Investing for Retirement

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Re: Investing for Retirement

Post by Buddy » Tue Jun 19, 2018 8:43 am

massgrass wrote:
Mon Jun 18, 2018 9:26 pm
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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Re: Investing for Retirement

Post by massgrass » Tue Jun 19, 2018 9:26 am

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. :D 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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Re: Investing for Retirement

Post by Buddy » Tue Jun 19, 2018 9:43 am

massgrass wrote:
Tue Jun 19, 2018 9:26 am
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. :D 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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The Tyranny of Compounding Costs

Post by dfw_pilot » Tue Jun 19, 2018 7:47 pm

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 23's of your returns. Stunning! Pay attention to the fees you are paying.



"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:

Image
Last edited by dfw_pilot on Mon May 06, 2019 12:37 pm, edited 1 time in total.
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Re: The Tyranny of Compounding Costs

Post by SGrabs33 » Tue Jun 19, 2018 8:34 pm

dfw_pilot wrote:
Tue Jun 19, 2018 7:47 pm
Over a 50 year investing lifetime, paying a 2% fee will erode nearly 23'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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Re: The Tyranny of Compounding Costs

Post by dfw_pilot » Tue Jun 19, 2018 8:59 pm

SGrabs33 wrote:
Tue Jun 19, 2018 8:34 pm
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 wrote:
Tue Jun 19, 2018 8:34 pm
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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Re: Investing for Retirement

Post by SGrabs33 » Tue Jun 19, 2018 9:11 pm

@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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Up and Down Formula

Post by dfw_pilot » Wed Jun 20, 2018 3:29 pm

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

1 equals even, percentages are in decimal format (30% drop = 0.30), and D is the percent drop.

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.
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Investing Periodic Table

Post by dfw_pilot » Wed Jun 20, 2018 4:13 pm

Image

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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firefighter11

Re: Investing for Retirement

Post by firefighter11 » Thu Jun 21, 2018 6:12 pm

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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Re: Investing for Retirement

Post by dfw_pilot » Thu Jun 21, 2018 6:56 pm

@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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Re: Investing for Retirement

Post by firefighter11 » Thu Jun 21, 2018 7:19 pm

@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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Re: Investing for Retirement

Post by jonthepain » Sat Jun 23, 2018 5:41 pm

Thanks for the info, dfw.

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The Magical HSA

Post by dfw_pilot » Sun Jun 24, 2018 6:02 pm

The Magical HSA


Image

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.

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Retirement Account Increases

Post by dfw_pilot » Thu Aug 02, 2018 11:40 am

Investment Account
Contribution Limits
2020 Limits
  • IRA: $6,000
  • IRA age 50+ catchup contribution: $1,000
  • 401(k) deferral: $19,000
  • 401(k) max contribution: $57,000
  • 401(k) age 50+ catchup contribution: $6,000
  • HSA: $3,550 (single) and $7,100 (family)
  • HSA age 55+ catchup contribution: $1,000
  • FSA's: $2,750
2019 Limits
  • IRA: $6,000
  • IRA age 50+ catchup contribution: $1,000
  • 401(k) deferral: $19,000
  • 401(k) max contribution: $56,000
  • 401(k) age 50+ catchup contribution: $6,000
  • HSA: $3,500 (single) and $7,000 (family)
  • HSA age 55+ catchup contribution: $1,000
  • FSA's: $2,700
2018 Limits
  • IRA: $5,500
  • IRA age 50+ catchup contribution: $1,000
  • 401(k) deferral: $18,500
  • 401(k) max contribution: $55,000
  • 401(k) age 50+ catchup contribution: $6,000
  • HSA: $3,450 (single) and $6,900 (family)
  • HSA age 55+ catchup contribution: $1,000
  • FSA's: $2,650
A full list of the: 2019 limits, or see the College of Financial Planning site for previous years. Always try to set a goal each year to maximize as much as you can.

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DIY vs Money Manager

Post by dfw_pilot » Sun Aug 26, 2018 11:35 am

"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.
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Re: Investing for Retirement

Post by iFisch3224 » Sun Aug 26, 2018 3:16 pm

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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Re: Investing for Retirement

Post by jonthepain » Sun Aug 26, 2018 5:35 pm

Congratulations Fisch! That's awesome

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Re: Investing for Retirement

Post by iFisch3224 » Mon Aug 27, 2018 10:01 pm

jonthepain wrote:
Sun Aug 26, 2018 5:35 pm
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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Re: Investing for Retirement

Post by Mozart » Wed Aug 29, 2018 4:21 pm

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

Image

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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