Investing for Retirement

A place to discuss everything else
Post Reply
User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Investing for Retirement

Post by dfw_pilot » Thu Jun 08, 2017 12:52 am

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

Retirement Roadmap
  1. Getting Started
  2. Where To Invest
  3. What To Invest In
  4. Indexing Benefits
  5. Asset Allocation
  6. Stay The Course
  7. Live On Half
  8. Financial Advisors
  9. The Backdoor Roth
  10. Every Dollar Counts
  11. Reading and Resources
Extra Reading
  1. Taxable Accounts
  2. The 529 Account
  3. The Magical HSA
  4. Annual Contribution Limits
  5. The Mega Backdoor Roth
  6. The Donor Advised Fund
  7. 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
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Getting Started

Post by dfw_pilot » Thu Jun 08, 2017 12:53 am

Getting Started

Image

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.

Image

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.
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Where to Invest

Post by dfw_pilot » Thu Jun 08, 2017 12:53 am

Where to Invest

Image

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.).
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

What to Invest In

Post by dfw_pilot » Thu Jun 08, 2017 12:54 am

What to Invest In

Image

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.

Image

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.
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Indexing Benefits

Post by dfw_pilot » Thu Jun 08, 2017 12:55 am

Indexing Benefits

Image

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.
Image
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.
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Asset Allocation

Post by dfw_pilot » Thu Jun 08, 2017 12:55 am

Asset Allocation

Image

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.

Image

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.
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Stay the Course

Post by dfw_pilot » Thu Jun 08, 2017 12:56 am

Stay the Course


Image

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.

Image

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.

The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Live on Half

Post by dfw_pilot » Thu Jun 08, 2017 12:57 am

Live on Half


Image

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 = Financially Independent, Retire Early) 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!

Image
*Inspired by the Physician on Fire. Similar, but not substantially identical ;)

Last edited by dfw_pilot on Thu Jun 08, 2017 2:11 am, edited 1 time in total.
Reason: Edit Links
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Financial Advisors

Post by dfw_pilot » Thu Jun 08, 2017 12:57 am

Financial Advisors


Image

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.
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Backdoor Roth IRA

Post by dfw_pilot » Thu Jun 08, 2017 12:58 am

Backdoor Roth IRA

Image

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 5912.

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 ($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 2nd 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)
Image

The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Every Dollar Counts

Post by dfw_pilot » Thu Jun 08, 2017 12:59 am

Every Dollar Counts



Image

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.

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.

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.

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.

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.

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."

The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Resources

Post by dfw_pilot » Thu Jun 08, 2017 12:59 am

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 0.037% [2019 edit] a year, or $37 per $100k invested.


Happy Investing! All the best,

dfw
Last edited by dfw_pilot on Thu Jun 08, 2017 1:17 am, edited 1 time in total.
Reason: Links
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Extra Reading

Post by dfw_pilot » Thu Jun 08, 2017 1:01 am

Extra Reading

For the extra reading topics, click back to the table of contents to find them.
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
SGrabs33
TLF Supporter
Posts: 1997
Joined: Mon Feb 13, 2017 12:52 pm
Location: Apex, NC
Grass Type: Tif419 Bermuda
Lawn Size: 4.5k sq ft
Mower: California Trimmer, TruCut
Contact:

Re: Investing for Retirement

Post by SGrabs33 » Thu Jun 08, 2017 6:20 am

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.

User avatar
chrismar
TLF Supporter
Posts: 856
Joined: Thu May 25, 2017 9:29 am
Location: Bridgewater, NJ
Grass Type: Elite KBG
Lawn Size: 22,000 SF
Mower: Bobcat 36" Walk Behind

Re: Investing for Retirement

Post by chrismar » Thu Jun 08, 2017 9:24 am

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". :)
Front: Bewitched, Prosperity, Midnight KBG / Back: JG "Black Beauty" TTTF (Lawn Journal)

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

529 Front Load

Post by dfw_pilot » Thu Jun 08, 2017 10:20 am

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.
Last edited by dfw_pilot on Thu Jun 08, 2017 10:22 am, edited 1 time in total.
Reason: Reworded
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
SGrabs33
TLF Supporter
Posts: 1997
Joined: Mon Feb 13, 2017 12:52 pm
Location: Apex, NC
Grass Type: Tif419 Bermuda
Lawn Size: 4.5k sq ft
Mower: California Trimmer, TruCut
Contact:

Re: Investing for Retirement

Post by SGrabs33 » Fri Jun 09, 2017 11:13 pm

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!

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Opportunity Costs

Post by dfw_pilot » Sat Jun 10, 2017 12:04 am

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.
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

User avatar
jayhawk
Posts: 767
Joined: Tue Apr 18, 2017 3:49 pm
Location: metro atlanta
Grass Type: zoysia; tifgrand beauty strip
Lawn Size: Yuuuge 2500
Mower: TruCut
Contact:

Re: Investing for Retirement

Post by jayhawk » Sat Aug 19, 2017 8:53 am

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.
Last edited by jayhawk on Sat Aug 19, 2017 6:59 pm, edited 3 times in total.

User avatar
dfw_pilot
Site Admin
Posts: 2410
Joined: Sat Jan 28, 2017 3:19 pm
Location: DFW Metroplex
Grass Type: Bermuda
Lawn Size: 5,000 ft²
Mower: Sigh, back to rotary.
Contact:

Mutual Funds

Post by dfw_pilot » Sat Aug 19, 2017 1:22 pm

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!
The Bermuda Triangle | Sprayer Wand | Invest for Retirement | PWS
- A clear conscience is a great pillow -

Post Reply