Investing is simple but not easy. However, by the time you've spent enough weeks reading up on how to invest and what to look for in a good "advisor", you already know enough about the subject to not require the services of one.

Investing for Retirement | Table of Contents​


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## dfw_pilot

*Backdoor Roth IRA​*







*Overview:* Many people incorrectly assume that they make too much money to contribute to the all important Roth IRA. Direct Roth contributions do have an income limit, but Congress has made an easy work-around. Everyone should be maxing out their Roth IRA. It is too important not to. If over the income limit, simply contribute to a traditional IRA and then convert it to a Roth.

Have you ever heard of the backdoor Roth? I don't like the term, as backdoor has negative connotations, but they have been around and legal since 2010.

Roth IRA's have always had earned income limits on those who wish to make contributions. This is unfortunate, because like I've said previously, Roth money is fantastic and some of the most valuable money you can have. You can stretch them by giving them to grandchildren for generations of tax free growth, they have no RMD's or age limits, and offer lots of flexibility on withdrawals prior to age 591/2.

Thankfully, in 2010, Congress removed the income limit on conversion of IRA's to Roth IRAs, so even if you make more than $137k being single [2019] or $203k for married filers [2019], you can still contribute. You just need to use the backdoor instead.

Traditional IRA's have no income limits for depositing earnings into them, but after you earn $74k single [2019] or $123k married [2019] you can no longer deduct the contribution from your taxes. This is important, because if you still contribute to what would now be called a 'non-deductible traditional IRA' you will pay tax on the money when you put it in _AND_ the earnings when you withdraw it in retirement. Try not to do this. Having money grow tax free in a Roth is much more desirable. So how do you do it? It's harder to write about it than actually do it.

*Get rid of IRA money*

If you have money sitting in an IRA, or a SEP/Simple IRA, that money needs to be moved into a 401(k) by the end of the year in which you do your Roth conversion. This is due to the pro-rata rule which states that you'll owe taxes on all the gains from all your IRAs, not just the $5,500 Roth conversion amount. With a traditional IRA balance of $100k and you do a Backdoor Roth conversion, you'll owe income tax on all the gains from that $100k. Hide that money first. Don't have a 401(k) to move the IRA money into? Start a business walking a neighbor's dog, babysit, or mow a lawn, and earn $10. Open a Solo 401(k) and deposit the $10. Roll your IRA money into your solo 401(k). Easy.

Note: If you have a Traditional IRA with a small balance in it, you might also simply choose to pay the tax due by just converting it. You might owe a bit of tax, but that might be preferential to setting up a Solo 401(k).

*Contribute your money*

Make a 'non-deductible traditional IRA' deposit to your now zero balance IRA. Preferably, put $12k in on January 2nd[/sup] ($6k for you and $6k for your spouse).

*Wait a few days*

Wait a few days for your funds to clear your bank.

*Convert*

Now, inside your online IRA account, convert your IRA funds to a Roth. Inside my Vanguard account, this is simply done with one click. A warning will say that this is a "taxable event"! Don't sweat this. In just a day or two, you will have no capital gains. Without capital gains, there will be no taxes due.

*Report*

You or your CPA fill out form 8606. The form takes 90 seconds to fill out. (Hopefully, it's you and not your CPA. This way you can learn and be savvy about the tax code while saving money) Harry Sit has a step by step on how to fill out this form if you are using TurboTax here. Use caution: many tax preparers screw this simple form up; even CPA's. Use the link above to check their work.

*Caveats*

This really is an easy and fantastic thing to do. You want Roth money, especially in a high tax bracket where an IRA or taxable account will cause more tax drag. However, you should be maxing out all tax-deferred space first, prior to doing a backdoor Roth. Don't put money into a Roth at a high marginal tax rate if you still aren't putting in $19K into a 401(k) or Solo 401(k).

There used to be concerns about Step-Transaction doctrine. If you don't know what that is, don't worry. The 2018 Tax Cut and Jobs Act got rid of any concerns over it.

Consider front loading. It isn't just for washing machines! Put the $12k into the market the day it opens on January 2[sup]nd so you have all year to reap the gains. I'm a believer that lump sum beats DCA (Dollar Cost Averaging) in cases like this.

Is your 401(k) unusually flexible? You can also do a Mega-Backdoor Roth potentially gaining $37k more in Roth dollars (56k limit - 19k elective deferral = 37k). This won't be right for everyone based on tax rates, but it is worth looking into.

The backdoor Roth really is a great benefit for high income earners, so I hope you make use of how easy it is to do. You can read more about the steps to accomplish this here.

Here are the Backdoor Roth steps graphically:
(Click for larger version)
​
Investing for Retirement | Table of Contents​


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## dfw_pilot

*Every Dollar Counts​*









*Overview:* There are countless ways for people in today's modern society to save money. Many of the ways are hiding in plain sight.

This isn't really an investing post, except to say that doing these things will be a huge investment in your future finances. If you are having trouble living on half, or even getting to 20% on your retirement savings, give some of these ideas a try. I hope others will chime in with their ideas, too.

*Every dollar counts.* Here are some ways to help add to those dollars:

_Earn a high income._ Don't settle for a low paying job. Always seek opportunities to move up. Come in early, go home late, be a good employee, and work hard. Give your boss a reason to pick you for the next promotion.

_Don't grow into your income._ I tell this to guys I fly with. Every year that you get a raise, you can spend it or save it. If you don't grow into your income, you automatically increase your savings rate. If you've lived for years on less, you've proven you can do it for several more years if need be.

_Save 20% for retirement prior to any other spending._ Paycheck deduction works wonders. Out of sight, out of mind, automatically. The next thing you know, you'll have a lot saved up.

_Max out all your retirement accounts._ Before you consider yourself "rich" based on your income, make sure you are maxing out your retirement accounts. Buy your toys with the money that is left over.

_Contribute to an IRA._ Remember that you can never earn too much to miss out on the Roth IRA.

_Make use of an employer 401(k) match._ Sign up for this as soon as you have a job that offers it. Use a target date retirement index fund as your investment option.

_Don't time the market._ Only rookie investors worry that the market is "at all time highs" (hint: it almost always is) or wonder when the next correction is coming. Instead, simply invest each month and ignore the market.

_Never buy whole life insurance._ Ever. Buy term life and disability insurance instead. When you are financially independent, drop those two as well. There is a reason Dave Ramsey calls whole life policies "The payday loan of the middle class."

_Don't buy an expensive house._ Unless you live on the coasts, don't spend more than 2x your annual salary on a home. Realize that a house is not an investment, it's a luxury item, so spend accordingly and cautiously.

_Pay extra on the mortgage._ Even just $50-$100 a month extra will save you thousands of dollars over the life of the loan.

_Free shipping is a myth._ That ship sailed many moons ago, so don't be duped.

_It's cheaper to keep her._ Don't get divorced. Splitting your assets in half will get you nowhere fast.

_"All hat and no cattle"._ Let this Texas saying guide you. Don't be a spendthrift or your friends will mock you behind your back.

_Guard your spending._ "You become a millionaire by NOT spending the $1 million that you could have spent." Read that twice and let it sink in.

_High income ≠ wealth._ Remember the Millionaire Next Door quote. You aren't really wealthy until you've saved properly. A doctor making $400k/yr that has $800k in debt isn't wealthy.

_Credit cards are for convenience, not credit._ Are you using them for credit? Cut them up and use cash, or at minimum, use a debit card. Imagine a world where people aren't mastered by a card.

_Use automatic bill pay._ Set it on autopilot. Keep things simple. The more you automate, the more likely it is you will save. Out of sight, out of mind. Don't pay late fees. Stay on top of bills and get organized. Mint and YNAB combined with your online banking are great for this.

_Keep taxes and investment expenses low._ Your investment fees will KILL you unnecessarily. This isn't 1975 anymore. Your fees should be less than 0.25%.

_Have a will or trust or both._ Use a will if you have financial assets and use a trust if you have a lot of property. Without future planning, your heirs will have a lot to deal with. Skipping a will or trust will be costly.

_Keep your spouse in the loop._ Make sure your spouse knows where the money is and how to manage it if you become The Departed.

_Invest in yourself._ Get educated on investing so you can easily do it yourself. No one will care for your own money as well as you will. Not using an "advisor" will save you hundreds of thousands over 50 years.

_Don't buy new cars._ "Where else can you take $40,000 and set it on fire seven years later?"

_Buy off brands/store brands._ Many off brand cosmetics, groceries, toiletries, OTC medicines, etc have the same ingredients as their name brand counterparts for much less.

_Raise your insurance deductibles._ Higher deductibles mean lower rates for home and auto insurance. Plan on covering your higher deductible with an emergency fund.

_Don't buy retail or pay retail prices._

_Shop for deals._ When you do shop retail, pay for a Costco membership. Don't be too good to shop at Walmart. You can buy whole food like items without the WholeFoods markup.

_Don't eat out._ If you do, order water. Skip the dessert menu and instead stop at Dairy Queen on the way home.

_Be a big tipper._ Being generous has a way of coming back to reward you.

_Pay cash for cars._ Can't afford it? Keep saving.

_If it flies, floats, or flirts, rent it._

_Don't keep up with the Joneses._ The Joneses are broke. Be at peace with your situation and don't worry if you don't seem as wealthy as your neighbors. "People gauge their wellbeing relative to those around them." You don't have to.

_It's not a competition._ Saving for retirement isn't a competition between you and your friends, family and neighbors. It's a contest between your current self and your future self.

_Don't compare yourself to others._ "Comparison is the thief of joy" - T. Roosevelt.

_Always negotiate._ Don't be too shy to ask for a better price.

_"That's not good enough"_ Don't be afraid to say "That's not good enough" when asking for a deal from a cable company, phone carrier, electronics salesman, at the dealership, and the like.

_Remember that the poor man pays twice._ Be smart and buy right the first time.

_Marry smart._ Stay married to that person. A wise spouse can keep you on the right financial track, earn a high income, raise smart kids, and more.

_Cancel the cable._

_Cut the landline phone._

_Check out your local library._

_Don't drink so much._ Beer or Coke is addictive, fattening, and expensive.

_Skip the tech upgrades._ Using last year's Apple watch or Samsung phone is just fine. Upgrading your tech every year is like throwing money in the trash.

_Pass on going to the cinema._ Instead of $15 tickets and $20 popcorn, make use of the flat screen TV that is already ubiquitous in American homes.

_Use pre-paid mobile service._ I use Cricket on AT&T's network. Stay at home or in WiFi a lot? Use Google Voice for free.

_Use public schools._ Send your kids to public or charter K-12 schools and in-state community or state universities.

_Use a 529 plan._ Start saving in that plan before you are even pregnant. Make yourself the beneficiary and then transfer the funds into the child's name once they have a social security number to ramp up your savings.

_Think ahead._ Save for big ticket items that you know are coming: weddings, houses, braces, cars, vacations, Christmas gifts. Use a high yield savings account or taxable account to keep your money growing.

_Delay social security._ By delaying until 70, you'll come out ahead financially.

_Budget._ Suck it up and start using a budget. Mint, YNAB, PC.

_Buy groceries online._ Even Walmart has free pickup so you can order everything online when you aren't tempted to overspend. At minimum, eat prior to grocery shopping.

_You can have more than one 401(k)!!_ Does your spouse have an Etsy shop or do you moonlight as a home inspector? Open up a Solo 401(k) yesterday.

_Don't work for the man._ You never get really wealthy as a W-2 employee. Be your own boss and start a company. And since you can have multiple 401(k)'s, start several businesses!

_Do your own lawn service_ (duh!). Come on, TLF'ers.

_Don't use a financial advisor._ In this day and age, with the internet at your fingertips, there just isn't the need to use one and pay high fees.

_Shop at GoodWill._ I'm not too good for it. Several of my "Sunday best" shirts are from GoodWill.

_Be generous._ You'll be a blessing and receive a blessing. Donate money in front of your kids and be an example to them. If not donating money, then have them help you serve in a soup kitchen.

_Spend money on experiences, not things._ So many studies have shown that we are happier when we buy experiences instead of things. I love things. I love things made of melanite and polymer that go bang. But as much as I love things, the shine eventually wears off, whereas good memories of a fun vacation last a lifetime. I fondly remember Disney World as a kid, Paris with my wife, and the zoo visits with my kids, but I couldn't tell you what I got for my 35th birthday. If you really want the "pleasure" of your money to go farther, spend it on experiences and memories instead of more things.

Finally, I know I've written a lot about money and the pursuit of being a wise steward with your money. The main reason to be astute with your money comes from the idea that none of it is really yours anyway. All that we have has been given to us for a short while. How well will you handle the money that's been given to you during the time it's yours?

Remember, a truly rich person doesn't always have a lot of money - life isn't about acquiring more money; being wealthy has a lot of different meanings. Some of the richest people in the world have very little money. Meanwhile: _"others are so poor, all they have is money."_

Investing for Retirement | Table of Contents​


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## dfw_pilot

*Resources*​
I hope I've been able to share and explain some of the basics in retirement investing. If you've read this far, you are probably ahead of 90% of the rest of the population. If you put these principles into practice, you are probably ahead of 99% of the population.

Your retirement is your responsibility. There is no time like the present to start taking it seriously. Decide today to do something about it.

Save, save, save. Watch each dollar and don't spend a single one foolishly. Dare to be different from all your friends and neighbors. Challenge yourself that you can do better than their 5% savings rate. Your future self and your heirs will thank you dearly for being proactive with your retirement plans.

I would be remiss if I didn't share with you some valuable links for further information.

*Books*

If You Can, by William Bernstein. Only 16 pages, it's the best resource out there. It's so important, I have it saved on my own web server. I have it printed in my will for my kid's guardians to use if my wife and I pass. I have it printed for my four daughters to read - it will be required reading before dating is allowed. Do yourself a huge favor and read it.

The Four Pillars of Investing, by William Bernstein. One of my favorite reads, a fantastic explanation of what to do and why to do it.

Bogleheads Guide to Investing, by the Bogleheads. An even simpler explanation of how retirement accounts work and how you should use them.

*Websites*

The Boglehead forum. Named after disciples of John Bogle, the founder of Vanguard, these people are laser focused on sound principles. Passive indexing, low fees, tax efficiency, and diversification are their keys. It's a helpful place to learn the nuances of investing with a very detailed wiki.

The White Coat Investor. One of my favorite blogs. Dr. Jim Dahle is an excellent writer. He is geared more to the high income earner, but the principles there are great for everyone. There is also the WCI forum and subreddit.

PhysicianOnFire. A great, down to earth guy who writes eloquently on the topic of finance. He's retiring in his early 40's having lived the principle he preaches: Live on Half.

Mr. Money Mustache. Coarse and controversial, Mr. Money Mustache retired in his early 30's by not following convention. I feel like a lemming when I read about all the ways he's challenged conventional wisdom. A bit of an eco-terroist progressive save-the-world type, I don't agree with is politics, but his financial advice is sound. Want to get radical? I dare you to read his blog. There is also the MMM Forum.

*Portfolios*

For a simple guide to portfolio construction, look over the Core-4 examples.

The Bogleheads Wiki has a section on investment philosophy for portfolio construction.

Finally, some may ask what my portfolio looks like. Don't copy mine - do what suits you. Here are 150 portfolios that are better than mine. But, for the curious, my entire portfolio looks like this:

Stocks:
VTSAX - A total US stock fund.
VTIAX - A total International stock fund.

Bonds:
VBTLX - A total US bond fund.

These funds sit across a 401(k), a Roth IRA, a taxable account, a 529, and an HSA.

That's it. Three index funds at a cost of only 0.036% [2020 edit] a year, or $36 per $100k invested.

Happy Investing! All the best,

dfw

Investing for Retirement | Table of Contents​


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## dfw_pilot

*Extra Reading*

For the extra reading topics, click back to the table of contents to find them.​


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## SGrabs33

Wow. That's a lot of info DFW! 10 parts all released on the same day. I'm looking forward to learning a few things! Thanks.


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## chrismar

Solid advice, DFW, thanks!

Many years ago my wife and I read "The Automatic Millionaire", and the advice stuck. The core advice in the book is simple:

1) Don't spend what you don't have.
2) Pay off your credit cards in full each month.
3) Take out and save as much as you can before it hits your bank account.
4) Automate the above as much as you can.

What we read resonated, and it works. And, it's pretty easy too.

Our strategy is as follows:

1) Try to max our 401Ks. We've gone up and down over the years, but I think we're currently at around 15% of our paychecks go directly to our retirement accounts.

2) KISS (Keep Investing Simple, Stupid). We automatically transfer $ to Vanguard every month which gets divided among our index fund portfolio. That's the extent of our investments. Only index funds. So far we're earning an 8.6% return (knock on wood). Not too shabby.

3) College Funds. We automatically transfer $ to our kids' 529 accounts every month. It's not a lot, but it's something that grows faster than whatever nonsense interest rate banks give out these days. Eventually it'll help pay for their (or my?) education.

4) Rainy day/emergency fund. Liquid cash that's easily accessible. Again, automatically & every month. Enough to hold us over for a few months if something bad happens. Certainly enough to hold us over until we can cash out some investments, if needed (worst case scenario). If we get too much in there we'll use it to splurge on something, maybe a down payment on a car (if one is needed), remodel part of the house, or take vacation, or whatever. Most times the surplus goes towards an expensive auto repair, or some other incidental, but it's nice to think of happier ways to spend it.

Happy to say it's all working so far, and we're well on our way to being "automatic millionaires".


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## dfw_pilot

Good points and great plan, Chrismar! Automatic paycheck deduct is a real blessing. Your gains will grow in no time. Your monthly investment into a 529 is what we do as well.

If you ever run into a lump sum of money or have a rich grandma give you $75k for "little Billy's college", 529's can do a lot of magic with it. $15k a year is the max contribution into a 529, per child, in 2018. However, the government lets you front load that up to five years. With grandma's money, you could front load $75k (15 x 5) into his plan! If junior is still a toddler, you'd never have to contribute again, as the gains would perform well enough on that kind of money. Married filing jointly? Double that to $30k a year or $150k front loaded [2018]. I wouldn't put more than that into a 529. They sure do make a great place for inheritance money.

529's grow tax free, and get withdrawn tax free if the expenses are school related. Little Billy doesn't go to college? The money can be transferred to another family member. I highly recommend the 529 plan for college tuition. Just watch out for investment fees. The Ohio, New York, Utah, and Nevada plans use Vanguard funds, which keeps fees low. Savingforcollege is a great resource.


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## SGrabs33

All great info, DFW! Thanks for taking the time to write all that up.

I agree the best way to not spend your money is to not let it hit your checking account. Every now and then I go into my auto paycheck transfer and increase the % that goes into our brokerage account(after maxing out our 401ks, of course).

I really need to focus on the "Spend money on experiences, not things." Not that I spend a lot of money on things but now that my wife and I have a daughter experiences that make her smile are the real deal!

I really want a boat, haha. I doubt I will get one anytime soon but one of our "goals" is to own a lake home at some point. Of course that wont happen without using many of the tips above.

Thanks again!


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## dfw_pilot

I *totally* hear you about the boat and lake house!

With four kids, my vice has always been a diesel four-door pickup and camper (buying both experiences _and_ things, haha!). I'm certainly not against those types of purchases, but they have to be weighed against the huge opportunity cost they present. They would effectively push retirement back many years.

Is retiring sooner with more money a higher priority than traveling/camping, or having a boat and lake house? There isn't a wrong answer, as long as you know what each costs you. Saving more right now costs you money that can't be spent on memories. But, a truck and camper may push retirement back five years. For me personally, there are health risks to working longer, so I'm _deferring_ large purchases until we are FI (having 25x living expenses banked in investments).

Western culture disagrees, but being *F* inancially *I* ndependent is the best time to make big purchases. When my sister was 35, she started an online business, sold it for millions, and then bought a Wakesetter and built a 4k ft2 lake house (#jealous). But, she did it when she could truly afford it.

I think you nailed it, where the best way to look at it is to use these large purchases as a goal. Let the truck/camper or the boat/lake house push you to work harder, save harder, and zero in on all your spending. All the way down to that $5 latte at $tarbucks. With a tangible goal set, it makes attaining that goal easier, and ultimately, more rewarding.


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## jayhawk

I knew this was one of your interest. Holy cow...you have invested a lot of time here just to write it up.

I had an Ameriprise adviser ....the fees every month no matter the performance - finally I shut it down. Hundreds a month....for what?

MF suck frankly. 
They might have several managers, but no one can really stay up on more than 10 (?) companies. Have you seen their prospectus--well over 100 usually. Secondly, most funds are too big to really actively manage (eg get out of a position quickly ) or constrained by their charter (?) to be x% equity. If your heading into a recession or want to get more cautious for a period of time.....you want cash vs a low beta (volatility) like AT&T or Altria. The industry will say the fund manager can be more defensive than an index but with the points above....not effectively.
When u sell a MF ....you don't have price transparency just whatever it ends up being at the end of the day.


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## dfw_pilot

I appreciate your thoughts and understand that not everyone is a mutual fund fan, and that's totally cool!

Some of the best performing index funds are simply cap-weighted, so the management is pretty much automatically done via computer (hence the low fees). I'm more than fine with this, because over the long run, it's proven passive indexing out performs the hunches and high turnover of actively managed funds by a mile. Remember, only four actively managed funds have beaten the S&P over 8 consecutive years. Ouch!

But, as far as getting more cautious over time, instead of moving to individual stocks, I prefer moving to bonds and cash. In other words, I take my risks on the equity side, not the bond side. Buying and selling into individual stocks will have a high cost if doing so in a taxable account. Volatility (Bernstein calls this _shallow risk_) is insignificant to the long term index investor, but can reek havoc on the stock picker. Personally, I'm hoping the market tanks. I need another 2008 to happen so I have the chance to enjoy a bull run like so many other's have over the last eight years.

Happy Investing!


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## jayhawk

No disagreement here to your index approach. In fact, I'm long IWM...
I could use a big pulkback, been to cautious, (too much cash %) mainly I underestimated the monetary policies (we'll see how that works out eventually) employed since 08 despite the last admin's world view wasn't amenable to real growth.

I recall the election futures diving ...i should have acted. There is always another opportunity, patience can pay.


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## pennstater2005

Vanguard LifeStrategy Growth here. I use to watch the markets but eventually investing became boring to me, which is a good thing. I still occasionally post over at Bogleheads but only in spurts. I just plug monthly monies away and onto other things I go! I still enjoy investing and watching my money grow but once I read William Bernstein's "The Investor's Manifesto" I never ready anything else and I'm not a day trader so you know.......now it's the grass :nod:


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## jayhawk

Dfw, sorry I think i wasn't precise or was lazy ...i was considering index funds and ETFs vs "managed mutual funds".

Thanks for sharing. I will check out some those links.


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## monty

Thanks so much for posting this here. You have motivated me (at least for the short term) to better develop a plan for investing and saving.

I do have one personal question. As a federal employee, my primary retirement fund is the Thrift Savings Plan (TSP), but I also have a Roth IRA outside of the TSP. My question is, because of the lower fees of the TSP compared to any other option, should I be totally maxing out my TSP contributions before even considering putting any money elsewhere?


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## dfw_pilot

Monty, thanks for the question! Personal finance is personal. However, I'm happy to share my opinion.

You are fortunate to have access to the TSP with such low fees. In general, if you are in a higher tax bracket, like 33%+, I'd max out the TSP first to gain the tax savings. Deferring higher taxes now in exchange for a lower tax bracket in retirement is good. You can then come back and max out the Roth after that. Remember, Roth money is after-tax money, so being in a high tax bracket means you are pre-paying taxes at a high rate to get money into your Roth. Deferring those taxes now makes a lot of sense.

If you are in a lower tax bracket, 15% or less, I'd put money into the TSP first, up to any match, then max out a Roth for you and a non working spouse. Then if there is any money remaining to invest, put it into the TSP until it is maxed out. In this case, a lower tax bracket makes more sense to get money into the Roth first, because you won't be paying a high tax rate on the money you put into it.

If you aren't happy with the fees in your Roth, I'd recommend rolling yours over to Vanguard, where the index fund fees are very similar to the TSP fees. I don't have access to a TSP and my entire retirement portfolio costs me 0.037% [2019 edit] which is a pittance. In the end, deferring taxes is probably better than concern over a small fee vs a really small fee, so your marginal tax rates will better determine where to put your money first - TSP or Roth.

Of course, the best answer is to max out both! The 25% bracket where I am puts me in the squishy middle, so I max out both the 401(k) [TSP] and the Roth together, but I know that isn't always possible. Sell a car, cut the cable, cook more meals, etc, might make the difference between maxing out a Roth or not.


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## dfw_pilot

Also, try a calculator like this for the nitty gritty details.


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## monty

dfw_pilot said:


> Also, try a calculator like this for the nitty gritty details.


Thanks! There is also a Roth TSP, so I guess my question is not so much Roth vs Traditional, but TSP Roth vs any alternative. TSP fees last year were .038%. Should the lower fees be my main decision for what the max out first?


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## dfw_pilot

In that case, I'd stick with the TSP for simplicity. The only reason to change to something like Vanguard would be for different investment options. If you are happy with the options in the Roth TSP, stick with it, but if you aren't happy or want to try some alternatives, like Mid Caps, REIT's, or Small Value type index funds, then try Vanguard. Remember, 0.05% vs 0.038% is only 0.012%, or $12 per $100K invested. That's absolutely nothing, so make your decision based on your preferred investment options.


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## JC5653

investing for retirement? simple really.

1) max out your 401k, ira, etc. get as much match as you can.

2) put as much as you can comforatbly into tracking funds. vanguard 500 is about the best there is.

3) wait

4) when you turn on the news and see.... market loses 700 points in one day, shove in your reserve cash, buy as much as you can

5) optional: when above said event happens, take out a margin loan against 30% of your portfolio, pay off your house. re-fi house and invest those funds into vanguard (doubling your return with margin risk)

stay on top of the market. avoid margin calls, and wait until your a millionaire.

done.

oh and PS... ROTH IRA is the absolute best vehicle for tax advantages in my opinion. most people dont bet that their after retirement income is going to be higher than when they were working , so they go traditional. this limits how much you can pull without some tax risk.. in a roth, its all tax free, period. and if your a serious investor, and do right with your money, you should make more after retirement than before (social security + part time work + investment returns, etc)

oh and one more PS.... never....NEVER.. pay off your house early. the interest savings WILL NOT beat the compounding in the market.


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## dfw_pilot

For those with access to the government's TSP, I thought of you as I came across this post, and figured I'd add it to the mix. With the TSP, there are some big pro's and a few cons. Dr. Jim Dahle is a former Army doc, turned ER doc, who also blogs about finance.

Here, he discusses the pro's and cons of the of the TSP. He actually has a fantastic website. I will make most of his articles required reading for my kids to graduate high school.


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## pennstater2005

Dfw

Thought you might get a little kick out of this! Found the coffee mug this morning buried in the cupboard.


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## dfw_pilot

DUDE!!! I need one for sure. Love it!


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## pennstater2005

dfw_pilot said:


> DUDE!!! I need one for sure. Love it!


Vanguard had a store a couple years ago. Forget what happened. I remember reading in a thread they might be opening up an online store again later this year.


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## dfw_pilot

The IRS has officially increased the personal 401(k) deferral limit to $18,500 for 2018.

If you are one to max this out, I highly recommend maxing it out as early in the year as you can, via "front loading."


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## pennstater2005

dfw_pilot said:


> The IRS has officially increased the personal 401(k) deferral limit to $18,500 for 2018.
> 
> If you are one to max this out, I highly recommend maxing it out as early in the year as you can, via "front loading."


Any adjustment to IRA limits?


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## dfw_pilot

No change for IRA's. I expect that to change next year.


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## pennstater2005

Looking forward to that!


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## GrassDaddy

Anyone investing in bitcoin?? I used to mine it years ago, would be worth 360,000 but I sold it for 12,000.... didnt think it would stick around lol


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## dfw_pilot

Ouch! For that reason, I stick with the vanillas: VTSAX, VTIAX, VTBLX.


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## gatormac2112

I was afraid of bitcoin because I didn't understand it. Still don't.

I'm maxed out in my 401k, probably too heavy in stocks and am considering moving it all to index funds for simplicity if nothing else. I've actually done OK with stocks like Boeing up 70%, Cummins up 72%, Cracker Barrel up 86%......actually looking over my portfolio of 18 stocks I only have one that is negative: CVS pharmacy at -5%. And I expect that to turn around eventually. I pretty much stick to blue chips with long histories of increasing dividend payouts.

If I want to do a backdoor Roth all I have to do is open a traditional IRA with after-tax money, wait a few days, then convert it to a Roth?


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## dfw_pilot

Yeah, that's right - to do a backdoor Roth, it's really pretty simple. When you are over the income limits for a Roth (if you are married filing jointly, make sure to do two Roth's) just put it into the Traditional IRA, which has no limits. Then, since 2010, it's been legal to simply convert the new $11,000 to a Roth. If you do it in a few days, and initially put the funds into a money market account, you'll have zero gains, and thus zero tax to pay upon conversion. Finally, you'll fill out form 8606 (easy) when you file your taxes.

Watch out for the Pro-Rata rule, which states that the calculation for tax upon conversion counts ALL IRA, SEP and Simple IRA money. If you have any IRA money, roll it over into your 401(k) first, then do the backdoor Roth. If you don't, you'll owe tax on all the money in your IRA, not just the new $11,000 you convert.

I'd highly recommend considering switching to index funds. More diversification, lower fees, and less volatility. There is also a lot to be said about dividend stocks that's beyond this post. However, I'll say that some of the best stocks, like BRK, don't pay one. The thinking is that it's better for the company to grow itself, than pay a dividend. Plus, with a dividend, you owe tax no matter what, whereas if you sell stock for income, you get to determine when and how much tax you pay. Sell some stock or get a dividend; it's the same thing, but the latter gives you much more control.

In the end, I've followed the no-dividend strategy as much as I can. You can read more about why avoiding dividends might be right for you, both here and here.


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## massgrass

dfw_pilot said:


> The IRS has officially increased the personal 401(k) deferral limit to $18,500 for 2018.
> 
> If you are one to max this out, I highly recommend maxing it out as early in the year as you can, via "front loading."


Perhaps not. Another tax reform trial balloon floated:

There's talk of capping 401(k) contributions at $2,400 per year


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## dfw_pilot

Agree - tax law changes, but until it's written in stone, I ignore it. Too much drama and distraction for me if I don't ignore it! Some of the changes sound appealing, other parts don't. We'll all have to wait and see if Congress acts. Until then, I'm mapping out my 2018 budget now.


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## massgrass

Yeah, it's yet another idea thrown out into the ether. Many of the things coming out about how these proposed tax cuts will be paid for will make certain groups of people very angry, and there are lobbyists for just about everything these days.

I just hope that whatever happens will be in early 2018 so I'll have more time to prepare. I'm going to have a kid starting college, some credits/deductions could be going away, I don't know what the tax brackets will look like, I don't know how this will impact my retirement savings options, etc. Good times. :|


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## dfw_pilot

I hear ya!

One thing that angers me about the talk coming out of D.C. and in the media is tax cuts that should be "paid for." Uh, sorry, it's my money in the first place! Businesses, families, and individuals often have to cut back, but our betters in Washington never seem to want to.


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## gatormac2112

I get what you're saying about tax implications of dividends, but I'm not getting a dividend payout, they're qualified dividends being reinvested in the same stock in my tax advantaged 401k. I'm not currently seeing any tax hit. I'm just getting more shares of stock. And I don't pay any fees for my stock outside of the $4.95 per trade I think it currently sits at. The 18 stocks I have are pretty diversified across sectors, but it would be foolish to claim that they are anywhere near as diversified as an index fund. I've also chosen proven companies at value with an expected upward trend so that my portfolio isn't just churning out nothing but 2-3% dividends. Once they reach overvalue its time to sell and move onto some more value offerings.

Its worked for me, but honestly just selecting some index funds would be so much more simple and probably just as good in the long run.


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## scarlso2

Great stuff! I'd switch 3) and 4) of Part Two, but agree with just about everything else. When can we expect the write-up on the Mega backdoor for those who have very kind employers?


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## dfw_pilot

Regards to 3 vs 4, it probably depends on a lot of things. I'd be more inclined to max out true retirement accounts first, for for fewer strings attached spending and the overall higher amounts of money one can put away. But the best answer of course, is to max everything out . Stealth IRA's are great though, and I wish everyone had access to them.


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## Ware

scarlso2 said:


> Great stuff! I'd switch 3) and 4) of Part Two, but agree with just about everything else. When can we expect the write-up on the Mega backdoor for those who have very kind employers?


I agree - maxing the HSA (after taking advantage of any employer 401k match) before going back to fill the 401k saves you the additional 7.65% in FICA withholdings on the front end. Then at retirement the best case is you use the money for medical expenses, and the worst case is you use the money for anything you want. Also, there are no required minimum distributions (RMD) with an HSA. So I would say it is more desirable than a 401k pretty much any way you slice it. I think it's also not uncommon to see more lower fee options in an HSA than an employer sponsored 401k.


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## dfw_pilot

Good call, guys, I'll make the switch. I don't have an HSA or pay FICA, so I learned something, too!


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## Ware

It's kinda like lawn care - everyone's situation is a little different, and there is more than one way to get there. :thumbup:


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## dfw_pilot

How timely. I got this in my inbox this morning about some of the best HSA providers.


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## pennstater2005

dfw_pilot said:


> How timely. I got this in my inbox this morning about some of the best HSA providers.


I love TFB! Good info there.


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## llO0DQLE

Wow nice post! I've actually stepped back from the lawn hobby this year to focus more on the family finances and to learn about investing. Thanks DFW!


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## HoosierHound

@dfw_pilot, I'm curious about the reasoning behind your asset allocation advice, especially regarding bond investing.

While the advice of including bonds in a retirement portfolio, sometimes in large percentages, is rather common, I completely disagree with this advice. Your "risk tolerance" should not be based on your age or on your ability to sleep at night, it should be based on the length of time you intend to be investing. For retirement, that length of time is decades, about 30-60 years depending on what age you start and your life span.

If you invest $10,000 in a stock index with average annual return of 10% versus a bond index with an average return of 5%, over time the differences are huge:
After 30 years: $158,000 vs $41,000
After 40 years: $411,000 vs $67,000
After 50 years: $1,067,000 vs $109,000

My rather blunt assessment is that if you are losing sleep at night because there are days when stocks decline in value, then the solution should be to gain more investing knowledge, and not trade the high-return of stocks for the low-return of bonds. The amount of money you are giving up over the long-term by investing in bonds is what should cause sleep loss.

I also maintain strong skepticism about international investing, although I will readily admit that I don't base it on detailed research. But a combination of what research I have done, along with intuition, leads to my opinion that international stock returns are too heavily weighted by currency exchange rates. The exchange rates, in turn, are influenced by all sorts of international political and economic factors that are difficult to predict and plan for, including government policies and investor speculation. International stock returns have historically been underwhelming, in my view, reflecting the influence of these factors and not offering sufficient compensation to the investor for the risks.


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## dfw_pilot

I don't invest in international bonds for the very currency hedge you mention. However, that risk is less with stocks, so I have them in my portfolio (VTIAX). It's a cheap way to diversify. It also protects against being too home-centric. The Japanese stock market crash in 1991 is a prime example why holding funds outside one's country can be wise. But, the world economy is truly global, and most large corporations have money spread all around, so only investing in US stocks is fine, too. That's what Jack Bogle recommends. Neither is right or wrong. Remember, there are many roads to Dallas.

As far as bond allocations, let me just bluntly say this: _investing is 90% behavioral and only 10% math_. You used 10% growth for stocks and 5% growth for bonds. Those are tidy numbers, but hardly guaranteed. There are many people now thinking that bonds may out perform stocks in the next decade. My crystal ball is hazy, so I don't know. But my point is that those returns won't always look like that. Sometimes new investors need a little "bond assurance" to keep them from selling out when stocks collapse. By having a reasonable allocation of stocks and bonds (60/40? 70/30? 80/20?) not only may help them stay the course, but it will also allow them to have money available to buy stocks whilst they are down and cheap. With a high stock allocation during a downturn, one can run out of bond money for rebalancing real fast. The brilliant William Bernstein makes this very point in his excellent book Four Pillars of Investing. If you, Hoosier, or anyone reading, hasn't read that book, I highly recommend it.

In a perfect world, yes, all high schoolers should be in 100% in stocks, hopefully an S&P 500 fund, and forget it until they are 60. But, we don't live in a perfect world, and most people don't invest from the time they are very young. Remember too, that adding bonds can actually _increase_ your return over a 100% stock allocation.

Each individual must decide on their own what their tolerance will be for down markets. That can only happen if they've experienced a real correction like 2008. We've been on a huge bull run for the last nine years, and there are lots of confident investors out there, many of whom are heavy into stocks. That works great until the next collapse. Remember that sequence of return risk is real. Like Buffett says: "Only when the tide goes out do you know who's been swimming naked."

Wade Pfau, Michael Kitches, and others have discovered that a rising equity glide path can make a lot of sense, and I agree. But, for general advice to those I don't know personally, I feel better offering the advice Bogle offers on bonds, even if the math might prove it wrong in theory. And even though stock to bond allocation is important, it's fairly far down on the list of things to get right. Invest for a long time, every month, with 20% of your income, maxing out retirement accounts, and being faithful to your IPS are the big things that help people win in the long run. Which US or International fund, or how many bonds one should have, is, while interesting to talk about, much less important. So that's my thinking on the reasoning for my post. We don't always have to agree, because there are many roads that thankfully end up in the same place.


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## HoosierHound

This is awesome, I really enjoy discussing these things! All of my opinions are offered in a spirit of good will. I intend no disparagement, only discussion, and I take no offense at any disagreement. 

I agree and use the axiom that investing (actually all personal finance) is 90% behavior. If anyone is reading this discussion about investment asset allocation and has not accomplished any of these other goals first, you need to stop and work on your personal finance behavior, since that will lead to 90% of your results.
1) Write and follow a household budget every single month
2) Using the budget, spend less money than you make
3) Pay off all non-mortgage debt, and don't acquire any new debt
4) Save up an emergency fund
5) Invest at least 15% for retirement, or even better 20% as dfw_pilot suggests
6) Optional and probably irrelevant: Over-analyze and debate your asset allocation :lol:

I would like to make two points, that I think often get overlooked in discussing retirement investing. The first point is how the time horizon for retirement investing is determined. Someone's retirement investing horizon is the first to occur of two events, either when they run out of invested funds or they die. Many people, including financial advisers, instead use the date of retirement as the time horizon for retirement investments. This is a mistake. No wise investor withdraws all their invested funds and holds them in cash on their date of retirement. These funds will continue to be invested throughout retirement. This means that even if someone is 60 years old today with a life expectancy of 85, then they still have 25 years of retirement investing. So while there are periods of time when stock market returns are relatively low, that has never historically been true over decades of time.

The second point is that investment management post-retirement, when you are no longer making new contributions to your investments but making withdrawals, is significantly different for pre-retirement, when you are making regular contributions and not withdrawals. And so, while my previous point remains that many people need to view their retirement investments with a longer time horizon than they do, they also need to make sure their current strategy is suited for whether they are pre- or post-retirement.

I read the article proposing a "rising equity glide path", and the first point to make is that this is an article discussing post-retirement strategies when withdrawals are being made. No one should use it to guide investment decisions of pre-retirement contributions and wealth accumulation. Additionally, I found the article unconvincing.

The highlighted comparison between beginning retirement with only 30% stock exposure compared to 60% increased the odds of supporting a 4% withdrawal rate over 30 years from 93.2% success to 95.1% success. Is that even statistically significant? Per their own analysis, a 100% stock portfolio would succeed at this goal 88.3% of the time. Is that such an undesirable result? Assuming practical adjustments to the withdrawal rate, rather than fixing it at 4% every year, would likely boost the success rate to 100% for an all-stock portfolio. But completely left out of the analysis is the upside potential that the investor gives up. Why the intense focus on the worst case scenarios? How much wealth is the person giving up in more likely scenarios by decreasing their stock exposure so significantly during retirement, just to have a tiny marginal benefit in the worst case scenario? Also left unexplained is how the portfolio will start retirement with a 70% bond allocation in the first place. What sort of investment returns are being lost and how much market timing risk is being added to adjust a portfolio to that balance at or before the retirement date?

They ultimately characterize their proposal as a type of bucket strategy. But a post-retirement bucket strategy (which I advocate) is built around income and withdrawal demands, not a percentage portfolio allocation. Once the short-term cash and medium-term bond buckets are funded, then all remaining funds can be aggressively invested for greater returns. But again the size of the cash and bond buckets is determined by the income needs of the investor, not as a percentage of the overall portfolio. So depending on how much wealth was accumulated prior to retirement that could result in 70% cash and bonds for one investor and 10% cash and bonds for another.


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## dfw_pilot

I'm not brave enough to disagree with the likes of Pfau and Kitces. That said, lots of good points, none of which really contradict what I've previously posted.

"Following the age-in-bonds method, if you are 20, have an 80/20 stock to bond split, and if you are 60, have a 40/60 split. *This is fairly conservative*, but probably something you should consider as it's what John Bogle (founder of Vanguard) advises. Another good rule of thumb is to never have more than 75% or less than 25% bonds.​
I am personally at 85/15 at age 40. People like POF are mid 40's at 90/10, while others like WCI are at 75/25. With one's head in the game, higher stock allocations are just fine. However, for folks who don't live and breath this stuff every day, they'll have to be very careful about their behavior if a downturn does occur. Further profits after retirement are just fine. I have no qualms with people reaching for yield, even in retirement. But at some point, once somebody has won the game, there isn't much need to keep playing, imo. I think wealth plays another factor in deciding allocation once in retirement. If one has "just enough" they should probably be more conservative than someone who can cover their yearly expenses plus a lot more.

Personally, my plan is retire with a few years worth of income in bonds, and keep the rest in stock index funds. With a 3.5-4% withdrawal rate, I hope to die with more money than I retired with, for my heirs sake. If others want to do the same, as long as they know their own personal behavioral risks, I say: Have at it!


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## SGrabs33

Always one of my favorite threads @dfw_pilot 
Thanks for your contribution @HoosierHound


----------



## Grass Clippins

dfw_pilot said:


> I don't invest in international bonds for the very currency hedge you mention. However, that risk is less with stocks, so I have them in my portfolio (VTIAX). It's a cheap way to diversify. It also protects against being too home-centric. The Japanese stock market crash in 1991 is a prime example why holding funds outside one's country can be wise. But, the world economy is truly global, and most large corporations have money spread all around, so only investing in US stocks is fine, too. That's what Jack Bogle recommends. Neither is right or wrong. Remember, there are many roads to Dallas.
> 
> As far as bond allocations, let me just bluntly say this: _investing is 90% behavioral and only 10% math_. You used 10% growth for stocks and 5% growth for bonds. Those are tidy numbers, but hardly guaranteed. There are many people now thinking that bonds may out perform stocks in the next decade. My crystal ball is hazy, so I don't know. But my point is that those returns won't always look like that. Sometimes new investors need a little "bond assurance" to keep them from selling out when stocks collapse. By having a reasonable allocation of stocks and bonds (60/40? 70/30? 80/20?) not only may help them stay the course, but it will also allow them to have money available to buy stocks whilst they are down and cheap. With a high stock allocation during a downturn, one can run out of bond money for rebalancing real fast. The brilliant William Bernstein makes this very point in his excellent book Four Pillars of Investing. If you, Hoosier, or anyone reading, hasn't read that book, I highly recommend it.
> 
> In a perfect world, yes, all high schoolers should be in 100% in stocks, hopefully an S&P 500 fund, and forget it until they are 60. But, we don't live in a perfect world, and most people don't invest from the time they are very young. Remember too, that adding bonds can actually _increase_ your return over a 100% stock allocation.
> 
> Each individual must decide on their own what their tolerance will be for down markets. That can only happen if they've experienced a real correction like 2008. We've been on a huge bull run for the last nine years, and there are lots of confident investors out there, many of whom are heavy into stocks. That works great until the next collapse. Remember that sequence of return risk is real. Like Buffett says: "Only when the tide goes out do you know who's been swimming naked."
> 
> Wade Pfau, Michael Kitches, and others have discovered that a rising equity glide path can make a lot of sense, and I agree. But, for general advice to those I don't know personally, I feel better offering the advice Bogle offers on bonds, even if the math might prove it wrong in theory. And even though stock to bond allocation is important, it's fairly far down on the list of things to get right. Invest for a long time, every month, with 20% of your income, maxing out retirement accounts, and being faithful to your IPS are the big things that help people win in the long run. Which US or International fund, or how many bonds one should have, is, while interesting to talk about, much less important. So that's my thinking on the reasoning for my post. We don't always have to agree, because there are many roads that thankfully end up in the same place.


"There are many people now thinking that bonds may out perform stocks in the next decade." You may want to research the relationship that bonds have to rising interest rates.


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## dfw_pilot

Grass Clippins said:


> "There are many people now thinking that bonds may out perform stocks in the next decade." You may want to research the relationship that bonds have to rising interest rates.


I don't think it's that simple, especially with bond index funds. Either way, you won't find me recommending 100% stock portfolios to any one, for the reasons I've already listed several times. My crystal ball on interest rates and stock performance over the next decade is very hazy, so I always think diversification is the best solution. Plus, bonds have some great characteristics, like having a larger market than the stock market, allow for bond ladders, and have poor correlation to stocks which increase returns. Though quirky, I really love the Rick Van Ness tutorials.


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## pennstater2005

@dfw_pilot You need to post more over at Bogleheads!


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## Grass Clippins

dfw_pilot said:


> Grass Clippins said:
> 
> 
> 
> "There are many people now thinking that bonds may out perform stocks in the next decade." You may want to research the relationship that bonds have to rising interest rates.
> 
> 
> 
> I don't think it's that simple, especially with bond index funds. Either way, you won't find me recommending 100% stock portfolios to any one, for the reasons I've already listed several times. My crystal ball on interest rates and stock performance over the next decade is very hazy, so I always think diversification is the best solution. Plus, bonds have some great characteristics, like having a larger market than the stock market, allow for bond ladders, and have poor correlation to stocks which increase returns. Though quirky, I really love the Rick Van Ness tutorials.
Click to expand...

I hear you, good write up. My problem with bonds is that to many people don't understand them and yet they invest in them. They look at the 10 year return and buy the MF or Index based off of that info alone, they don't understand that they are looking at performance based on a market with declining or flat interest rates. That is no longer the environment we live in. They also don't understand that in the MF or Index they don't actually own the bond. If/when the price drops due to interest rates they can't just ride it out until maturity, they go down with the ship. Don't get me wrong, there will always be a market for bonds but it's won't be what it was and folks who are closing in on retirement have to own them for diversification. But the experienced person who is 10 to 15 years away from needing their money could do so much better without them. Keyword there is experienced, experienced investors stay invested. Unexperienced investors sell low and buy high, that's about 90% or the general population. I'm not disagreeing with you just giving my opinion.


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## JulietAlpha

Slight drift from saving for retirement for yourself, to helping your kids save for retirement. I wanted to do a cool thing for each of my kids to set them up with some retirement savings. My initial thinking, without researching anything, was to put 5.5k into a Roth IRA for them at their 5th birthday and again at 10 and 15. Then when they graduate college hand it over and tell them YOUR WELCOME! With some limited research you probably already know you have to have earned income in order to contribute to the Roth IRA, so that's not going to work. I don't really want to contribute more to our 529, we contribute a good amount and will use current income to pay for the rest. My next thought is to just make a brokerage and put the money in there and at graduation time, gift it to them to put into their own retirement accounts. Having not thought deeply about that yet, I'm sure there will be some tax annoyance this way.

Any workarounds to the Roth IRA idea or better idea then a standard brokerage account and gifting?

Amazing posts by the way.


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## Ware

JulietAlpha said:


> Slight drift from saving for retirement for yourself, to helping your kids save for retirement. I wanted to do a cool thing for each of my kids to set them up with some retirement savings. My initial thinking, without researching anything, was to put 5.5k into a Roth IRA for them at their 5th birthday and again at 10 and 15. Then when they graduate college hand it over and tell them YOUR WELCOME! With some limited research you probably already know you have to have earned income in order to contribute to the Roth IRA, so that's not going to work. I don't really want to contribute more to our 529, we contribute a good amount and will use current income to pay for the rest. My next thought is to just make a brokerage and put the money in there and at graduation time, gift it to them to put into their own retirement accounts. Having not thought deeply about that yet, I'm sure there will be some tax annoyance this way.
> 
> Any workarounds to the Roth IRA idea or better idea then a standard brokerage account and gifting?
> 
> Amazing posts by the way.


I'm in a similar situation where we are funding the 529's near my comfort level. For now I am also saving some in a brokerage account earmarked for each child - which will hopefully help them do something like avoid PMI when it comes time buy their first home. Personal decision, but I do not put that money into custodial accounts. That way it does not become theirs if they turn 18 and decide to join the circus. There will no doubt be some tax annoyance with this approach, but the government - they're pros at getting their part.

Once they are old enough to actually earn some income from summer or part time work, you can open a Roth IRA for Kids, and even help them fund it...

_A contribution to a Roth IRA for Kids can be made if a minor has earned income during the year. Eligible income can include formal employment income or self-employment income. Activities like babysitting or mowing lawns can qualify a minor for Roth IRA contributions. Note that in some cases self-employment taxes (Medicare and Social Security) can apply so it's advisable to consult with a tax professional. The current maximum annual contribution is $5,500, or the total of a child's earned income for the year-whichever is less. For example, if your daughter earned $2,000 during a summer job, you could contribute up to $2,000 to a Roth IRA in her name. If your child is not filing a tax form that covers his or her earned income, consider maintaining a written log of their earnings in case the IRS asks questions._​


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## dfw_pilot

JulietAlpha said:


> you have to have earned income in order to contribute to the Roth IRA, so that's not going to work.


That's right, however, you can get creative, as long as you save documentation. Can your kids work in your home office? Can they be models for the blog you run? Can they mow lawns? As long as they are paid a "going rate", they'll be fine; i.e. not $5,500 to run a lemonade stand. You can also do the "daddy match" where they earn $5000 but don't want to put all $5k into their Roth, so you let them keep the five thousand and you put your own five into their Roth.



JulietAlpha said:


> My next thought is to just make a brokerage and put the money in there and at graduation time, gift it to them to put into their own retirement accounts. Having not thought deeply about that yet, I'm sure there will be some tax annoyance this way.


I think the tax annoyances will actually be lesser doing the brokerage account than setting up UTMA accounts.



JulietAlpha said:


> Any workarounds to the Roth IRA idea or better idea then a standard brokerage account and gifting?


Like Ware, I do the brokerage account method. Having all your funds in one account is both easier to keep track of, and allows you to get into the Vanguard Admiral shares (cheaper) sooner. I run a spreadsheet to keep track of who owns what in the brokerage account. For example, I have four kids and the oldest gets 10%, the next ones get 9%, 8%, and 7%, and I get 66%. Because their ages are staggered, they'll each have roughly the same amount when they reach age 25. I then have a second sheet that shows what the new balance is if they spend something of their slice of the pie. This way, the account money they have doesn't hurt as bad toward financial aid, I can more easily keep track of it, and the tax implications are less than UTMA's.


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## Ware

dfw_pilot said:


> ...Can they mow lawns? As long as they are paid a "going rate", they'll be fine; i.e. not $5,500 to run a lemonade stand.


Yet another advantage of maintaining a reel low lawn that needs to be mowed several times a week. :lol:



dfw_pilot said:


> ...the account money they have doesn't hurt as bad toward financial aid, I can more easily keep track of it, and the tax implications are less than UTMA's.


Good point on the financial aid implications. A custodial UTMA account is reported as the student's asset on the FAFSA, which can significantly increase the Expected Family Contribution (EFC) - compared to assets held by the parents.


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## JulietAlpha

Ware said:


> I'm in a similar situation...





dfw_pilot said:


> That's right...


Thank you both for the responses. Looks like it will be the brokerage account until they make some income.

I started doing steps similar to these you wrote about since I started to make actual money when I was young. It feels good to finally see the fruits of all this planning for the past decade coming to fruition and being able to do something like this.


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## massgrass

I'm a little farther down the road with the 529/Roth IRA situation for children. My oldest just graduated from high school and we've stopped contributing to his 529 since we have more than enough to cover undergrad tuition at his school of choice between the 529 balance and scholarships. This year we made a 2017 Roth IRA contribution on his behalf based on his income from a part time job and will likely continue to do so until he is done with school and out working on his own.

I was fortunate enough to start investing in the 401k at my first job out of college as soon as I was eligible. My hope is that the head start we will be able to give him will put him in an even better financial position than my wife and I have been able to attain.


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## dfw_pilot

Great work, MassGrass! Compounding is your friend, and it's much more powerful than large deposits later life.


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## dfw_pilot

*Taxable Accounts​*







*Overview:* A taxable brokerage account is often maligned because it doesn't offer the same tax protections of accounts like 401(k)'s or IRA's. However, there are lots of great reasons to have a brokerage account. Excellent for long term savings goals and piggy backing on to retirement accounts, they are a great addition to have for your overall retirement and savings goals.

People often think brokerage accounts are just for buying and selling stocks. They can be, but I don't recommend buying individual securities because of uncompensated risk. Passive index funds however, are a great way to invest in taxable accounts for their tax efficiency. But why use a taxable account? They offer lots of benefits regular retirement accounts can't. Also, if you have a 401(k) or IRA, you really _should_ be using a brokerage account!

Like the name implies, taxable accounts have tax consequences when you sell the investments you've purchased. This is unlike retirement accounts where you can buy and sell without worry of paying taxes on any gains. Because of this, you need to be selective in what you buy because you may hold that investment for a long time before selling it and realizing a gain.

*Benefits*

One of the best benefits of the taxable account is the lower capital gains rates on any earnings that you've held for longer than a year. Depending on your tax bracket, these are 0%, 15%, or 20% for long term capital gains (LTCG). This is in contrast to retirement accounts like a 401(k) or IRA, where withdrawals are taxed at income rates. For example, earning less than $78,750 [2019] filing jointly, enjoys the 0% LTCG tax rate. This can be a great place to earn extra tax free income by selling appreciated shares.

Tax loss harvesting is a great way to use a brokerage account. When you lose money in an investment, the government lets you take up to $3,000 off your taxes each year. At the next dip, I plan on selling what I have in my account, realizing the loss, then buying a similar fund so I can keep my money in the market. If I realize a $9,000 loss, I can deduct $3,000 for three years. If the market falls but I don't sell (don't tax loss harvest), I'd still be down in my accounts, but I wouldn't have a deduction at the end of the year. TLH sounds complicated, and sometimes it feels like it can be, but there are lots of tutorials online that help make sense of it.

Traditional versions of 401(k)'s and IRA's have RMD's, or 'required minimum distributions' when you reach 701/2 years old. These aren't terrible because if you don't need the money, you can simply reinvest them. However, taxable accounts never have RMD's tied to them. Taxable accounts are also great to leave to heirs because they get a step up in basis upon your death. This means your heirs get the funds, but pay tax on the gains from the day they receive them, not the day you bought the funds. There are also a lot of low-cost investment options you can choose from in a taxable account, unlike many 401(k)'s.

Taxable accounts are also a great way to give to charity. Instead of writing a check to our church or favorite charity each month, I put that money in our brokerage account. Then, if it grows, the charity gets the money plus the gains, tax free. I also don't pay taxes on the gains of donated shares. If the market plummets and I lose money, I'll tax loss harvest and either donate other shares, or donate cash. It's a real win-win. Shares to charity are a great way to flush out capital gains, especially on money you were going to donate anyway. A donor advised fund is a good vehicle for this as well.

With short investing horizons like saving up for a car or house downpayment, savings accounts or CD's (Certificates of Depression) are best. Money for goals that mature within five years or less should probably be out of the market. But if you want to save up for a child's first car, first house, wedding, round the world vacation, etc., taxable accounts can give you more leverage with market gains and compounding. I'm currently saving for all the expenses my four young daughters will cost me one day.

*Save the tax break*

*Finally, it's all about the tax savings.* Everyone should have either a 401(k), IRA, or both. If you have a traditional 401(k) or traditional IRA, you _need_ a brokerage account. Let me explain. Traditional IRA's and 401(k)'s are _tax deferred_ meaning you are currently getting a tax break to put money in those accounts. You'll have to pay taxes on that money and any gains upon withdrawal in retirement. But for now, contributing to a 401(k) means you are paying less in taxes. You have two choices with that tax break: spend it or save it.

Take your marginal tax rate (your tax bracket rate) and multiply it by the amount you put into the traditional IRA or 401(k) each month. Then, invest that difference instead of spending it on yet another Starbucks coffee. If you put $1,000 a month into your 401(k) and you are in the 24% tax bracket, then you are saving about $250 a month in taxes. Again, you can spend that money, or you can save it. I choose to save it. Send that $250 to your brokerage account, and buy something simple like VTSAX, a passive total US stock market fund. Set that transfer to run automatically each month and you'll be all set, with it being out of sight and out of mind.

Remember, if you have $1 million in a 401(k), you don't really own all of it, the government owns about 25% of it. You really own about $750,000, depending on tax rates. But what if there was a way to own all of it? There is! If you have been diligently "saving the tax break" into a brokerage account, along with your 401(k) deferrals, you'll also have a healthy amount of money in your brokerage account. If you have $200,000 in your taxable account, you'll have enough to offset a lot of the taxes you'll owe on your 401(k) withdrawals. The numbers and percentages can differ, but the principle is the same: save your tax deductions in a brokerage account. It will help you save more for retirement, and it's a hidden way of saving without spending that money willy-nilly without a purpose.

*Roth Accounts*

One note, the point of saving the tax break only works with traditional pre-tax accounts. If you have a Roth 401(k) or Roth IRA, this doesn't apply. Why? Because you've already paid the taxes to get that money in the account. There is no tax break. Roth accounts "pre-pay" the taxes now but then are tax free in retirement. $1,000,000 in a Roth 401(k) really is 1 million bucks because the government doesn't own any part of it. 
I'm still a big believer in the saying "a tax deferred is a tax not paid." That means that future tax law is unknowable, so defer the taxes as long as you can to avoid dealing with them. I put money into my traditional tax deferred accounts while "saving the tax break" to get the tax cut now, and I'll deal with future tax rates in the future.

Investing for Retirement | Table of Contents​


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## Grass Clippins

Very nice. Someone with a Roth 401K could still save for future taxes owed on the employer contribution, if your employer matches it's almost always on a pretax basis, even if you select 100% Roth Employee Contribution. In your example they could save 25% (tax rate) of 5% (employer match).


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## dfw_pilot

*The 529 Account​*







*Overview:* Once your retirement savings is on track, saving for college is another big goal for most people. There are lots of ways to save for college, but the 529 Plan offers the best options. There are no income limits to using one, anyone can give to your child's account, the beneficiary can be changed to another child if needed, everything grows and is withdrawn tax-free if used for education, and front loading the account really boosts your gains. Use any state plan you like, but your own state might offer a tax deduction for using theirs, so check first.

*Better than other accounts*

If you need to save for college, the 529 is a fantastic way to do so. Money goes in (with a possible tax credit depending on your state), grows tax free, and then comes out tax free upon withdrawal if used for education expenses.

This is a better deal than saving in a taxable account because there isn't a tax drag on your investments in the 529. It's also better than an ESA because the contribution limits are higher in a 529. For 2018, you can put $15,000 per year per child into a 529, or $30,000 per year if you are married filing jointly.

Finally, the 529 beats a UTMA account because the 529 counts less against financial aid than a UTMA account. Remember, too, that a UTMA account is the child's money. When the child reaches the age of majority, they control the money. If she wants to sell paintings out of a van in a parking lot and use the UTMA money to fund her boyfriend's tattoos, you can't stop her. The 529, however, is controlled by the account owner (you), not the child. We all hope that our kids will grow up to be responsible adults, but _just_ in case that doesn't happen, the 529 gives you a bit more control and options later on.

*Save for retirement first*

Remember: _retirement is mandatory, but college is optional_. So, make sure you are on track with your retirement savings before affording the luxury of college saving. I would generally recommend knocking down high interest debts, saving up to the match in a 401(k) account, and funding Roth IRA's before getting very far into saving for college. YMMV. A child's diploma won't feed you in retirement. Kids can work to pay for college, they can go to an affordable school with lower fees, and they can even get loans if they have to. Therefore, don't kill yourself saving for college at the expense of your own retirement. I was an RA in one of the dorms at Purdue, which paid for my last two years of school. My sister got a full scholarship to school. If your child ends up like we did, it would have been better to have more money in your retirement accounts than saved up for higher education.

*Use any state plan*

All states provide a 529 plan, and no matter where you live, you can use any state's plan. No matter which state your child attends college (or studies abroad), the 529 money can be used no matter which plan it's in. It's best to check out your own state's plan first, because they will often give you a tax credit for doing so. I'm in Texas with no income tax, so I use the Vanguard plan (Nevada) because it has fantastic options with low fees. Utah, New York, and Ohio are some others that use low-fee funds. Also, if you move, find a better plan, or feel stuck in a bad plan, you can always transfer your funds to a new state plan. I switched from the Ohio to the Nevada plan a while ago and all it took was a notarized form and a few days to transfer.

*Have more than one*

Maybe your state offers a tax benefit for making 529 contributions, but you aren't happy with the investment options within the plan. In this case, have two 529's! If your state gives you a $2,000 tax deduction and you plan on investing $12,000 per year, you could: Invest the first $2,000 in your own state's plan for the tax deduction, and put the last $10,000 into a better plan, like Utah, Ohio, NY, or Nevada.

*Switching the Beneficiary*

One of the best features of a 529 plan is being able to switch the beneficiary. You are the account holder and your child is the beneficiary. To be a beneficiary, he or she needs a SSN. I started saving for our children's college before they were even born. I did this by being both the account owner _and_ the beneficiary *at the same time.* This allowed us to get a head start on saving, which is important due to compounding. When each daughter was born and her SSN was received, I'd open a new 529 account and transfer the assets from my name to hers. Easy. There are other benefits to this, too. What if one of your children doesn't go to college? Transfer their assets to another child or cousin. Another option is to simply leave the money in their account. If or when they have their own children, they can transfer that money (that has now been compounding for decades) to their own childrens' accounts. That then saves them the hassle of saving for their own kids. Or, transfer the money back to yourself and get that soil science degree you always wanted. This flexibility is what makes the 529 amazing.

*Front loading isn't just for washing machines*

The IRS allows people to front load 529 plans up to FIVE years worth. Married filing jointly gift limits for 2018 are $30,000. Times five is $150,000. This is what the very wealthy do, and it's really smart: Drop all $150k into their child's 529 account the day it opens. They then never have to save again because that much money compounding for 18 years is more than the child would ever spend in undergrad school. MBA, med, or law school, anyone? The point is that if you have a wealthy relative that wants to unload money prior to being hit with an estate tax situation or just be generous, the 529 is flexible enough to handle that situation.

*Withdrawals or Cashing out*

There are a lot of expenses that are covered by the tax-free 529 plan. Tuition, room and board, fees, books, computers, and even meal plans are covered. If you buy a house for your child to live in off campus with the plans to sell it after graduation, you can even pay yourself back with the rent money charged. The rent just can't be more than the room fees of the dorm. As always with tax related account spending: Keep receipts and good records.

Hopefully it never comes to this, but you can always get a lot of your money back if you absolutely have to. Like an IRA, you pay a 10% penalty and income tax on any gains. Ouch. Try not to do that. Penalties _might_ be waived for things like the death of the beneficiary or scholarships, but cross that bridge when you get there. Instead, I'd look at ways to transfer those assets to some other family member first. Or send them to me - I have four daughters, haha.

Graduate easily without debt
SavingForCollege.com
Vanguard 529
Utah 529
Ohio 529
New York 529

Investing for Retirement | Table of Contents​


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## pennstater2005

dfw_pilot said:


> Remember: retirement is mandatory, but college is optional. So, make sure you are on track with your retirement savings before affording the luxury of college saving.


This part is so important and something I occasionally stress to co-workers if they're up to hearing my rants


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## Grass Clippins

Georgia Path 2 College is a good one for Georgians. No fee to open, no annual fee, no load funds. 0.19% management for All Equity Fund (because I'm wild and he 14 week old son). For Georgia Residents contributions are deductible up to $4,000 each year per beneficiary for joint income tax filers, and up to $2,000 each year per beneficiary for all others.


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## dfw_pilot

I forgot to mention that as far as investments are concerned, I really love the target date funds or the ones specifically managed for certain types of risk, i.e. conservative, moderate, or aggressive. That way, the funds are low fee, managed, and rebalanced. They are truly a contribute and forget type of thing, which is great for no-fuss investing.



Grass Clippins said:


> For Georgia Residents contributions are deductible up to $4,000 each year per beneficiary


Man, that's fantastic! I got $2k in Ohio and get none now.


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## Buddy

I'm looking at the Fidelity 529 plan for Mass residents. I'm going with an age based strategy, but need to select which type of funds. I can select:

Fidelity Funds - 100 % of your contributions will be invested in a portfolio of Fidelity mutual Funds (Exp ratio gross 0.95%)

Fidelity Index Funds - 100% of your contributions will be invested in a portfolio of Fidelity index funds (Exp ratio gross 0.13%)

Multi Firm - 100% of contributions will be invested in a portfolio that includes funds from different companies that include Fideltiy.

Any suggestions on the funds vs index funds?


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## dfw_pilot

Without knowing what the underlying funds are, I'd pick the Fidelity Index fund option. The reason being that the expense ratio is so much cheaper than the 0.95%, it has less to overcome before it starts making money. Therefore, in the long run, it will most likely make more money.

The bigger thing to look at would be what are the funds invested in from all three choices. The age based strategy is a good one, where they manage the risk based on age. If they slowly move the allocation from stocks to bonds over 18 years, I'd go with the cheapest option that does that. My money would be on the age based index fund option.


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## Buddy

dfw_pilot said:


> Without knowing what the underlying funds are, I'd pick the Fidelity Index fund option. The reason being that the expense ratio is so much cheaper than the 0.95%, it has less to overcome before it starts making money. Therefore, in the long run, it will most likely make more money.
> 
> The bigger thing to look at would be what are the funds invested in from all three choices. The age based strategy is a good one, where they manage the risk based on age. If they slowly move the allocation from stocks to bonds over 18 years, I'd go with the cheapest option that does that. My money would be on the age based index fund option.


Thanks for the insight. My understanding of all this is fair I guess you could say. But some information goes above my understanding. Will review some more of the information/charts provided and see what I can make an educated decision on. Thanks for the insight, and love the thread very informative!


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## massgrass

I use the Fidelity index fund-based portfolios with the MA 529 accounts for my kids. They're basically the institutional version of the former Fidelity Spartan low-cost index funds, which are very competitive with their Vanguard counterparts.


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## Buddy

massgrass said:


> I use the Fidelity index fund-based portfolios with the MA 529 accounts for my kids. They're basically the institutional version of the former Fidelity Spartan low-cost index funds, which are very competitive with their Vanguard counterparts.


How has the success of the fund been for you and your investment? Any issues along the way or insight from your personal experience? Thanks


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## massgrass

I've been in the 2018 and 2021 index portfolios since they first became available. They're simple, low cost, and well diversified with age-appropriate risk. Basically, typical boring index funds like my retirement savings.  They've done everything I was looking to accomplish and I will start using the money when my oldest son starts school in September. Even better, 529 plan contributions are now eligible for a MA state income tax deduction.


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## Buddy

massgrass said:


> I've been in the 2018 and 2021 index portfolios since they first became available. They're simple, low cost, and well diversified with age-appropriate risk. Basically, typical boring index funds like my retirement savings.  They've done everything I was looking to accomplish and I will start using the money when my oldest son starts school in September. Even better, 529 plan contributions are now eligible for a MA state income tax deduction.


yes the state tax deduction is a nice little perk. I have some money spread around in various investments, and I'm going to open this one up as well for my two kids so not all the eggs are in one basket. I appreciate the info!


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## dfw_pilot

Jack Bogle, the founder of Vanguard, describes "the tyranny of compounding costs." I've watched this three minute video a dozen times and I still love it. It elucidates why high fees _kill_ returns.

Remember: _Investment returns compound, but fees compound as well!_

*Over a 50 year investing lifetime, paying a 2% fee will erode nearly 2/3's of your returns.* Stunning! Pay attention to the fees you are paying.

[media]https://www.youtube.com/watch?v=KuZvu_h3x1A[/media]

"What happens in the fund business, is the magic of compound returns is overwhelmed by the tyranny of compounding costs."

To view fees graphically, look at what fees can do:


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## SGrabs33

dfw_pilot said:


> *Over a 50 year investing lifetime, paying a 2% fee will erode nearly 2/3's of your returns.* Stunning! Pay attention to the fees you are paying.


I fully agree that it's always best to pay as little in fees as possible. I think everyone can agree with that.

In the example the guy did @ the end of the video there was no reference to any type of gains on the account. The example basically was describing an account that started with 100k, had a 2% fee, 50 year time horizon, and never had any capital gains. Of course that looks terrible. I think that is misleading.

I guess the reason why most people buy into accounts with higher fees is that they hope the managed account will produce higher returns than an index fund, therefor offsetting or hopefully exceeding the fee difference. Obviously you can look up historical data talking about how index funds have beaten the returns of the biggest and brightest minds over the previous X amount of years. Who knows how that data will look in the future.

Again, not arguing here. I'll take the low fees just about any day of the week :thumbup:


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## dfw_pilot

SGrabs33 said:


> I fully agree that it's always best to pay as little in fees as possible. I think everyone can agree with that.


Amen!



SGrabs33 said:


> In the example the guy did @ the end of the video there was no reference to any type of gains on the account. The example basically was describing an account that started with 100k, had a 2% fee, 50 year time horizon, and never had any capital gains. Of course that looks terrible. I think that is misleading.


Actually, the math in the video is correct. The simple example given was to isolate the fees. But the numbers and math are the same with gains included, the numbers are just bigger.

For example, use a Return on Investment calculator like this one. If someone starts with $10,000 dollars and earns a 7% return with no fees, or earns the same 7% but has a 2% fee taken out for a 5% return, after 50 years, the 5% earner is left with 38.9% of the value of the 7% earner. $114,674 vs $294,570.

So, even with gains included, the 2% fee that seems small erodes a vast sum of returns. The tyranny is worse when one includes gains, due to compounding.


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## SGrabs33

@dfw_pilot Yeah, that makes sense now. Thanks.

I used to work for a fund manager. Many of our clients were smart and had a base fee (% of AUM) and then also a Performance base fee (fund manager gets 20% of return if over a certain BM). The base fee would usually be pretty low, giving the manager incentive to outperform the BM. That was a pretty good way to charge the fees IMO.


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## dfw_pilot

Often times, the market will fall by a large percentage, leaving investors to wonder how much will it have to climb back up for their investments to get back to even.

It's not as easy as: If the market drops 10%, then it needs to go up by 10% to get back to even. It actually has to grow even more to get back to even. For example, it would need to climb 11.1% to recover from a 10% fall. The numbers get a bit worse if the market declines further. A fall by 50% requires a 100% gain to get back to even, and a 75% correction requires a 300% gain to get back to even.

If we assume no new money is invested, and just let our money ride through the dip, there is a simple formula to figure out the needed correction:

(1 / [1-D]) - 1

D is the percent drop in decimal format; ie 30% = 0.3

So a 40% correction in the market requires what to get back to even?

(1 / [1 - 0.4] - 1)
1 / 0.6 = 1.67
1.67 - 1 = 0.67

A 67% increase in the market.

And what is the market? I usually look to the S&P500 because it comprises the largest 500 U.S. companies, or 80% of the total market. The Dow is often reported, but it is less of an indicator and is just 30 companies. The two are very close, but I like the S&P500 as I feel it is _more_ representative.


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## dfw_pilot

​
Pictured above is the 2018 Callan Periodic Table. Click the image for a larger view.

Each year across the top represents a column of the 10 major indices for investors. The top index preformed the best and the bottom index performed the poorest in each year. Each index has it's own color, so it is easy to see how the different indices perform year to year. This truly is a fascinating graphic.

Some indexes perform great for a few years and then "revert to the mean" and perform poorly the next year or two. Look at the orange index, the MSCI Emerging Markets index. Some years it's on the top with huge gains, like from 2003 to 2007. Then 2008 has it dead last, followed by 2009 being the top performer again.

What does this chart really show? It shows a few things.

1) It shows that your investments need to be diversified. If you are too centric on one area of investments (only in the S&P500, or only in Emerging Markets), your investments will swing wildly and you'll miss out on a lot of gains. With diversification, when parts of your portfolio are down, your total returns can be boosted by other parts of your portfolio that are up. When some parts zig, others zag. That's the beauty of diversification.

2) It shows that markets really fluctuate. When things are down, don't panic. When things are up, don't get too confident. When people think they know which direction the market is headed, show them this graphic and ask them to predict the next five years, accurately. They'll balk. Like most everyone else, my crystal ball on future market direction is hazy, so I don't invest in a way that requires me to know what's coming next. Neither should you. Broadly diversified index funds will keep you from having to know what the future holds while also boosting your returns during fluctuations.

3) It shows that investing based on past performance, or "hot stocks" on their way up, is a terrible way to invest. Sadly, many people do this, and are then befuddled when they lose money in the market. Yesterday's rockstar index will be tomorrow's loser. It's counter intuitive, but it's often best to buy funds that are declining, not rising, because so many revert to the mean in a few months or years. People can't resist buying stocks and funds that are going up, but this isn't a winning strategy.

This is why I feel bad for people who rely on their "money guy" to send them newsletters with the "hot stock tip" of the month, or the "10 best performing funds of 2018". It's all meaningless.

Stay diversified, buy in every month rain or shine, and remember that markets fluctuate.


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## Guest

How about gross expense ratio's there's a lot of info out there and I'm using a work 457 plan. The funds are work chosen so there is about 10-12 with expense ratios ranging from .08-1.10. 
I've tried to stay away from the higher but not real sure it makes a difference.


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## dfw_pilot

@firefighter11, I agree with you that you should lean toward the lower expense ratio funds, depending on what they are. If there is only one good fund option with a low fee in your 457, you could go all in on that fund, and then balance out your asset allocation with your other investments, like I describe in this post.

In other words, I used to have a 401(k) full of terrible and expensive funds. There was one, however, the Vanguard S&P fund that was 0.04% and is a great fund to anchor a portfolio. So what I did was, inside that 401(k) I bought only that fund. This would normally have put me in too risky an asset allocation for my liking, so I bought other funds and bond funds inside our Roth IRA's to balance it out. You could do something similar if you have other assets in other investment accounts (even a taxable account), or Roth IRA.

Finally, just be sure you are happy with the strength of the 457 provider. If it's a non-governmental 457, your employer owns all the money until you retire. If they go bankrupt, you'll lose all that money that is in there. If it's a governmental 457, you're bullet proof with it. Other than that, 457's work just like 403(b)s. Does that answer your question?


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## Guest

@dfw_pilot Yes thank you. 
I recently had been reading on them, I'm far from a good investor but they give 4 portfolio options and they re arrange from high to low risk. This disregards any thing to do with the expense ratios. So I sat down and picked roughly 8 of the 12 with the strongest returns on the 10 year earnings list and lowest expenses. So I guess it's a start. Yes it's a government funded 457 where they constantly change and switch out to different funds. I lost 3 Vanguard funds from it within the last year.


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## jonthepain

Thanks for the info, dfw.


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## dfw_pilot

*The Magical HSA​*









*Overview:* The health savings account, or an HSA, is often called the Stealth IRA because it can be treated like another investment account. Reasons for treating it as such include fantastic tax treatment, no income limits, no RMD's, and the balance will roll over each year. If you can afford to cash flow your medical bills (up to your max out of pocket amount) each year, the HSA is the first investment account you should max out. It's a great investment deal.

Up until recently, I didn't have access to an HSA. Now that I have one, I'm excited about using it as another investment account. If you can cash flow your medical bills, I highly recommend you do so as well.

*Do you qualify*

Your health insurance plan must qualify for you to be eligible for an HSA. At a minimum, you need a $1,350 deductible for a self plan, or a $2,700 deductible for a family plan. For 2019, once you have an HSA, a self plan will allow $3,500 a year into the HSA while a family plan will allow $7,000 per year into the HSA. Once you reach 55, you get an extra $1,000 a year to invest. These numbers go up every year.

The decision to go with an employer sponsored health plan that allows for an HSA verses one that disqualifies you from an HSA may not be easy to make. Carefully look at all the variables before deciding what to do. Things like: what is your family's over-all health like? Does your employer contribute money to the HSA for free, and if so, how much? What kind of savings do you have to cover the deductible? Do you plan on using the HSA as a way to pay for bills or save for retirement?

My employer puts in a substantial amount of money in my HSA on my behalf for free, so that is the plan we went with. We also plan to bunch our medical procedures (within reason) into the same year to hopefully only hit the max out of pocket every other year or so. I plan on using the HSA as an investment account. But why would I do so?

*HSA's are a good investment*

The HSA/Stealth IRA is a great investment because it's _triple tax free_. Money comes out of your paycheck and goes into the HSA saving you income and FICA taxes (social security and medicare. The only place this isn't true is the deepest of blue California and New Jersey.) Then, inside the HSA, it grows tax free. My HSA provider has tons of low fee Vanguard funds to invest in, just like an IRA or 401(k). Then the money can come out of the investment account tax free if it is used for medical expenses.

Each year, your balance will roll over and it will keep growing, unlike an FSA. Finally, once you are 65 and in retirement, the money can still be spent tax free on medical bills like medicare premiums or insurance, or on anything you like if you pay income tax on it, like an IRA. But unlike an IRA or 401(k), there are no RMD's on the money, there are no income limits for deductibility, and the annual max contribution limits are higher than an IRA.

*How does it work*

How does this work in a practical sense? Let's say you have $500 in an HSA and you get a doctor bill for $500. One option would be to take the $500 from the HSA and pay the doctor bill. Easy and over with. But, I think there's a better way. What if, instead of taking that $500 out of your HSA, you paid $500 out of pocket and left your HSA money alone? $500 growing at 5% over 30 years is over $2,200. $500 today or $2,200 later? If you paid it later, you'd net $1,700.

To make that work, you'd have to take $500 out of savings and pay the doctor bill. You would continue to do this, and over 30 years, your HSA would grow to a huge sum. $7,000 a year into your HSA at 5% for 30 years, is over $500,000. Scan or save receipts for your out of pocket doctor visits. 30 years later, or in retirement, pay yourself back for all those out of pocket expenses you've had while your HSA money has been _growing and compounding_. The hope is that through investment gains and inflation, you come out way ahead. You also avoid taxes in the process.

*Contributions*

You can elect to contribute to your HSA via paycheck deduction (recommended) or directly to your HSA provider. I'm normally a front loading fanatic, but in this case, I like the paycheck deduction better. Front loading means you send all $7,000 to your HSA on January 2 and reap the gains of front loading all year. The downside is that while you avoid income tax on that money, you don't avoid FICA tax. Is front loading going to net more than the FICA tax drag? Who knows? It depends on the market, so I don't fault either method. But, I think the sure bet of avoiding FICA is the more conservative way to go.

There is also the "Last Month Rule." This only applies your first year with an HSA. It allows you to get all $7,000 into your HSA even if your plan starts half way through the year. It says that if you have your HSA in December, and plan on having it all of the following year, you may top up to the $7,000 limit even though you didn't have it all year. So if you were hired in November and don't have enough paychecks to get up to your annual max, you could send in the balance to your HSA provider. I did this and recommend it because it maxes out your account the first year.

*Future withdrawals*

One way to make the HSA investment pay off is to save your EOB statements from your insurer. My HSA provider actually makes this easy, and I'll bet yours will too. Scan and save receipts and EOB's, then in retirement, pay yourself back for all those bills you cash flowed during your working years. Another sensible and easier option than scanning receipts is to simply not save receipts. Once in retirement, you and your spouse _will_ have medical expenses. Between Medicare costs, insurance costs, and premiums paid, health insurance is a huge hole that people often forget to budget for in retirement. With a $500k HSA waiting in the wings, all those costs can be paid for from the HSA, freeing up the rest of your retirement budget for more fun things in life.

*Is it right for you*

Depending on your income and cash flow, the HSA as a Stealth IRA won't be for everyone. There is also the added factor of dealing with scanning or saving receipts. I use the EOB .pdf from my insurance company for 99% of our expenses, and just save them on my computer and upload them to our HSA website. You can also simply plan to pay for retirement healthcare costs with it instead. There is certainly the risk of the market as well, but over a long period of time, I think it's worth it. Some people would rather just pay out of the HSA and send their extra money to a brokerage account, even if that means paying extra taxes. There is a good article about the pros and cons of that here. In the end, the HSA is a fantastic tool either way.

*Extra reading*

7 Principles for using an HSA

Investing for Retirement | Table of Contents​


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## dfw_pilot

*Investment Account*​*Contribution Limits*​
*2021 Limits*


IRA: $6,000
IRA age 50+ catch-up contribution: $1,000
401(k) employee deferral: $19,500
401(k) max contribution: $58,000
401(k) age 50+ catch-up contribution: $6,500
HSA: $3,600 (single) and $7,200 (family)
HSA age 55+ catch-up contribution: $1,000
FSA's: $2,750
Max salary for 401(k) calculations: $290,000

*Prior Limits:*

*2020 Limits*


IRA: $6,000
IRA age 50+ catch-up contribution: $1,000
401(k) employee deferral: $19,500
401(k) max contribution: $57,000
401(k) age 50+ catch-up contribution: $6,500
HSA: $3,550 (single) and $7,100 (family)
HSA age 55+ catch-up contribution: $1,000
FSA's: $2,750
Max salary for 401(k) calculations: $285,000

*2019 Limits*


IRA: $6,000
IRA age 50+ catch-up contribution: $1,000
401(k) employee deferral: $19,000
401(k) max contribution: $56,000
401(k) age 50+ catch-up contribution: $6,000
HSA: $3,500 (single) and $7,000 (family)
HSA age 55+ catch-up contribution: $1,000
FSA's: $2,700
Max salary for 401(k) calculations: $280,000

*2018 Limits*


IRA: $5,500
IRA age 50+ catch-up contribution: $1,000
401(k) employee deferral: $18,500
401(k) max contribution: $55,000
401(k) age 50+ catch-up contribution: $6,000
HSA: $3,450 (single) and $6,900 (family)
HSA age 55+ catch-up contribution: $1,000
FSA's: $2,650
Max salary for 401(k) calculations: $275,000

Always try to set a goal each year to maximize as much as you can.

*IRS Limit Names*

The max employee deferral is the _402(g)_ limit, the max 401(k) contribution is the _415(c)_ limit, the max salary for calculations is the _401(a)17_ limit, and the max 401(k) catchup contribution is the _414(v)_ limit.

Investing for Retirement | Table of Contents​


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## dfw_pilot

*"I have a money guy"*

As lawn DIY'ers, we understand that spending money on a lawn service or a weed control company is an expensive exercise that yields poor results when compared to what we could achieve on our own. After just a little time on the forums, we can learn that buying supplies at DoMyOwn saves money, that cutting our grass a few more times per week makes the grass thrive while giving us more exercise, and that the right watering schedule will actually use less water _and_ money.

We intrinsically understand this because no one cares for our lawn more than we do. We also understand that there is a very high premium for paying someone else to do for us what we could do for ourselves.

It occurred to me that people often use a financial advisor because they feel like they don't have enough knowledge to watch over their own money. They feel this way because the financial services industry spends billions of dollars a year making investing sound complicated, and therefore, the use of their services necessary. However, paying a finance guy is very much like paying a lawn service.

The simple takeaway is that with a little bit of DIY on our part, 95% of what we need to know can be learned without the need of the financial "services" industry. With the help of TLF, we learn that we don't need to pay TruGreen to do for us what we can easily do ourselves. In the same way, when we get most of the basics down (actually saving, putting that savings in the right accounts, in sensible funds) the rest is just tweaking around the edges.

Do you have a money guy? Do you use a lawn service? My point is that you can do without either one, for the same reasons.

*"But my situation is different!"*

There are times to use a financial fee-only planner. Complicated situations that deal with taxes, estate planning, or cleaning up one's past financial mistakes can become complicated. In the same way, sometimes we just need a lawn service to knock out some really tough weeds from a neglected lawn, or a sod company to help us start over with a clean slate.

There are always times when professional help is warranted, and there is no need to apologize for using it. I would simply implore you to think of those times as quick correction help, not a long term solution. In the same way we wouldn't lay new sod every month, we wouldn't want to pay for financial help (or investment fees) each month either.

Let the pros lay the sod and establish a firm foundation, then take it from there.

_"Gurus don't make money predicting markets, they make money marketing predictions." - Rick Ferri_


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## iFisch3224

Good stuff, and glad to see this here. I know a little bit, with special interest in ETF's.

In 2018,

I turned in my leased vehicle, bought a vehicle for $4,000 cash. Paid off all my debt and only outstanding debt I have is my mortgage. Do work for a solar company and plan on adding a solar system in the next 3 years to cut expenses even further.

31 years old, debt free, put away 15% into my IRA with company match. Current return on my portfolio over the last 3 years is 27%. I may be able to add a little value here, but my goals and risks are little more relaxed than most, as I am younger than most here.

Thanks again for @dfw_pilot for this thread. If I knew about this when I was 24 or 25, I'd be in an even better situation, but it's a start. And glad to be where I am today.


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## jonthepain

Congratulations Fisch! That's awesome


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## iFisch3224

jonthepain said:


> Congratulations Fisch! That's awesome


Thanks! Been hard, lots of dedication and saying "no" for a few years. Finally, the weight has been lifted, and I dropped some $20k of debt this year.

If a 31 year old can do it, YOU CAN DO IT!! *fist bump*


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## Mozart

This thread reminds me of a book I read earlier this year:



Great book to read if you like math! Sharpe ratios, utility, efficient frontiers, how to calculate optimal allocations in active vs passive portfolio.

I don't think it made me any better at investing though. I still use vanguard index funds 

One interesting chapter though was behavioral finance. One takeaway from that chapter is that it's sub-optimal to earmark money and invest it separately. Better to optimize a single portfolio that reflects your overall risk aversion.


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## dfw_pilot

Mozart said:


> Better to optimize a single portfolio that reflects your overall risk aversion.


Couldn't agree more. I'll see if that book is in my local library.

P.S. Love your music!


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## Mozart

dfw_pilot said:


> P.S. Love your music!


Thank you! :thumbsup:


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## TheSwede

Fantastic writeup, @@dfw_pilot! There's just so much to say about how to manage whatever might be left after normal living expenses of your hard-earned money!

First thing that needs to be understood is that "investment advisers", really are salesmen (and/or women) catering solely for their respective employers and their own bonuses rather than for you.

As you are hinting, the single most important thing for growing your hard earned savings is to make sure to select financial instruments with as low premium/interest as possible. It is not uncommon for "actively managed" funds in the multi billion dollar range to be handled by 1 fund manager. On part time(!). If you relate the cost of the "active management" to the earnings made for beeing able to keep 1% higher interests on that fund compared to a passive one it is easy to understand why the "advisors" push for the "actively managed" fund rather than the passive one...


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## pennstater2005

Well @dfw_pilot it finally happened. I've heard the stories. I was hand watering the front and saw a gentleman, dressed up, heading my way. Here's how it went.....

Him: Beautiful day to be outside, huh?
Me: Sure is.
Him: Do you mind if I ask you a few questions?
Me: Not if you're selling anything.
Him: I'm not. I'm with Edward Jones. We're opening up a branch here in ........,PA. Would you like to discuss a few options?
Me: Absolutely not.
Him: Thanks. Have a nice day.

Damn! I thought it would never happen in my small town. Didn't seem like he had much luck with any neighbors either, thank the Lord or I would've went over right after and had a few things to say


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## dfw_pilot

You've reached the pinnacle of finance: being courted, lol!

Good job resisting, the force is strong with you.


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## pennstater2005

I had to bite my tongue though when after I asked him if he was selling anything and he said no! I wanted to say I wish you were selling water softener systems or something cause this is worse :lol:


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## dfw_pilot

:lol: 
True. I'd sleep better knowing I sold something useful like water softeners (I love mine) instead of expensive investment products and unnecessary insurance (whole life).


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## pennstater2005

Ohh..I would've loved for him to discuss whole life with me.


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## Rackhouse Mayor

This is all great info. I really like the discussion on 529s as they're of particular interest to me right now. I live in a state that offers a 529 investment account as well as a "prepaid tuition plan". I can't decide whether I should pick one over the other or do a combination of both. What are y'alls thoughts on this? In MS you can contribute $20k if filing jointly. The prepaid for a 4yr plan will run appx $40k. The downside to the prepaid tuition is it's only good for tuition (no books or room and board). It also locks you in to a plan (ex: 4yr univ pricing, 2yr juco / 2yr @ 4yr univ). I asked my accountant what he's doing for his kid, and he said he went the prepaid route because he felt the cost of education would outpace the investment. However, it seems like the 529 investment fund gives you much more flexibility - you'll just have to pay more. Thoughts?


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## dfw_pilot

If I was in your shoes, I'd want to know a few things:


What happens if my child doesn't go to college, either by choice, death, or otherwise? Is the money lost or is it transferrable?
What if the child decides/needs to go to an out of state or private school? Are the assets lost?
What type of return or discount rate is the $40k giving you?
Vanguard says that tuition rates increase about 5% a year (don't get me started on what a fleece that is - hint, it's politics) so do you think you can beat that in a self directed 529?
What are the odds that the state can hold its end of the bargain over the next 20 years? If the budget gets in trouble, taxes can be raised, but ultimately the voters decide.

It sounds like you'd want a 529 either way, to help pay for your other expenses. I love 529's because they are flexible and transferrable.

Also remember the four pillars of paying for college, and none of them include loans:

Pick the right school within your budget
Let the student have some skin in the game by paying for a portion, via work and savings
Pay for school out of your savings from 529's and brokerage accounts
Cash flow

Always remember to fund your own retirement first. Like putting on your oxygen mask before helping your children during an airplane depressurization, help yourself first, so you can then help others.


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## Mozart

New York State offers an excellent 529 plan. Fees are low and it's managed by vanguard.

You do not need to be a resident to open a NY 529 plan and you can use the funds for schooling is any state. Also a tax advantage if you pay NY state income tax. This plan is better than most state plans, even as a non-resident.


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## dfw_pilot

*The Mega Backdoor Roth​*







*Overview:* The Mega Backdoor Roth is a _fantastic_ tool for supersavers. If one's 401(k) plan allows for after tax contributions, those contributions can then be rolled over to the Roth 401(k) inside the plan, or rolled out to a Roth IRA. This is great because then future gains and distributions are then tax free. With a 2019 401(k) contribution limit of $56,000, that leaves room for up to an additional $37,00 of after-tax contributions per year if you max out your $19,000 deferral limit. Having $37,000 per year of extra Roth space is an amazing retirement tool, but should only be utilized after fully maxing out other retirement accounts first, like the Roth IRA, 401(k) and HSA.

*How does it work?*

Jim Dahle first coined the phrase Mega Backdoor Roth. It's a play on the term Backdoor Roth, where a contribution is made, then a conversion is done to avoid further taxation. The Backdoor Roth involves using a Roth IRA where the Mega Backdoor Roth uses a 401(k), where larger amounts of money are involved.

Inside a 401(k), there are lots of different "buckets" of money. I want to focus on three:

The most common is a Traditional 401(k), where money is _deferred_ out of a paycheck prior to any taxation. This bucket grows tax free, but upon withdrawal, the money that was put in, plus any gains, are then taxed. Any employer match or non-elective contributions are also in the pre-tax bucket. Another common bucket is the Roth 401(k), where money goes in after tax and then grows and is withdrawn tax free. Both the Traditional and the Roth 401(k) buckets are limited to a total of $19,000, the 402(g) limit.

In between these two common buckets, is the after-tax bucket. Specifically: the Non-Roth After-Tax portion. It's a hybrid of the Traditional and the Roth. Money goes in after tax like the Roth, but all gains are taxed like the Traditional. This is because in a 401(k), all gains outside of the Roth 401(k) are taxed upon withdrawal. So any gains that an after-tax contribution makes, will be taxed in retirement.

There is a simple solution to prevent any gains on after tax contributions from being taxed: Convert those contributions to either the Roth 401(k) or a Roth IRA. Doing so allows for any future gains to be sheltered from taxes on gains, just like any Roth account.

*Numbers and Examples*

For someone 49 or younger, the 2019 limit on 401(k) contributions is $56,000. The elective deferral limit, or what can be _deferred_ out of a paycheck, is $19,000. That leaves an extra $37,000 of investing space. Most employers offer either a match, a non-elective contribution, or both. Subtract off any of those employer contributions, and the remaining amount can be contributed into the "after tax bucket."

Let's say an investor maxes out her $19,000 deferral, gets a $2,500 employer match, and gets $10,000 from her employer in the form of a non-elective contribution. $56k - $19k - $2.5k - $10k = $24,500 remaining under the 401(k) limit. She could contribute ~ $2,000 a month in after tax contributions and stay under the cap.

Those $2,000 each month go in after tax, meaning she's already paid tax on those contributions. However, it will go in to the after tax bucket of her 401(k) meaning that any gains it makes will be taxed again upon withdrawal. If however, instead of leaving her $2,000 a month contribution sitting in the after tax bucket, she converted those contributions to her Roth 401(k) (called an in-plan conversion) or she rolled them out of her plan and into a Roth IRA, she would no longer pay tax on any gains. Doing this once a month or once a quarter means she would have very few gains on which to actually pay tax.

$2,000 a month at 8% is $3 million dollars after 30 years, or $1.7 million real dollars in today's money after 3% inflation. Subtract $720,000 of contributions, and that's a lot of gains to pay tax on! If she converted her $2,000 per month to her Roth 401(k) each month, she might pay taxes on a few dollars of gains, but that's it. The rest grows and is withdrawn tax free. Hence: the Mega Backdoor Roth.

*What's the catch?*

There's always a catch, isn't there? The biggest catch is that many people's 401(k) plan simply do not offer after tax contributions. The custodians of 401(k) plans, like Vanguard and Fidelity, keep track of the basis and all the taxable vs non-taxable gains, so employers could offer an after tax plan if they wished. However, many apparently don't. Step one in getting the Mega Backdoor Roth is to simply ask for an after tax option. Step two is to have in-plan conversions, but many plans have that already. The third and final step is to actually have both the income and the discipline to save above and beyond normal contribution limits.

This isn't for people who haven't already maxed out their other retirement accounts. Always max out the 401(k), max out a Roth IRA and a spousal Roth IRA, max out an HSA, and be saving in a brokerage account to offset Traditional 401(k) contributions prior to contributing any after tax funds to a 401(k). After tax money is great, but only after you've reaped tax deferrals through normal contribution channels.

*Further Reading*

Some better writers than me have tackled this topic:
Mad FIentist
Harry Sit
Michael Kitces

I am fortunate enough that my employer offers after tax contributions. It's easier than it sounds (just a few clicks inside your 401(k) and you're all set). If your employer offers it as well and you get stuck or have questions, feel free to shoot me a PM. Like I tell my co-workers: "Contribute then Convert." Contribute your after tax money, then convert it to Roth for tax free gains from then until eternity.

*Coda*

There are those who like tax free Roth money because they are worried the government will change the income tax laws, so they want their taxes paid now. Others like the tax deferred Traditional money because they are worried that the government will change the income tax laws so they want their taxes paid later. See what I did there? In other words, there are always guesses and theories as to what tax rates will do. My advice is to plan and make decisions based on _today's_ tax law, and then adapt if it ever changes.

The government likes Traditional investments because it gets more taxes from them, but at a later date. The government likes Roth money because it gets its taxes up front, today. I don't see either style going away. The correct answer to Roth or Traditional? Both.

Investing for Retirement | Table of Contents​


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## g-man

You piqued my interest. Will the conversion to a Roth 401k be counted as a "contribution"? Or is it like a ira to Roth conversion (normal backdoor)?


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## dfw_pilot

Good news: Conversions never count as contributions. This is because conversions have already been contributed in the past.


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## dfw_pilot

The market has been on a downward tear this week [mid-October 2018]. Pay little attention to it. I've said it before: when the market falls or corrects, it is the best time to turn off the financial media. Sit on your hands. _"Don't just do something, stand there!"_ Expect 10% corrections each year, and 20%+ corrections every three. No big deal.

There is one caveat though: Tax Loss Harvesting. If you have losses in a brokerage account, there is money to be made on bad days like this! TLH doesn't work inside of tax-advantaged retirement accounts, but it's a great tool inside of taxable accounts. Essentially, if you have losses, you can sell those stocks/funds and realize the losses. You can then deduct up to $3,000 of those losses against your taxes each year. If you have $15,000 in losses, you can deduct $3,000 off your taxes each year for the next five years because the losses can carry forward.

By exchanging a fund while it is down into a similar fund (like Total Stock Market fund for an S&P500 fund), you can capture the loss, get the deduction, still keep your money in the market, and make money while doing so. It's awesome, and it's why staying level headed pays off. While everyone else panics, smart investors see opportunities.


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## jayhawk

Some posts disappeared....hmmm


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## dfw_pilot

jayhawk said:


> Some posts disappeared....hmmm


Really? Any details?


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## samjonester

Great info @dfw_pilot! The information about how to invest is _extremely_ useful. I love (and also subscribe to) the boglehead approach. One thing that makes this series of posts stand out to me is the practical tips to navigate the tax implications of different types of investment accounts.

I think the only thing that I'd like to debate is the goal setting approach from your second post.

I personally feel that setting a target retirement age and defining a income threshold during retirement has an air "living for tomorrow". My mentality for retirement savings is that it is an insurance policy against being unable to earn a sufficient income later in life. I personally feel that right now, while my kids are young and depend on me, is the most financially valuable part of my life. I'd rather front load my spending on that part of my life. Treating retirement as an insurance policy allows me to guiltlessly spend my money on my family while we can all enjoy it together, rather than feel like I'm sacrificing for a day when the kids have moved out, and my wife and I have a significantly lower cost of living.

I do realize, though, that the only reason I'm able to support this mentality is that I do something that doesn't getter harder as I will get older. I'm a software consultant, so I won't have the same struggle continuing to work later into life as someone with a more physically demanding occupation would.

Thanks again for putting this all together, especially all the cross-linking to other resources! I definitely learned a few things reading the posts.


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## dfw_pilot

I'm glad you've enjoyed the series, Sam!

The great thing about this subject is that there are very few hard and fast rules and there are lots of right answers.

We definitely don't want to miss the present by focusing too far into the future. I'm peddle to the metal because I don't want to be a burden to my kids and also want to be able to help them when they may need it the most.

An aside: *Money is Everything.* It allows us to do the things we love the most and support the causes that are dearest to us.


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## massgrass

samjonester said:


> I'm a software consultant, so I won't have the same struggle continuing to work later into life as someone with a more physically demanding occupation would.


I'm an IT consultant and the age discrimination that I've seen in this field worries the bejeezus out of me. While most of the people I've seen pushed aside have been 50+, even being in your 40s is "old" and can be a liability. I worry about being in the situation where I want a job but the job doesn't want me, so for us retirement and college savings have been a top priority.


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## rhanna

dfw_pilot said:


> The market has been on a downward tear this week [mid-October 2018]. Pay little attention to it. I've said it before: when the market falls or corrects, it is the best time to turn off the financial media. Sit on your hands. _"Don't just do something, stand there!"_ Expect 10% corrections each year, and 20%+ corrections every three. No big deal.
> 
> There is one caveat though: Tax Loss Harvesting. If you have losses in a brokerage account, there is money to be made on bad days like this! TLH doesn't work inside of tax-advantaged retirement accounts, but it's a great tool inside of taxable accounts. Essentially, if you have losses, you can sell those stocks/funds and realize the losses. You can then deduct up to $3,000 of those losses against your taxes each year. If you have $15,000 in losses, you can deduct $3,000 off your taxes each year for the next five years because the losses can carry forward.
> 
> By exchanging a fund while it is down into a similar fund (like Total Stock Market fund for an S&P500 fund), you can capture the loss, get the deduction, still keep your money in the market, and make money while doing so. It's awesome, and it's why staying level headed pays off. While everyone else panics, smart investors see opportunities.


1 thing to keep in mind about tax harvesting. There is something called the wash sale rule where you can't sell and buy a substantially identical security and trigger a capital gain or loss. The wash sale rule prevents you from claiming a loss/gain on a sale of stock if you buy replacement stock within 30 days before or after the sale. Of course the gain is a good thing, you end up not paying taxes.

I knew you couldn't sell and buy the same exact stock but I didn't realize they couldn't be substantially identical. So for example, you sell 1 S&P 500 ETF and buy a different S&P 500 ETF. Ultimately its up to the IRS if that "substantially identical" criteria has been met. In my example I believe that would be substantially identical.


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## jayhawk

dfw_pilot said:


> Really? Any details?


Nevermind, someone suggested the S&P was "on-sale" during the *first* distribution day ...was it 5 days ago? i think that banter was in the "sales" thread.


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## dfw_pilot

@jayhawk I wrote this in the Hot Deals thread:



dfw_pilot said:


> The S&P 500 is on sale right now.


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## dfw_pilot

rhanna said:


> I knew you couldn't sell and buy the same exact stock but I didn't realize they couldn't be substantially identical.


That's correct. The link I shared in my TLH post shared some good examples of trading partners and Bogleheads has a great list here, too. I mentioned a total stock fund and an S&P 500 fund, but there are lots to chose from.

Another simpler option is to simply leave the market for 30 days: sell into a money market fund and then buy back in 30 days later. However, I prefer to stay invested.


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## samjonester

massgrass said:


> samjonester said:
> 
> 
> 
> I'm a software consultant, so I won't have the same struggle continuing to work later into life as someone with a more physically demanding occupation would.
> 
> 
> 
> I'm an IT consultant and the age discrimination that I've seen in this field worries the bejeezus out of me. While most of the people I've seen pushed aside have been 50+, even being in your 40s is "old" and can be a liability. I worry about being in the situation where I want a job but the job doesn't want me, so for us retirement and college savings have been a top priority.
Click to expand...

Good point! Under the "insurance policy" model, you feel there's a high risk of filing a claim, so you're paying more in premiums


----------



## jayhawk

massgrass said:


> samjonester said:
> 
> 
> 
> I'm a software consultant, so I won't have the same struggle continuing to work later into life as someone with a more physically demanding occupation would.
> 
> 
> 
> I'm an IT consultant and the age discrimination that I've seen in this field worries the bejeezus out of me. While most of the people I've seen pushed aside have been 50+, even being in your 40s is "old" and can be a liability. I worry about being in the situation where I want a job but the job doesn't want me, so for us retirement and college savings have been a top priority.
Click to expand...

What ? I keep hearing that there are not "qualified" people ....can't find ...open positions. Need more H1Bs, who must be really smart, right? #sarcasm ...not to derail this thread


----------



## Smokindog

Ya, that's the line they use to get an increase in the H1B Visa's. If you're over 50, white and male you're a target. 
They would actually accidentally post on the internal sight "Only diversity candidates to be considered for this position". 
Those post were always quickly removed but ....

It's crazy.

https://www.oregonlive.com/silicon-forest/index.ssf/2018/05/federal_commission_investigati.html
https://www.oregonlive.com/silicon-forest/index.ssf/2018/09/ibm_sued_for_age_discriminatio.html



jayhawk said:


> massgrass said:
> 
> 
> 
> 
> 
> samjonester said:
> 
> 
> 
> I'm a software consultant, so I won't have the same struggle continuing to work later into life as someone with a more physically demanding occupation would.
> 
> 
> 
> I'm an IT consultant and the age discrimination that I've seen in this field worries the bejeezus out of me. While most of the people I've seen pushed aside have been 50+, even being in your 40s is "old" and can be a liability. I worry about being in the situation where I want a job but the job doesn't want me, so for us retirement and college savings have been a top priority.
> 
> Click to expand...
> 
> What ? I keep hearing that there are not "qualified" people ....can't find ...open positions. Need more H1Bs, who must be really smart, right? #sarcasm ...not to derail this thread
Click to expand...


----------



## massgrass

It's about five years old, but I came across this on another forum today since one of the participants in the piece was the guy who was dead in his car for a week before anyone noticed:

Brutal Job Search Reality for Older Americans Out of Work for Six Months or More

That is exactly why I've saved aggressively for retirement and college costs for my kids. Very sad.


----------



## CenlaLowell

massgrass said:


> It's about five years old, but I came across this on another forum today since one of the participants in the piece was the guy who was dead in his car for a week before anyone noticed:
> 
> Brutal Job Search Reality for Older Americans Out of Work for Six Months or More
> 
> That is exactly why I've saved aggressively for retirement and college costs for my kids. Very sad.


Good read, but also a very sad one. People really need to save hard while they're young to take advantage of compounding interest. I try to get this message across at work all the time.


----------



## dfw_pilot

_"About once a year people forget that the market falls 10% about once a year."_ - Morgan Housel


----------



## pennstater2005

Always good news.

https://www.apnews.com/7001b1fee4344b829b60ea66e9dfb496


----------



## dfw_pilot

+1. I updated the Contribution Limit post.


----------



## dfw_pilot

Mr. Money Mustache helped popularize _"The Shockingly Simple Math Behind Early Retirement"_.

Essentially, the time it takes to reach retirement is *directly* related to one's savings rate. If you live on 100% of your income, you'll never retire. If you live on none of it, you can retire today. The line isn't linear between the two, however:



The fantastic NetWorthify calculator takes exactly eight seconds to fill out. So click the above graph and see where you are on the retirement timeline. It can be a bit depressing if you are only saving 5% toward retirement (hint: you'll work 66 years before you can retire). Let that be a motivator to re-read this investing series and see where you can increase your savings rate. A goal to Live On Half is always a good one to have.


----------



## JulietAlpha

dfw_pilot said:


> Mr. Money Mustache helped popularize _"The Shockingly Simple Math Behind Early Retirement"_.
> 
> Essentially, the time it takes to reach retirement is *directly* related to one's savings rate. If you live on 100% of your income, you'll never retire. If you live on none of it, you can retire today. The line isn't linear between the two, however:
> 
> 
> 
> The fantastic NetWorthify calculator takes exactly eight seconds to fill out. So click the above graph and see where you are on the retirement timeline. It can be a bit depressing if you are only saving 5% toward retirement (hint: you'll work 66 years before you can retire). Let that be a motivator to re-read this investing series and see where you can increase your savings rate. A goal to Live On Half is always a good one to have.


Not sure if it is the hotel internet, but the links to networhify don't seem to be working. I keep getting "502 Bad Gateway"


----------



## dfw_pilot

It's not you. The site went down after I posted that. The TLF traffic probably crashed it, haha. JK. I think it will be up again soon.


----------



## dfw_pilot

Vanguard has announced and now implemented, lower expense ratios on 38 of their most popular funds. This is most likely in response to Fidelity lowering their expense ratios to zero on a couple of their funds. The race to zero fees is in full swing, and this is great news for investors. Remember: _In investing, you get what you don't pay for._

That being said, I don't think anyone should move their money from one brokerage company to the other: Fidelity -> Vanguard or Vanguard -> Fidelity, in chasing fees. With fees essentially zero, the better way to differentiate one index fund from another is its tracking error and after-tax return. How well a brokerage company tracks the indexes matter more than a couple basis points in fees.

For example, Vanguard is pretty hard to beat on the indexing front. The 5-year after-tax returns on their Total Stock Market index fund are 12.03% where Fidelity's is 11.82%. That's a difference of 21 basis points. Fidelity's fund has a zero expense ratio, while Vanguard charges 0.04%, or four basis points. It's better to pay 4 points on a fee to gain 21 points on after-tax returns. Vanguard can do this by flushing capital gains out of their fund via their ETF share class.

But that's really down in the weeds. The great news is: fees are trending lower, and that helps everyone. It's a great time to be an indexer.


----------



## CenlaLowell

When investing for retirement what's better investments w/ dividend or those without? In my 401k I use to have alot of investments with dividend but the company kept changing holding now I only have two that issue out dividends. @dfw_pilot


----------



## dfw_pilot

@CenlaLowell, good question. The answer is more personal than right or wrong. It also seems to be more controversial than it probably should be.

TL;DR: I come down on the side of avoiding dividends, especially outside of a tax protected account.

PhysicianOnFire agrees here, and BigLawInvestor agrees here. Those are two great articles that explain further.

I'm not totally against dividends, especially if they are in a tax protected account like an IRA or 401(k). I own a REIT fund (Real Estate) in a Roth IRA and it sends out nice dividends. But being in the Roth, I don't pay taxes on those dividends.

And that's the real rub of dividends in a brokerage account. They are a tax drag. Some are qualified (meaning they are taxed at capital gains rates) and others are not qualified (meaning you pay income tax on them). I'd rather sell shares, creating my own dividend, and pay capital gains rates on the sale, than always having to pay dividend taxes.

Even inside tax protected accounts, I still prefer limiting dividends. Basically, a company can provide a higher stock price without a dividend, or a lower stock price with a dividend. I prefer companies take the money they would have sent out as dividends and use it to reinvest in themselves, providing a higher stock price, a means to innovate, pay off debt, hire more employees, buy smaller companies, and so on. Berkshire Hathaway BRK.B for example, doesn't pay dividends.

A company like GE, who just a few years ago was doing ok, has drastically cut their dividends. This leaves investors who want a healthy dividend to have to sell and find another stock to sit on. In my opinion, it's best to stick with broad market index funds. Those kick off roughly 2% per year of mostly qualified dividends.

Dividend investing sounds nice. Simply buy enough stocks to kick off enough dividends to live off of forever. However, in my opinion, it's safer to buy index funds than be stuck with 10-20 blue chip dividend paying stocks.


----------



## iFisch3224

What do y'all think about this article? Re: mutual funds

https://apple.news/AZooaBBghTkOdFl-NLbf_vQ


----------



## dfw_pilot

I'm not currently worried. Some people speculate that even 95% of the market being indexed is ok due to efficiency. The topic comes up from time to time on Bogleheads; here's the thread with some good back and forth on the article you linked.

ETA: Here's yet another good article that discusses the myth that too much indexing is a bad thing.


----------



## iFisch3224

dfw_pilot said:


> I'm not currently worried. Some people speculate that even 95% of the market being indexed is ok due to efficiency. The topic comes up from time to time on Bogleheads; here's the thread with some good back and forth on the article you linked.


I'll check it out DFW,

But I am trying to be an active, critical thinker - I'm 31. I need to figure out how and what I'm going to diversify in, and I have a feeling today, that more and more real estate is in my future.

For now, current portfolio has averaged 64% return over the past 3 years. I'm fine where I am now. That triple leveraged Biotech ETF I stumbled across has been an amazing ride, wish I had more then my initial investment of $2,500 in there - could retire today! 😁😳


----------



## dfw_pilot

iFisch3224 said:


> For now, current portfolio has averaged 64% return over the past 3 years.


That's certainly impressive. Multi-Billion dollar endowments haven't done half that well. I'm not doubting it, but make sure you are doing the return calculations correctly. The Wiki has a good example with several downloadable spreadsheets to do it for you, as well.

I agree, that once you've maxed out retirement accounts (with diversified index funds - I'm not a fan of buying real estate inside IRA's), real estate is a great next step.


----------



## iFisch3224

Is this not the same thing?

Just a couple different screen shots.


----------



## jayhawk

@ifisch3224......might suggest Robert Oneil's "how to make money in stocks". Founder of IBD ...not a TV blowhard


----------



## dfw_pilot

Like me, the 401(k) began in 1978. With just 900 words added almost as an afterthought, the modern retirement vehicle was born.

Section (k) was added to the 1978 Revenue Act as a way for Kodak employees to use _pre-tax_ income to buy company stock. Ted Benna was a benefits specialist who realized it could be a way to save for retirement. He pitched it to companies and the rest is history. Now there is more than 5.3 Trillion dollars in 401(k) plans.

My only question is, why isn't this post in the birthday thread?


----------



## Ware

dfw_pilot said:


> ...My only question is, why isn't this post in the birthday thread?


@pennstater2005 must be sleeping on the job. :lol:


----------



## pennstater2005

Ware said:


> dfw_pilot said:
> 
> 
> 
> ...My only question is, why isn't this post in the birthday thread?
> 
> 
> 
> @pennstater2005 must be sleeping on the job. :lol:
Click to expand...

I'm awake. And it's official now per the B-day thread :thumbup:


----------



## dfw_pilot

A quick reminder that December 31st is the last trading day for 2018.

Thanks to some end of year volatility, if you have a taxable brokerage account (and everyone that has a Traditional 401(k) or IRA should), there are probably some Tax Loss Harvesting opportunities. Take some loss on paper by selling while your funds are down, buy a similar fund, and then take the capital loss off of your taxes. You don't actually lose money doing this, but you gain a larger tax break in April.

Finally, don't let the ~ 10% losses in the market scare you. These are normal. Expect 10% drops every year, and 20% corrections every three. Unless retirement is only a few years away, _embrace_ these corrections! I am. (I'm actually hoping for more, but that might be getting greedy.) When stocks are down, there is a lot of lemonade to be made from the lemons. Beyond Tax Loss Harvesting, buying funds as they decline is a drama free way to increase your returns when it's time to retire.

Here's to 2019!


----------



## CenlaLowell

Anyone worried they won't have enough when it's time to retire? I'm living in Louisiana, so the cost of living is not high, but something about having enough scares the living shit outta me.

I'm only investing in a 401k and a Roth IRA. Im doing better than average, but I feel that's not good enough.


----------



## dfw_pilot

Make sure at check out the spreadsheet I linked to and see where your spending vs savings is going. If you feel like you need more room, a taxable account is advisable. My guess is, however, that maxing out a 401k and an IRA, plus Social Security, you'll be fine.

Remember that in retirement, your expenses will probably drop a lot. You won't be saving for retirement, you won't be paying for college or a mortgage (hopefully), etc. Take your expected annual expenses in retirement, multiply them by 25, and see if you will be close to that number by retirement. A 4% withdrawal rate (25x spending) is a good rule of thumb to get you close.


----------



## Creppin

@dfw_pilot

Do you have expierence with mint.com?

I've been manually doing so by spreadsheet, but if I can simplify I think will help in long-term goals and focus efforts elsewhere.

Great thread to challenge yourself with spending.


----------



## dfw_pilot

Creppin said:


> Do you have expierence with mint.com?


Yes, earlier in the thread I've mentioned it as a good tool to help with budgeting. I used it for seven years, from 2011 until this year. It does a nice job of sorting items via learned rules, and gets smarter as you train it.

I finally got rid of it because I wasn't using it anymore. Like training wheels, once you have a good handle on your monthly expenses and get used to the monthly outgoing flow of cash, it's okay to move beyond budgets. But tools like Mint, Personal Capital, YNAB, etc, are great for starting out. They are also enlightening to people who either struggle to get to the end of the month with enough money, or earn a high salary but can't figure out why they aren't getting any wealthier.

For anyone who hasn't ever budgeted, I highly recommend Mint or something similar.


----------



## ctrav

Creppin said:


> @dfw_pilot
> 
> Do you have expierence with mint.com?
> 
> I've been manually doing so by spreadsheet, but if I can simplify I think will help in long-term goals and focus efforts elsewhere.
> 
> Great thread to challenge yourself with spending.


like @dfw_pilot said mint is good and I still use it. I dont focus on it weekly or monthly but quarterly and yearly snapshots work fro me. My hardest area to manage in the budget is food...I spend way too much


----------



## Creppin

dfw_pilot said:


> Creppin said:
> 
> 
> 
> Do you have expierence with mint.com?
> 
> 
> 
> Yes, earlier in the thread I've mentioned it as a good tool to help with budgeting. I used it for seven years, from 2011 until this year. It does a nice job of sorting items via learned rules, and gets smarter as you train it.
> 
> I finally got rid of it because I wasn't using it anymore. Like training wheels, once you have a good handle on your monthly expenses and get used to the monthly outgoing flow of cash, it's okay to move beyond budgets. But tools like Mint, Personal Capital, YNAB, etc, are great for starting out. They are also enlightening to people who either struggle to get to the end of the month with enough money, or earn a high salary but can't figure out why they aren't getting any wealthier.
> 
> For anyone who hasn't ever budgeted, I highly recommend Mint or something similar.
Click to expand...

Thanks! Yeah, I've looked it before, but was nervous to try.


----------



## Creppin

ctrav said:


> Creppin said:
> 
> 
> 
> @dfw_pilot
> 
> Do you have expierence with mint.com?
> 
> I've been manually doing so by spreadsheet, but if I can simplify I think will help in long-term goals and focus efforts elsewhere.
> 
> Great thread to challenge yourself with spending.
> 
> 
> 
> like @dfw_pilot said mint is good and I still use it. I dont focus on it weekly or monthly but quarterly and yearly snapshots work fro me. My hardest area to manage in the budget is food...I spend way too much
Click to expand...

Thanks! Good to hear it's being used. I think only budget too for me and link the bank accounts and credit cards to only track spending. Don't want a whole investment snapshot etc. mortgage linked etc but will see once I get it installed tonight.


----------



## pennstater2005

Rest In peace Jack. Father of index investing and his philosophy changed the way I invest.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=269919


----------



## daniel3507

Sad. That one man helped millions of people save/make money. An incredible change from those who made their money by taking advantage of people.


----------



## dfw_pilot

Well said. If you have a low fee fund in your portfolio, especially if it's from a broker other than Vanguard, then thank Jack Bogle. He forced the industry to match his prices, but they still can't match his company's indexing prowess. Even funds that charge less than his, still can't beat his company's after-tax returns. He revolutionized the industry and will be missed.

ETA: _"You cannot measure the quality of a man by the size of his bank account, but in John Bogle's case, you can measure it by the size of your bank account."_ -- Rick Ferri


----------



## dfw_pilot

Warren Buffett's annual shareholder letter has been released.

One little gem that's amazing? He's been investing for 77 years. If he had paid a 1% fee all these years on an S&P500 Index investment, he'd have *half* the money he'd have without that 1% fee. The S&P would have compounded at 10.8% instead of 11.8%.

Incredible. Fees matter.


----------



## Grass Clippins

@dfw_pilot Fees matter almost as much as staying invested


----------



## TC2

Thanks for some great advice! Started following it last year.

I'm currently invested in a selection of mutual funds. However, I recently came across ETFs and I'm wondering whether it's a good idea to invest in these, particularly in a taxable account as I read they are more tax efficient? Would welcome any advice!


----------



## dfw_pilot

Hey @TC2, imo, I would just buy what's more convenient.

It may be different at other brokers, but my brokerage account is at Vanguard, so I'm more familiar with them. They have a (patented?) way to flush capital gains out of their mutual funds via trades from their ETF share class. In this way, their taxability is very similar. Looking at both VTSAX and VTI, the mutual fund and ETF of the total stock market, both have a turnover of exactly 3%. Essentially, turnover is how often the fund manager has to buy and sell to track the index. Anything below 25% is great for a taxable account. Interestingly, lots of actively managed funds have turnover in the 400% range, making them a poor choice (hint: stick with passive index funds). With any fund, you can check the tax analysis of a mutual fund verses ETF at places like Morningstar.

Some things to keep in mind: You can exchange a mutual fund for an ETF tax free, but once you have an ETF, you cannot exchange it back to the mutual fund share without a taxable event. At many brokers, the ETF class may have a lower expense ratio (ER), but the gap is closing. The ER is the same at places like Vanguard. ETF's have much lower minimums than most mutual funds. I know Fidelity has a few mutual funds with zero minimums, however.

Mutual funds can be purchases with partial shares, unlike an ETF. If you have $100 to invest, you can put all $100 into a mutual fund with an automated monthly contribution set up. If you have $100 to buy an ETF, but the price is $110, you can't buy it. Also, ETF trades need to be done during trading hours, whereas buying mutual funds is more like setting up auto bill pay at your bank.

If you are a buy and hold type investor, ETF's might have more temptation to sell during trading hours, whereas mutual funds trade at the end of the day. You'd definitely want to hold the ETF's long term to get the savings from any tax advantages. For what it's worth, most of the investment blogs writers I read every day who are smarter than me use the mutual fund class without any concern.


----------



## TC2

@dfw_pilot, that makes sense thanks! :thumbup:


----------



## dfw_pilot

@TC2, I like Allan Roth, and this article about ETF/Mutuals showed up in my inbox today. Not much new over what I posted above, but more info on the subject. Cheers.


----------



## dfw_pilot

Half of older Americans have nothing in retirement savings.

48% of those 55 or older have nothing in an IRA or 401(k). 30% of those don't have a pension, either.

Don't end up like this, requiring full support from family and government. Make today the day you start to take control of your future with some of the information presented in this thread.


----------



## CenlaLowell

dfw_pilot said:


> Half of older Americans have nothing in retirement savings.
> 
> 48% of those 55 or older have nothing in an IRA or 401(k). 30% of those don't have a pension, either.
> 
> Don't end up like this, requiring full support from family and government. Make today the day you start to take control of your future with some of the information presented in this thread.


The thought of this makes me save more and more each year. Now imagine if Social security really cut benefits by 25% in 2034, crazy.


----------



## Ware

A different perspective...

No, Half of Older Americans Aren't Without Retirement Savings


----------



## dfw_pilot

Yahoo reported the first link, then Forbes said no, with a rebuttal, and now another Forbes article is a rebuttal to the rebuttal, lol. Probably some Fake News in there somewhere - I'll leave that to the pundits and GAO.

The bigger point isn't whether 50% or 25% or some other percent of Americans haven't saved enough for retirement. The point is: Are _you_ saving for retirement? The beauty of retirement savings, like I've said before, is that it isn't a contest between you and your friends, neighbors, or co-workers, but between you and your future self.

When my dad passed away a few years ago, he left my mom with $0 in retirement savings, and a mortgage payment. They fell into that percentage of people who hadn't thought enough about or saved enough for the future. The hardest conversation I've ever had with my mom was telling her there wasn't any more money. It was their story that pushed me to finally learn more about what I can do to secure my own retirement.

Today brought us all one day closer to when we'll be retired. Hopefully this thread can provide some tools and confidence that you won't end up falling short, like so many [%?] already have.


----------



## Guest

> If we expanded Social Security to provide adequate retirement for the vast majority of Americans, workers' payroll taxes would rise to about 30% of pay-up from around 12% today.


This is from the rebuttal of the rebuttal link above. Where is she getting this info?

I can tell you I pay 24% federal income tax, 7% city and state, 6.25 "social insecurity", 2% into family health insurance, thousands a year in property tax. I literally pay just shy of 40% now out of my paycheck to taxes. An 18% increase puts me at paying about 58% tax rate......I wish I was making this up.

This is proof social security is a failure. Not that it needs to be expanded.


----------



## dfw_pilot

Morgan Housel says:

_Those who think investing will be easy if you just have a long-term mindset ignore that the long run is just a collection of short runs, each of which has uncertainty, volatility, and decisions that have to be dealt with.​_
Housel is one of the best writers in finance. This is a great reminder that long-term, "staying the course" can be difficult.


----------



## dfw_pilot

A recent study finds that dual earner couples often don't save enough in their retirement accounts.

_Since dual-earner households generally earn more than one-earner households, they need more savings. But only about half of private sector workers have a workplace retirement plan at any given time, and people rarely save outside of such plans. As a result, only one person in many dual-earner couples is actually saving. In this situation, the spouse with a plan should save more to make up for the non-saving spouse. _​
Don't be average, be _better_ than average. Always calculate your retirement savings based on total take home pay, not just from the person with the 401(k) at work.


----------



## FATC1TY

What's a good starting point to help lessen the tax burden of a large capital gain event?

Looking like I could potentially be on the hook for roughly 90k in taxes, and need to find creative ways along with helping to grow some of the money long term.


----------



## dfw_pilot

Do you donate to charity?


----------



## Grass Clippins

@dfw_pilot :lol: That question reminds me of a joke about a stripper named Charity....

@FATC1TY What is the capital gain on and how long did you hold it?


----------



## dfw_pilot

@Grass Clippins, lol.

Donor advised funds could help. Leaving them to heirs can help, too.


----------



## JP900++

Grass Clippins said:


> @dfw_pilot :lol: That question reminds me of a joke about a stripper named Charity....
> 
> @FATC1TY What is the capital gain on and how long did you hold it?


Hard topic.


----------



## FATC1TY

Grass Clippins said:


> @dfw_pilot :lol: That question reminds me of a joke about a stripper named Charity....
> 
> @FATC1TY What is the capital gain on and how long did you hold it?


It was on profit interest in a company that was acquired. At the close of the deal the value was realized, and an award was made. Was given to me with a value of zero. I had the shares for over 3 years I think.


----------



## Grass Clippins

FATC1TY said:


> Grass Clippins said:
> 
> 
> 
> @dfw_pilot :lol: That question reminds me of a joke about a stripper named Charity....
> 
> @FATC1TY What is the capital gain on and how long did you hold it?
> 
> 
> 
> It was on profit interest in a company that was acquired. At the close of the deal the value was realized, and an award was made. Was given to me with a value of zero. I had the shares for over 3 years I think.
Click to expand...

Yeah you're definitely going to need to see a CPA. I do Financial Planning for a living (CFP) and when I run into these issues I always refer to a CPA for liabilities sake. Congratulations on that profit though!


----------



## dfw_pilot

Tax issues can be sticky and personal, so I agree about the CPA. Just don't let the tax tail wag the dog. IE, don't be talked into something dumb like buying an annuity or whole life insurance just to avoid taxes. Congrats on the good problem to have. Cheers!


----------



## Drewmey

Man, I just randomly found this thread. Surprised and glad to see the useful info here. I have always been interested in saving and track my expenditures pretty religiously in an excel spreadsheet. My wife and I had a savings rate of 57% last year. Shooting for 45% savings rate this year as we are having our first child and planning to renovate (2) bathrooms. Also hoping this is the first year I max my 401k deferral, currently on track.

Any FIRE followers/people with the mindset on here?


----------



## dfw_pilot

Do you get weak when you see the markets fall? Feel like selling? Enjoy some calming meditation by JL Collins, haha:

[media]https://www.youtube.com/watch?v=OOGU94eL07E&feature=youtu.be[/media]​


----------



## daniel3507

I love JL Collins. Highly recommend his book


----------



## badtlc

dfw_pilot said:


> Do you get weak when you see the markets fall? Feel like selling? Enjoy some calming meditation by JL Collins, haha:


If you aren't within 5 years of retirement, you should be happy when it dips. You get to buy stuff on sale!


----------



## dfw_pilot

*Warning*, this link may sound controversial, but I think it's an important read if you make individual stock "investments."

Why Talking About Individual Stocks (and Sectors) Makes You Look Dumb

Investing in individual stocks has many more risks than rewards. Trading against institutional traders is a losing proposition, as is listening to any guru or newsletter advice. If you really want to buy stocks, make sure an read this article several times and fully understand the odds first. Again, plain old, boring index funds are never sexy and will never make you the life of the party, but their slow quiet success over a lifetime of investing is what really counts.


----------



## Still learnin

@dfw_pilot Enjoyed the article. 
What are your thoughts on ETF's vs low cost index funds? I stick primarily to ETF's because of the reasons outlined in the article.


----------



## dfw_pilot

@Still learnin, I posted this further back up the thread. I'm basically agnostic on ETF vs Mutual funds, so buy what's convenient. However, I'm sticking with mutual funds because I like buying partial shares, not worrying about intra-day pricing, and setting up automatic monthly purchases.

Cheers!


----------



## CenlaLowell

I have a 401k with troweprice from my old job. They not long ago changes investment and now now most of is in blackrock products.

Does anyone know about this company good or bad?

They have investment like

blackrock tf2040& 2045
Blackrock index funds
Blackrock mutual fund
Etc

Trying to get a better understanding of this account and calling them didn't help me one bit.


----------



## g-man

Roll it out to another broker.


----------



## Grass Clippins

@CenlaLowell Do you have a symbol for the black rock target date fund 2040 or 2045? Sometimes employer plans have special share classes with lower expenses. It would also be helpful if you knew the expense of a comparable target date fund at your new employer plan.


----------



## CenlaLowell

Grass Clippins said:


> @CenlaLowell Do you have a symbol for the black rock target date fund 2040 or 2045? Sometimes employer plans have special share classes with lower expenses. It would also be helpful if you knew the expense of a comparable target date fund at your new employer plan.


Are you talking about this. 


Ticker: LP45L maybe
Employer charges 19$ every three months to run the entire portfolio.


----------



## CenlaLowell

These are all the investment in the portfolio


----------



## dfw_pilot

Yes, Blackrock is a good ETF and fund company, and while not the lowest cost, your expense ratio of 0.08% is very good for a 401(k) plan.

But like g-man said, if you have a current employer 401(k) with similar or even lower fees, it's a good idea to roll it over so you can see more of your money in one place. This makes it easier to rebalance and get a more full picture of your finances.

However, if you don't have a new 401(k), the fees are high, or you don't plan on ever doing Backdoor Roth IRA's you can always roll it over to an IRA and have a lot more fund choices.


----------



## CenlaLowell

dfw_pilot said:


> Yes, Blackrock is a good ETF and fund company, and while not the lowest cost, your expense ratio of 0.08% is very good for a 401(k) plan.
> 
> But like g-man said, if you have a current employer 401(k) with similar or even lower fees, it's a good idea to roll it over so you can see more of your money in one place. This makes it easier to rebalance and get a more full picture of your finances.
> 
> However, if you don't have a new 401(k), the fees are high, or you don't plan on ever doing Backdoor Roth IRA's you can always roll it over to an IRA and have a lot more fund choices.


Thanks for this advice


----------



## jayhawk

Still learnin said:


> @dfw_pilot Enjoyed the article.
> What are your thoughts on ETF's vs low cost index funds? I stick primarily to ETF's because of the reasons outlined in the article.


Just know what you're buying. Some ETFs are market cap weighted ...(xlf, xle) meaning, skewed to one 1 or 2 of the larger companies. Are you that much better off in JPM or XLF, looking at their charts?


----------



## dfw_pilot

Mike Piper is a CPA, author of several books on Social Security, and blogs at The Oblivious Investor. It's a fantastic blog and I never miss an article.

He wrote an amazing analogy as to why investing profitably in individual stocks is so hard. I wont reproduce the entire article here due to copyright, but the whole post is a 90 second read, and a salient portion is below.

He imagines you and a friend going to an antique fair, where you are looking to buy an undervalued item in hopes of selling it again later on eBay for a profit. You want to get there early so you can find that special and profitable deal, before everything is already picked over . . .



> _. . . You arrive at the market as soon as it opens, Saturday morning.
> 
> But you promptly learn that your friend misread the advertisement. The show opened yesterday. Thousands of shoppers - including many experienced antique bargain hunters - have already been through, picking over all the items.
> 
> *In fact* you learn from another shopper that many of the vendors themselves shopped around at other booths, buying items they thought were underpriced, and then putting them back up for sale at their own booths, at higher prices that they considered more appropriate.
> 
> How optimistic are you at this point that you're likely to find a bargain worth buying?
> 
> Not very, probably.
> 
> That's the stock market. Except . . ._ Article continues -->​


----------



## pennstater2005

dfw_pilot said:


> Mike Piper is a CPA, author of several books on Social Security, and blogs at The Oblivious Investor. It's a fantastic blog and I never miss an article.
> 
> He wrote an amazing analogy as to why investing profitably in individual stocks is so hard. I wont reproduce the entire article here due to copyright, but the whole post is a 90 second read, and a salient portion is below.
> 
> He imagines you and a friend going to an antique fair, where you are looking to buy an undervalued item in hopes of selling it again later on eBay for a profit. You want to get there early so you can find that special and profitable deal, before everything is already picked over . . .
> 
> 
> 
> 
> _. . . You arrive at the market as soon as it opens, Saturday morning.
> 
> But you promptly learn that your friend misread the advertisement. The show opened yesterday. Thousands of shoppers - including many experienced antique bargain hunters - have already been through, picking over all the items.
> 
> *In fact* you learn from another shopper that many of the vendors themselves shopped around at other booths, buying items they thought were underpriced, and then putting them back up for sale at their own booths, at higher prices that they considered more appropriate.
> 
> How optimistic are you at this point that you're likely to find a bargain worth buying?
> 
> Not very, probably.
> 
> That's the stock market. Except . . ._ Article continues -->​
Click to expand...

I plan on buying his book for each of my parents. He has answered a few of my questions in the past as well.


----------



## dfw_pilot

pennstater2005 said:


> I plan on buying his book for each of my parents.


Yes, I've heard nothing but praise for his "made simple" series of books.


----------



## bhutchinson87

Looks like the IRS is increasing retirement contribution limits by $500 for 2020.

https://www.irs.gov/newsroom/401k-c...o-19500-for-2020-catch-up-limit-rises-to-6500


----------



## dfw_pilot

bhutchinson87 said:



> Looks like the IRS is increasing retirement contribution limits by $500 for 2020.
> 
> https://www.irs.gov/newsroom/401k-c...o-19500-for-2020-catch-up-limit-rises-to-6500


Thanks! My Contributions Limit post is updated with the new figures.


----------



## claydus

My work has a 401k that I contribute to and the investment options are below. I am not axing out my 401k contributions. I want look into ETF fund. What could I do to do this? A new taxable account? Or an additional 401k?

Thoughts?

Allocation Conservative
American Fds Ret Inc Port Con	
Bond
Metro West Total Return Bond	
Pimco Diversified Income Fund	
Cash/Stable Value
Rtc-Ny Life Anchor Account	
International
American Fds Europac Gr R4	
Large Cap
Bny Mellon S&P 500 Index	
Dodge & Cox Stock	
T Rowe Price Blue Chip Growth	
Mid Cap
American Beacon Mid Cap Value	
T Rowe Mid-Cap Growth Fd Adv	
Small Cap
Hartford Small Cap Growth Hls	
Nuveen Small Cap Value	
Specialty
T Rowe Price Real Estate
Target Date
American Funds Target 2015 R4	
American Funds Target 2020 R4	
American Funds Target 2025 R4	
American Funds Target 2030 R4	
American Funds Target 2035 R4	
American Funds Target 2040 R4	
American Funds Target 2045 R4	
American Funds Target 2050 R4	
American Funds Target 2055 R4


----------



## dfw_pilot

claydus said:


> . . . I want look into ETF fund. What could I do to do this? A new taxable account? Or an additional 401k?


If there is a fund you'd like to invest in, but it isn't in your 401(k), you'd have to invest in it elsewhere, like a brokerage account.

Yes, you can have more than one 401(k) but they have to be from different jobs, like a main job and a side gig contractor job. You can only defer $19,500 [2020] across all 401(k)'s you have. Employer contributions (or you if self employed) can make further contributions, up to $57k in _each_ 401(k)!

If investing in a brokerage account, make sure the ETF is a tax efficient fund, like a total US stock fund, and not like a US REIT fund, for example.

If you are investing in a 401(k) with tax deferred money, I highly recommend saving your "tax break" into a taxable brokerage account. In this way, when your deferred taxes come due, you have a large taxable account to not only pay the taxes, but give you lots of spending flexibility up until retirement and after. The tax drag on tax efficient funds in a taxable account is minimal, and shouldn't be glossed over.

Tax efficient funds in a brokerage account aren't as good as Roth money, but it's close.


----------



## claydus

dfw_pilot said:


> claydus said:
> 
> 
> 
> . . . I want look into ETF fund. What could I do to do this? A new taxable account? Or an additional 401k?
> 
> 
> 
> If there is a fund you'd like to invest in, but it isn't in your 401(k), you'd have to invest in it elsewhere, like a brokerage account.
Click to expand...

Did a little research today read a little bit into TDAmeriTrade, Fidelity and Vanguard brokerages. I hear that Vanguard has some really low fees compared to other. Still getting my feet wet trying to sort out. If I have $1000 to start with today... what brokerages and funds do I qualify for?

All of these seems to be good for a beginner like me
Fideility
TDAmeritrade
CharlesSchwab
AllyInvest


----------



## dfw_pilot

claydus said:


> If I have $1000 to start with today... what brokerages and funds do I qualify for?


I depends on the funds you want to invest in. Stocks and ETF's trade at their share price, so you'd only need enough to buy the shares you want plus any fees. Ex: $122.45 a share; you could buy 8 shares before fees.

I'm not a big fan of trading, however. It becomes too exciting, then it becomes work, then you lose money when you buy high and sell low. Or you end up paying too much in capital gains. For retirement, I highly recommend buying quality index funds. You can do that in any brokerage account. You can't go wrong with the big three: Fidelity, Vanguard, and Schwab. Plus, $1,000 should get you into most funds without any problem.


----------



## Guest

I'm a fan of index funds too. Always considered them ideal.

DFW, I think you would find this interesting.

https://www.youtube.com/watch?v=ocJH1HRR09g&t=724s


----------



## dfw_pilot

Good video, and I agree. I've read lots of articles that worry about index bubbles, but I don't think indexing is going to cause problems. Like the video discusses, the market is too efficient for large concern, imo.

As an aside, I love his desk. It reminds me of this one, which I almost bought . . . but didn't. Dang I love it though.


----------



## DIY Lawn Guy

This is a great topic for me because I have been investing since the late '80's and now both my wife and I are retired.

I have never owned an individual stock or bond. I always use mutual funds like from Fidelity, T Rowe Price and Vanguard. Funds such as, Small Cap Value, Emerging Mkts, Growth Funds, Magellan, Blue Chip and the like and these days, I am ONLY in Index Funds.

For many years there were various random picks of 20 or so stocks (on January 1st) from all the NYSE total list made by MONKEYS, or THROWING DARTS at the NYSE list and CHICKEN Scratches on the NYSE stock pages VERSUS the "PROS" 20 stock picks. At the end of each year, the RANDOM picks beat the PROS every time!

Now for me at my age and risk tolerance, all my IRA's are in Vanguard or T Rowe Price BOND Index Funds, Domestic Bond (Investment Grade) Fund to be exact. I'm at a gain of about 9% YTD. Great for a bond fund.

I pulled my wife's IRA in T Rowe Price Capital Appreciation (up 19% YTD) and put it in a bond index fund too because we MUST focus on capital preservation at this stage in life.

If your investment mix keeps you up at night with worries, you need to restructure your portfolio so you can sleep soundly with your chosen risk mix.

I sleep soundly, not getting rich, but not losing money either. As long as I can stay significantly ahead of inflation, it's good with me.


----------



## Guest

DFW - that guy runs a good channel and the desk is pretty sweet. Being a pilot it would make sense to have an "aviator wing desk." I am cheap and insist on a standing desk. It is better for your back. This is my desk

https://www.amazon.com/SHW-55-Inch-Electric-Adjustable-Computer/dp/B07Q3TGL7M/ref=sxin_3_ac_d_pm?ac_md=4-2-QWJvdmUgJDIwMA%3D%3D-ac_d_pm&crid=3FJKMVT7J6FQT&keywords=standing+desk&pd_rd_i=B07Q3TGL7M&pd_rd_r=dd7a54c0-f962-4e4b-a5dd-4f6ccd4ad62f&pd_rd_w=YSILu&pd_rd_wg=0iaSM&pf_rd_p=24d053a8-30a1-4822-a2ff-4d1ab2b984fc&pf_rd_r=DWE6WJMZF9HVRDJT5NTK&psc=1&qid=1574221442&sprefix=standing+des%2Caps%2C166

This thread is a gold mine really.

DFW - what do you think about investing 5-10% with a company match up to 5%, opposed to investing 15-20% for a few even 2-3 years and just hammering out double or triple payments on the house? It weighs on me to have a mortgage.


----------



## DIY Lawn Guy

dfw wrote:

"When the market drops, emotions run high, panic sets in, fear takes over and you end up doing the worst thing you could do: sell. The buy and hold strategy is very proven, but for it to work, you actually have to buy and hold. The worst time to sell is when the market is dropping, outlooks are bleak, and the world economy is tumbling (2008). This is especially true as a new retiree. As John Bogle has said when the markets are dropping: _"Don't just do something, stand there!"_ It can be tough when your family, neighbors, and the financial media are all squawking in your ear that you are crazy to be buying. I'm reminded of Mr. Potter. "When everyone else was panicking, he was buying." Why? Because he was smart and had seen all this before."










Right on dfw!

It is said that no one can 'time' the stock market. well yes and no IMHO. Sorta like Mr. Potter said. Here is my own personal experience with market timing:

In the months before Black Monday;
___________________________________________________________

Monday, October 19,1987 is known as Black Monday. On that day, stockbrokers in New York, London, Hong Kong, Berlin, Tokyo and just about any other city with an exchange stared at the figures running across their displays with a growing sense of dread. A financial strut had buckled, and the strain brought world markets tumbling down.

________________________________________________________

I was heavily invested in major mutual Fidelity stock funds, especial the flagship Magellan fund. I was getting nervous because the market was too up and the mass of advice was " buy buy buy!". My gut told me to look-out!

So, cautious guy that I am, I reduced my stock/mutual fund exposure to about 15% of before, parked the cash in a money market account and slept better at night :thumbup:

Black Monday hits! I feel like a smart guy now. What did this 'cautious guy' do on Wednesday of that week?. I believed that Black Monday was not a rational event, not driven by fundamentals but human panic and maybe computer-driven trip points.

On Wednesday of that week I bought heavily back into my Magellan mutual stock fund account. IIRC, the price had fallen to about half the price of the previous week and I believed that this event, Black Monday, was a mirage, not really what it looked like.

By the end of the Black Monday, year 1987, my total return on the year was 13.5%. My tax guy and CFA told me that "I got lucky". Maybe I did, but I think that a mild dose of being a stock market contrarian aided my choices at that time.

Like I said in a peviuos post, I'm all bond index these days, but I felt like a genuis with my moves right after Black Monday.


----------



## dfw_pilot

Wow, your hunch paid off! Just don't let hunches, guesses, and timing [_that works out well_] embolden you to make more timing bets. Being emboldened can lead to trouble. I'll bet, that had you simply "stood there" and held, instead of going to cash, you'd have come out pretty well ahead, too. In this case, you did even better! Kudos. :thumbup:

_"Time in the market trumps timing the market."_


----------



## DIY Lawn Guy

After hours of reading this very interesting and years long post, the comments, experiences and advice, it just dawned on me that all this money management knowledge is really just common sense when you begin to grasp the basic premise of it.

It pretty much boils down to: work diligently, live BELOW your means, buy carefully, invest consistently (without greediness).

In the mid 20th century and before that time, I think that it was thought to be a virtue to live sensibly and frugally. My father passed on all this "common sense" behavior to me as a kid. It just seemed so pragmatic and logical AND wise.

There is no shame in a basic frugal lifestyle. As a matter of fact, I truly enjoy being frugal as I have never had to worry about paying my bills because I keep them low and avoid credit debt like the plague.

A friend of mine, knowing of my careful spending habits once remarked to me; "Do you know what the birds say as you walk by them?......CHEAP CHEAP CHEAP!" lol.

So thanks to DFW for the OP and the 10 section advice about money management and other TLF'ers for their thoughts too.

It is really just old fashion financial wisdom that got lost somewhere in the last 50 years for millions of Americans.

One last thought. My late father had a little roll of stickers printed up in the 1980's. He put the little stickers on the letters he sent to us children. The sticker said; "The future will arrive. Money will be required. Plan for it now".


----------



## pennstater2005

Keep expenses low. That was a game changer for me. Paying 1% ER vs .1% can be an astronomical difference over 30 years.


----------



## dfw_pilot

I love it all - good words, and well said, gents.


----------



## dfw_pilot

I'm amazed at the power of _"time in the market." _

More money has been lost waiting for a correction than has actually been lost in corrections. I think it comes down to human nature, and how unintuitive investing can seem at times.

Theories like "buying the dip" sound great on paper but rarely work out in reality. Getting in and out of cash also sounds great on paper but rarely works out, either. This is because one has to be right two times: once to get out and once to get back in. It's tricky business.

The simple answer to all of this is buy and hold. Another great strategy is to put your fears of market corrections aside and simply buy in when you have the money. Get a paycheck? Buy in. Get a lump sum of inheritance? Buy in. Time in the market trumps timing the market. The math proves it to be true.

I was astounded to read the wisdom of how that actually works out, not just in theory, but also in reality, when Of Dollars and Data wrote:

The Cost of Waiting

If you get $100k inheritance, the math and history say you are best off simply putting it into the market immediately, even if a correction is seemingly imminent. _What??_ Yes. People are so fearful of doing so, they often dollar cost average it in over 24 months rather than right away. However, even if they took their $100k and put it all in on a conservative bond fund, they would likely come out ahead of simply DCA into a stock fund.

It's a short yet profound article that explains why lump sum is so important; why time in the market (lump sum) often beats timing the market (dollar cost averaging) when investing. We dollar cost average because we are nervous, but we lump sum to win.

This is why I highly recommend front loading all retirement accounts as much as possible because it gets us closest to lump sum as we can. Max out the 401(k) by mid year; put all IRA money into the account on January 2nd. Get your money working for you as soon as you can!

Cheers.


----------



## dfw_pilot

macdawg said:


> DFW - what do you think about investing 5-10% with a company match up to 5%, opposed to investing 15-20% for a few even 2-3 years and just hammering out double or triple payments on the house? It weighs on me to have a mortgage.


Sorry, I just saw this. Honestly, this is the age-old question with no right or wrong answer. No one who's paid off their mortgage ever regrets it. But time in the market trumps much anything else for returns.

Since you asked my opinion, it is this: The mortgage will pay itself off in time, but you can never go back in time and fill up your retirement accounts and reap the compound returns. Once you've missed that chance, it's gone forever.

Personally, I recommend maxing out retirement accounts prior to paying significantly more on a low rate mortgage. I always threw $300-$500 extra at my mortgage, just to shave off some interest, but I'd never make double or triple payments on it until I had maxed out all my retirement accounts and saved significantly into a taxable account. Doing that? Then load up on the debt payments.

No right or wrong answers here. YMMV.

Cheers!

ETA: Food for thought: I paid off my mortgage but my housing costs didn't go down.


----------



## Guest

Thanks DFW. I think I will stick to paying about $500 extra per month and then leave it alone. I will keep a big fat emergency fund to sleep easy at night and then spend, give or invest the rest.


----------



## dfw_pilot

macdawg said:


> I think I will stick to paying about $500 extra per month and then leave it alone. I will keep a big fat emergency fund to sleep easy at night.


 :thumbup:

Until your taxable account is large enough*, I like this Ally CD for E-Funds.

*Another endless debatable topic, lol.


----------



## Guest

I've been using this: https://www.ally.com/bank/online-savings-account/

When I opened that account about a year ago it was 2%, better than the bank and easy way to store money on the side.


----------



## jayhawk

S&P 500 Index would be my choice in the above options.

Left over, Roth IRA max it (instead of car payments) Assuming you have 20 years + ....QQQ index


----------



## Guest

.


----------



## dfw_pilot

Real Estate

This question pops up in investing circles a lot: Mutual Funds or Real Estate? My answer: Yes. :bd:

My personal recommendation is to max out tax advantaged retirement accounts first, and then with excess money, move up to real estate. My reasoning is that passive index funds are easier, and take less effort and know-how to utilize the tax advantages. 1031 exchanges aren't as easy as selecting "Traditional 401(k) Contributions" from a drop down list.

_I have no current real estate_ holdings, but I have family that holds a lot, and it's certainly been good to them. 40%+ returns are much easier to obtain in RE than passive index MFs. Maybe some true "BiggerPockets" types will chime in.

There is always a decent halfway mix called a REIT.

Returns

Calculating accurate returns can be tricky. The Beardstown Ladies proved that. The returns listed inside one's investment accounts will be accurate, but when combining multiple accounts or using different types of return can cause confusion. Calculating money-weighted returns vs time-weighted returns will show different values.

I use this Bogleheads spreadsheet. They recommend it when comparing returns because it gets everyone on the same page. Here are my returns, which contains two Roth IRAs, an HSA, a 401(k), 4 529 plans, a DAF, and a taxable brokerage account. Cheers!


----------



## bhutchinson87

Thanks for the spreadsheet, DFW, I'll have to dig into that.

My 401K (with JH, bleh) is up 22.39% this year. One of my colleagues has his up 27.14%. His account is mostly the in-house 500 index fund.


----------



## Guest

Yeah, great post as always DFW! Thank you for the links and looks like we all had a great year. Cheers to your goals in 2020.


----------



## Wolverine

Let's hope for 4 more years of Trump in 2020 and keep the gains rolling!


----------



## srogue

Absolutely


----------



## dfw_pilot

A new year is upon us. I use the beginning of the year to look over my current investments and plan for the next year.

*Rebalance*

Have a look at rebalancing your portfolio. Stocks and bonds grow (and fall) at different rates. If your risk preference is to have a stock to bond allocation of 60/40, there's a good chance that it's no longer 60/40 thanks to the great returns in 2019. If it has grown to 65/35, you might consider rebalancing back to 60/40. Nothing fancy needs to be done, and I don't recommend doing it very often, but use your birthday or the first of the year to check in and rebalance as necessary.

If you have funds that are both in taxable accounts and tax protected retirement accounts, only rebalance what's in your IRA/HSA/401k. Doing so will save on any capital gains taxation when you exchange in a brokerage account.

*Front Load the IRA's*

On January 2nd[/sup], you can put in $6,000 into your IRA, and six thousand more for a spouse. You can put in an extra $1,000 when age 50+. These limits often go up every year or so. One way to do this is put in money each month, and that's pretty common. I'm not a fan of common, though. :bd:

What we do is pay ourselves $1,000 each month, so that at the end of the year, we already have $12k to put it all in on day one, January 2[sup]nd. This is called front loading and it get's all $12k working for you all year, instead of just a bit each month. History has shown that this pays off way more often than it doesn't. When you get a large enough taxable account, just buy $1k/mo in a tax efficient mutual fund like VTSAX, and then sell some of your shares to fund your IRAs. Prior to having a large taxable account, just save the money in a money market or CD.

It _does_ take a bit of initial saving to get the front loading plan to work. Get in the habit of front loading, and it will help you ensure you properly fund your retirement accounts prior to spending it on other projects that always tend to come up.

_Remember: You never earn too much to make use of an IRA!_

*Employer Plans*

Finally, have a look at your workplace 401(k). Make sure you are happy with the investment choices you are currently investing in. Are the fees on the funds less than 0.25%? Do you even know what fees you are paying? Choose passive, broad index based funds with the lowest fees if you want the best long term gains. Do some rebalancing if you need to. Also check to make sure you are contributing as much as you can afford into this account. Again, front loading works great here. But at an absolute minimum, make sure you contribute enough to capture any and all employer matching funds.

Often times, employers have access to institutional shares that have lower expense ratios than you will have access to in an IRA or taxable account. What does this mean? Buy the funds in the accounts where they are cheapest. I invest in three funds: A Total US stock index fund, a Total International stock index fund, and a Total US bond index fund. Simple. The bond and international fund is 4x cheaper to buy in my 401(k) than it is in our Roth IRA's. Therefore, I only buy the Total US stock index fund in our Roth's and buy the international and bond fund in my 401(k) to get to the stock/bond allocation I'm happy with.

Happy investing, and cheers to 2020!


----------



## JDgreen18

Hello all anyone use M1 Finance as a brokerage. I opened an account last month and think its pretty awesome. It has free trades as most brokerages do now. You can create your own portfolio and with the help of fractional shares you can deposit smaller amounts of money and still own stock like Amazon or Google just parts of the stock lol. This allows you to deposit as little as couple hundred a month and build up an account over time. What else is nice is the auto reinvest that as you earn dividends or make deposits it will invest them for you. Also as you create your portfolio you allocate the percentage you want in each pie and each stock so as you reinvest it will buy the pies or stocks that lost percentage do in turn you are buying when the stock is down vs up.
Anyway they have a referral program if you open an account, taxable or retirement, and fund it (this can be as little as $100 for taxable & $500 for retirement) we will both get $20. Just follow the link below to get the $20 https://mbsy.co/DHZwV


----------



## smurg

claydus said:


> My work has a 401k that I contribute to and the investment options are below. I am not axing out my 401k contributions. I want look into ETF fund. What could I do to do this? A new taxable account? Or an additional 401k?
> 
> Thoughts?
> 
> Allocation Conservative
> American Fds Ret Inc Port Con
> Bond
> Metro West Total Return Bond
> Pimco Diversified Income Fund
> Cash/Stable Value
> Rtc-Ny Life Anchor Account
> International
> American Fds Europac Gr R4
> Large Cap
> Bny Mellon S&P 500 Index
> Dodge & Cox Stock
> T Rowe Price Blue Chip Growth
> Mid Cap
> American Beacon Mid Cap Value
> T Rowe Mid-Cap Growth Fd Adv
> Small Cap
> Hartford Small Cap Growth Hls
> Nuveen Small Cap Value
> Specialty
> T Rowe Price Real Estate
> Target Date
> American Funds Target 2015 R4
> American Funds Target 2020 R4
> American Funds Target 2025 R4
> American Funds Target 2030 R4
> American Funds Target 2035 R4
> American Funds Target 2040 R4
> American Funds Target 2045 R4
> American Funds Target 2050 R4
> American Funds Target 2055 R4


Those expense ratios are a bit high, so if your company does a 401k match, I would max out that benefit before doing anything else. If they don't match or once you contribute enough to get the full match, I'd open an IRA if you don't have one already and contribute there. Vanguard, Fidelity, or Schwab are all pretty close in terms of low cost options, but I'd stick all my money in an S&P500 fund or total market and call it a day.


----------



## 440mag

claydus said:


> My work has a 401k that I contribute to and the investment options are below. I am not axing out my 401k contributions. I want look into ETF fund. What could I do to do this? A new taxable account? Or an additional 401k?
> 
> Thoughts?


Happily for you, Numerous of the funds on your list can also be found on this roster! "*The 30 Best Mutual Funds in 401(k) Retirement Plans*" https://finance.yahoo.com/news/30-best-mutual-funds-401-173818070.html

Of your list, the funds I have experience with (own or owned) these are screaming sound (long) investments:

*Dodge & Cox Stock* (perennial appearance on many (most) "Best of" funds lists!)

Symbol: DODGX

Type: U.S. stock

Expense ratio: 0.52%

One-year return: 6.5%

Three-year annualized return:12.3%

Five-year annualized return: 8.6%

10-year annualized return: 12.6%

Rank among the top 401(k) funds: #10

Best for: Patient buy-and-hold investors.

Ten Dodge & Cox Stock managers analyze companies with a three- to five-year time horizon in mind. They steer toward well-established firms with attractive long-term prospects that trade at bargain prices. At the moment, top holdings include the likes of Charles Schwab (SCHW) and Capital One Financial (COF).

At times, their investment thesis can take years to play out, which can drag on returns. But patient investors will find the fund typically delivers over the long haul.

Over the past decade, DODGX's 12.6% annualized return bests 86% of its peers: mutual funds that invest in value-priced large companies.

*T Rowe Price Blue Chip Growth* (perennial list-near-topper on many (most) "Best of" funds lists!)

Symbol: TRBCX

Type: U.S. stock

Expense ratio: 0.7%

One-year return: 14.4%

Three-year annualized return: 19.4%

Five-year annualized return: 13.8%

10-year annualized return: 16.2%

Rank among the top 401(k) funds: #32

Best for: Aggressive investors with long time-horizons.

*Only a few actively managed funds consistently beat the broad stock market. T. Rowe Price Blue Chip Growth, a Kip 25 member, is one of them.*

Manager Larry Puglia fills his portfolio with established companies that boast strong free cash flow (cash profits after capital outlays), above-average earnings growth and smart executives at the top. A big chunk of the fund's $65 billion in assets sits in technology, health-care and consumer-oriented firms.

TRBCX holds roughly 130 stocks and has a turnover rate of 27%, which is half that of its peers: mutual funds that invest in large, growing companies.

*T Rowe Mid-Cap Growth* (ding, Ding, DING!!!!!!!!!!!!!! this fund is closed to new investors and most I know would give just about anything to have access to this proven, proven manager and performance! (Along with TRP's Capital Appreciation (PRWCX) I have owned and DCA'ed into this fund RPMGX since its inception which I have to give the nod to Morningstar for (back then, wayyyyyy before personal computers, I would go to the local library and pore over the huge Morningstar reference "bible" sheet-size pages. My family, including heirs not even born yet, OWE SO MUCH to Mgr Brian Berghuis, it is hard to quantify ... (BUY ... THIS ... FUND!) :thumbup: 
Symbol: RPMGX

Type: U.S. stock

Expense ratio: 0.75%

One-year return: 15.9%

Three-year annualized return: 16.4%

Five-year annualized return: 12.2%

10-year annualized return: 15.4%

Rank among the top 401(k) funds: #49

Best for: Investors seeking exposure to growing midsize companies.

Midsize-company stocks don't fetch as much attention as their large and small brethren do, but T. Rowe Price Mid-Cap Growth is hard to overlook. *Over the past one, three, five and 10-year periods, the fund has outpaced the S&P 500 and the S&P MidCap 400 - with less volatility than the average midsize-company stock, too.*

Manager Brian Berghuis likes fast-growing companies that trade at a reasonable price. At last report, medical-device makers Cooper Companies and Teleflex (TFX), as well as Ball (BLL), known for its ubiquitous jars, were among the biggest holdings. *RPMGX is closed to new investors, but this rule doesn't apply if the fund is in your 401(k) plan.*


----------



## 440mag

Food for thought ... "*How To Maintain And Compound ... Wealth*" https://www.forbes.com/sites/martinsosnoff/2020/01/22/how-to-maintain-and-compound-inherited-wealth/#51c772772f58


----------



## SGrabs33

Wondering what the usual mutual fun "transaction fee" is for most brokerages.

I was going to buy some Vanguard today and was :shock: when I saw a $75 transaction fee on Fidelity.


----------



## dfw_pilot

I think Vanguard has dropped most all their fees to zero or near zero. I thought that was the case with the other few large brokerages.

If you are getting fees, try buying the in-house mutual fund instead, which is usually free or much cheaper. IE, buy Fido funds at Fidelity, Schwab funds at Schwab, etc. I thought though, that the fee wars had brought them all to zero. Which funds were you trying to buy for $75, and at which brokerage?


----------



## Ware

SGrabs33 said:


> Wondering what the usual mutual fun "transaction fee" is for most brokerages.
> 
> I was going to buy some Vanguard today and was :shock: when I saw a $75 transaction fee on Fidelity.


I'm at Fidelity too. Check out this page for Boglehead-style investing at Fidelity. It has a table of Fidelity equivalents for a variety of Vanguard funds. These options will be no-commission trades at Fidelity.


----------



## SGrabs33

Ware said:


> SGrabs33 said:
> 
> 
> 
> Wondering what the usual mutual fun "transaction fee" is for most brokerages.
> 
> I was going to buy some Vanguard today and was :shock: when I saw a $75 transaction fee on Fidelity.
> 
> 
> 
> I'm at Fidelity too. Check out this page for Boglehead-style investing at Fidelity. It has a table of Fidelity equivalents for a variety of Vanguard funds. These options will be no-commission trades at Fidelity.
Click to expand...

Exactly what I needed. Thanks.


----------



## SGrabs33

@Ware taxable account unfortunately which isn't great with fidelity funds.

A little more research and I found " Highly tax-efficient total market index funds available commission-free at Fidelity: ITOT [iShares Core S&P Total U.S. Stock Market ETF], IXUS [iShares Core MSCI Total International Stock ETF]. I would use those."

Thanks!


----------



## Ware

SGrabs33 said:


> Ware taxable account unfortunately which isn't great with fidelity funds.
> 
> A little more research and I found " Highly tax-efficient total market index funds available commission-free at Fidelity: ITOT [iShares Core S&P Total U.S. Stock Market ETF], IXUS [iShares Core MSCI Total International Stock ETF]. I would use those."
> 
> Thanks!


Yes, we use those commission-free BlackRock iShares quite a bit in our taxable accounts - mostly in the two you mentioned, as well as IVV (S&P 500 Index). :thumbup:


----------



## Ware

Here is a breakdown of their "core" ETF's:


----------



## SGrabs33

@Ware perfecto 👌🏻


----------



## CenlaLowell

SGrabs33 said:


> Wondering what the usual mutual fun "transaction fee" is for most brokerages.
> 
> I was going to buy some Vanguard today and was :shock: when I saw a $75 transaction fee on Fidelity.


You can still buy it ETF version of the fund without the fee I believe. Another thing you can do is match the same type of fund in Fidelity.


----------



## dfw_pilot

_"Wealth Is What You Don't Spend"_ - Morgan Housel

It seems so obvious right? You have a million dollars because you _didn't spend_ that million dollars.

Morgan Housel is such a great writer, he hits the nail on the head again. Household incomes are up over double from what they were in the 1950's, but we don't save any more money today than we did back then. Why? Because we spend it. He explains it so simply and beautifully by connecting it to trying to lose weight.

You can spend or save the extra earnings you make. Most of us spend it.

Wealth Is What You Don't Spend


----------



## dfw_pilot

*Roth Conversions*

Roth _conversions_ are a way boost your tax free money within retirement accounts. This is when you have money in a Traditional 401(k) or IRA and you convert some or all of the balance to a Roth 401(k) or Roth IRA. In this way, you are converting tax deferred money to Roth, and paying taxes on it after the conversion.

*Example*

I ran into a situation in December, where I was going to end up with an unexpectedly high tax refund. I used the excellent TaxCaster in December to get an idea of my potential refund, which was higher than I wanted it to be. December is too late to make changes to the W-4. It wasn't too late, however, to make some Roth conversions inside my Traditional 401(k).

I converted a portion of my Traditional 401(k) balance to the Roth 401(k) side of the account. This has the effect of adding money to my W-2, increasing the taxes owed in April. This in turn, reduced a potential high refund, but also allowed me to painlessly get more money into my Roth 401(k).

*Money is Fungible*

To be sure: _money is fungible_. It can be used for more than one project. I could have also simply received the higher refund and then used those funds to deposit into my Backdoor Roth. But, this doesn't get me more Roth money in my 401(k), and it puts that refund at risk of being spent. This was a surefire way to get more Roth money into my 401(k) while reducing the refund.

How much to convert? Take your marginal tax rate and multiply it by how much you want to convert to get close to what taxes you'll owe on the conversion. I highly recommend looking at TaxCaster. If you find yourself looking at a large refund, know that you have options besides getting a lot of money back in April.

*Estimate*

Also, the TCJA changed W-4 forms, so use the IRS estimator to make sure you are getting the smallest refund possible. Hint: There are no more "withholdings". Fill out the estimator and it will let you print a PDF of your updated numbers which you can then update with your employer.


----------



## tommyboy

Found this site for tax estimating also. Love it. Estimate current and future year/s. Key word being estimate.
Can save and reload estimates.
https://www.mortgagecalculator.org/calcs/1040-calculator.php


----------



## 440mag

*﻿PRGTX re-opening to new investors *

This is info (great news!) worth sharing!

https://www.sec.gov/Archives/edgar/data/1116626/000111662620000006/gtfstatsticker2720-20202.htm

Some context: https://www.morningstar.com/funds/xnas/prgtx/quote

A new manager is settling in.
Summary 
| by Katie Rushkewicz Reichart, CFA Aug 23, 2019
T. Rowe Price Global Technology retains its Morningstar Analyst Rating of Neutral as its new manager settles in.

A meaningful transition occurred on March 31, 2019. Predecessor Josh Spencer left for T. Rowe Price New Horizons PRNHX, leaving this closed strategy to Alan Tu, a tech analyst who has covered enterprise software since joining T. Rowe in 2014. Spencer's departure was a loss, as he'd posted exceptional returns since his 2012 start.

Tu has taken logical steps in his short stint as lead manager. He has worked to build relationships across the analyst team in industries where he has less experience, such as semiconductors, media, and Internet, travelling with analysts to visit prominent companies such as Netflix NFLX, Amazon.com AMZN, and others in Asia. He transitioned the portfolio throughout the first half of the year, which wasn't a radical overhaul. Indeed, the June 2019 portfolio had 79% of its holdings in common with the Dec. 31, 2018, iteration.

Still, Tu has put his stamp on the portfolio. As telegraphed, he's broadened out the portfolio to 44 public holdings as of June 2019 from 31 in late 2018 and upped the mid-cap stake to 15% from 10%. Unsurprisingly, he's delved into more software names, his area of expertise, buying firms such as Zen Desk ZEN, New Relic NEWR, and Twilio TWLO; he admits valuations are at historic highs for software as a whole, but likes the fundamentals and long-term growth prospects of those companies and has limited most to less than 1% of assets. He's more valuation-conscious in cyclical industries such as semiconductors, where he's taken some profits. Notably, he reduced the 10% stake in former top holding NXP NXPI.

Tactical trading will be toned down. Tu is unlikely to replicate Spencer's valuation-based, fast-trading approach that resulted in high turnover, instead taking a long-term view on competitively advantaged companies. This more muted approach has worked well across other T. Rowe offerings, and Tu has a talented analyst team for support. While there are positives in place, Tu needs to show he can effectively execute at his first management charge.


----------



## dfw_pilot

It's about time we had a sale.

Use offer codes "Corona2020" and "Panicky10" for an extra 10% off.


----------



## SGrabs33

dfw_pilot said:


> It's about time we had a sale.
> 
> Use offer codes "Corona2020" and "Panicky10" for an extra 10% off.


I'm ok with Panicky2.5 but Panicky10 wouldn't be my favorite.


----------



## dfw_pilot

SGrabs33 said:


> I'm ok with Panicky2.5 but Panicky10 wouldn't be my favorite.


I think SARS dropped the market about 10%. But if you are still in the accumulation phase, long term, cheaper funds are a good thing.


----------



## smurg

@dfw_pilot, this is a solid accumulation of content that I've read over different forums over the last few years that hits the nail on the head time and time again between all the different sections you covered.

The only gripe I have is with your comment on credit card usage under "Every Dollar Counts". Between card benefits (rental coverage, travel insurance, price matching, theft coverage, etc.), security versus a debit card (fraud), sign-up rewards, and cashback, using cash or a debit card leaves money on the table. If used in the wrong way, it can cost you money for sure.

I avoid using automatic bill pay as I get into the groove of checking all my accounts weekly to make sure bills are paid before they even post, there's no fraud, check dinner receipts if tips were added on in the correct amounts, etc.


----------



## dfw_pilot

@smurg, I'm with you 100%.

I mentioned:



> Credit cards are for convenience, not credit. Are you using them for credit? Cut them up and use cash, or at minimum, use a debit card. Imagine a world where people aren't mastered by a card.


I use credit cards for convenience, ie, cash back and fraud and balance protection, etc. However, I still think that if people are using them for credit, where they need revolving balances to make ends meet, and paying high interest to do so, it's time to switch to cash and forego the convenience until spending is under control.

I'm also with you on checking in on accounts. I'm OCD enough I keep them on autopay but still log in (probably too often) to see what's going on.

Cheers!


----------



## smurg

dfw_pilot said:


> @smurg, I'm with you 100%.
> 
> I mentioned:
> 
> 
> 
> 
> Credit cards are for convenience, not credit. Are you using them for credit? Cut them up and use cash, or at minimum, use a debit card. Imagine a world where people aren't mastered by a card.
> 
> 
> 
> I use credit cards for convenience, ie, cash back and fraud and balance protection, etc. However, I still think that if people are using them for credit, where they need revolving balances to make ends meet, and paying high interest to do so, it's time to switch to cash and forego the convenience until spending is under control.
> 
> I'm also with you on checking in on accounts. I'm OCD enough I keep them on autopay but still log in (probably too often) to see what's going on.
> 
> Cheers!
Click to expand...

Ah gotcha, may have missed those notes. Working through a $300 BOA direct deposit bonus right now and will be going for for minimum spend CC bonus on a Chase card in a bit.


----------



## dfw_pilot

Some of you may have short term losses in a brokerage account. Don't forget this is a great time to:

1) Dump the investments you don't like (ie, individual stocks) and trade them for index funds,

2) Tax Loss Harvest your losses.

Tax Loss Harvest is a *great* way to stay invested but get up to $3,000 off your taxes. Have $33k in losses? Carryover $3k in losses for 11 years.


----------



## DIY Lawn Guy

Seems like good time to cherry-pick a new stock mutual fund for my IRA. So, even though my IRA investment-grade bond index fund has been very positive all 2020 (and 2019) I pulled out about 20% of that fund and put the money in a Morning Star 5 star Blue Chip Growth fund this afternoon. The fund is a behemoth, $71B in assets.

Now that my wife and I have both been retired for 6 month living on our pensions and Soc. Sec, we are still saving money, so I now have the confidence to get a little deeper into stock mutual funds for my IRA.

Only God knows the future, but He does impart wisdom to those who ask. I asked and then invested.


----------



## pennstater2005

I keep cash reserves for times like this.


----------



## daniel3507

pennstater2005 said:


> I keep cash reserves for times like this.


Smart. I'm stuck waiting for transfers from my bank to my IRA to clear right now.


----------



## FlowRider

I've gone to using cash again a lot more. Can't be hacked, and not traceable, not that I have anything to hide. I distrust data mining....

Used a credit card at a restaurant out in Marina Del Ray. Got a call from my card company wanting to know if I was buying women's shoes in Maryland online. I said heck no. They asked "what about your wife?"

I said "I'll conference her in." Bride said heck to the no too.

Killed the card, bank denied the charges. After that, I watch the account anytime I travel via text alerts on usage. Waitresses were skimming numbers. Money must be tight out in Cali...!

Scared to look at my 401(k) balance right now.... :bd:


----------



## pennstater2005

Just to clarify, when I say cash reserves I mean as in used to buy shares of index funds immediately when my rebalance bands strike. I don't keep actual paper money anywhere.


----------



## driver_7

I'm down 4% right now on my 401(k). Not the worst, but still made me sad when I logged in this week.

Logged in just now after posting, -8.84%. :|


----------



## CenlaLowell

717driver said:


> I'm down 4% right now on my 401(k). Not the worst, but still made me sad when I logged in this week.
> 
> Logged in just now after posting, -8.84%. :|


You should be happy because everything is on sale.. the market going down is a good buying opportunity for long term investors. Brought a bunch of index funds on Thursday.


----------



## daniel3507

The market would have an awesome day today now that I'm waiting for my mutual fund order to process today :roll:


----------



## jayhawk

i doubt we've seen the lows but finding /picking the bottom is not the goal......once the trend resumes, bull market runs are longer.


----------



## kds

dfw_pilot said:


> It's about time we had a sale.
> 
> Use offer codes "Corona2020" and "Panicky10" for an extra 10% off.


 :lol:



jayhawk said:


> i doubt we've seen the lows but finding /picking the bottom is not the goal......once the trend resumes, bull market runs are longer.


I've been watching the markets intently over the past few weeks and have a spreadsheet set up with stocks I want to buy that lists prices and other stats that update automatically. I know you shouldn't time the market but dang I want to time the market!


----------



## dfw_pilot

"The only thing we have to fear, is fear itself."


----------



## daniel3507

dfw_pilot said:


> "The only thing we have to fear, is fear itself."


And spiders...


----------



## Drewmey

dfw_pilot said:


> *Example*
> 
> I ran into a situation in December, where I was going to end up with an unexpectedly high tax refund. I used the excellent TaxCaster in December to get an idea of my potential refund, which was higher than I wanted it to be. December is too late to make changes to the W-4. It wasn't too late, however, to make some Roth conversions inside my Traditional 401(k).
> 
> I converted a portion of my Traditional 401(k) balance to the Roth 401(k) side of the account. This has the effect of adding money to my W-2, increasing the taxes owed in April. This in turn, reduced a potential high refund, but also allowed me to painlessly get more money into my Roth 401(k).


Wouldn't you have been better getting the tax refund in Feb/early March and simply investing it in a brokerage account? You still paid that tax at your current tax rate. Which will more than likely be lower in retirement. So I would have thought putting off paying the tax until retirement (lower bracket) would be the better option.


----------



## Grass Clippins

@Drewmey sounds like you're optimistic the income tax brackets won't rise in the future 😏. Not gettIng into politics.


----------



## Drewmey

Grass Clippins said:


> @Drewmey sounds like you're optimistic the income tax brackets won't rise in the future 😏. Not gettIng into politics.


Haha good point. I do agree that we will likely be required to move in that direction, regardless of anyone's political stance.

I guess it depends on where your savings are coming from. I think about 1/3 of my retirement withdrawals will be from brokerage (so no income tax implications from withdrawing those). We also save about 1/2 of our income at the moment (meaning that if spending is similar in retirement, I will only be taxed on the half that I withdraw).

So looking at my particular scenario, Since I only spend about half of what I currently make, the tax bracket that I fall into at retirement will literally be cut in half (as I'm now taxed on what I withdraw, not what I make). Then in addition, 1/3 of my withdraws will come from brokerage. So this would require taxes to basically triple to be in the same tax bracket that I currently am. Obviously other people may have drastically different scenarios that I didn't consider. I can't imagine a world where my effective Federal tax rate remains at ~12% when my "income" is cut by 66%. Point being, things would need to change *drastically* for me to be in a higher tax bracket during retirement than I am now. For these reasons I mentally favor tradition over Roth, but this reasoning really only works for people in a similar situation.


----------



## Grass Clippins

@Drewmey I get where you're coming from. Everyone has their own way of saving. Who's to say what is right or wrong when we don't know what the future holds for us in regards to taxes. I personally prefer to do a combination of traditional and roth vehicles to allow for strategy in my later years. More Roth than Tradition because I'm not optimistic about our nations spending problem. I do 90% of my investing in retirement accounts because money grows quicker in there and I'm emotionally more comfortable dealing with fluctuation, that may sound odd but it works for me.

Regarding Roth vs Trad., one thing you may want to look into is something they call the "Tax Torpedo". The RMD at age 72 (see secure act) sounds modest but if you've amassed a surplus of tax deferred money this can totally destroy your tax situation. People who are retired today are dealing with the fact that it doesn't take much to get your combined income over the point of having up to 85% of your social security benefits added back to earned income. How and when they came up with those limits is a different discusion.


----------



## dfw_pilot

Drewmey said:


> Wouldn't you have been better getting the tax refund in Feb/early March and simply investing it in a brokerage account?


Maybe, maybe not. The next line after what you quoted stated:

_"To be sure: money is fungible. It can be used for more than one project. I could have also simply received the higher refund and then used those funds to deposit into my Backdoor Roth."_​
Or brokerage account, or HSA, or . . . you name it. The difference between the 401(k) and brokerage savings is mostly behavior for me: I can always spend the brokerage account if I want to, but I view the 401(k) money as "locked in" until retirement. Which is a good thing. As far as taxes - they vary widely and are hard to predict.

For me, fortunate enough to have a good pension, based on income and tax rates, Roth is right for me currently.

Also, for those public employees with a pension, or those who max out their retirement accounts, Harry Sit agrees: Roth 401(k) is a good move. Check out those links, but always do your own "maths" for your specific situation. Again, no real right or wrong answers here. :thumbup:


----------



## Drewmey

dfw_pilot said:


> Drewmey said:
> 
> 
> 
> Wouldn't you have been better getting the tax refund in Feb/early March and simply investing it in a brokerage account?
> 
> 
> 
> Maybe, maybe not. The next line after what you quoted stated:
> 
> _"To be sure: money is fungible. It can be used for more than one project. I could have also simply received the higher refund and then used those funds to deposit into my Backdoor Roth."_​
> Or brokerage account, or HSA, or . . . you name it. The difference between the 401(k) and brokerage savings is mostly behavior for me: I can always spend the brokerage account if I want to, but I view the 401(k) money as "locked in" until retirement. Which is a good thing. As far as taxes - they vary widely and are hard to predict.
> 
> For me, fortunate enough to have a good pension, based on income and tax rates, Roth is right for me currently.
> 
> Also, for those public employees with a pension, or those who max out their retirement accounts, Harry Sit agrees: Roth 401(k) is a good move. Check out those links, but always do your own "maths" for your specific situation. Again, no real right or wrong answers here. :thumbup:
Click to expand...

Thanks, it is always interesting to see different situations and how they create different ways of approaching retirement savings.

I am hoping to retire around 50. So I plan to use a combination of 72t distributions and Roth Conversion Ladders to access my traditional retirement funds. To use the Roth Conversion Ladder, I will need roughly 5 years of accessible income outside of my 401k and Roth IRA (only some of which will be contributions eligible to withdraw without penalty). So my wife and I both try to max out our 401k's, Roth IRA's and then save additional in brokerage to be used for those first 5 years of retirement.

I think Roth's have their place, but for me the math does not point towards all/mostly Roth working out well for me for (2) reasons:

1. Right now a married couple can withdraw $24k of traditional retirement income tax free by using the standard deduction. Assuming a roughly 4% safe withdrawal rate (mine is personally 3.7%), this means that I should have traditional accounts totaling roughly $600k ($24k / 4%) to maximize *not paying taxes on $24k every year*. So I would argue that everyone should have at least $600k in traditional accounts at retirement to maximize not getting taxed on the front _*or*_ back end, with the exception of people who plan to immediately take social security or pensions (like you have).

2. Currently my wife and I make a combined ~$130k per year (varies based on bonus), yet only spend roughly $60k/year. Right now we are taxed off of a salary of $130k (minus deductions). In retirement, we will be taxed off of our spending, which would only $60k assuming *none comes from our Roth IRA or brokerage*, an unlikely assumption. I can't see how our tax rates would ever be higher, even if drastically increased due to political changes.

I choose to still use a Roth IRA though because it provides some flexibility that @Grass Clippins mentioned. In addition, we are not always eligible for the full traditional IRA deduction, depending on how our bonuses turn out each year.

Thanks both of you for your perspective and insight. It is always interesting to hear from others on these topics.


----------



## dfw_pilot

With ya 100%. Like I said earlier in the thread:



dfw_pilot said:


> The correct answer to Roth or Traditional? Both.


----------



## Drewmey

dfw_pilot said:


> With ya 100%. Like I said earlier in the thread:
> 
> 
> 
> dfw_pilot said:
> 
> 
> 
> The correct answer to Roth or Traditional? Both.
Click to expand...

And again, I wasn't disagreeing with you there. Just elaborating on how I find it interesting that different personal scenarios can create different retirement strategies...pretty drastically different. I hadn't thought about the implications of a pension in quite a while.


----------



## dfw_pilot

The TCJA is another good reason for potentially going Roth for now. However, I'm a big fan of Traditional as well because a tax break now (on contribution) can be better than a tax break later , i.e. the time value of money.

A lot has to go into the decision for sure. Cheers!


----------



## SGrabs33

Front loading everywhere you can @dfw_pilot?


----------



## dfw_pilot

SGrabs33 said:


> Front loading everywhere you can @dfw_pilot?


Both Backdoor Roth IRA's maxed Jan 2. Whoops, I'd like to have those back.

Same with the 529's.

401(k) deferral maxes out Mar 31. Good timing on that one.

HSA is DCA'd all year for the FICA tax savings.

Historically, Front Loading pays off. It also keeps me from spending it on guns and ammo, haha.


----------



## SGrabs33

dfw_pilot said:


> SGrabs33 said:
> 
> 
> 
> Front loading everywhere you can @dfw_pilot?
> 
> 
> 
> Both Backdoor Roth IRA's maxed Jan 2. Whoops, I'd like to have those back.
> 
> Same with the 529's.
> 
> 401(k) deferral maxes out Mar 31. Good timing on that one.
> 
> HSA is DCA'd all year for the FICA tax savings.
> 
> Historically, Front Loading pays off. It also keeps me from spending it on guns and ammo, haha.
Click to expand...

 :thumbup: :thumbup: :thumbup:


----------



## pennstater2005

Bought some more. I sent my Dad a text a couple weeks ago to not sell stocks. He replied back he already moved 80k to cash left 20k in stocks and took 5k out. I told him you instantly lost money by selling. Two weeks later, and I'm not a market timer, I'm glad he did it. I've been telling him for years he had too much in stocks. He finally found out.


----------



## CenlaLowell

pennstater2005 said:


> Bought some more. I sent my Dad a text a couple weeks ago to not sell stocks. He replied back he already moved 80k to cash left 20k in stocks and took 5k out. I told him you instantly lost money by selling. Two weeks later, and I'm not a market timer, I'm glad he did it. I've been telling him for years he had too much in stocks. He finally found out.


Never understood why people panic when the market goes down all it means is stocks are on sale. I also tell everyone don't check that account everyday because you get fixated on the amount of money and that causes you to make rash decisions.

Keep your head down, move forward, and keep investing us what I've always been told. So far so good.


----------



## Grass Clippins

@CenlaLowell Sad reality is that most people buy high and sell low. If you're not familiar with it research "Odd Lot Theory".


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## 440mag

I (very sadly) know so many people who lost their financial independence back in October, 1987 - because they panicked. (Full disclosure: it wasn't a matter of me being "braver" than any family or friends but rather, my being in a time and place (plainclothes assignment) that I could not have surfaced and liquidated any of my investments even if I'd had the desire to do so. I call it "dumb luck," really. But instead, I have looked back years later - and even now - upon THE IMPORTANT LESSONS in the below videos which I've never forgotten (and I hope I never do)!

*Barry Ritholtz* unearthed the footage from 1987 and assembled the full airing into 3 parts back in 2012 with many still reeling from an equally dark time ... these videos have helped me keep my feet on the ground more than once since they actually aired but, I HAVE GOT TO FIND SOMEPLACE TO PUT THESE THREE VIDEOS WHERE I WILL NEVER, EVER "NOT BE ABLE" TO FIND THEM AGAIN and I am choosing one other forum I frequent - and here!

PS - the upper video, Part I is the MUST WATCH now, in late March, 2020 but, the 2 lower videos are mis-labeled and it is the middle video, Part 2, that contains the real-life titan John Templeton doing his thing ...

Hope they are of interest / usefulness here, in 2020 .... (they certainly underscore why keeping a personal investing journal can be so critical!)

*After the Crash: Louis Rukeyser Wall Street Week Oct. 23, 1987*

_October 19, 2012 7:15am by Barry Ritholtz

First 10 minutes of Wall Street Week episode from Friday October 23, 1987 just after the market crash on black Monday October 19. Hosted by Louis Rukeyser, guests included John Templeton, Steven Einhorn and William Schreyer._:
https://ritholtz.com/2012/10/after-the-crash-louis-rukeyser-wall-street-week-oct-23-1987/


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## dfw_pilot

I rebalanced today. I use 5% as a band. Even as "bad" as it's been, I was only just at 5% out of spec on my allocation. Rebalancing is a great way to sell high and buy low. :thumbup:


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## kds

I just switched jobs and my previous employer isn't letting me keep my balance in their 401(k) plan. I was hoping I could keep it there while the markets are volatile -- I didn't want to roll over to my new plan and have the markets rise between the time the check is issued to the time my new fund receives my check. Here's to hoping the market goes down while the check is in the mail &#129310;&#127995;


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## cldrunner

Thanks for that link. I really enjoy listening to John Templeton. He was one of the great mutual fund investors of his time. He was also a great man.


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## dfw_pilot

Repost! "Meditation when the market drops." lol

[media]https://www.youtube.com/watch?v=OOGU94eL07E&feature=youtu.be[/media]​


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## Ware

Not necessarily suggesting this strategy, but enjoyed watching this. :thumbup:

https://youtu.be/Bwyo5OP5MPo


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## 440mag

kds said:


> I just switched jobs and my previous employer isn't letting me keep my balance in their 401(k) plan. I was hoping I could keep it there while the markets are volatile -- I didn't want to roll over to my new plan and have the markets rise between the time the check is issued to the time my new fund receives my check. Here's to hoping the market goes down while the check is in the mail 🤞🏻


2 thoughts:

1) most 401ks (ie, your new employer) have a Money Market Fund. Actually, under new rules, it is possible it will need to go into some form of "holding fund" for a couple days anyway. Just leave it there. (That would be a mistake IMHO, though; experience has shown me time and time again worrying about the market "going down" or "up" and not putting your dollars to work ASAP nearly always comes back to bite ...

2) *CONTACT T ROWE PRICE IMMEDIATELY AND ENLIST THEIR ASSISTANCE in rolling your old employers 401k into a Traditional IRA with T. Rowe Price! LITTLE KNOWN FACT: doing so will give you access to a boy of some of the worlds best performing funds and managers that are CLOSED to new investors EXCEPT 401k / 457b plans being rolled over into a T-IRA w TRP.*

TRP reps are great and my oldest was very intimidated by all this / was dealing with lazy, inept people in his old employers HR section but, he didn't even have to ask the TRP rep set up a 3-way conference and guided the HR dolts at his old employer through what they needed to do to get his 401k transferred into his T-IRA at TRP and he has never looked back!

*We're talking best of the best funds such as PRWCX (a Closed Fund most would kill to have access to!); RPMGX; PRNHX, OTCFX, PRSVX, PRHYX, TRMCX.*

Many / most are Morningstar 5- and 4-star Medalist funds; you really are looking at a very rare, only once in a _______ opportunity - SEIZE IT!!!!!

Best o' Success!


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## Ware

440mag said:


> kds said:
> 
> 
> 
> I just switched jobs and my previous employer isn't letting me keep my balance in their 401(k) plan...
> 
> 
> 
> 2) *CONTACT T ROWE PRICE IMMEDIATELY AND ENLIST THEIR ASSISTANCE in rolling your old employers 401k into a Traditional IRA... doing so will give you access to a boy of some of the worlds best performing funds...*
Click to expand...

I once did this with an old employer's 401k balance - rolled it into a Traditional IRA instead of my new employer's 401k to open up my investment options for that money. However, I later regretted it because a Traditional IRA balance blocks your ability to efficiently do a backdoor Roth contribution.

You can fix it, but it creates some extra steps. So if you exceed (or see yourself exceeding) the MAGI limits for a Roth IRA and even remotely think you may want to do a backdoor Roth contribution now or in the future, I would just go ahead and roll it into your new employer's 401k now. It will save you some headache down the road. :thumbup:


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## jayhawk

kds said:


> I just switched jobs and my previous employer isn't letting me keep my balance in their 401(k) plan. I was hoping I could keep it there while the markets are volatile -- I didn't want to roll over to my new plan and have the markets rise between the time the check is issued to the time my new fund receives my check. Here's to hoping the market goes down while the check is in the mail 🤞🏻


You have time. Bear markets, arent a flash event. I prefer more flexibility a rollover provides....

Roll it, low 'cost' QQQ is hard to beat and liquid if you can't handle individual stahks


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## Guest

.


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## Guest

.


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## Grass Clippins

@macdawg Brace yourself... most companies offer a Roth 401k. Aside from that you would be amazed at the wealth one can accumulate over the years by only contributing $6k/year.


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## Guest

.


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## Grass Clippins

@macdawg Who knows the real number. I've been told 7 in 10 companies offer a Roth 401K. Usually, not always, it's your big companies with big plans that offer the Roth 401k. Seems like more people are working for big companies vs mid/small companies now a days. Debating Roth vs Traditional is a fruitless endeavor with people who have already picked their side.

:lol: I didn't say that you said you can can't build wealth in a roth at 6k a year.... :lol: I'm just messing with you know.


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## dfw_pilot

Yes: that's my answer to one vs the other, haha.

The best option is often unknowable, so we each have to make our best guess based on our own situations and income. The new TCJA marginal rates made me switch to Roth 401k for at least one more year based on income. But even when I switch back to Traditional, I'll still do Backdoor Roth IRA's and Mega Backdoor Roth at all income levels, because: why not?

Cheers.


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## cldrunner

Not many people know about 401(A) contributions. Yes that is an A not a K. Some plans allow after tax contributions. My plan allows after tax. This provision is way better than a backdoor IRA. It allow participants to put upwards of 50K into after tax contributions. Why do this? FLEXIBILITY! You have three options with this money. 1. Keep it in the 401K to grow tax free. 2. Roll it over to a ROTH IRA.(Backdoor ROTH in large amounts) 3. Take the money out as a cash distribution with tax only on the gains.

This allow you to build an emergency fund inside of your 401k.


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## dfw_pilot

@cldrunner, like this!


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## Ware

cldrunner said:


> Not many people know about 401(A) contributions...


You work in government, education or for a non-profit?


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## cldrunner

Ware said:


> cldrunner said:
> 
> 
> 
> Not many people know about 401(A) contributions...
> 
> 
> 
> You work in government, education or for a non-profit?
Click to expand...

No. I work for a large for profit(well not much profit the last few weeks) U.S. based company.


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## Ware

cldrunner said:


> Ware said:
> 
> 
> 
> 
> 
> cldrunner said:
> 
> 
> 
> Not many people know about 401(A) contributions...
> 
> 
> 
> You work in government, education or for a non-profit?
> 
> Click to expand...
> 
> No. I work for a large for profit(well not much profit the last few weeks) U.S. based company.
Click to expand...

That's pretty uncommon. Most of us have to play the hand we're dealt.


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## cldrunner

dfw_pilot said:


> @cldrunner, like this!


YES! I have been contributing after tax 401(A) for years. It's times like this allow me to look into my 401K and see the emergency fund that I have built up if needed. I actually roll most of my funds into my self directed ROTH IRA that I buy real estate with. My IRA's own single family rentals but that is a whole other topic.


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## cldrunner

Ware said:


> cldrunner said:
> 
> 
> 
> 
> 
> Ware said:
> 
> 
> 
> You work in government, education or for a non-profit?
> 
> 
> 
> No. I work for a large for profit(well not much profit the last few weeks) U.S. based company.
> 
> Click to expand...
> 
> That's pretty uncommon. Most of us have to play the hand we're dealt.
Click to expand...

I am not an accountant but I think the new law passed a few days ago is going to allow a similiar transaction for up to 100K. It may allow workers who are affected by Covid 19 (we may all be), to take funds out of a 401K and roll into Roth and pay taxes over 3 years. I am still trying to figure this out. My plan has not formally allowed this or the 100k loan at this time yet.


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## Grass Clippins

@cldrunner You are correct. People are able to avoid the penalty and pay taxes over a three year period vs 1 year with hardship withdrawal. This would be a good opportunity to convert to Roth to take advantage of 3 year stretch. What I'm anxious to see is how they (IRS) think they're going to get these tax payment from people who are dealing with a true hardship. Typically they do a mandatory 20% withholding, at withdrawal, to get ahead of the issue but it sounds like they aren't going to withhold anything from what I read.


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## 440mag

Alert!

*T. Rowe Price Mid-Cap Value Fund reopens to new investors*

497 1 c497.htm

T. Rowe Price Mid-Cap Value Fund

https://www.sec.gov/Archives/edgar/data/1012678/000174177320000799/c497.htm

Supplement to Prospectus Dated May 1, 2020

Effective June 5, 2020, the T. Rowe Price Mid-Cap Value Fund will resume accepting new accounts and purchases from most investors who invest directly with T. Rowe Price.

Accordingly, effective June 5, 2020, the first sentence under "Purchase and Sale of Fund Shares" in Section 1, and the first four paragraphs under "More Information About the Fund and Its Investment Risks" in Section 3, are deleted in their entirety from the prospectus.

Financial intermediaries and other institutional clients should contact T. Rowe Price Financial Institution Services or their relationship manager to determine eligibility to open new accounts and purchase shares of the fund.

The date of this supplement is May 5, 2020.

F115-041 5/5/20


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## 440mag

440mag said:


> [
> 2) *CONTACT T ROWE PRICE IMMEDIATELY AND ENLIST THEIR ASSISTANCE in rolling your old employers 401k into a Traditional IRA with T. Rowe Price! LITTLE KNOWN FACT: doing so will give you access to a bevy of some of the worlds best performing funds and managers that are CLOSED to new investors EXCEPT 401k / 457b plans being rolled over into a T-IRA w TRP.*
> *We're talking best of the best funds such as PRWCX (a Closed Fund most would kill to have access to!)
> *


*

@kds And on ^^^ that ^^^ note! :lol:

here's some interesting reading. Btw, Giroux PM, my treasured PRWCX (and largest managed stake) doesn't do interviews often, at all ... managers like this are few and far between but they are the reason to own A VERY SELECT FEW managed funds (not a sleight at index funds, they have their place in any portfolio).

The point here is, THE ONLY WAY ANY INVESTOR CAN ACCESS PRWCX IS BY ROLLING A 401 or 457 over to a IRA with TRPrice; a heck of an oppty in a position to do so ... 

Interview here: https://www.marketwatch.com/story/these-16-stocks-figured-prominently-in-this-39-billion-fund-managers-strategy-as-markets-dove-in-march-2020-06-03?siteid=yhoof2&yptr=yahoo

Best o' Success!*


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## IaHawk

Not sure how I am just seeing this but its very timely as I've just switched employers and have been researching HSA's, Roth 401ks, etc. Thank you @dfw_pilot ! This is awesome, lots of reading to do though!

I turned 40 this year and I know I'm behind where I need to be but prepared to hit it hard now. My wife on the other hand did it the right way and started out early has been consistent 10-15%...she's 2 years younger and has me doubled up. I got off to a slow start in my mid 20's, did ok in my 30s and then basically stopped any investment the last 3 years for various reasons but I'm ready to get back after it! New company has a great 401k match, offers Roth 401k, has HSA with annual contributions and even stock options. I'd also like to start contributing to my kid's 529 plans again but just not sure what to prioritize.

If anyone wants to take a shot at mentoring me I'm all for it, just shoot me a pm. I love this stuff, but just lots to learn.


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## dfw_pilot

IaHawk said:


> New company has a great 401k match, offers Roth 401k, has HSA with annual contributions and even stock options. I'd also like to start contributing to my kid's 529 plans again but just not sure what to prioritize.
> 
> If anyone wants to take a shot at mentoring me I'm all for it, just shoot me a pm. I love this stuff, but just lots to learn.


Priorities can be fuzzy, but I'd start here. I'd personally put 529's after step 4. You want to help your kids, but if you don't help yourself (by being financially secure in retirement) you'll just be a burden to your kids, not a help.

Post here or feel free to PM if you have more questions; if this thread helps just one or two people get a handle on their retirement savings, it was worth it. Cheers.


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## jayhawk

I'm using ARK investments etfs for wife and college funds ....Cathy Wood is the real deal. Research and look at performance.


----------



## Thick n Dense

Guys so looking for advice here.... I've done my own research but want to make sure I understand the back door roth correctly...

So my employer offers both a 401k and a roth 401k... having a roth 401K is pretty awesome as I can invest nearly like ~25K of post tax but gain tax exempt earnings. (19K in the 401k Roth Plan + 6K in traditional roth)

There is one good very good mutual fund that I get a discount on management fee's which is also a benefit HOWEVER, I'd take to take some riskier investments and all my funds are trapped in the employer 401K plan.
I'd like to move my money from my 401K Roth to a Traditional Roth that's already setup and not associated with my employer to allow me to invest into securities that my 401K plan does not offer.
As I understand it, I'm allowed to transfer my 401K Roth balance to the traditional roth outside my 401K without penalty correct? 
I called both my employer and the broker and they said basically a check will be sent from the employer to the broker and added to my funds... this seems risky to me...

Does this make sense? Is this how it's traditionally done? Is a mail in check the way it's always handled? am I breaking any rules?

Thanks in advance, I'm sure that some of you can at least make me feel better about this....


----------



## dfw_pilot

Yes, you can roll out your Roth 401(k) to a personal Roth IRA tax free. They send a check to your home as a security measure. It will only be payable to your new broker and sending it to your home overnight keeps someone from draining your account via only an electronic transaction. You'll be fine.

Cheers.


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## Thick n Dense

dfw_pilot said:


> Yes, you can roll out your Roth 401(k) to a personal Roth IRA tax free. They send a check to your home as a security measure. It will only be payable to your new broker and sending it to your home overnight keeps someone from draining your account via only an electronic transaction. You'll be fine.
> 
> Cheers.


Thanks DFW !!!


----------



## CoopyHarry

Question

Looking at my avail 401k offerings should I always pick the low expense ratio over higher ones ?

For example there that I can choose and have some invested in currently without even really knowing anything other than looking for good 5-10 year return numbers

AOFYX 0.87 ER. 10 year performance 16.30%
WFSPX 0.03 ER. 10 year performance 13.67%
TBCIX 0.56 ER. 10 year performance 18.14%

I'm not known for my smarts but at least I know the .03 ER will cost me the least. Does that cover the lower 10 year return number or can one not look at that for a real world performance figure ?

Thanks.


----------



## dfw_pilot

CoopyHarry said:


> AOFYX 0.87 ER. 10 year performance 16.30%
> WFSPX 0.03 ER. 10 year performance 13.67%
> TBCIX 0.56 ER. 10 year performance 18.14%


The shortest answer is: There's no way to know for sure.

The slightly longer answer is: It depends.

What does it depend on? Your overall investment strategy and your goals. Do you want to invest in targeted sectors like Blue Chip [TBCIX], Small caps [AOFYX], or the overall market like the S&P500 [WFSPX]?

My personal choice is to invest in the total market as much as I can. It helps to keep fees low, and it usually provides automated low cost funds [0.03%] instead of actively managed funds with fund managers that have to guess or get lucky and have to be paid [0.87%].

The Callan Periodic Table posted a few pages back shows how the different sectors do really well some years and come in dead last other years. I prefer the slower but steady, and cheaper, total market funds. That way I know for sure I'm not having to pay too much, plus the long run shows that they will usually come out on top over an investing lifetime, say 40 years.

Your Blue Chip fund has done really well. Morningstar shows that it's had some really good years which kind of inflate the numbers over the short run (<10 years). Will it keep going up? Will the past performance continue? Will the fund managers continue to make the right choices (guesses)? That's for you to decide, but I know what answer I'd give.

Counter intuitively, the periodic table linked shows that really, _you should be buying funds that have current poor performance_, instead of jumping on the ones that are already high in the sky. IE, I'd rather buy Amazon at $30 instead of $3,000.

When I used to have a 401(k) that had expensive funds in it (more than 0.50%), I bought the cheapest 401(k) fund, an S&P500 fund, and then bought a cheap bond and international fund in my IRA to balance it out. If you have enough money in an IRA or HSA, you could do that.

If your 401(k) has any Target Date funds that are less than 0.25%, you could try them instead too. Most of the time, the hands off simplicity of TDF's can bring a zen that few can get to.

*Bottom Line*

Finally, I'd say that the bottom line is don't stress. Pick some funds and save every month rain or shine. Pick an asset allocation and stick with it. Rebalance. Fund your retirement budget before buying toys like new trucks, boats, campers, etc. Save where you can. All of that is way more important than this fund or that fund, this expense ratio or that one, this 10-year gain or that one.

Cheers!


----------



## CoopyHarry

dfw_pilot said:


> CoopyHarry said:
> 
> 
> 
> AOFYX 0.87 ER. 10 year performance 16.30%
> WFSPX 0.03 ER. 10 year performance 13.67%
> TBCIX 0.56 ER. 10 year performance 18.14%
> 
> 
> 
> The shortest answer is: There's no way to know for sure.
> 
> The slightly longer answer is: It depends.
> 
> What does it depend on? Your overall investment strategy and your goals. Do you want to invest in targeted sectors like Blue Chip [TBCIX], Small caps [AOFYX], or the overall market like the S&P500 [WFSPX]?
> 
> My personal choice is to invest in the total market as much as I can. It helps to keep fees low, and it usually provides automated low cost funds [0.03%] instead of actively managed funds with fund managers that have to guess or get lucky and have to be paid [0.87%].
> 
> The Callan Periodic Table posted a few pages back shows how the different sectors do really well some years and come in dead last other years. I prefer the slower but steady, and cheaper, total market funds. That way I know for sure I'm not having to pay too much, plus the long run shows that they will usually come out on top over an investing lifetime, say 40 years.
> 
> Your Blue Chip fund has done really well. Morningstar shows that it's had some really good years which kind of inflate the numbers over the short run (<10 years). Will it keep going up? Will the past performance continue? Will the fund managers continue to make the right choices (guesses)? That's for you to decide, but I know what answer I'd give.
> 
> Counter intuitively, the periodic table linked shows that really, _you should be buying funds that have current poor performance_, instead of jumping on the ones that are already high in the sky. IE, I'd rather buy Amazon at $30 instead of $3,000.
> 
> When I used to have a 401(k) that had expensive funds in it (more than 0.50%), I bought the cheapest 401(k) fund, an S&P500 fund, and then bought a cheap bond and international fund in my IRA to balance it out. If you have enough money in an IRA or HSA, you could do that.
> 
> If your 401(k) has any Target Date funds that are less than 0.25%, you could try them instead too. Most of the time, the hands off simplicity of TDF's can bring a zen that few can get to.
> 
> *Bottom Line*
> 
> Finally, I'd say that the bottom line is don't stress. Pick some funds and save every month rain or shine. Pick an asset allocation and stick with it. Rebalance. Fund your retirement budget before buying toys like new trucks, boats, campers, etc. Save where you can. All of that is way more important than this fund or that fund, this expense ratio or that one, this 10-year gain or that one.
> 
> Cheers!
Click to expand...

Thanks my friend! I'm maxing out my plan just wanted input on the expense ratio vs known past performance

We are targeted in good shape according to my 401k's calculator

Cheers to you !


----------



## cldrunner

@dfw_pilot

You wrote in another thread that I did not want to ask this question "*'lol. I was explaining why we want to roll after tax contributions in our 401k over to the Roth401k to avoid further taxation to a guy making over 400 big ones and even his eyes were glazing over. It's stunning what people don't care about. "*

Why roll it over to a Roth 401K when you have greater flexibility rolling that money into a Roth IRA. Now your not tied to the 401k provider and you can choose any type of investment and even have the possibility of using a self directed IRA(including real estate). The IRA seems to me to have greater flexibility with investment and withdrawal. Just want to make sure I am not missing something.


----------



## dfw_pilot

cldrunner said:


> @dfw_pilot
> 
> You wrote in another thread that I did not want to ask this question "*'lol. I was explaining why we want to roll after tax contributions in our 401k over to the Roth401k to avoid further taxation to a guy making over 400 big ones and even his eyes were glazing over. It's stunning what people don't care about. "*
> 
> Why roll it over to a Roth 401K when you have greater flexibility rolling that money into a Roth IRA. Now your not tied to the 401k provider and you can choose any type of investment and even have the possibility of using a self directed IRA(including real estate). The IRA seems to me to have greater flexibility with investment and withdrawal. Just want to make sure I am not missing something.


No sweat; I don't think you are missing anything.

My big point to him was that you don't want to pay more taxes needlessly. You'll pay taxes on any gains from after-tax contributions unless those after-tax contributions are quickly rolled into the plan's Roth 401(k).

You could easily roll those funds out to a Roth IRA and accomplish the same goal. However:

1) Many plans don't allow a roll out of funds, or limit how many times a year you can roll money out. At our MegaCorp, we can roll out funds to a Roth IRA only twice a year. I prefer to have those funds rolled into the Roth 401(k) after each payday.

2) The Vanguard funds in our 401(k) are institutional shares and the fees are about 4x lower than what I can get in my Vanguard Roth IRA.

3) Self-directed IRA's aren't bad by any stretch, but for *most* people, the safe confines of 401(k) guardrails can prevent a myriad of troubles. I think real estate probably has enough tax benefits that I'd rather invest in it outside of tax protected accounts, but there's no real wrong answer there.

4) It's a small thing, but 401(k)s enjoy better asset protection from creditors than IRAs do, depending on your state of residence.

I do plan on rolling any remaining/all my Roth 401(k) money into my Vanguard Roth IRA either at retirement or when RMDs kick in so as to avoid any RMDs. This is because Roth 401(k)s demand RMDs, but a simple roll over solves that issue.

Finally, there are a lot of basics when talking about 401(k)s, and it's mostly the mechanics of maxing one out. But also with 401(k)s, there are a lot of company plan specifics where care has to be taken so as to follow the plan rules properly.

I hope that helps - and again, I don't think you missed anything, but thanks for letting me expound a bit further!


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## Grass Clippins

@cldrunner There's also an odd little catch about not being able to only move after tax contributions from a 401k to a Roth IRA. You would have to roll out the entire balance, pretax to Trad IRA & post tax to Roth IRA. When I get to a computer I can find the link on the IRS website.


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## Grass Clippins

@cldrunner 
Here it is: Rollovers of After-Tax Contributions in Retirement Plans

People will also run into this issue when utilizing NUA (Net Unrealized Appreciation) of highly appreciate company stock within a 401k.


----------



## dfw_pilot

Grass Clippins said:


> @cldrunner There's also an odd little catch about not being able to only move after tax contributions from a 401k to a Roth IRA. You would have to roll out the entire balance, pretax to Trad IRA & post tax to Roth IRA. When I get to a computer I can find the link on the IRS website.





Grass Clippins said:


> @cldrunner
> Here it is: Rollovers of After-Tax Contributions in Retirement Plans
> 
> People will also run into this issue when utilizing NUA (Net Unrealized Appreciation) of highly appreciate company stock within a 401k.


 :thumbup:


----------



## viva_oldtrafford

jayhawk said:


> I'm using ARK investments etfs for wife and college funds ....Cathy Wood is the real deal. Research and look at performance.


have you signed up for their daily intraday trading information email? I've been mirroring that for a couple weeks now and it's been paying off handsomely!


----------



## jayhawk

viva_oldtrafford said:


> jayhawk said:
> 
> 
> 
> I'm using ARK investments etfs for wife and college funds ....Cathy Wood is the real deal. Research and look at performance.
> 
> 
> 
> have you signed up for their daily intraday trading information email? I've been mirroring that for a couple weeks now and it's been paying off handsomely!
Click to expand...

Yes @viva_oldtrafford it's fascinating. Managing an etf is a bit different, you see them buying big weakness and trimming *some* % winners on rips. context of position matters (new, trim, add) ....record inflows of cash lately. The daily email can tip off some future big runners. 
Could be another thread in itself.

For most, just enjoy the ride rather than trying to game.
$arkk, $arkg, $arkf, $arki ...

you can find her interviews ...you'll be blown away.


----------



## viva_oldtrafford

jayhawk said:


> viva_oldtrafford said:
> 
> 
> 
> 
> 
> jayhawk said:
> 
> 
> 
> I'm using ARK investments etfs for wife and college funds ....Cathy Wood is the real deal. Research and look at performance.
> 
> 
> 
> have you signed up for their daily intraday trading information email? I've been mirroring that for a couple weeks now and it's been paying off handsomely!
> 
> Click to expand...
> 
> Yes @viva_oldtrafford it's fascinating. Managing an etf is a bit different, you see them buying big weakness and trimming *some* % winners on rips. context of position matters (new, trim, add) ....record inflows of cash lately. The daily email can tip off some future big runners.
> Could be another thread in itself.
> 
> For most, just enjoy the ride rather than trying to game.
> $arkk, $arkg, $arkf, $arki ...
> 
> you can find her interviews ...you'll be blown away.
Click to expand...

She's very sharp, no doubt. Quite gorgeous, too! After that FLIR play, I've convinced myself to follow her into battle for the next few months, grabbing small positions here and there. FLIR was great...surf has been a great little nugget as well. That TAK info yesterday forced me into that last night...it's wild just to see how much money is moving in and out of these funds on the daily!


----------



## CenlaLowell

Bull market get in on the individual stock game if your not already. I'm enjoying learning and investing.


----------



## uts

How many GME millionaires are here? &#129297;


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## Thejarrod

what does this group think about spending extra cash on either retirement investments or mortgage payoff? 
I've tended to put any extra cash towards paying off the mortgage because i HATE debt. but had i put that money in the market i would have made way more in returns in the past year.

I don't regret my decision, even though i would have made more in investment returns because i want to remove that debt from my life. what do y'all do?


----------



## CenlaLowell

Thejarrod said:


> what does this group think about spending extra cash on either retirement investments or mortgage payoff?
> I've tended to put any extra cash towards paying off the mortgage because i HATE debt. but had i put that money in the market i would have made way more in returns in the past year.
> 
> I don't regret my decision, even though i would have made more in investment returns because i want to remove that debt from my life. what do y'all do?


Depends on age imo. Money in the market is a much better position, but I also want my home paid off by age 50.


----------



## Ware

Thejarrod said:


> what does this group think about spending extra cash on either retirement investments or mortgage payoff?


Becoming 100% debt free was important to us. We were able to pay off our mortgage early while hitting our marks for retirement savings, so for us the answer was "both".

It was one of the most satisfying things we have ever done, but I acknowledge that no mortgage is probably a little less attractive given these historic low interest rates.


----------



## TroyScherer

We have been working on becoming fully debt free for the past 2 years. Other than 1 car loan we never carried any debt other than out Mortgage. And currently we are right around 2yrs till we are fully paid off. We have also been doing retirement savings as well as some other investing as well.

Just watch "The Big Short" last night about the mortgage housing crisis of 2005. Watching the rest of the market and the issues being revealed due to Covid, I wonder if we are on our way to another bubble again.


----------



## rhanna

How long would it take for you to pay off the mortgage if you really went at it? If it's a short time period then I'd go ahead and tackle that. If you are saying 30 year mortgage down to 20 year then I'd stick with the retirement contributions. Don't forget about the tax advantages of contributing to retirement and maybe interest deduction. Of course not as many people itemize I wouldn't think after Trump but that could always change.


----------



## CenlaLowell

TroyScherer said:


> We have been working on becoming fully debt free for the past 2 years. Other than 1 car loan we never carried any debt other than out Mortgage. And currently we are right around 2yrs till we are fully paid off. We have also been doing retirement savings as well as some other investing as well.
> 
> Just watch "The Big Short" last night about the mortgage housing crisis of 2005. Watching the rest of the market and the issues being revealed due to Covid, I wonder if we are on our way to another bubble again.


I've been wondering this as well.


----------



## CenlaLowell

rhanna said:


> How long would it take for you to pay off the mortgage if you really went at it? If it's a short time period then I'd go ahead and tackle that. If you are saying 30 year mortgage down to 20 year then I'd stick with the retirement contributions. Don't forget about the tax advantages of contributing to retirement and maybe interest deduction. Of course not as many people itemize I wouldn't think after Trump but that could always change.


Borrowing is so cheap I would invest my money instead. I made a goal just to have mind paid off before I'm 50.


----------



## jayhawk

@CenlaLowell at the moment, monetary policy makes it wise to be fully invested (stocks only) according to history. Despite the counterproductive proclivities of bidens party, can't fight money printing and 0 rates.

But if you would mentally benefit from no mortgage, then sure, do it.


----------



## CenlaLowell

How is everyone doing with their retirement? I was up 28% in last year in my 401k portfolio.

What are investing plans for 2021??


----------



## Phids

CenlaLowell said:


> What are investing plans for 2021??


I feel like we're going to be in some craziness in the next 6-24 months when mortgage forbearance ends this summer and the potential for more government spending, and inflationary results. This may very well impact people's investment plans, retirement plans, etc.


----------



## Tmank87

jayhawk said:


> @CenlaLowell at the moment, monetary policy makes it wise to be fully invested (stocks only) according to history. Despite the counterproductive proclivities of bidens party, can't fight money printing and 0 rates.
> 
> But if you would mentally benefit from no mortgage, then sure, do it.


This


----------



## turfnsurf

Phids said:


> I feel like we're going to be in some craziness in the next 6-24 months when mortgage forbearance ends this summer and the potential for more government spending, and inflationary results. This may very well impact people's investment plans, retirement plans, etc.


In what way do you think this will impact investing and retirement plans?
I hadn't really thought it through and I would be interested in what you think may unfold.


----------



## Ben S

Ware said:


> Becoming 100% debt free was important to us. We were able to pay off our mortgage early while hitting our marks for retirement savings, so for us the answer was "both".


This is my view. Once we eliminated our consumer debt we began putting 15% of our income towards retirement. With that under way we are now putting extra money above that towards paying off the mortgage. At the current pace we'll be 100% debt free in seven years. Everything that happened last year confirmed to me that this is the path I want to be on. I was on unemployment for several months. What happens if there is no federal supplement or if I'm not eligible for unemployment for some reason? Life is so uncertain with so many variables I can't control. I don't want debt hanging around.


----------



## JayGo

Possibly the best (definitely the most important) thread on TLF.
Thanks, @dfw_pilot.


----------



## Thejarrod

Ben S said:


> Ware said:
> 
> 
> 
> Becoming 100% debt free was important to us. We were able to pay off our mortgage early while hitting our marks for retirement savings, so for us the answer was "both".
> 
> 
> 
> This is my view. Once we eliminated our consumer debt we began putting 15% of our income towards retirement. With that under way we are now putting extra money above that towards paying off the mortgage. At the current pace we'll be 100% debt free in seven years. Everything that happened last year confirmed to me that this is the path I want to be on. I was on unemployment for several months. What happens if there is no federal supplement or if I'm not eligible for unemployment for some reason? Life is so uncertain with so many variables I can't control. I don't want debt hanging around.
Click to expand...

Sounds like you are on the Dave Ramsey baby steps?

I totally agree about getting rid of debt to de-risk our lives.

What would you do if you didn't have any payments? Answer: anything you want.


----------



## Phids

Thejarrod said:


> Sounds like you are on the Dave Ramsey baby steps?


Was thinking the exact same thing.


----------



## Ben S

Thejarrod said:


> Sounds like you are on the Dave Ramsey baby steps?


Good eye. It's been great for us.


----------



## Jacob_S

Ben S said:


> Ware said:
> 
> 
> 
> Becoming 100% debt free was important to us. We were able to pay off our mortgage early while hitting our marks for retirement savings, so for us the answer was "both".
> 
> 
> 
> This is my view. Once we eliminated our consumer debt we began putting 15% of our income towards retirement. With that under way we are now putting extra money above that towards paying off the mortgage. At the current pace we'll be 100% debt free in seven years. Everything that happened last year confirmed to me that this is the path I want to be on. I was on unemployment for several months. What happens if there is no federal supplement or if I'm not eligible for unemployment for some reason? Life is so uncertain with so many variables I can't control. I don't want debt hanging around.
Click to expand...

This is the path we are on also, I've not done the math yet but pretty sure we are close to if not at 15% into retirement accounts. After this weekend we will be down to one car note, once they are both gone it is on to the house, and also our goal is to have a year minimum in tangible savings. I have wanted to get to this for a long time, ex wife wasn't fully on board, current wife is. Like you last year was a huge wake up for us and we are full speed ahead now.

And we are most certainly "loosely" following the baby steps, I say loosely because we are not rice and beans beans and rice but we are pretty well focused on the end goal. I myself just started actively investing in retirement last year and have been amazed at the growth I've seen in one year, so needless to say I am very motivated to keep it up.


----------



## turfnsurf

CenlaLowell said:


> How is everyone doing with their retirement? I was up 28% in last year in my 401k portfolio.
> 
> What are investing plans for 2021??


@CenlaLowell wow that's awesome! i thought I was doing well by being at 15%. While I know investments in 401k are limited to what your employer offers, do you mind me asking what you're in? Off the top of my head, if I had everything in my employer's small cap offerings, I would be close to what you are getting.


----------



## Ben S

@Jacob_S Keep grinding and best of luck.


----------



## CenlaLowell

turfnsurf said:


> CenlaLowell said:
> 
> 
> 
> How is everyone doing with their retirement? I was up 28% in last year in my 401k portfolio.
> 
> What are investing plans for 2021??
> 
> 
> 
> @CenlaLowell wow that's awesome! i thought I was doing well by being at 15%. While I know investments in 401k are limited to what your employer offers, do you mind me asking what you're in? Off the top of my head, if I had everything in my employer's small cap offerings, I would be close to what you are getting.
Click to expand...

Troweprice
Fund 2065
High dividend fund
Blue chip growth fund
Mid cap fund

Have another 401 with my new job have the same funds just with fidelity


----------



## CenlaLowell

Ben S said:


> Ware said:
> 
> 
> 
> Becoming 100% debt free was important to us. We were able to pay off our mortgage early while hitting our marks for retirement savings, so for us the answer was "both".
> 
> 
> 
> This is my view. Once we eliminated our consumer debt we began putting 15% of our income towards retirement. With that under way we are now putting extra money above that towards paying off the mortgage. At the current pace we'll be 100% debt free in seven years. Everything that happened last year confirmed to me that this is the path I want to be on. I was on unemployment for several months. What happens if there is no federal supplement or if I'm not eligible for unemployment for some reason? Life is so uncertain with so many variables I can't control. I don't want debt hanging around.
Click to expand...

I definitely understand this thinking. It's hard for me to do because I can make more than 3% in the market. I need to commit to it though.


----------



## Ben S

CenlaLowell said:


> It's hard for me to do because I can make more than 3% in the market.


I completely get where you're coming from. What really pushed me over the edge was thinking about how much I'll be able to invest and give once we have no house payment. I'm really looking forward to that. In the meantime I'm still saving and I enjoy watching that retirement account grow. To be honest, I also get a kick out of the reactions I get every time I meet with a financial professional. Sometimes it's fun to be unusual.


----------



## CenlaLowell

Ben S said:


> CenlaLowell said:
> 
> 
> 
> It's hard for me to do because I can make more than 3% in the market.
> 
> 
> 
> I completely get that. What really pushed me over the edge was thinking about how much I'll be able to invest and give once we have no house payment. I'm really looking forward to that. In the meantime I'm still saving and I enjoy watching that retirement account grow. To be honest, I also get a kick out of the reactions I get every time I meet with a financial professional. Sometimes it's fun to be unusual.
Click to expand...

How long are you giving yourself to have it paid off??


----------



## Ben S

In my previous post I said seven years but I just double checked my spreadsheet. So we are 4.5 years through a 15 year note. So far we have knocked 15 months off through extra payments. So we have just over 9 years left and we are just throwing any extra money we can at it along the way. I am 37 years old and would love to have it done before 45.


----------



## Phids

I only recently started watching Dave Ramsey videos on Youtube and while I partially understand his reasoning for paying off mortgages as fast as possible, there are some things I'm missing. Here are the steps:

Fill $1k emergency fund
All debt paid off (minus mortgage)
Emergency fund of 3-6 months
15% in retirement
College fund for children
Pay off mortgage
Give, etc.
He seems to often tell people who have tens of thousands stashed in their bank accounts to put it all (minus the emergency fund) toward the mortgage as much as possible. However, it seems like ultra-low interest rates, along with the security of having extra funds on hand now (beyond what is in the emergency fund), make it seem like paying off a mortgage as soon as possible isn't necessarily the wisest move. For example, if you have $30k in an emergency fund and need to buy a new car ($25k) you would wipe out that fund and just hope you don't get into an emergency situation while you rebuild your savings. In contrast, if you have that $30k in an emergency fund, and then an equal amount in low-risk investments, you could just tap into that account if you needed to buy a new car without touching your emergency fund.

Any thoughts on this?


----------



## Ware

Phids said:


> Any thoughts on this?


Kind of like lawn care, there are a lot of variables, and everyone's situation is a little different. I think some of his advice is extreme, but I also recognize that some people need extreme advice to get their finances in order.


----------



## jayhawk

Phids said:


> I only recently started watching Dave Ramsey videos on Youtube and while I partially understand his reasoning for paying off mortgages as fast as possible, there are some things I'm missing. Here are the steps:
> 
> Fill $1k emergency fund
> All debt paid off (minus mortgage)
> Emergency fund of 3-6 months
> 15% in retirement
> College fund for children
> Pay off mortgage
> Give, etc.
> He seems to often tell people who have tens of thousands stashed in their bank accounts to put it all (minus the emergency fund) toward the mortgage as much as possible. However, it seems like ultra-low interest rates, along with the security of having extra funds on hand now (beyond what is in the emergency fund), make it seem like paying off a mortgage as soon as possible isn't necessarily the wisest move. For example, if you have $30k in an emergency fund and need to buy a new car ($25k) you would wipe out that fund and just hope you don't get into an emergency situation while you rebuild your savings. In contrast, if you have that $30k in an emergency fund, and then an equal amount in low-risk investments, you could just tap into that account if you needed to buy a new car without touching your emergency fund.
> 
> Any thoughts on this?


Thoughts: 
No one NEEDs to spend close to 25k on wheels, for general transportation.


----------



## Thejarrod

A new (used) car isn't an emergency. Ramsey baby steps would tell you to save up separately for the car. Always keep 3-6 months cash for true emergencies.


----------



## ksturfguy

Ware said:


> Phids said:
> 
> 
> 
> Any thoughts on this?
> 
> 
> 
> Kind of like lawn care, there are a lot of variables, and everyone's situation is a little different. I think some of his advice is extreme, but I also recognize that some people need extreme advice to get their finances in order.
Click to expand...

Agree 100% with this. I do not follow all of Dave's advice because it is a little extreme and some I don't agree with but for people who have issues with debt it's absolutely what they need.


----------



## Jacob_S

These last few posts are why I "loosely" follow Ramsey steps. We are working them all over the place, as of now we have one vehicle note, house, and wife uses a points card for groceries and gas and such(card gets paid in full monthly as part of budget). we already have 3-6 in savings, we also have a vacation savings and one being funded to buy my girls their first cars when that day comes. 
The way we do it is attack the debt while still enjoying life, not rice and beans, beans and rice. I plan/would like to "retire" early, like by the time I am 55, to do that we will need a bridge savings till I can pull from retirement. I was crunching numbers yesterday and concluded we would be able to pay off house in the next 7 years at the same time putting 15% minimum to retirement accounts and stock away tangible savings allowing the early "retirement".

To summarize, Ramsey's plan is a great foundation, but as long as you have the discipline and your own goal then no need to follow them to the T.


----------



## ken-n-nancy

Phids said:


> I only recently started watching Dave Ramsey videos on Youtube and while I partially understand his reasoning for paying off mortgages as fast as possible, there are some things I'm missing. Here are the steps:
> 
> Fill $1k emergency fund
> All debt paid off (minus mortgage)
> Emergency fund of 3-6 months
> 15% in retirement
> College fund for children
> Pay off mortgage
> Give, etc.
> He seems to often tell people who have tens of thousands stashed in their bank accounts to put it all (minus the emergency fund) toward the mortgage as much as possible. However, it seems like ultra-low interest rates, along with the security of having extra funds on hand now (beyond what is in the emergency fund), make it seem like paying off a mortgage as soon as possible isn't necessarily the wisest move. For example, if you have $30k in an emergency fund and need to buy a new car ($25k) you would wipe out that fund and just hope you don't get into an emergency situation while you rebuild your savings. In contrast, if you have that $30k in an emergency fund, and then an equal amount in low-risk investments, you could just tap into that account if you needed to buy a new car without touching your emergency fund.
> 
> Any thoughts on this?


My basic thought is that for people with a "middle class" job whether or not one has money available has more to do with how much one spends than how much one earns. The thing to note is that the paying off the mortgage is after one has that 3-6 months "emergency fund" in place. A 3 month emergency fund is sufficient to buy a used car if one's car suddenly dies.

Savings beyond the emergency fund goes into the mortgage partly to keep one from being tempted to spend that money on "needs" that aren't truly "needs" (such as a new car.) If one is truly in a dire emergency and wipes out that 3-6 month fund, a home equity loan or refinance of the mortgage can be performed if really needed.

However, getting to the point of being debt-free, including having the mortgage paid off is an excellent way to avoid living beyond ones means and simply spending more than one can afford.


----------



## Phids

@ken-n-nancy That makes sense as a discipline thing. I've also been thinking if it makes sense financially despite the conventional wisdom saying that you shouldn't rush to pay off a low-rate mortgage when that money can be invested at a higher rate elsewhere..

Basically, if you have a mortgage at 3%, paying it off with extra cash on hand is the equivalent of investing it elsewhere at about 4% rate of return (assuming taxes). In order to beat that you'd realistically need to make a return of 6%+ in order to make it worthwhile, but with such an investment you're increasing your risk.

So it seems to me that paying off a mortgage is the equivalent of investing in a low to medium-yield stock, but with much less risk.


----------



## Boy_meets_lawn

If you can itemize still you benefit from deducting mortgage interest. I'd rather have 6 months funds, max HSA 1st and dependent fsa if you have kids in daycare, then 401k and backdoor roth. The left over goes into a 529, and taxable which can be withdrawn if you need cash. My mortgage is at 2.5% and I dont plan on paying that off early as its probably losing to inflation.


----------



## Ben S

Boy_meets_lawn said:


> If you can itemize still you benefit from deducting mortgage interest.


This is actually something of a myth. The mortgage deduction reduces your taxable income by the amount of interest you pay, saving you the taxes on that amount. If you pay $4k in interest annually your tax bill is reduced by $1k. If you have a mortgage you should obviously claim the deduction but sometimes people will say they're keeping the mortgage just so they don't lose the deduction. That would be losing money.


----------



## Boy_meets_lawn

Ben S said:


> Boy_meets_lawn said:
> 
> 
> 
> If you can itemize still you benefit from deducting mortgage interest.
> 
> 
> 
> This is actually something of a myth. The mortgage deduction reduces your taxable income by the amount of interest you pay, saving you the taxes on that amount. If you pay $4k in interest annually your tax bill is reduced by $1k. If you have a mortgage you should obviously claim the deduction but sometimes people will say they're keeping the mortgage just so they don't lose the deduction. That would be losing money.
Click to expand...

Depends on your individual scenario, I'd rather reduce my tax burden and invest the difference. At 2.5% on a 30 year mortgage with a 30 year investment horizon just stick the extra you would pay in a total market fund or similar and let it ride. You gain liquidity without having to tap home equity if times really get tough and you burn down your emergency fund.

The standard deduction will probably phase most people out of this scenario and I bet they keep raising it as the IRS is understaffed.


----------



## turfnsurf

Ben S said:


> If you have a mortgage you should obviously claim the deduction but sometimes people will say they're keeping the mortgage just so they don't lose the deduction. That would be losing money.


What do they mean by saying that they don't want to lose the deduction?


----------



## Tmank87

turfnsurf said:


> Ben S said:
> 
> 
> 
> If you have a mortgage you should obviously claim the deduction but sometimes people will say they're keeping the mortgage just so they don't lose the deduction. That would be losing money.
> 
> 
> 
> What do they mean by saying that they don't want to lose the deduction?
Click to expand...

Itemized deduction for interest paid on mortgage.

With the SALT cap at 10K and the increase to the standard deduction, I'd be curious to see the statistics on who is taking what (deduction) these days versus 7-8 years ago.


----------



## turfnsurf

Tmank87 said:


> turfnsurf said:
> 
> 
> 
> 
> 
> Ben S said:
> 
> 
> 
> If you have a mortgage you should obviously claim the deduction but sometimes people will say they're keeping the mortgage just so they don't lose the deduction. That would be losing money.
> 
> 
> 
> What do they mean by saying that they don't want to lose the deduction?
> 
> Click to expand...
> 
> Itemized deduction for interest paid on mortgage.
> 
> With the SALT cap at 10K and the increase to the standard deduction, I'd be curious to see the statistics on who is taking what (deduction) these days versus 7-8 years ago.
Click to expand...

Let me re-ask, because I am still not understanding.

You said if you have a mortgage, you should obviously claim the deduction. I agree.

You then said that sometimes people will say they're keeping the mortgage just so they don't lose the deduction. Perhaps I should have asked what does "keeping the mortgage" mean? In my mind, not keeping a mortgage means selling the house, and then you wouldn't qualify for the deduction anyways.

Perhaps what is throwing me off is the "but" that you have in the sentence. 
The way it reads to me is that taking the deduction is best unless you don't intend on keeping the mortgage.


----------



## Tmank87

@turfnsurf you can also get rid of your mortgage by paying it off, not just selling the home (which effectively pays it off with the proceeds). I think what @Ben S was saying is that you shouldn't be necessarily be inclined to not pay off your mortgage (keep it) just so you can keep the deduction. You'll pay more in interest on the mortgage than you would be able to deduct for that tax year, more than likely, this losing money.

My point above was taking it one step further between standard and itemized deductions.

Hopefully that makes more sense.


----------



## turfnsurf

Tmank87 said:


> @turfnsurf you can also get rid of your mortgage by paying it off, not just selling the home (which effectively pays it off with the proceeds). I think what @Ben S was saying is that you shouldn't be necessarily be inclined to not pay off your mortgage (keep it) just so you can keep the deduction. You'll pay more in interest on the mortgage than you would be able to deduct for that tax year, more than likely, this losing money.
> 
> My point above was taking it one step further between standard and itemized deductions.
> 
> Hopefully that makes more sense.


Oh wow. The reason I didn't even think of this is because I wouldn't have ever imagined that this was a thing.

I couldn't imagine a scenario where holding onto a mortgage to keep an interest deduction was a better alternative than paying off the mortgage and trying to procure that monetary benefit of the interest deduction via the market in some form or fashion.


----------



## Ben S

@turfnsurf , @Tmank87 is right. Sometimes people say that it is "bad" to pay off a mortgage because you lose the mortgage interest deduction on your tax return. If you don't slow down long enough to think this through it can feel like a loss when you are used to getting that refund check at tax time but since the deduction saves you less than you are actually paying in interest this is not a sound strategy. @Tmank87 is also right that this may be an outdated discussion given that the standard deduction was doubled several years ago.


----------



## Overtaxed

> I think what @Ben S was saying is that you shouldn't be necessarily be inclined to not pay off your mortgage (keep it) just so you can keep the deduction. You'll pay more in interest on the mortgage than you would be able to deduct for that tax year, more than likely, this losing money.


In today's climate, I'd typically advise someone who's financially responsible (IE, won't blow the money if it's in cash) to keep the mortgage. 30 year rates hover around 3-4% now, where the market does much better than that over long time horizons. Yes, the market can crash, and probably will crash, but the historically, if you can borrow at 4% and invest that money in the market, you'll make money, perhaps a lot of money, over a 20-30 year time horizon.

That said, there's something to be said for the peace of mind having a paid off home, I see that and appreciate it, so both options are valid/reasonable, IMHO. Times like this, where the market is crazy high, I'd suggest taking some money out of the market and paying down the mortgage, lock in the 3-4% "gain" now because I'm not sure you'll see that in the market over the next few years.

Very few can take the mortgage interest deduction anymore, so IMHO, except for special cases, that no longer figures in. It's a simple "what can I make on this money elsewhere" vs "what's my mortgage interest rate".

One tidbit I want to throw in here, be aware of what the real 401K limits are! 95% of people will quote 19,500/yr. And 95% of people are dead wrong. The real 401K limit this year is 58,000 (or 64,500 if you can do catch ups). If you can't contribute that much, it's your employer's fault, not the government. Everything over 19,500 has to be "Roth style" (pay tax on it now, no tax at withdraw), but given the debt we're running, I'd rather pay now because I see nothing but higher taxes in our future.

If you'd like to understand more about maxing a 401K, look up "mega backdoor Roth", for the details. A lot of employers don't have the plan setup, but it's free to them to allow it, so if you don't have it, ask for it; it's a huge benefit to you and your employer with basically 0 cost to either of you.


----------



## ionicatoms

Years ago, my MIL argued against paying off her mortgage for that very reason (deduction). She liked the deduction. I didn't get it. Maybe people making this argument simply don't want to give up their cash to improve cash flow, but aren't willing to say it.

People are supposedly rational, but I find much evidence to the contrary.


----------



## Overtaxed

ionicatoms said:


> Years ago, my MIL argued against paying off her mortgage for that very reason (deduction). She liked the deduction. I didn't get it. Maybe people making this argument simply don't want to give up their cash to improve cash flow, but aren't willing to say it.
> 
> People are supposedly rational, but I find much evidence to the contrary.


Depends what she was doing with that cash instead of paying the mortgage. If it was sitting in a bank account at .05% and her mortgage was at 3%, bad move. If it was in the stock market and returned 10% a year, good move to not pay it down.

That said, I agree with you, people do all sorts of irrational things, especially when it comes to taxes! Spend 2 bucks to avoid 1 dollar in tax? That math seems to make sense for many.


----------



## ionicatoms

She had it in a savings account. My point was that her argument was illogical regardless of what she was doing with her cash.


----------



## Ware

Overtaxed said:


> ...if you can borrow at 4% and invest that money in the market, you'll make money, perhaps a lot of money, over a 20-30 year time horizon...


Unfortunately I think there is a big disconnect there. Most people borrowing longer at a low rate are not actually investing the difference in the market - they're just keeping their payment low so they can spend money on other things.

In reality, I suspect it's probably the same people who are most likely to pay off their mortgage early that are investing more in their retirement accounts, and vice versa.


----------



## SeanBB

@ware agree 100%


----------



## Jacob_S

Ware said:


> Overtaxed said:
> 
> 
> 
> ...if you can borrow at 4% and invest that money in the market, you'll make money, perhaps a lot of money, over a 20-30 year time horizon...
> 
> 
> 
> Unfortunately I think there is a big disconnect there. Most people borrowing longer at a low rate are not actually investing the difference in the market - they're just keeping their payment low so they can spend money on other things.
> 
> In reality, I suspect it's probably the same people who are most likely to pay off their mortgage early that are investing more in their retirement accounts, and vice versa.
Click to expand...

Bingo Bango, I can not for the life of me fathom NOT paying off the mortgage if I am already investing near or max contributions to various investments. Why would I not want to actually own my home and have that payment in pocket every month. Besides, I want to retire "early" and to do that I will need a fairly substantial savings to bridge the gap to being able to withdraw from investments, therefor no debt payments including house will allow this savings to build very rapidly.

ETA: FWIW I am currently on a 15yr at 2.625, and plan to pay that off in half the time if not quicker.


----------



## Overtaxed

> ETA: FWIW I am currently on a 15yr at 2.625, and plan to pay that off in half the time if not quicker.


First, let me start off with "you are not wrong". I'm going to make a counterpoint, but, IMHO, both are valid and worthy paths to pursue.

Let's start with the assumption that you have the discipline to not spend "extra money" and that you have 2 choices, add to the mtg payment or invest in SPY (a simple stock that tracks the SP500).

The first question you should ask, what do you expect the rate of return on the SP500 to be over the next 15 years. Higher or lower than 2.625%? If lower, then proceed to the next question. If higher, stop here; invest the money and pay off your mortgage on the original amortization schedule. This, of course, is an unknown, but history tells us that nearly all 15 year periods are over 3% return. But some aren't; it's a reasonable expectation that returns are lower for the next 15 years (especially starting from here, which, IMHO, is way overvalued).

Anyway, if you make it through that question, and you believe that the stock market return will be below your current mortgage rate, the next question to ask is "What do you expect the rate of inflation to be over the next 15 years". Same math, if it's higher than your mortgage rate, don't pay it off. If lower, then do pay it off.

Now into pure speculation. We have an unserviceable level of debt in this country. The government can talk about raising taxes all day long, there's only so high, and we're approaching the number (see the migrations out of high tax states right now). The other alternative that only the government has is "inflate it away". Devalue the currency, which drives down the amount you have to repay by making each dollar you borrowed in the past less valuable when paid back in the future. I believe this is the path that we're on, hence the massive price increases we're seeing in some basic commodities (lumber, fuel, etc).

If that comes to pass, you want to have debt because you can pay it back tomorrow with dollars that are less valuable and easier to come by than those you can get today.

That's the basic thesis of my argument; it's certainly not for everyone, and there are some BIG assumptions that may be completely wrong in there. But with a crazy low interest rate, I'm going to ride that debt into the sunset and keep my money in the market where historically I can expect 5-10% annual returns. It also provides more flexibility, the cash in hand can be valuable where trying to get a HELOC or a new mortgage in the future will almost certainly cost more than it does today.


----------



## turfnsurf

Overtaxed said:


> The first question you should ask, what do you expect the rate of return on the SP500 to be over the next 15 years. Higher or lower than 2.625%? If lower, then proceed to the next question. If higher, stop here; invest the money and pay off your mortgage on the original amortization schedule.


If you expect the SP500 to be higher than your rate, wouldn't you pay it off instead of the regular amort schedule (which means you're keeping the loan and not retiring it early)?



> Anyway, if you make it through that question, and you believe that the stock market return will be below your current mortgage rate, the next question to ask is "What do you expect the rate of inflation to be over the next 15 years". Same math, if it's higher than your mortgage rate, don't pay it off. If lower, then do pay it off.


Do you mind fleshing out a process to try to assess future inflation? I imagine it would involve 20 year treasuries, but I am not sure.



> Now into pure speculation. We have an unserviceable level of debt in this country. The government can talk about raising taxes all day long, there's only so high, and we're approaching the number (see the migrations out of high tax states right now).


Some states either have lower or nonexistent taxes in some areas, however that's offset (in my opinion) by the existence of some taxes that other states don't have. Do you have any thoughts on an accurate state by state comparison of tax costs which include all major taxes?



> But with a crazy low interest rate, I'm going to ride that debt into the sunset and keep my money in the market where historically I can expect 5-10% annual returns. It also provides more flexibility, the cash in hand can be valuable where trying to get a HELOC or a new mortgage in the future will almost certainly cost more than it does today.


This is my view as well. The only debt that makes _financial _sense to retire is expensive debt.


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## Jacob_S

Guess that is where I differ, ALL debt makes financial sense to retire, I don't want any bit of it. If/when I acquire new debt it will get hammered to get rid of it. 
In my mind, the less of the money I make that goes to other entities aside from normal cost of living (utilities, food, regular cost of vehicle operation) is more money in my pocket/investment for me to quit working a regular "9-5".


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## turfnsurf

Jacob_S said:


> Guess that is where I differ, ALL debt makes financial sense to retire, I don't want any bit of it. If/when I acquire new debt it will get hammered to get rid of it.
> In my mind, the less of the money I make that goes to other entities aside from normal cost of living (utilities, food, regular cost of vehicle operation) is more money in my pocket/investment for me to quit working a regular "9-5".


I agree. Income potential heavily determines how fast they can extinguish debt though. I am able to be very aggressive in paying off debt, so the type of trade-off we're discussing might not be as meaningful to me.


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## Overtaxed

> ALL debt makes financial sense to retire, I don't want any bit of it. If/when I acquire new debt it will get hammered to get rid of it.


Again, I'll provide the counterpoint, but start off with "in most cases, you're right". Almost all debt make sense to retire as fast as possible.

The exceptions are long term debt at very low interest rates. Let's take a silly example, if I offered to lend you 1M dollars for 50 years at 0% interest, would you take that? The answer is "you should". Again, assuming you (not you personally) have self control and will invest that money, there's no 50 year period in history where the stock market hasn't climbed. Take the "free money" invest it, and pay it back in 50 years when it's worth about 100K in today's dollars.

Of course, 0% 50 year notes aren't exactly common, so the decision becomes more nuanced. And honestly, there's a lot of value in buying security, it doesn't show on a balance sheet, but it does show between your ears! I would never say anyone is 'wrong" to pay down a low rate mortgage, but, at the same time, it can be the "right" move to not pay down that mortgage, it all depends on the rate, inflation, you personal risk tolerance and your self-control to not spend big chunks of liquid funds in accounts. Paying off the mortgage makes it much harder to do something silly with the money; I could have a big wire sent from my brokerage account today and go buy something that will depreciate 100% the moment I finish paying for it. Much harder to do that if you're tying the money up in the house and for some (probably most) people it's a safer play.



> Do you mind fleshing out a process to try to assess future inflation? I imagine it would involve 20 year treasuries, but I am not sure.


I could give you lots of indicators and technical jargon, but let me say something much more relatable. It's a guess. It might be an educated guess, but no matter who's saying it, anyone predicting future inflation is guessing.

Fleshing it out a little, I'm convinced the government has been grossly understating inflation for years. It's much easier to look backwards and see prices of things I buy regularly that have risen dramatically than to guess the future. But even with the price of lumber up 3X, or the price of houses (during the bubble) up 2-3X, inflation is 2%? That didn't and doesn't make sense to me. I'm not guessing at the future as much as I am disagreeing with the past, I think "real inflation" today is much closer to 10% than it is to 2%, and likely to get worse before it gets better because of all the money that's been injected during the past 2 years.

However, if you figure a way to reliably determine inflation, please let me know, we'll both be beyond rich pretty fast and not have to worry about it anymore! It's a guess, someone could easily make the counter case that inflation is lower than 2% by looking at different metrics. Which feels more right to you? Are things going up quickly in price or falling? You finding more money at the end of the month or less?


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## turfnsurf

> Do you mind fleshing out a process to try to assess future inflation? I imagine it would involve 20 year treasuries, but I am not sure.





Overtaxed said:


> I could give you lots of indicators and technical jargon, but let me say something much more relatable. It's a guess. It might be an educated guess, but no matter who's saying it, anyone predicting future inflation is guessing.
> 
> Fleshing it out a little, I'm convinced the government has been grossly understating inflation for years. It's much easier to look backwards and see prices of things I buy regularly that have risen dramatically than to guess the future. But even with the price of lumber up 3X, or the price of houses (during the bubble) up 2-3X, inflation is 2%? That didn't and doesn't make sense to me. I'm not guessing at the future as much as I am disagreeing with the past, I think "real inflation" today is much closer to 10% than it is to 2%, and likely to get worse before it gets better because of all the money that's been injected during the past 2 years.
> 
> However, if you figure a way to reliably determine inflation, please let me know, we'll both be beyond rich pretty fast and not have to worry about it anymore! It's a guess, someone could easily make the counter case that inflation is lower than 2% by looking at different metrics. Which feels more right to you? Are things going up quickly in price or falling? You finding more money at the end of the month or less?


I have a finance and accounting background, so I actually _want_ the theory or technical terms. I want a methodology for making some assessment of inflation. So for example, you believe it is grossly understated. What data did you examine to reach that conclusion? And what thresholds do you set to determine if it's under/over stated vs being reasonably close?


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## Overtaxed

Plenty of anecdotal (some offered above), but the biggest data point I look at is M3 supply. If you look at the chart linked below, M3 was at ~9T 10 years ago, now standing at about 20T. I see no way we can 2X M3 and state inflation during that period as ~30%. That doesn't make sense at all to me.

Another few data points, price of housing, price of oil, price of gold, BTC, etc.

The things we want to buy generally fall in price, the things we need to buy generally rise in price. Housing increasing by huge percentages, while good for those who own 2+ homes, is purely inflationary in my view.

https://fred.stlouisfed.org/series/MABMM301USM189S


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## david_

I'm aggressively paying down mortgage to free up future cash flow ($15k/yr in P&I) so that I can potentially shift into lower paying yet more enjoyable work and still feel good security for my family.

I'm still maxing tax sheltered investment accounts. And I know mathematically I should be investing extra in a brokerage. But this economy freaks me out and I think I'd kick myself if we finally get that recession a few years from now and I still had this mortgage hanging around.

That said.. it's HARD to throw thousands of dollars into what feels like a bottomless pit. Really don't want to do this again if we upgrade house. Hamster wheel.


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## turfnsurf

Overtaxed said:


> Plenty of anecdotal (some offered above), but the biggest data point I look at is M3 supply. If you look at the chart linked below, M3 was at ~9T 10 years ago, now standing at about 20T. I see no way we can 2X M3 and state inflation during that period as ~30%. That doesn't make sense at all to me.


In your opinion, what circumstances (M3 supply or otherwise) would make 30% inflation reasonable? Also, what would you expect to be a more accurate inflation rate based on the current M3 level, and what information would lead you to render that opinion?



> Another few data points, price of housing, price of oil, price of gold, BTC, etc.


When trying to determine a view on inflation, what source would you recommend for the price of housing, especially given that housing demand is a regional phenomenon. Not sure how to account for that for inflation. I am assuming I can find some popular indexes for oil and gold.


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## Overtaxed

> In your opinion, what circumstances (M3 supply or otherwise) would make 30% inflation reasonable? Also, what would you expect to be a more accurate inflation rate based on the current M3 level, and what information would lead you to render that opinion?


Phew, those are really difficult to answer questions. Mostly because you have exact percentages in there; I need to generalize them because if I could predict what level of M3 makes 30% inflation happen, well, again, I wouldn't be worried at all about the price of fungicides. 

My thesis is this; I cannot see how you can double M3 in 10 years and not nearly double the price of goods. M3 and inflation are linked, not a direct 1-1, but closely correlated. I think of it this way, M3 is the rate of release of water from a massive dam, if you double the rate of release, obviously, right next to the dam, there's 2X the water. But the water 50 miles from the dam, after there have been many splits in the flow and bends in the river, what's the level there? It's not 2X, some of the water is lost, some absorbed, some diverted to other tributaries. But it's higher. And if you keep dumping 2X the water, eventually, as all the newly wet spots get water logged, you'll eventually wind up with close to 2X the water measuring downstream.



> When trying to determine a view on inflation, what source would you recommend for the price of housing, especially given that housing demand is a regional phenomenon. Not sure how to account for that for inflation. I am assuming I can find some popular indexes for oil and gold.


This one is much easier. The Case-Shiller index. Which is up ~10% YOY, a shocking rate of climb for home prices. That's the 20 city composite index, but there are more regional variants as well. You're correct though, housing booms are more localized, however, in this case (because, IMHO, what we're seeing is inflation, not a housing bubble) it's playing out more nationally than a typical housing boom.


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## Boy_meets_lawn

I dont think you can hit the 58k unless you are self employed. Most employers will match some but if you ask about setting up post tax contributions your going to run into ACP testing issues because it greatly favors HCE and most employees aren't maxing out their 401ks. So your then stuck with just the max plus match and the small annual backdoor roth.


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## Grass Clippins

@Boy_meets_lawn Yeah…contributions after the max would be non deductible with tax deferred growth which is not like a Roth at all. Noticed that as well but didn't want to nitpick.


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## Boy_meets_lawn

Well you don't leave the money in the 401k, you roll it to your roth but your plan must also allow for that.


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## Grass Clippins

@Boy_meets_lawn It gets a little tricky. You would leave it in the 401K if you're still employed and contributing over the max. You have to immediately convert the after tax contribution to Roth within the 401K (if allowed) after each pay period to work the system and get tax free growth. You can't pick and choose what you roll or don't roll from a 40K, it's all or nothing. All of those steps take place with the 401K.


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## cldrunner

@Grass Clippins @Boy_meets_lawn I maxed out my after tax 401K contributions(technically called 401A contributions) by May 1st with a 75% after tax contribution into my 401k(yes, I basically went without a paycheck for 4 months after all deductions).

Since I have hit the 58K max my company contribution is taxable and comes in my current paychecks.

It worked out to about 46K after tax and 12k company contribution. My plan allows me to:

1. Keep the 46K in the 401K and grow tax free. 
2. Take a withdrawal as cash and pay no tax on contributions 
3. Roll 46K into my Roth IRA (what people call backdoor Roth).

This strategy is not for most people. For me it gives me *maximum flexibility* to build an emergency fund if needed if I keep it in the 401K. It also has allowed me to fund real estate in my Roth IRA(that is another whole subject). I can choose to roll any amount at anytime if I choose into my Roth IRA. I work for a Fortune 500 company.


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## Boy_meets_lawn

That sounds like a dream plan, I work for a small company that will match 10% but I am stuck with about 12 different funds to choose from and was told there is not a way to contribute after tax funds to the plan.

I believe they could probably amend the plan to accommodate but I got the impression that I was rocking the boat too much. So I just stick with 401k maxed, hsa, limited backdoor roth, and a taxable.


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## Grass Clippins

@cldrunner Ok I see. Option 1 would be to rollover after tax contributions to Roth 401K contributions within the plan. Option 2, I'm not sure why anyone would do option 2 unless they accidentally over-contributed. Option 3 is technically processed as an in service distribution not a rollover. If it were an in service rollover then you would have dealt with the pro-rata rule. I'm assuming you had to make an indirect rollover of the distribution from the 401K once you received the check. I hope you don't think I'm being argumentative or a know-it-all. I know you are a diligent researcher from your other post. I get hung up on terminology sometimes, which is why I try not to post on this thread to often.


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## desirous

Backdoor Roth IRA options may be going away?

https://www.morningstar.com/articles/1058691/is-the-door-closing-on-backdoor-roth-iras


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## cldrunner

@desirous @Grass Clippins


> Similarly, under the proposal, 401(k) participants who are making after tax contributions to their company retirement plans would no longer be eligible to convert those assets to Roth, either. That would be the death knell of the *"mega-backdoor Roth IRA" *maneuver, whereby an investor makes after tax contributions to a 401(k), then converts those funds to Roth, often inside the plan itself. If the after tax contributions can never be converted, they're much less attractive because the investor will still owe ordinary income tax on any investment earnings that rack up.


I have used this technique for the last 10+ years to fund my Roth and buy and pay off real estate in a self directed IRA. They are also trying to end many functions of the self directed IRA. I have used after tax to build up an emergency fund inside my 401K while still having the opportunity to convert to my Roth IRA.


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## desirous

Congratulations on discovering the technique early on and taking advantage. I am ashamed to admit that I did not read this thread at first and only got into the backdoor ROTH two years ago, just before it is getting killed.


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## DeepC




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## Monocot Master

@DeepC I use Charles Schwab for my Roth with everything in Schwab index funds. Their user interface could be a little more user friendly, but other than than that has been great. Fidelity is another great choice and will be a bit easier to use in my experience. Both of these companies have the lowest costs of anyone in the business that I know.

Also, you being self employed, have some additional options such as a SEP and a solo 401k (I think). Check out Clark Howard's website and his investment guide I think it is. Investopedia is also a good place.


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## CenlaLowell

Ok got a question if you got laid off would you keep your 401k money with the same company and just roll it to an IRA?

Started a new 401k when I got another job. I'm also setting up a living trust to get things in order I'm 41 by the way


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## pennstater2005

DeepC said:


> Can I get some help in getting started in a Roth Investment? I'm new to the market but I'm researching tremendously. Im 40 years old, wife and 2 kids. I've paid off the house and cars. No debt at all. Self employed and make 48k a year after deductions, Not a lot... but I'm wanting to start investing for me and the wife (not working).
> I have 12k to put in for our combined account. So I'm thinking:
> VTI
> VOO
> AOR
> Mutual fund?
> Can someone tell me if this is a good or bad plan. Thank you for any help!


I always like the advice of a simple index fund. They have low expenses and should not have additional fees as other managed funds may (12b-1 (marketing) and other odd ones)

They tend to mirror the market holding thousands of stocks and bonds. The primary thing you need to figure out is asset allocation (percentage of stocks to bonds). I'm currently 80/20 at 43 years old. A bit aggressive some might say but it works for me.

Vanguard, Schwab, Fidelity all have good offerings.

I have a Roth IRA in my name and a Traditional IRA for my wife to give me some tax diversity for the future. I split between the two.


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## SouthernTiftuf

CenlaLowell said:


> Ok got a question if you got laid off would you keep your 401k money with the same company and just roll it to an IRA?
> 
> Started a new 401k when I got another job. I'm also setting up a living trust to get things in order I'm 41 by the way


Yeah you can do that and just manage your investments out of the IRA. I would call whoever your broker is and make sure it all gets setup correctly to avoid any penalties.


----------



## CenlaLowell

SouthernTiftuf said:


> CenlaLowell said:
> 
> 
> 
> Ok got a question if you got laid off would you keep your 401k money with the same company and just roll it to an IRA?
> 
> Started a new 401k when I got another job. I'm also setting up a living trust to get things in order I'm 41 by the way
> 
> 
> 
> Yeah you can do that and just manage your investments out of the IRA. I would call whoever your broker is and make sure it all gets setup correctly to avoid any penalties.
Click to expand...

Yeah the lawyer told me IRA have to wait to put it in the trust because of tax implications. Everything else is a good though


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## pennstater2005

I will always recommended Bogleheads for investment advice. I got a great start gleaning information from those folks. Even if all they do is keep you sane in an insane market so you don't do anything irrational!


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## jayhawk

DeepC said:


> Can I get some help in getting started in a Roth Investment? I'm new to the market but I'm researching tremendously. Im 40 years old, wife and 2 kids. I've paid off the house and cars. No debt at all. Self employed and make 48k a year after deductions, Not a lot... but I'm wanting to start investing for me and the wife (not working).
> I have 12k to put in for our combined account. So I'm thinking:
> VTI
> VOO
> AOR
> Mutual fund?
> Can someone tell me if this is a good or bad plan. Thank you for any help!


I'd be index funds or their ETF (qqq, spy), no bonds at your age. you got a long runway so let it ride. Etf you at least have price transparency.
Not investment advice.


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## cldrunner

@jayhawk @CenlaLowell @viva_oldtrafford Now with most of the ARK funds down 50%+ for the last one year and back to about even over the last two years I would expect that most of the ARK Fund investors have lost even more than that. I would actually become interested in these funds if I see another 25% drop. The ARK funds were very similiar to the Firsthand funds back in the late 90's and early 2000 when tech stocks were the rage before they fell 75%. ARKK is down 65% from it's high so I think we are getting close with these riskier names.


----------



## CenlaLowell

pennstater2005 said:


> I will always recommended Bogleheads for investment advice. I got a great start gleaning information from those folks. Even if all they do is keep you sane in an insane market so you don't do anything irrational!


I agree with the boglehead planning, but I also invest maybe 10% in individual stocks


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## pennstater2005

CenlaLowell said:


> pennstater2005 said:
> 
> 
> 
> I will always recommended Bogleheads for investment advice. I got a great start gleaning information from those folks. Even if all they do is keep you sane in an insane market so you don't do anything irrational!
> 
> 
> 
> I agree with the boglehead planning, but I also invest maybe 10% in individual stocks
Click to expand...

I played for a little while too. BRK-B, Alcoa, and a few others but got tired of having to follow so eventually sold. I bought Fannie Mae shares once off the pink sheet at .26 a share. Got too antsy and sold after a few months and it jumped to over $5 briefly. That told me how much I knew.


----------



## CenlaLowell

pennstater2005 said:


> CenlaLowell said:
> 
> 
> 
> 
> 
> pennstater2005 said:
> 
> 
> 
> I will always recommended Bogleheads for investment advice. I got a great start gleaning information from those folks. Even if all they do is keep you sane in an insane market so you don't do anything irrational!
> 
> 
> 
> I agree with the boglehead planning, but I also invest maybe 10% in individual stocks
> 
> Click to expand...
> 
> I played for a little while too. BRK-B, Alcoa, and a few others but got tired of having to follow so eventually sold. I bought Fannie Mae shares once off the pink sheet at .26 a share. Got too antsy and sold after a few months and it jumped to over $5 briefly. That told me how much I knew.
Click to expand...

Your right, but no one truly knows. For me it helps keep me engaged with whats going on in the United States economy plus it keeps the mind sharp.


----------



## jayhawk

cldrunner said:


> @jayhawk @CenlaLowell @viva_oldtrafford Now with most of the ARK funds down 50%+ for the last one year and back to about even over the last two years I would expect that most of the ARK Fund investors have lost even more than that. I would actually become interested in these funds if I see another 25% drop. The ARK funds were very similiar to the Firsthand funds back in the late 90's and early 2000 when tech stocks were the rage before they fell 75%. ARKK is down 65% from it's high so I think we are getting close with these riskier names.


Surely some are under water.
Most growth stocks are down over 100% 

Did the degree of the slope look sustainable? Selling is hard, requires discipline.

Look for a trend break before legging in


----------



## CenlaLowell

jayhawk said:


> cldrunner said:
> 
> 
> 
> @jayhawk @CenlaLowell @viva_oldtrafford Now with most of the ARK funds down 50%+ for the last one year and back to about even over the last two years I would expect that most of the ARK Fund investors have lost even more than that. I would actually become interested in these funds if I see another 25% drop. The ARK funds were very similiar to the Firsthand funds back in the late 90's and early 2000 when tech stocks were the rage before they fell 75%. ARKK is down 65% from it's high so I think we are getting close with these riskier names.
> 
> 
> 
> Surely some are under water.
> Most growth stocks are down over 100%
> 
> Did the degree of the slope look sustainable? Selling is hard, requires discipline.
> 
> Look for a trend break before legging in
Click to expand...

I agree selling is hard. I'm looking for a spot to get out of MRO now. I been in this position since 4$, there's also position I didn't sell and now they have lost all the gains. Pltr, sofi, etc


----------



## turfnsurf

pennstater2005 said:


> I played for a little while too. BRK-B, Alcoa, and a few others but got tired of having to follow so eventually sold. I bought Fannie Mae shares once off the pink sheet at .26 a share. Got too antsy and sold after a few months and it jumped to over $5 briefly. That told me how much I knew.


Two questions:
How/where do you pink sheet investing? I have an interest in using a small amount of money in that arena, but I don't know where you're able to do it.

And also, are there any tips that you have for pink sheet investing?


----------



## pennstater2005

turfnsurf said:


> pennstater2005 said:
> 
> 
> 
> I played for a little while too. BRK-B, Alcoa, and a few others but got tired of having to follow so eventually sold. I bought Fannie Mae shares once off the pink sheet at .26 a share. Got too antsy and sold after a few months and it jumped to over $5 briefly. That told me how much I knew.
> 
> 
> 
> Two questions:
> How/where do you pink sheet investing? I have an interest in using a small amount of money in that arena, but I don't know where you're able to do it.
> 
> And also, are there any tips that you have for pink sheet investing?
Click to expand...

I don't remember how I purchased. And it was the only pink sheet listing (over the counter) I ever bought. I do remember I did it over the phone which was weird.


----------



## CenlaLowell

pennstater2005 said:


> turfnsurf said:
> 
> 
> 
> 
> 
> pennstater2005 said:
> 
> 
> 
> I played for a little while too. BRK-B, Alcoa, and a few others but got tired of having to follow so eventually sold. I bought Fannie Mae shares once off the pink sheet at .26 a share. Got too antsy and sold after a few months and it jumped to over $5 briefly. That told me how much I knew.
> 
> 
> 
> Two questions:
> How/where do you pink sheet investing? I have an interest in using a small amount of money in that arena, but I don't know where you're able to do it.
> 
> And also, are there any tips that you have for pink sheet investing?
> 
> Click to expand...
> 
> I don't remember how I purchased. And it was the only pink sheet listing (over the counter) I ever bought. I do remember I did it over the phone which was weird.
Click to expand...

Vanguard, fidelity does


----------



## Virginiagal

Somehow I've missed the years of this topic. I read/skimmed maybe a third this morning. Something I haven't seen discussed yet and maybe it needs its own thread is long term care insurance. I have a friend who was in the hospital and when she was discharged, she thought she needed 24/7 care for awhile. She had a long term care policy she had paid into for 20+ years and had never used it and wanted to take advantage of it. Unfortunately she didn't know/remember that there was a waiting period (called "elimination period") where she would have to pay all the costs before the policy paid anything. Also she would have to qualify as needing help with a certain number of Activities of Daily Living (like dressing, bathing, eating, toileting, transferring). Just needing help preparing meals or other housekeeping tasks doesn't count. She paid over $5000 for one week's care the week after discharge. In her case, she lived in a continuing care facility which has a health care unit and she could have gone directly there from the hospital. Medicare likely would have paid for a certain amount of time if she went directly there. But the facility wouldn't charge her more than her normal rent/fees anyway. She transferred into the health care unit for a few weeks and is now back in her apartment doing pretty much everything she did before going to the hospital.

In retirement, one of the biggest drain on your finances is likely to be assisted living or nursing home care or in home care if you need it. I don't know if long term care insurance is worth it. There are hoops to jump through and you may have to pay for months yourself anyway. I have been skeptical about continuing care facilities because of the huge upfront costs. But it is an alternative to long term care insurance. Anyone with any thoughts on navigating the costs of care in retirement?


----------



## pennstater2005

Virginiagal said:


> Somehow I've missed the years of this topic. I read/skimmed maybe a third this morning. Something I haven't seen discussed yet and maybe it needs its own thread is long term care insurance. I have a friend who was in the hospital and when she was discharged, she thought she needed 24/7 care for awhile. She had a long term care policy she had paid into for 20+ years and had never used it and wanted to take advantage of it. Unfortunately she didn't know/remember that there was a waiting period (called "elimination period") where she would have to pay all the costs before the policy paid anything. Also she would have to qualify as needing help with a certain number of Activities of Daily Living (like dressing, bathing, eating, toileting, transferring). Just needing help preparing meals or other housekeeping tasks doesn't count. She paid over $5000 for one week's care the week after discharge. In her case, she lived in a continuing care facility which has a health care unit and she could have gone directly there from the hospital. Medicare likely would have paid for a certain amount of time if she went directly there. But the facility wouldn't charge her more than her normal rent/fees anyway. She transferred into the health care unit for a few weeks and is now back in her apartment doing pretty much everything she did before going to the hospital.
> 
> In retirement, one of the biggest drain on your finances is likely to be assisted living or nursing home care or in home care if you need it. I don't know if long term care insurance is worth it. There are hoops to jump through and you may have to pay for months yourself anyway. I have been skeptical about continuing care facilities because of the huge upfront costs. But it is an alternative to long term care insurance. Anyone with any thoughts on navigating the costs of care in retirement?


Google long term care over at Bogleheads. That subject gets contentious.


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## CenlaLowell

pennstater2005 said:


> Virginiagal said:
> 
> 
> 
> Somehow I've missed the years of this topic. I read/skimmed maybe a third this morning. Something I haven't seen discussed yet and maybe it needs its own thread is long term care insurance. I have a friend who was in the hospital and when she was discharged, she thought she needed 24/7 care for awhile. She had a long term care policy she had paid into for 20+ years and had never used it and wanted to take advantage of it. Unfortunately she didn't know/remember that there was a waiting period (called "elimination period") where she would have to pay all the costs before the policy paid anything. Also she would have to qualify as needing help with a certain number of Activities of Daily Living (like dressing, bathing, eating, toileting, transferring). Just needing help preparing meals or other housekeeping tasks doesn't count. She paid over $5000 for one week's care the week after discharge. In her case, she lived in a continuing care facility which has a health care unit and she could have gone directly there from the hospital. Medicare likely would have paid for a certain amount of time if she went directly there. But the facility wouldn't charge her more than her normal rent/fees anyway. She transferred into the health care unit for a few weeks and is now back in her apartment doing pretty much everything she did before going to the hospital.
> 
> In retirement, one of the biggest drain on your finances is likely to be assisted living or nursing home care or in home care if you need it. I don't know if long term care insurance is worth it. There are hoops to jump through and you may have to pay for months yourself anyway. I have been skeptical about continuing care facilities because of the huge upfront costs. But it is an alternative to long term care insurance. Anyone with any thoughts on navigating the costs of care in retirement?
> 
> 
> 
> Google long term care over at Bogleheads. That subject gets contentious.
Click to expand...

This is a tricky subject. On one hand you don't want to be a burden on the taxpayer and on the other you don't want to drain your finances to pay for this. My plan, for now, is to set up a trust and eventually move all assets except my vehicles in there. I rather use Medicare instead of not starting generational wealth.


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## Virginiagal

CenlaLowell said:


> This is a tricky subject. On one hand you don't want to be a burden on the taxpayer and on the other you don't want to drain your finances to pay for this. My plan, for now, is to set up a trust and eventually move all assets except my vehicles in there. I rather use Medicare instead of not starting generational wealth.


I think you mean Medicaid instead of Medicare. You should research the type of trust that could be used and the limitations on them. As I understand it, you would not be able to be either the trustee or beneficiary. Retirement accounts can't be transferred and would have to be liquidated. There is a five year look back period.


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## CenlaLowell

Virginiagal said:


> CenlaLowell said:
> 
> 
> 
> This is a tricky subject. On one hand you don't want to be a burden on the taxpayer and on the other you don't want to drain your finances to pay for this. My plan, for now, is to set up a trust and eventually move all assets except my vehicles in there. I rather use Medicare instead of not starting generational wealth.
> 
> 
> 
> I think you mean Medicaid instead of Medicare. You should research the type of trust that could be used and the limitations on them. As I understand it, you would not be able to be either the trustee or beneficiary. Retirement accounts can't be transferred and would have to be liquidated. There is a five year look back period.
Click to expand...

Yes your right my error. I set my trust up with an estate planning attorney here. Yes, their is a five year look back, so I created mine at this year at the age of 41 wife 44. I'm working on the retirement accounts now figuring out how I'm going to start moving them over to the trust starting at age 59 1/2. I suggest anyone interested in doing this to talk to someone that specializes in estate planning.


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## tommyboy

We're in the process of setting up an irrevocable trust in Wisconsin. Rules may vary by state. Our lawyer says yes me and wife can be and will be trustee's. And yes, IRA's/401k's cannot be put in a trust. It is actually a revocable (living) trust wrapped in an irrevocable trust. Or maybe the other way around. Revocable trusts alone are good for bypassing probate only. According to the lawyer. This stuff is mostly beyond me though. Bottom line for me is, set up the trusts and if nursing home ect. is required , run to the lawyer.


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## Virginiagal

Besides asset limits, there are also income limits to be eligible. And there are assessments to determine whether nursing home level care is needed. It's more likely that someone will need assisted living care than nursing home care, yet Medicaid does not pay for assisted living. There are downsides to relying on Medicaid. Unfortunately, many people have no choice.

Even if all you're looking at is money, not being able to have tax free growth in a Roth throughout retirement years is a big disadvantage. Is it worth it to forgo tax advantages to set oneself up to save money on a nursing home that might never be needed? You should be careful about tying assets up irrevocably and then finding out when the time comes that you don't qualify anyway because your income is too high.


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## Virginiagal

Another caution. You may think, well, I can just direct all income to the trust to get around the income limits. You can, except for probably Social Security and pensions which you may have to avoid claiming if it puts you too high, but just know that ordinary income in trusts is taxed at 37% for income over $13,450. That's for federal. If your state taxes income, there will be state tax too. For the income that comes to you, you will be able to reserve some for your spouse, but a lot will have go to the nursing home. Medicaid rules are state specific and rules will be different is different states. The loss of choice in picking where you get care is a big thing. Nursing homes have a certain number of beds for Medicaid and you may not get into where you'd like to go. It may be that you end up in a different town. You might not be able to use the doctors you prefer and it may be difficult to get appointments. I'd think carefully about whether this is the way you want to go. Talk to some people who have actually done this and intentionally gone on Medicaid using a Medicaid trust.


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## CenlaLowell

tommyboy said:


> We're in the process of setting up an irrevocable trust in Wisconsin. Rules may vary by state. Our lawyer says yes me and wife can be and will be trustee's. And yes, IRA's/401k's cannot be put in a trust. It is actually a revocable (living) trust wrapped in an irrevocable trust. Or maybe the other way around. Revocable trusts alone are good for bypassing probate only. According to the lawyer. This stuff is mostly beyond me though. Bottom line for me is, set up the trusts and if nursing home ect. is required , run to the lawyer.


This is exactly what I just did.


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## CenlaLowell

Virginiagal said:


> Another caution. You may think, well, I can just direct all income to the trust to get around the income limits. You can, except for probably Social Security and pensions which you may have to avoid claiming if it puts you too high, but just know that ordinary income in trusts is taxed at 37% for income over $13,450. That's for federal. If your state taxes income, there will be state tax too. For the income that comes to you, you will be able to reserve some for your spouse, but a lot will have go to the nursing home. Medicaid rules are state specific and rules will be different is different states. The loss of choice in picking where you get care is a big thing. Nursing homes have a certain number of beds for Medicaid and you may not get into where you'd like to go. It may be that you end up in a different town. You might not be able to use the doctors you prefer and it may be difficult to get appointments. I'd think carefully about whether this is the way you want to go. Talk to some people who have actually done this and intentionally gone on Medicaid using a Medicaid trust.


I'll talk to the lawyer about the ordinary income tax because this was something not discussed during our four meetings. The next thing I need the figure out is how I'm going to move retirement money when I hit that age. As far as the nursing the wife knows we will go whatever Medicaid pays because my main concern will be leaving my wealth to my daughter not the state.


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## Virginiagal

Capital gains have lower rates, the highest being 20%. If you distribute the income, the individual getting it pays the tax on their own tax return at whatever rates apply to them. You could have it distributed to you or your wife if it doesn't put you over the income limits. Maybe you could have the income distributed to your daughter if the trust allows it. Pensions, retirement account income, and Social Security would be ordinary income as well as interest and rent but pensions, retirement accounts, and Social Security can't be put in a trust. Well, you might be able to make the trust the beneficiary of a retirement account but it probably won't help you qualify; you'd need to check on state rules and retirement account rules. Qualified dividends and capital gains fall under capital gains rates.


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## MarkV

The recent downturn made me look closer at what was going on with my accounts. Then I remembered skimming this thread years ago. So now I'm am an Edward Jones to Vanguard convert. I wish I would have made the change years ago.


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## CenlaLowell

MarkV said:


> The recent downturn made me look closer at what was going on with my accounts. Then I remembered skimming this thread years ago. So now I'm am an Edward Jones to Vanguard convert. I wish I would have made the change years ago.


 Made a great decision going to vanguard. Now to figure out what type of investor you are a boglehead or active investor. Investing for the future will lead to a comfortable future.


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## MarkV

CenlaLowell said:


> Made a great decision going to vanguard. Now to figure out what type of investor you are a boglehead or active investor. Investing for the future will lead to a comfortable future.


Definitionally more of a boglehead than an active investor. About 76% of our total retirement money is at Vanguard (the remainder is at my wife's work). Of the Vanguard money, 90% is in the 500 Index (VFIAX) and 10% is in Total Bond Market Index (VBTLX). I take that back, 10% of the VG money is still in cash to buy as things (VFIAX) as they get cheaper. So there might be a slight "active investor" in me. I don't know if buying indexes makes me an "active investor" though.


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## Amoo316

MarkV said:


> Definitionally more of a boglehead than an active investor. About 76% of our total retirement money is at Vanguard (the remainder is at my wife's work). Of the Vanguard money, 90% is in the 500 Index (VFIAX) and 10% is in Total Bond Market Index (VBTLX). I take that back, 10% of the VG money is still in cash to buy as things (VFIAX) as they get cheaper. So there might be a slight "active investor" in me. I don't know if buying indexes makes me an "active investor" though.


Assuming you're not flipping indexes every month or so I would call it active investing as opposed to trading.


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## Boy_meets_lawn

I'm sure most of the people browsing this thread recently have bought into I bonds. But if you haven't it's definitely a good place to park some capital until rates cool off.


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## falconsfan

^^^ They are a great deal right now. Make sure you do your homework as you are committing the $ for a year minimum. Meaning you can't get it out period. Also make sure you write down your password and challenge questions. It's easy to be locked out and then you have to spend hours waiting to talk to someone to get your account unlocked.


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## Allan-00

Put money into bonds for a *guaranteed* negative real return. Sounds good to me.


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## Grass Clippins

Allan-00 said:


> Put money into bonds for a *guaranteed* negative real return. Sounds good to me.


I can't tell if you are being sarcastic.


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## massgrass

I'm all ears if anyone has a better option than a 9.62% guaranteed return.


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## moedank

Grass Clippins said:


> I can't tell if you are being sarcastic.


You're not making money, just maintaining your money's purchasing power re: inflation. 

Example, you have $100. Inflation for a 1 year period is 9.62% for goods/services that you purchase. At the end of the year, your ibond earned you 9.62% (6-month fixed rate and inflation rate stay the same), so you have $109.62. The $109.62 at the end of the year has the same purchasing power as the $100 twelve months prior. You didn't "earn" money, you only maintained its purchasing power. 

The ibond money will eventually be taxed once withdrawn, so negative real return.

Still, I buy them.


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## Grass Clippins

moedank said:


> xample, you have $100. Inflation for a 1 year period is 9.62% for goods/services that you purchase. At the end


I understand what he was saying in regards to real return, I put as much as possible into I bonds as well. I just don't understand why a person wouldn't be all over these.


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## jerrywil

I don't have a huge expectation of the pension, so checking some other interesting offers.
At the moment I am reading about Lithuania crypto license and considering to try that one day. 
The risks seem to be not so high and the profit i can make is actually unlimited.


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