Please note:
For the time-being, my schedule does not permit the time to respond to questions here.
Once I am again able to, I will post another note announcing it.
Thanks for your patience and I hope you will save your questions until then.
Best,
JL Collins
Ever since the start of this blog I’ve received questions and requests for help from readers. Mostly these come as comments on one post or another and sometimes by private email. Since most of these questions are likely on the minds of others, I prefer to respond on the blog and I ask emailers to post their questions here.
So with that in mind, I’ve created this page. This is how I hope it will work:
- If you have a question or comment that is specific to a given post, by all means please continue to put it there.
- If you are one of my international readers and are trying to figure out how to apply the advice here to the investment options in your home country, there are two posts about that: Stocks — Part XXI: Investing in Vanguard for Europeans and What if you can’t buy VTSAX, or even Vanguard.Please check them out along with the questions and answers you’ll find in the comments. And post your own there.
This is already growing into a nice data base of international investing info. - If your question doesn’t really fit with in other posts, right here is the place. Put it in the comments and I’ll try to answer as many as I can.
- Some questions will also become part of the growing series of Case Studies.
The investment ideas of others:
Occasionally in the comments I am asked to read some book, article and/or blog and dispute the ideas in them. I simply don’t have the time or inclination to do this.
If you read my blog you’ll soon have a very clear idea of my views. You can then read other sources, compare and decide for yourself what resonates.
Important points before you post:
Be sure to read the Disclaimer Page. You are always solely responsible for your own decisions.
If you choose to comment:
You are solely responsible for any comment/content you leave on this blog. By leaving a comment on this blog it becomes a part of the public domain and you hereby grant the owner of this blog the unlimited right and license to use, copy, display, save, reproduce, distribute, or publish (including, without limitation, in another blog post, article or book) your content or comment free of charge.
Mr. Collins,
I’m a long time reader of your blog and thought I’d reach out with what I hope is a quick question.
I have been living a fairly frugal lifestyle since I was a teen quite by accident and stumbled across the ERE website when trying to decide if I had enough money to retire. From there I ended up on MMM and eventually on your blog through google searches and blog rolls. I believe I’ve read your entire archive at this point and really enjoy your work.
I’m a 41 year old single renter with very little debt ($23k in student loans at 2.85% so I invest the money rather than pay off the loan). I have roughly $400k split between a 401(k) and rolled over IRA and another $1.8m currently invested in Fidelity and Vanguard mutual funds. I currently make $450k ish from work and pay an obscene amount in taxes. I’ve been FI for several years, but don’t dislike my job and figure I might as well make hay while the sun is shining. I also wouldn’t mind building up a cushion so that family and other decisions can be made without an impact on lifestyle. That being said, if I were to lose this job I don’t think I would work again for quite a few years, if at all.
After testing out a wealth tracking tool at “Personal Capital” I was approached by a financial advisor there and sat through a pitch on them handling my portfolio. The main benefits that they articulated related to tactical weighting and tax loss harvesting. Following this meeting I set up a similar meeting with a financial planner at Fidelity and another at Vanguard. Since you’re the smartest guy I know on this topic I thought I would solicit your advice as well.
I know that you utilize a VTSAX/Vanguard Reit/Cash strategy but I was wondering if you think an alternate strategy is warranted for a person in my situation. Am I making a huge tax mistake by investing in mutual funds? Any other strategies you would consider in my situation other than the ones I’m hearing about above?
I know that all advice depends on personal circumstances and results will vary. I also know that you aren’t holding yourself out as an investment advisor so I promise not to rely or make any investment decisions based on your answer, but I am very curious as to your thoughts.
Thanks very much for your work on this blog. You are definitely making the world a better and more informed place!
Best,
ES
Welcome Eric…
and thanks for the great question and very interesting situation.
Let’s walk thru this together.
First, as I suspect you already know from interviewing a couple, with your net worth and income you are a mouthwatering target for financial planners. Be very, very careful and if you haven’t already, please read this:
https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
Second, let me say that larger sums of money don’t change my basic advice.
Third, I like your student loan strategy. Makes perfect sense. Because it is so small against your resources, I’d probably just pay it off. But that reflects my affection for simplicity. What you are doing is more correct financially.
Fourth, you say you are FI. Since you have 2.2 million in assets, this implies you are comfortable living on 4% of that: 88k per year.
If this is the case, with 450k in annual income, you either are willing to take a major step back lifestyle when you hang up the job or you have a very high savings rate. If the latter, I have to wonder why your net worth isn’t higher. Perhaps you’ve only enjoyed this income level recently?
In any event, my overall advice would be:
*Since you are financially independent, begin living solely on your investments.
*Now you can decide anytime if you are still having fun and want to continue your career. Or possibly try something new.
*If you keep working, invest 100% of your earnings. You are living on your investments now.
*This will, of course, dramatically accelerate the growth of your assets.
*This growth of your assets will, in turn, accelerate the growth of the spendable dollar amount 4% represents.
*Now, should you so choose, is the time to begin expanding your lifestyle. Just be sure to keep it at 4% of your holdings.
*Now is also the time to think about giving like a billionaire: https://jlcollinsnh.com/2012/02/08/how-to-give-like-a-billionaire/ There are some interesting tax advantages.
(BTW, those points all come directly from this post: https://jlcollinsnh.com/2013/06/04/my-path-for-my-kid-the-first-10-years/
Ok, now finally to your actual question.
No, I don’t think you are making a tax mistake investing in mutual funds.
For the bond portion of your portfolio, you might look for a Vanguard tax-free municipal bond fund. If you live in a high tax state like NY, NJ, CA try to find on focused there to avoid those taxes, too.
But if you are really FI and able to live on that 88k the 2.2 million will throw off, consider focusing on just VTSAX. As a broad-based stock index fund, this is considered a “tax-efficient” investment. Here’s why:
–Taxable dividend payouts are relatively low and dividends still receive favorable tax treatment. VTSAX currently pays about 2%.
–Capital gains distributions. These are distributed by mutual funds at the end of the year and represent a taxable gain, if any, on the trading the fund has done. These also have favorable tax treatment. But since VTSAX is an index fund it does very little trading and it mostly avoids these taxable gains.
–Capital gains on the growth in value of your shares. This is the big one and what you are investing in VTSAX mostly for. Tax on these gains is due only when you sell shares, so you have some control. Like waiting until you hang up the job and your income drops.
At your income level and with your growing net-worth, relatively high taxes are going to be a fact of life. Certainly you want to consider and plan for them. But don’t loose sight of the fact, as problems go, this is not a bad one to have.
Finally if you are willing to share, and of course I have to ask, what do you do for a living?
I’m a corporate attorney in California.
I recently went back and tracked my spending over the last ten years (very easy to do looking at bank statements). It has vacilated between a high of $67,250 (2008) and a low of $56,231 (2012) (excluding taxes paid in both cases). It’s pretty suprising how consistent it is over time considering that I don’t budget or think about expenses other than as a “to purchase or not to purchase” decision as they arise. I tend to spend on things I value (I play a lot of golf, travel alot and eat at a lot of nice restaurants) and not on things I don’t (I drive a 13 year old car with the paint peeling off).
Over the last four years my savings rate has been roughly between 65% and 75% (again excluding taxes).
In terms of why my net worth isn’t higher, I borrowed to attend college and law school, so started with a pretty high level of debt. I’ve also taken a couple of mini-retirements to travel (one year between jobs in 2001 and two years between jobs in 2005-2007). My income has also grown at a fair pace over the years so savings percentage wasn’t always this high and frankly has never been something I’ve focused on.
I really appreciate the advice here!
Thanks for sharing this, Eric, and major league kudos.
Sounds like we share many of the same priorities, including the “mini-retirements” and except the golf. I’ve always felt I had enough grief in my life without that. 😉
Speaking of grief, does your 13 year old car with the paint peeling off draw any from your colleagues or clients?
A wise man once said that the first half of life is spent fucking up, the other half is dealing with it. Obviously you are a very wise man, because you seem to have side-stepped a lot of the fucking up aspect of life. But what advice do you have for someone who maybe did make a big financial mess, someone without John Goodman or JLCollins to sit them down and set them straight, someone staring down the barrel of their fifties with debt in the six figures? Pay off debt first, then build a nest egg? Hire a professional or try to figure it out myself? Thanks in advance -Joshua
Hi Joshua…
I have frequently said, here on the blog and in real life, that if I know anything about this stuff it is because I’ve made most every financial blunder there is.
This blog is basically written for my daughter in the hopes it will help her avoid some of the traps and enjoy a smoother path.
For anyone else interested, this entire blog is me sitting down and telling it straight. So if you are interested, there you go.
Most start with: https://jlcollinsnh.com/stock-series/
Given your debt you might want to jump ahead to this one: https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
…and then start at the beginning.
Good luck!
Jim,
This is a topic that my wife and I have been debating (not arguing) for some time now.
First off, we are both 29, make about 140k combined per year, and have zero debt except 130k left on our mortgage (3.25%, 15yr fixed), we also have our first child due this year. We have 120k saved in a combination of retirement accounts and straight mutual funds plus around 20k in cash accounts. My goal is to be able to retire at or before age 40.
The question is a common one, but as I’ve found very few people who share my views on money and even fewer who have actually been down the road I hope to stay on, it’s been difficult to get any good advice on the topic. Every financial advisor I’ve spoke with thinks I’m crazy when I tell them I want to retire around 40, and then proceeds to try to sell me some high fee funds or cash value life insurance (blah).
The debate we are having is whether it’s better to pay down our mortgage very quickly (in our case it would be paid off in about 3 years) or to only pay minimum payments on the mortgage and instead put all that money into retirement accounts and other investments. Since the mortgage is such a low rate, I know that purely mathematically we would be better off in the long term investing over paying down the mortgage. The problem is that I tend to value the freedom of a paid off house over a higher net worth, while my wife prefers to look at the overall picture and seeing our savings grow faster. I know she’s right based on the math, but a paid for house and zero debt just seems too sweet for me.
We are currently putting 55% of our take home pay into paying off the house and about 10% pre-tax into retirement accounts to take full advantage of employer matching. After the house is paid for the plan is to divert the extra money into retirement accounts and mutual funds. Undoubtedly having kids will slow this down a little, but I prefer to have ambitious goals to easy ones.
Thanks in advance,
-David
Hi David…
First, let me offer my congrats to you and your wife on the upcoming birth of your first!
And for the great start you’ve made toward FI. No question, with your discipline you’ll be there in 11 years. Probably a lot sooner.
Regarding the mortgage, it sounds like you guys have already sorted out the issues:
1. At 3.25% fixed no question it is financially better to pay the minimum and keep that going as long as possible. You have better options for the money. Point for your wife!
2. But I also take your point on the emotional satisfaction of being absolutely debt free. I actually paid my mortgage off early for this very reason. But as I said to Eric above, that reflects more my affection for simplicity than financial acumen.
Assuming that once the mortgage is toast, you crank those monthly payment into your investment portfolio, this will work almost as well.
So you are really faced with a choice that is as much personal as financial. As you say, zero debt is sweet. But sweeter still just might be a happy wife. 😉
Finally, as I suspect you already know from interviewing a couple, with your growing net worth and income you are a mouthwatering target for financial planners. And they are not likely to understand or appreciate your take on your financial life. Be very, very careful and if you haven’t already, please read this:
https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
Be sure to check back and let us know what you decide.
Thanks for the congratulations, we’re both pretty excited about the kid on the way.
One thing I forgot to mention is that we would like to move to a larger house once we have a few kids (and the first house is paid for), it would add around 100k to our total house price and at that point we would just pay the minimum payments and put as much into investments as we can.
For people retiring well before 59.5, where do you recommend putting money, all standard mutual funds? We already use the vanguard funds you mention elsewhere for everything outside of 401k/403b accounts. I know there are ways to withdraw from a 401k before 59.5 years old, but I’m wondering if the rules are practical for early FI. I’m wondering if you think minimum 401k/403b contributions and put the rest into vanguard funds? This is another point of disagreement, my wife would like to max out tax-deferred accounts, then roth, then other places, but I don’t like the idea of having so much tied up in accounts that are tough to get to before 59.5.
I’m with you on the financial “advisors”, I mostly meet with them because it doesn’t take much time and I occasionally get some good information from them. After a while the sales pitch does get old though.
Once again, David, I’m on board with you wife. 😉
At 140k, you guys are at an income level where the tax advantage of 401k/403b contributions is significant.
Your saving rate is also large enough that you can fully fund these and still invest outside them.
Once you retire, it is these “outside” investment accounts you’ll be drawing on to live. Mostly likely, you will have to draw down principle in them to do so.
No worries, even if you draw them to zero. Meanwhile your tax advantaged accounts will have been reinvesting all their earnings and growing unmolested. You’ll just switch to these when the time comes.
The key is to look at your investment portfolio as a whole.
Congratulations on being married to such a smart lady! 🙂
I definitely married a good one. Thanks for all the insight, she will especially like that you are with her on this 🙂
Dear Mr. Collins,
Good day! I hope all is well with you.
I’m an avid reader of your blog and really look forward to each new post you send out. I have especially read all your posts on investing in the stock market, as I know nothing about this field, and always felt quite hopeless ever understanding it, much less have the courage to invest in it, until I came upon your blog.
If I may, could I please just ask your opinion on my situation, as I have been turning things over in my mind for the past several months, and really have had no one else I could ask.
I’m single, 41 years old, working as a nurse in Australia. I have always been quite frugal and saved 50%+ of my pay by buying two rental properties and my “savings” was paying whatever the shortfall in the mortgage was from the rents I was receiving. In short, I’ve been negatively geared for both rental properties. I invested in real estate without really thinking much about it, as I felt this was an investment I understood, since I can see the bricks and mortar, so to speak, unlike the stock market, where all I saw was numbers on websites. I now realize that even my real estate investments weren’t the best ones to make, for many reasons I won’t go into now. But I have been staying afloat, and one will be paid off in 2015 after a 5 year mortgage, while the other one, located in New Zealand, I had a 30 mortgage on it, and at my current rate of payment and interest rate of 4.95%, I have about 15 years more to pay off. I have not thought of selling my New Zealand property as at this point in time, I would be selling at a loss, with agent’s fees, solicitor’s fees and other expenses related to selling a property, as you well know from recently selling off your house as well. At present, I am adding about Au$200+ every month to cover the shortfall in rent of this property.
After reading your blog, Mr. Money Mustache, and Jacob in Early Retirement Extreme, I am thinking long and hard about investing in the stock market, but I am taking your strategy and keeping it simple, and want to invest in Vanguard here in Australia.
My question to you is, at this point in time, I am not sure which option I should take with the extra disposable income I have coming in every month. Whether to keep making extra payments on my New Zealand property so as to expedite the number of years in which I can finish paying it off, or sell it when there’s a profit to be made, whichever comes first, or, should I instead just open an account with Vanguard already and start investing in the stock market here in Australia already?
In case you’re wondering, and if it’s at all relevant to my question, I am aiming for early retirement, as early as I can make it anyway, so as to be able to do the things I love, and have all the time to raise my child, as I am currently pregnant.
Thank you so much for your time, and for sharing your blog out there for all the rest of us.
Sincerely,
Michelle
I realize my question is similar to Eric’s above, although my mortgage interest rate is at 4.95%, which is low enough for New Zealand, but doesn’t seem that low compared to the interest rates mentioned around here for the US.
I do like the thought of owning my rental properties debt-free, but at the same time, want to be FI asap, so as to be able to spend as much time with my child as possible, especially since I’m a single mom. Wondering which fork in the woods to take. Thank you very much for your thoughts, Mr. Collins.
Hi Michelle…
Welcome and thanks for sharing your story.
Sounds like you already know what mistakes you’ve made with the rentals, so we won’t dwell on those. Don’t feel bad. I have too. Here’s my tale of woe and lessons learned:
https://jlcollinsnh.com/category/how-i-lost-money-in-real-estate-before-it-was-fashionable/
Your NZ property is your main problem here and you are hemorrhaging (a term just for you as a nurse! ;)) $2400 a year. That’s huge. While you haven’t shared how deeply under water you are on this, my first instinct is to sell it, take the loss and move on. As you’ll see reading that series I linked too, that’s what I did. Tough medicine to take, but no regrets.
Back when I was investing in RE we used to call this kind of property an “alligator” in that it would eat you alive.
Rid of it, your life will be simpler, you’ll have more time for the much more important task of raising your new baby and you can begin to rebuild.
If you are determined to keep it for some reason, then I would take the extra cash you’ve been putting toward the mortgage and open a Vanguard account. This will give you:
1. Some much needed diversification
2. Some much needed liquidity.
If you haven’t already, be sure to read this post and the comments:
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
Good luck, and congrats on the new baby!
Thank you for your reply. After I posted my questions and read the most recent post and comments, I (belatedly) realized that if FI is my priority, the fastest way to get there would be to sell my rentals. Thanks again!
Good luck and post again on how it goes!
Hi Jim, just an update on our discussion here. Like I told Linda below, I was able to sell my NZ property at last just in January of 2014. As soon as I didn’t have to think of that mortgage anymore, it felt like a huge weight lifted of my mind. I have since been investing all my extra funds in a Vanguard index fund. We don’t have as many choices in Australia as you seem to have in the US, and I chose the High Growth diversified fund that they offer here. I have realized the difference in just being invested in this one fund, over having to constantly think about how my rental house is doing and getting the occasional notice of yet another maintenance issue from the property manager. I now wish I had known all that I learned from you much sooner. 🙂
At this point in time, I totally detest mortgages, and think that I will never take on another mortgage again in my life. I would rather save up all my cash in Vanguard, and if I do ever want to buy a property, just pay in cash. A mortgage is truly a form of bondage, to you your job.
I lost a lot in that rental property. I sold it for NZ$10K less than I bought it for, but thanks to a consistently high-ish savings rate (50-60%), like you said in another post, it’s mostly a loss I don’t feel (unless I sit down and do the maths on it, them I might cry ;-)), and I’m not totally broke from it. Everything I learn from this blog, MMM and ERE have helped me so much, it’s invaluable what you share with the rest of us. Thank you again!
Hi Michelle,
What did you end up doing with this rental in New Zealand?
If it’s in Auckland – the property market is rocketing at the moment and it should have increased a bit last year. Rent in Auckland is much cheaper than house prices – it would be difficult to find good ROI here.
I also feel the market in New Zealand is completely overpriced, maybe even in bubble territory (inflated by overseas investors) and it would be to your advantage to sell now while the market is hot.
Better than taking an even greater hit when the market inevitable tanks!
And as an advantage to you, New Zealand dollar has strengthened greatly compared to Aus$, so you’ll get a bit more bang for your buck if you transfer the money back to Aus.
If you’ve already sold the property – congrats on being free of that particular burden!
Hi Linda! Sorry for the very late reply. Lucky I had a look at this thread again today, and saw your comment! Thank you! I was a bit tardy acting on my resolution, but I have sold the property, just closed the sale in January. The house is in Palmerston North. Like Jim said, I did have to bite the bullet, and sold for less than I bought it for. At least, I didn’t have to cover the costs of selling, which is what was most important to me. I ended up with less than NZ$2,000 to show for four years of owning the property and topping up my mortgage payments almost regularly. I did close in about two weeks though, and I was happy to end that chapter in my investment history.
Hello Jim!
I feel compelled to say that, first off, I have no formal education regarding finances and investments, and even less experience with it. With that being said, a majority of the lingo associated with the posts on this wonderful blog sometimes go over my head, and even the comments as well!
Regardless, I figured that if investments were a path that I wanted to take, I should lay out my situation and see what advice I could receive from someone that has as much knowledge on the subject as yourself. Here are the current state of my affairs.
I am 26 years old and I have only recently considered looking into savings accounts and investments (the latter term being a broad definition to me still). Currently I am sitting on a pile of debt that amounts to roughly 41k whilst my income is 44k (before taxes, etc).
The only ‘investments’ that I have are in the NYS Retirement System (through work, and the details of which I do not recall at the moment) and in an online savings account with Ally (Interest Rate and Annual Percentage Yield at 0.84%).
Currently, I have been focusing on whittling down my debt, primarily on paying off my car loan as to free up those monthly obligations in order to use that against paying off my student loans. With that in mind, I have been able to place whatever is left at the end of the month into the Ally savings account.
My situation is not dire, but I am very interested in what you have mentioned about Vanguard, but putting in an initial investment of 10k is not feasible. As such, I read the one post (Stocks Part XVII) that mentioned ETFs.
My question is as follows, would it be better for me to start committing to the ETFs? Or would the best course be saving up to 10k and investing it into the Admiral Shares? Or, perhaps I should not invest at all, and just continue using Ally?
Any and all advice would be greatly appreciated, and if you need any details, I will do my best to be forthcoming with my information.
Thank you, and I love the blog!
-David
Welcome David…
..thanks for your questions.
First, don’t worry about just starting with this stuff. That’s what this blog is for.
With that in mind, I am concerned that some of the lingo is confusing. I try hard not to slip into jargon, or at least to explain it when I do. But it can be an easy mistake for me to make. As you likely know in your own profession, after you get used to using certain terminology it can be easy to forget it isn’t second nature to others.
So, never hesitate to ask around here about some term you don’t understand. Mmm. Maybe a glossary would be useful on the blog….
Anyway, to your questions:
Don’t worry about investing just now.
With your debt load, it sounds like you are doing exactly what you should:
Focus most of your resources to getting rid of it, fund your NYC retirement fund and build an emergency fund in a savings account. Ally is fine. This should be your sole focus until that debt is history.
I’ll make the assumption you’ve dramatically cut back on your expenses and that you are making substantial payments on that debt each month. If not, this is your next step. The debt needs to be dead and gone.
Doing this has two other great benefits:
1. it trains you to live on far less than you earn.
2. it gets you used to setting aside a substantial part of your pay.
Once the debt is gone, start channelling 100% of those payments into your Ally account.
Once you have $4000 there, take $3000 of it and open a Vanguard account in VTSMX: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT
VTSMX is the “investors shares” version of VTSAX as described here:
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
and it only has a 3k minimum. Once your account hits 10k, Vanguard will automatically convert it to VTSAX and the low costs associated with it. This is not a taxable event, so no worries there.
Finally, don’t worry about ETFs. You don’t need them.
Sounds pretty solid to me, and thank you!
As for what I said about the jargon, this is coming from someone who has only just started looking into investing within the past few months with no prior experience. As such, I have started reading through Mr. Money Mustache’s blog, and that is how I was linked to yours. So, the concern you mentioned, I would not worry too much about it. Someone who wants to understand it, and take the time to read, will have a thorough enough understanding to know where the start. Like myself!
Honestly, I do have quite a bit to learn when it comes to living within my means, but I am learning and trying to find what works for me, and then doing what I can with the benefit of that and putting it against my debt.
I will take your advice with Ally and continue with that up to the threshold you mentioned, and… See what happens from there.
Thank you for your response! It’s difficult to find well versed people in this field. Keep doing what you do!
Dear Mr. Collins,
I would appreciate your wisdom with regard to my financial situation. I am an avid reader of MMM and more recently your site as well. Just in case you don’t browse the MMM forum questions, I wanted to post my question personally to you. As I just posted on MMM:
Only 9 more days until my CD matures. A little background about me. Widowed in 2009 at age 45, luckily had life insurance so I didn’t lose my home. I paid it off. Put most of the rest in laddered CD’s. The last matures in 9 days. It is worth $188K. I’d like some advice on what to do with it now.
I was lucky enough to find a wonderful man again and we recently married. Have thus far kept our finances separate but may join them at some point. I sold my house and we live in his now. My only expenses are food and gas. He pays everything house related.
I work 30 hours a week as a nurse, make $30/hr, contribute $17,500 to my 401K, get an employer match of 8.9%, and I put in $5K/yr to my Roth IRA. Here are my own current assets as of today (I have no debt):
Checking account (earning .25%) $1,064
Savings account (earning .75%) $80,599
Money market account (earning .75%) $116,330
CD (earning jack shit) $188,500
Retirement accounts (Vanguard IRA Target Fund 2030) $102,929
Retirement accounts (Vanguard Roth IRA Target Fund 2030) $31,877
Retirement account (Vanguard Employer Plan Target Fund 2030) $21,110
I will also receive maybe $65K when my recently deceased parent’s home sells.
2010 Subaru worth about $20,000
I seem to be paralyzed with how to invest my CD and also the money gained when the house sells. Do I invest in Vanguard index funds? I’ve read every MMM post and know that I can’t just let it earn a paltry amount in a CD. I also know that I have way too much just sitting in my MMA and emergency savings account. My current net worth is over $600K and yet I’m afraid that I won’t be able to support myself should I lose another husband, who by the way is in great health. I’m tired of working my ass off as a nurse for very little praise and I want to retire ASAP so that I can thoroughly enjoy my life and new husband.
All advice welcome and appreciated! Thanks!!!
Welcome Kim….
…and congrats on your recent marriage!
Glad you found your way over here.
As much as I like the MMM site I simply don’t have the time to keep up with the forums. Although I’d be curious as to what advice you are getting there if you care to post a link.
Anyway, here’s my take.
My first reaction is, as you seem to already know, you have a huge amount of your wealth in cash and cash equivalents: 387k/64% by my count.
You also have 156k/26% in your TRFs (target retirement fund) https://personal.vanguard.com/us/funds/snapshot?FundId=0695&FundIntExt=INT
20% of this is in bonds.
For a young woman like yourself, this is extremely conservative. And risky. Risky because over time cash loses buying power to inflation.
Once the 65k shows up you’ll have about 608k total. Using our 4% withdrawal guidelines that can generate 24k in annual income. If that covers your annual expenses you are FI. If not, it is easy now to calculate how much more you’d need in investments or how much you might cut in expenses to make it work. All depends on how motivated you are to step away from nursing.
But, it sounds to me like you are already there. Your living arrangement seems very secure and low cost.
My guess is the demand for nurses is such that you could step back in easily. If that’s correct, why not take a “mini-retirement” from it and see how you like it and how it goes?
What I would do is move all my assets into your TRF. It is a good one, will give you an 80/20 stock/bond allocation and will automatically tilt more toward bonds as time goes by. Simple and effective. You can just set it, forget it and let it and time work their magic.
But before you do, please sit down and read my Stock Series here on the blog. It will help you understand the wild ride you’ll be in for and why it doesn’t matter. It will also give you the understanding of the rational behind this advice you’ll need when times get tough.
If, after reading, you have any doubts about your ability to stick with the plan, stay in cash.
Good luck and let us know what you decide!
Thank you so much for your quick reply! So far the only response I’ve received on MMM was a link to your “Stocks Part VI.” I knew you were the man to ask! I will definitely go back and re-read your entire series of stock information.
I’m not sure I understand “Once the 65k shows up you’ll have about 608k total. Using our 4% withdrawal guidelines that can generate 24k in annual income.” If all my money is in the TRF how is that generating 24K in income that I have access to? Wouldn’t it be better to put it into VTSAX non-retirement account?
Thanks again!
My pleasure Kim!
The 65k is the money coming from your parent’s house as mentioned in your comment. I added that to the 387k in cash and the 156k in the TRFs to get the 608K.
You’ll better understand the 4% concept after reading this post:
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
VTSAX is a pure stock fund and, as you’ll find reading my series, my favorite tool. But it is very aggressive as there are no bonds to smooth the ride.
My sense in reading your comment was that you are pretty conservative and so I figured the TRF would be a gentler step. Simpler too as I discuss here:
https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
It seems the best fit for you and it is a great approach.
But if you are willing to do a bit more work and rebalance once a years, the strategies in the post the MMM forum sent you to work too. Depends on how much time you want to spend on this stuff! 🙂
Hi Kim…
One other thing?
If you don’t mind, post a link to our conversation here over on the forum. Just in case others there are interested.
Plus then I and others here can check it out.
Thanks!
Hi Mr. Collins, it’s Kim again. lol. I did post a link on MMM so that others can follow along. One more quick question. I’m in the TRF 2030 which as you pointed out is 80/20 stocks/bonds. I think you’re right that I’m a little more conservative and that a TRF is a good bet for me. Would it benefit me any to invest in the TRF 2060? It’s basically a 90/10 ratio, so a little bit riskier but maybe also more return. Would love to hear your thoughts on this. Thanks again!
Hi Kim…
Always a pleasure.
Thanks for the link to here over at MMM, that’s great! But I was also hoping you post a link here to there so my readers here can find your thread over there.
As for the 2060 fund, that would be my choice. But then I’m a very aggressive investor with a high tolerance for drops. So really, you question is more about your temperament than anything financial. Either will serve you well, as long as you stay the course. 😉
Hi Kim, it’s good to see another nurse here. I can totally understand what you’re saying about work. In my case, I really just want to own my own time, and not be subject to a rotating roster for most days of the week. Unfortunately, I have a much longer way to go, you seem very well set up to retire already, if you wanted to. Congratulations on how far along you are on the path to FI. Wishing you the best of luck. Aren’t we lucky to have found Mr. Collins to show us the way to freedom 🙂
Yeah, and when I need nursing care you’ll all be retired! 😉
At the rate you’re going, doesn’t look like you’ll need nursing care anytime soon, Mr. Collins. Unfortunately, yes, I’d want to be long retired by then 🙂
Good luck to you too Michelle! It is very nice to have other nurses here. I’ve already cut back to 30 hrs a week but like you it could be any 3 days of the week. After 20+ years of this, I’m pretty much over it! Freedom here I come.
Hello Mr. Collins,
I have been reading your site for the last few months, and thoroughly enjoy it, as it is very much inline with my thinking.
I am new to the world of investing, as I am now managing a relatively complex portfolio, following my divorce. At first I was overwhelmed with the responsibility, as my ex managed our finances, and I was not involved.
However, with due diligence, I am feeling much more comfortable in this new territory. After some effort and grit, I have come to the conclusion that Index Funds are the way to go.
I hired a financial advisor to the tune of 2% of my portfolio, and although I knew I was paying too much, felt like I could trust him (and I interviewed several potential candidates).
Now, one year later, I am convinced that I can manage my own portfolio (with the assistance of a financial advisor every now and then).
I am having a heck of a time finding an advisor who is willing to work on an hourly basis; disappointingly, they all have their own agenda. Could you recommend a financial advisor to me?
Sincerely,
Welcome Darley!
Well I have some good news and some bad. First the bad:
For reasons outlined here:
https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
I’m not a fan of advisors and so, not surprisingly I don’t have any to recommend.
As you point out, they all have their own agenda. But if you must use one, you are on the right track in seeking out one who is fee (hourly charge) based.
These can be tough to find as there is more money to be made, for them, charging commissions and annual management fees.
But the good news is, reading your comment, I don’t think you need one. This stuff is really very simple especially once you understand, as you’ve indicated you do, the power and value of Index funds.
It can be the soul of low cost simplicity with TRFs:
https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
Or you can be just a bit more “hands-on” and have still lower costs with the simple three fund portfolio like I describe here:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
But regardless of advisor or no, TRF or Index fund portfolio please do read the full Stock Series here. Stocks are a wonderful wealth building tool, but they also are a wild ride. It is important you understand why both are true and how to live with it.
Good luck and keep us posted!
Mr. Collins-
Its finally glad to be in a place that feels like home and know that I am not the only one in the investment world that feels this way after reading some of the other comments.
I have read many of your blogs, comments, and stock series articles over the last little bit and feel like I am ready to ask my own set of questions.
I am 26 and currently have an income over 60k/year. I invest about 16% to my 401k two times a month (6% company match) and the annual allotment to my ROTH. I took your advice and just bought into the Total Stock Market Index today. As of now my ROTH portfolio sits at about 20% Total Stock, 25% Energy, 25% Healthcare and 30% Precious Metals (I messed up on this last year…I bought pretty low in hopes of it rising quicker than it has, but it keeps falling. Nonetheless, I want to get to a 50% Total Stock Market, 20% Energy Fund, 20% Healthcare Fund and 10% REIT allocation for the long haul. Do you suggest REIT for young people or would it be better served adding to my Total Stock Market Fund?
My main concern is my 401k. In the three years I have been working and accumulated a portfolio totaling (33k) 70% is in company stock that pays ~4.0% yield, 15% in a high Expense Ratio REIT fund that I want to get out of and move to VG with a lower ER and tax-sheltered account, 5% Large Value, 5% small cap and 5% international. This is where I am totally clueless on what my AA should be closer too at this age and okay with high risk. I am thinking 60% Large Value, 25% Small Cap, 10% Non-US and 5% Company Stock.
You seem to touch a whole lot more on mutual funds and vanguard in general, which I suppose is why I feel ok about the above mentioned ROTH; however, not so much on the 401k side. I am totally fine with the big risk, big reward scenario early in my career…that is why most of my holding are equities. I know this is a lot to throw at you amongst the many other readers that comment…but it always helps to get it off my chest and hear your opinion. What do you suggest for your daughters 401k AA (aside from her 100% Total Stock Market Roth)? I don’t want to dig into your personal life, but curious as to what you are suggesting others might want to do that are not as up-to-date on investing =)
I appreciate your time and any advice that you can offer. If something is unclear or you need more info on please let me know. I am tired of worrying if I have the right AA and just want to set and forget for awhile 🙂
Welcome Kyle…
Glad this old place feels like home. Pull up a nice comfy chair by the fire and we’ll talk. This is actually going to be very simple.
Four things jump out at me from your comment:
–You are young: 26
–You have a nice savings rate
–You are “totally fine with the big risk, big reward scenario”
–You “just want to set and forget for awhile”
All great things and all completely at odds with the cumbersome portfolio you’ve put together.
Here’s what I’d do:
401k = 100% in the US EQ S&P 500 Index fund.
This is Fidelity’s S&P 500 Index fund and it has a nice low expense ratio (ER) of just
.05%. You might be wondering why I didn’t go with the All Cap Index that would more closely match a total stock market index like my favored VTSAX. Simple. The one offered in your 401k carries an ER of .16%. Yes, low costs are that important.
A huge 401k concern is that you are holding 70% in your company’s stock. Double risk of holding an individual stock and one that is also the source of your income. My guess is that you get the juicy 6% match in choosing this option. If that’s the case, do it. They probably also require that you hold it for a certain period of time. But as soon as you can move as much as you can out of that stock and into your S&P 500 Index fund.
Roth = 100% VTSAX.
Non-tax advantaged accounts = 100% VTSAX. You should plan to build these too.
With those two funds, you will now own a piece of every business held in all those other sector funds you now have. Sector funds focus on one business sector: Energy, Health, Metals, Small Cap, Mid Cap, International, REITS and the like. Almost any niche the investment industry can imagine. And they can imagine a lot.
I am not a fan. In choosing sector funds you are essentially trying to do the same thing as in choosing stocks: pick the one that will out perform. Both entail predicting the future, an un-winable game.
This is exactly what you were doing when you said: “Precious Metals (I messed up on this last year…I bought pretty low in hopes of it rising quicker than it has, but it keeps falling….)”
In a very real sense, it is fortunate this trade moved against you. Had it worked, there likely would be no convincing you it was a mistake. At least not until your luck ran out on some much larger bet in years to come. Count you blessings, assuming you’ve learned the lesson here that is. 😉
So given the four bullet points drawn from your comment, this is all you need.
But it is also a very aggressive approach designed for maximum performance over decades and assuming you have the fortitude to weather the storms that will surely come more than once.
https://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/
If you are willing to give up some performance for a bit smoother ride, you can add bonds and REITS. In your case, they belong in your ROTH due to the ERs in you 401k offerings. Both need to be in a tax-advantaged “bucket” as they throw off taxable dividends and interest. VTSAX is the most tax efficient fund you can own outside IRAs and 401k.
In addition to smoothing the ride, bonds and REITS offer some protection against the two really awful things that can happen in an economy:
Deflation and Inflation.
For more:
https://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
That’s it. Set it and, except for continuing to fund it, forget it. 🙂
Wow, thank you for your thorough and complete response… I would expect nothing less from you!
I agree with everything you mentioned and that finally puts a lot of my concern to rest. Although, I do have a few questions … quick and simple I hope as I know you are busy!
In regards to the 401(k) … my plan also has a US Equity Large Cap Value Fund with an ER of .07% and has beaten the S&P 8.09% to 7.66% for the lifetime of the funds. I am not at all going against anything you mentioned, but simply just asking if the S&P would still be a better choice with the -.02% difference in ER.
In regards to my ROTH, would it be wise to wait until my PM&M fund rebounds before I sell and dump those shares into VTSAX? I am just thinking that it would hurt me more taking an $7/share loss than missing a few years compound interest … maybe not?
One last thing, I know that bonds and REIT’s smooth out the ride a bit and offer some diversification. I am not to keen on Bonds at the present time as a safe haven, however, REIT’s have had my eye lately. Mainly, because I am trying to do some Real Estate Investing on the side with rental properties. Would you suggest REIT as a small holding in my ROTH at the current time for dividends, diversification, etc or stick with the plan and go all in with VTSAX? You mentioned you currently hold some bonds and reit’s but I am thinking that is only because you are taking less risk off the table and for me it may not be worth looking at right now?…
As for me right now, I am going to set my allocations and forget them =) Thanks again!
1. Doesn’t matter that the large cap fund has outperformed in recent years. Some sector fund(s) will always be outperforming at some point. Depends on what’s fashionable at the moment. In fact, the fact that large caps have had a good run is more a reason to move out of them now. Perhaps small caps are about to have their day.
But again, this is all trying to out-wit the market and if you take nothing else from this blog, let it be knowing that’s a fool’s game.
2. Same thing with waiting for your metals fund to rebound. You are assuming and hoping it will. Maybe. Maybe not. Trying to predict is, repeat after me, a fool’s game.
3. You are right. I own bonds and REITS because of my age and being retired. Were I 26 it would be all VTSAX.
If you are going to be buying rentals, you really don’t need a REIT fund. Rentals will be lots more work and you’ll be able to leverage them. Done well, the potential returns are greater than any REIT.
(because, of course, you have something more than an investment at work: your labor and leverage)
When you get tired of the work and hassles of rentals, look then to REITS. Owning them with your rentals will over balance you into real estate.
oops… one more thing I failed to mention … *sigh* … my company matches 6% regardless of what its invested in. The 70% allocation was just me not knowing how to diversify a few years back and it just built up :/ however, atleast I have been receiving nice dividend payments, ha.
Great!
Sounds like it hasn’t hurt you and there’s no reason not to leave it behind.
Dump the stock into the S&P 500 fund. Have future contributions sent to the fund as well.
Set it and forget it.
I cant thank you enough! Your advice has finally put me at ease, ha! One last thing, if I am getting ready to open a ROTH for the wife in the near future, would you also suggest 100% Total Stock Market Allocation?
Yep. Same advice for girls.
unless maybe she’s 65 years or so old, of course. 🙂
Haha… nope, at least I dont think so :-l
I am going to pass your blog along to many friends and family and wish you nothing but the best…! I hope this makes your day =)
Hi Mr. Collins,
I know you and I are largely on the same wavelength and in my final step to become even more-so, I had a financial planning session with Vanguard last Friday. I wanted them to recommend a simplified portfolio for me given the answers I provided on their questionnaire (re: goals, tolerated risk, etc).
I was tickled to see many of the usual suspects in their recommendation for me:
– VTSAX (total stock)
– VTIAX (total international stock)
– VBTLX (total bond)
I then asked why no REIT funds were represented (like VGSLX) and they explained that VTSAX (total stock) already accounted for all industries including Real Estate.
I did a little verification and sure enough, VGSLX has 121 holdings and most, if not all (I didn’t check every single one) are also represented in VTSAX (~3200 holdings in total).
I know in one of your posts you recommend an allocation as below:
VTSAX – 50%
VGSLX – 25%
VBTLX – 20%
Cash – 5%
And just wanted to point out that investing in both VTSAX and VGSLX may be “double dipping” your exposure to real estate. This is not something I realized beforehand and thought I’d reach out to get your thoughts.
Regards,
Buck
Hi Buck….
Always nice to see you here and your question is especially timely. I’ve been thinking about exactly that today.
If you check out my conversation with Kyle, directly above in the comments here, you’ll see I slam his choice of multiple sector funds as being akin to trying to select individual stocks. Both are losing games. In the process I point out that with VTSAX he’s got exposure in all these sectors. REITS are even one of the specific sectors discussed.
Then I go on to recommend VGSLX which is every bit as much a sector fund as any other he owns. Geez. 😉
You are, of course, absolutely correct. REITs, like all other sectors, are well represented in VTSAX.
This is one of the reasons I am comfortable with the concept of TRFs which combine just stock and bond index funds as discussed here:
https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
So, why do I still hold VGSLX? Mostly because it serves as a hedge against one of the two potentially devastating economic disasters that could happen:
Hyper-inflation
The bonds are my hedge against the other:
Deflationary depression.
More on those two ugly events: https://jlcollinsnh.com/2012/04/29/stocks-part-iv-the-big-ugly-event/
So REITS and bonds are a bit of ying/yang as I discussed here:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
and both provide a bit more dividend and interest income while we wait for disaster to strike. or if it doesn’t. 🙂
Toward the end of that last post above, I offer an idea:
“The Wealth Building with Cash Insurance Portfolio” and I begin by saying:
“Confession time. I hate bonds and I’m not all that keen on REITs either.”
I’m still toying with that idea and unfortunately readers didn’t much weigh in on it much at the time in the comments. But I’d sure be interested in your take over there.
Along those same lines, in the comments here: https://jlcollinsnh.com/2013/06/04/my-path-for-my-kid-the-first-10-years/
I had this to say:
“If I were to seek absolute security I’d hold 100% in VTSAX and spend only the 1.5-2% dividend it throws off. Basically, I’d be tying my future to that of every publicly traded company based in the most powerful, wealthiest and most influential country in the world. Companies focused everyday on dealing with the changing world around them and all the uncertainties it can create. Nothing is sure, but I can’t think of a surer bet than that.”
But doing this would take more capital than I have. Maybe more guts in riding out the storms at this point too. 🙂
Anyway, very astute observation on your part. I’ve been waiting for someone to catch this “logical inconstancy” and call me on it. Well done! I might even have to make this one a post.
Thanks for such a super fast answer! I was just looking at the ER for the 3 funds. I believe it is .17%, .18%, and .05% for 2030, 2060, and VTSAX respectively. From what I can tell, Admiral shares aren’t an option for the TRF’s, hence the higher ER. Would it make a huge difference over the years to opt for the .05% ER over the other 2 options? Enough to make me want to accept the risk a little more?
Here’s a link to where I posed my original question over on MMM forum:
http://www.mrmoneymustache.com/forum/investor-alley/only-9-more-days/
I’ve only received 2 responses there. I do truly value your opinion and gracious responses!
Thanks Kim.
Yep, ERs do make a surprisingly large difference over time. My take is if you can live with 90/10 bite the bullet and go for VTSAX. If not the extra cost is worth having the 80/20.
Of course you can always add VBTLX to VTSAX and create your own mix. Then you just rebalance once a year to stay on track. I recommend on your birthday as it is easy to remember.
I don’t believe any of the TRFs are offered in Admiral form.
Hi Jim,
Back in June I wrote to you several times, with the following being our last convo:
“I’m back for a little more advice. I received my payout check from the matured CD and deposited it into checking today. I’ve re-read (several times now!) your stock series and think I can suck it up and just go for VTSAX. My question is regarding cash reserve. I know you usually keep 5% in cash. May be a stupid question but is that 5% of your total net worth or what? I was thinking maybe keeping 7.5-10% of my total net worth in my MMA which is currently earning 0.75%. Also just realized that I can always take out my contributions to my Roth (not earnings on it) if I needed something in an emergency. So would 5% be best? Thanks!”
I just wanted to tell you that I finally did bite the bullet last month and invested $300K in VTSAX. It felt great to have my green soldiers earning more money for me instead of sitting in a MMA. I will admit that these past few days of hearing about the gov’t shutdown, debt ceiling, etc., has made me a bit anxious but I will stay the course! My plan is to not check my account balance if possible. As per a recent MMM post I continue to be on a news diet. I never watch at home but sometimes see things on TV in our work break room.
Thank you so much for all the advice you so generously offer here!
Kim
Congratulations, Kim!
No need to be nervous. After the gov’t shutdown, debt ceiling, etc resolve themselves there will be new crises to take their place in a never ending parade. Noise.
We both KNOW there will be crashes, bear markets and pull backs to come. We both know the news will be filled with doom as if these things had never happened before. We both know they are part of the process. We both know they are not worth even a passing glance. We both know the market will not only recover, but march on to new heights making us wealthier.
Everybody makes money when the market rises. But it is what you do when it is collapsing that will determine if it will make you wealthy.
That was a classic MMM post and for readers who might have missed it, here you go: http://www.mrmoneymustache.com/2013/10/01/the-low-information-diet/
This response to Kyle answered something Ive wondered about:
“Roth = 100% VTSAX.
Non-tax advantaged accounts = 100% VTSAX. .”
I wondered if this was too “weighted” into one category, but I think I understand the line of thought.
Hi EGS…
Basically, VTSAX is a total stock market index fund and it holds stock in around 3200 individual companies. Broad diversification.
For more, check out the links I put in my reply to Kyle.
If it still doesn’t make sense, come on back and we’ll kick it around a bit more. 🙂
I really enjoy your posts, James. I have been generally following similar advice to what you give for a while but you are REALLY helpful on the particulars and I want to thank you.
I am in my 20’s and have been recently inherited an IRA worth $50,000. My general investment strategy is 100% VTSAX. With the required minimum distributions (RMD, $1,000) I will need to take out each year I am thinking about 90% VTSAX and 10% in VMMXX. That gives me a few years worth of RMD in money market and the rest in stock. My question is will VTSAX my goal is to keep my money market value at $5,000 and reinvest the rest. Is this the right strategy? Will I be able able to make enough in dividends to replenish my withdrawals? Should I invest in bonds or REITs to produce more dividends?
Thank you!
Thanks Steve….
Good to hear it’s helpful for you.
I’m not sure I entirely understand your situation, but let me run down what I think I hear you saying and offer some thoughts.
Seems you have 50k in an inherited IRA with a RMD of $1000 per year. Sounds like this is also invested in VTSAX? If not, my first step would be to move it there.
VTSAX is currently paying a dividend of about 2%, so your 50k will throw off the $1000 you need to withdraw each year. Plus it has the potential to appreciate. Very sweet.
Next it sounds like you are taking this $1000 per year and investing $900 in VTSAX and $100 in a MM Fund. 90/10 split, and you goal is to have $5000 in the MM fund.
Since I don’t know why you want the 5k in the MM fund, it is hard to comment on the idea. My guess would be an emergency fund. But I can say that at $100 a year it will take a long time to get there. Way too long if an emergency fund is the goal.
Unless you are very risk adverse, at your age I don’t see the need for bonds or REITs. This, of course, assumes you know market crashes will come and that you’ll be tough enough not to panic sell when they do.
Hope that helps!
Thank you so much. You answered the question and sorry I didn’t explain very well. I have $50,000 which I need to transfer into an inherited IRA by the end of the year. I wanted to know what assets to have in my inherited IRA in order to produce enough cash to pay the RMD without selling funds at possibly disadvantageous times. My thought had been to put 10% in money market funds to cover the RMD but that is probably too much as you indicate and since the 2% dividend should cover my RMD.
From reading what you wrote I should have a much smaller buffer than $5,000 (or 5 years). I need at least 1 year since I will have to pay RMD this year before I get any dividends and maybe a second year. That would be under $2,000. Is it stupid to put my money in the tax-exempt money market since I won’t meet the $3,000 requirement of VMMXX?
Thanks again,
Steve
Hi Steve….
Got it. Given your age, I’d put 100% in to VTSAX. Set it up to have the dividends and capital gains reinvested. When you need to make the RMD each year just instruct Vanguard to transfer $1000 to your bank account or wherever you want it to go.
You don’t need to worry about the $1000 coming from just the dividend. Treat the investment as a whole.
I am a recent reader of both your blog as well as Mr money mustache’s. Although your sites are full of valuable financial planning advice, I haven’t seen anything about your thoughts on life insurance or disability insurance for those of us who haven’t reached FI yet. I appreciate your comments and thanks again for this free and very valuable resource.
Waddaya mean free?? Yer check better be in the mail. 😉
Welcome Brandon…
Glad you found your way over here.
You are right, I’ve yet to write anything about life or disability insurance although I do have a planned post in my drafts folder. It is in the very early stages of development and is tentatively titled: Life Insurance v. F-You Money
In a nut shell, I am not a fan of insurance. Fees are high, the fine print in policies is daunting and the value is low. It is sold based on people’s fears and the stories of tragedy.
Personally the only time I’ve owned any was when my employer provided it as no-cost-to-me benefit.
For those who follow the plan I lay out here: https://jlcollinsnh.com/2013/06/04/my-path-for-my-kid-the-first-10-years/
should have the resources financial and personal to deal with what comes. I’d rather see the money you’d spend on insurance go to building those.
Having said all that, I also recognize that there are people who find themselves with young children and who have not built up any financial cushion. That is a mistake that needs correcting in my view. But until it is, some insurance is a good idea. Buy only term and buy as little as possible.
Hope this helps!
Wow, thanks for the rapid reply… I haven’t even finished my $5 latte yet. Just kidding of course.
That’s what I thought you’d say. I have term only in an amount commensurate with the debt obligations I currently hold–mortgage, undergraduate and med school student loans–and I plan to only hold this policy until we reach FI. As an oncologist, I don’t need the insurance salesman to scare me with horror stories of young productive people gone before their time, I know it all too well. Plus being young, its very cheap and provides some peace of mind.
But as my income is growing substantially now that I’m done with training, I am considering disability insurance as well to protect that income. DI is something the salesman are always pushing on us young doctors. “Protect your greatest asset–your ability to work and earn,” they tell us. Problem is its very expensive, and judging by how hard they sell it, I’m sure the fees are steep. Any advice on this conundrum?
Lastly, I suppose I will forgive your butchering of my name. Its something I’m used to down here in the South, but I expected more from a New Hampshire man 🙂
Ha!
Well, Brendan, that’s the price you pay for the quick response written only half way thru my first cup of coffee. 🙂
As for DI, I am no expert. But I think you have already figured the best way to call it. Anything sold that hard, especially insurance, is;
A. Very profitable for the seller
B. Highly unlikely to happen
If it were me, I’d pour that money into my own investments with the goal of becoming FI, and therefore self-insured, on my own. If they are willing to bet it is highly unlikely I’ll become disabled, so am I.
Are you going to practice in Florida?
Since I’m a pretty risk-adverse type of guy, its a pretty safe bet I won’t be disabled. After all, I essentially need one functional hand and a brain to do my job.
So either youre a good guesser or you’ve got good friends at the NSA. I am indeed practicing in Florida.
Hi Brendan,
Just my 2 cents regarding DI: After my husband completed optometry school, we also had a mortgage and lots of student loans to repay. We decided to get a good DI plan. Sorry I can’t remember which company. Anyway I’m very glad we did so because he (age 48, very healthy) got leukemia and was hospitalized for a total of 144 days, before he died. If we hadn’t had that DI, I couldn’t have paid all our debts just on my measly nursing salary. We were nowhere near FI. It was a pain having to get his doctors to fill out forms every few weeks but the overall process of collecting the DI was not bad. So in our situation it was a godsend. I was already stressed just with his illness but at least I knew there was some money coming in, as I’d taken a leave of absence from work to be with him. Yes it was fairly expensive but as you are well aware being an oncologist, things happen. I see it everyday in my nursing world too. Best of luck to you, whatever you decide!
Hey Mr. Collins,
I just had to write and tell you how much I appreciate your financial/worldly advice. I am a huge Dave Ramsey fan – used his methods to drop $40K worth of debt after grad school and according to his advice, I also opened up and regularly contributed to a Roth/Simple IRA, HSA as well as put together a nice emergency fund (I am 26 by the way). Recently however, I kept asking myself, what’s next? I knew that I didn’t want to work until I am 65. Luckily, I stumbled onto your site after reading MMM. I wanted to do more and gain financial independence much earlier in life than most, so, as you can guess, I was extremely excited to find you. I had to write you because I felt like I knew so much of your story after not being able to stop reading your blog this past weekend that I had to stop and say thanks for such tangible, great advice. I look forward to continue reading!
Adam
PS – I really enjoyed your interview on Mad Fientist.
Thanks Adam…
your kind words are very much appreciated!
Sounds like you are off to a fine start and dumping that debt is such short order is impressive. Kudos!
Glad you liked posts here and the MF interview. On the off chance you missed it, here’s my guest post on MMMM: http://www.mrmoneymustache.com/2012/05/26/guest-posting-financial-independence-23-years-later/
All the best on your continuing journey!
Mr. Collins,
I just had one question. Would you think it best to roll over my existing Simple/Roth IRAs and Mutual Fund Account (which are being “actively managed” right now) to Vanguard’s VTSAX? I know you are a big proponent of VTSAX. If so, how would I go about this?
Adam
Yes.
Actively managed funds almost always underperform index fund and they always charge more in fees to do so.
Just give Vanguard and call and they’ll walk you thru the process of moving your accounts.
I learn a lot from reading the comments. I posted a question about what to do with my kids money and thanks for your advise.
I will open an investment account with Van Guard and transfer the money over, but before I do that, I need your input: My husband is 48 and I am 39, have 2 kids, 9 and 2, house paid off, 500 credits in GET for boys education, no debts.
My husband has a pension through his company, I contribute 15% of my salary to 401K, I max out my Roth IRA, just opened a Roth IRA account through Van Guard for my husband (I assume he will get pension so didn’t open one before, kick myself for that) this year, will max out every year.
After I do all that, I will put my money into the investment account. I am in the process of opening an investment account to dump my kids’ money and our into this account, for $50,000 and will add $1,000 a month.
What are the funds do you recommend?
I like stock, real estate and energy funds. Besides my investment account, I will open another Roth IRA for myself with Van Guard and transfer my current Roth IRA account $37,000 with Chase, not making any money, over. Should I invest my money in the same funds for both accounts or different funds. I am really appreciate your input.
Hi Monrab….
At your age and with the long-term time horizon you have VTSAX would be my choice. Especially since your husband has a pension coming. That allows you to take an aggressive stance with your investments.
Real Estate and Energy funds are what’s called “sector funds”
With with VTSAX, you will now own a piece of every business held in all those other sector funds so you really don’t need them. Sector funds focus on one business sector: Energy, Health, Metals, Small Cap, Mid Cap, International, REITS and the like. Almost any niche the investment industry can imagine. And they can imagine a lot.
I am not a fan. In choosing sector funds you are essentially trying to do the same thing as in choosing stocks: pick the one that will out perform. Both entail predicting the future, an un-winable game.
Dear Mr. Collins,
I’m back for a little more advice. I received my payout check from the matured CD and deposited it into checking today. I’ve re-read (several times now!) your stock series and think I can suck it up and just go for VTSAX. My question is regarding cash reserve. I know you usually keep 5% in cash. May be a stupid question but is that 5% of your total net worth or what? I was thinking maybe keeping 7.5-10% of my total net worth in my MMA which is currently earning 0.75%. Also just realized that I can always take out my contributions to my Roth (not earnings on it) if I needed something in an emergency. So would 5% be best? Thanks!
Welcome back, Kim!
Not a stupid question at all: Yes it is 5% of my total net worth. But 5% is just a guideline. What really matters is how much your expenses run v. what that net worth is. Also, how secure your income stream is.
For instance, if you had 10million and only spent 100k per year, 5% would be 500k and excessive.
So your 7.5%-10% could be a better call for you. But you’d be the best judge of that.
You are right about being able to access your contributions in the Roth. But remember, if you have that in VTSAX we could be going thru one of those down drafts when you need it. That why we hold cash, so we don’t have to sell our stocks at a bad time.
BTW, thanks for adding your comment and experience to the discussion with Brandon!
Awesome insights! Thank-you!
Some quick bullet points on my personal situation. Anything done well? What would you change? I am fascinated by how close I come to many of your recommendations before I even read them. Any ideas for improvement?
– Early 30’s, happily single, no debt, living on 25% of my salary, and grateful for all the blessings God has brought into my life.
– I currently max out my 401K with Vanguard and am 100% invested in VIFSX (60% of total assets) with an expense ratio of 0.05. I also can split this with VEMSX to get full exposure to the market as these are the only pure index options. The expense ratio is 0.14 for this fund. I have not taken any action with this as of yet. Should I?
– I max out my Roth annually currently 100% invested in VGSLX (20% of total assets)
– I currently hold the remaining 20% in cash in a HYSA earning less than 1% currently.
Some concerns I would love feedback on:
A) Part of the offerings in my 401K is VBTIX with an attractive expense ratio of 0.07 and no minimum within in the plan. Should I add this within the 401K? Increase slowly maybe over time? I would like some helpful diversification but am educated beyond media driven panics at this stage.
B) I also have a Vanguard taxable brokerage account with $0 and am not sure whether to buy the international VTIAX, domestic VTSAX, or something else altogether? Which leads me to my final concern…
C) At current savings rates and projected returns based on principles espoused here I should cross that FI threshold in approximately 7 years. I am not clear on what a good gauge for how much cash to keep on hand would be though and do not want too many lazy employees on hand. At current spending rates I have approximately 18 months worth. Is this too much? In the event of a “real financial crisis” there are many options to buy time of course. *sigh*
Thanks for your feedback
RJ
Welcome RJ…
…your post is interesting to me in that you sound a bit unsure of the decisions you’ve taken and yet you’ve done a fantastic job. So my first comment is pat yourself on the back for a job well done and have confidence in your ability to sift thru this stuff.
Further, early 30s — debt free — living on 25% of your income is seriously badass, to steal a term from my pal Mr. MM. I only wish when I was 30 you were around to show me the ropes!
OK, let’s walk thru this together and I’ll offer my perspective and answer your specific questions. But really it will be only the finest of fine tuning.
20% cash. You don’t mention the dollar amount and cash holdings are as much about that as they are a percentage. 20% of a million is way too much. 20% of 10k way too little. It also depends on your expenses. If your job is secure, I’d hold no more than 6 months expenses.
A. Personally I’d skip the bonds. At your age you don’t need them and with interest rates so low they are pretty risky just now. But they do tend to smooth out the ride over time. It is a personal call, but if that’s important to you VBTIX in your 401k is a great way to hold them.
B. I’d go for VTSAX. With that and VIFSX (and S&P 500 index fund) you don’t really need international for reasons I discuss here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
C. 18 months is a good target, especially if you want to leave your other assets mostly untouched during a pull back. Personally I keep about a year’s worth, but just of basic living costs. My high travel indulgence I don’t count as I could easily cut it back.
You are right, what you are doing is very close to what I would have suggested. I curious. Since you didn’t get it from me, how did you come to make the choices you have?
Anyway, hope you stick around and add your thoughts to some of the other threads around here.
Best!
Thanks for the very specific feedback and response. Honestly some of the salaries presented here intimidate me and some seem light years ahead in terms of earning potential, but it is not hopeless. I was promoted recently with over a 20% increase and all is going directly into savings – so onward and upward! Funny thing is, I only calculated my savings rate after reading on these early retirement/FI forums and found that I was already saving 75% after my promotion within the last six months – so piece of cake. It was still very high before that as well.
Six months of essential non-discretionary costs is particularly helpful and helps me nail down something decisive on the cash front. I am not so much unsure as simply very open to the the feedback of others especially those who have lived longer and experienced more. I am of the persuasion that nearly no one gets every point right so I like to get feedback from multiple sources if possible and “shop and compare before you buy” as there could be other slightly better options or ways to proceed.
As far as knowing exactly what to do, not quite. I have gathered bits and pieces here and there over time from reading and had some low impact educational experiences provided during efforts to time the market and pick individual stocks ect. This timing the market effort has been the hardest to eradicate, and inaction with lump sums of cash has been costly to me. It really takes training your mind to think properly about all of the relevant factors. *sigh* I wish I could claim to have arrived.
I am one who loves simplicity in its many magnificent forms, so naturally this rings true with me. For example it was immediately obvious long ago to me that consolidating accounts under as few roofs as possible is the only logical action before I ever read anything about it. Needless to say then the idea of owning multiple, large cars with extra seats, houses too large, too many clothes, shoes, toys…these things are real problems in my mind. All owned items must be used to their maximum potential and even beyond the intended scope whenever possible 😛
I have made some shaky choices along the way, but these even tend to be moderate by societal standards. One example is out right purchasing a brand new VW GTI. While many here would cringe at the near 30K I forked over with that ‘questionable decision’, it is still the best vehicle in its class by combining every aspect of practicality you can get in a car and still satisfy that passion to drive! I have moved my entire apartment with this hatchback, and even RV in the high alpine at times as it sleeps a full 6 foot person in the back comfortably. I am not paying anymore than the amount I aggressively negotiated and paid in full. It is hard to fully explain the excitement its incredible handling and impressive torque has brought as I carve winding interstate and mountain roads through the inter mountain west – all while averaging over 30mpg highway. Pure bliss! Perhaps I would have chosen the almost 50mpg diesel TDI version today, but such is life. Maybe not, who knows. Live, Learn and Grow! I seek balance as I will only live this life one time.
At any rate, thanks for your feedback and discussion on the specific funds. I have been targeting high impact funds with the lowest fees for a while and appreciate your candid information regarding what has worked and what has not for you.
I will hold onto VGSLX in my Roth IRA, but not purchase more at this point and direct the rest of available resources to VTSAX.
I wanted to finally add that I read your post on MMM and really appreciated your spirit and tone. It is amazing how if I was to give a speech on the subject, it would be exactly like yours. We are a rare breed. It is really about enjoying the journey, a journey filled with gratitude as well as options.
God Bless You
Don’t let salary numbers intimidate you. 🙂
Getting to FI is every bit as much about controlling needs as it is having assets. I have a friend who has never made more than 40k per year who is FI and that’s after putting two sons thru college. I have another friend who makes $800,000 per year. Last time we had lunch he spent the whole time complaining that “you just can’t live on only 800k per year.” Given his expenses and lifestyle, he’s right.
As for your GTI, I’d say anybody who has arranged their life in such a fashion as to live on 25% of their earnings can drive any car they please. Enjoy!
Much appreciated my friend. Thank-you.
Hi Jim,
I haven’t been able to find anything from you about Thrift Savings Plans on the blog… I was wondering if you could weigh in with your thoughts on TSPs and where to contribute in it.
I’m a reservist in the military and I have the option of contributing to a no-match TSP. A big perk to the TSP plan is the .027% expense ratio, which is roughly 50% lower than that of VTSAX. I’m 26 and have many working years ahead of me. To me the C-Fund looks just like an index fund, but the targeted F-Funds also seems to be an intriguing option, as they adjust for acceptable risk over time.
Currently I put 6% of my civilian salary (matched @ 50% by employer) into FUSVX, and max out my Roth IRA through Vanguard. After reading your recent 401(k) column, a TSP seems to have the benefits of an employer-sponsored plan and more (choice of traditional or Roth, tax-free Roth contributions when deployed(!), ability to roll money in/out from other plans), without most of the drawbacks.
This seems to be a no-brainer to me (right?), but I can’t decide between the C- and F-Funds.
Thanks!
Hi Enceladus
Do me a favor?
Move your question here https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
as it is a perfect fit for this post and more people will benefit from sharing in our conversation.
Thanks!
Hi Jim,
Could you give me feedback for my plan? (23, Canada)
Current Situation
80-120k Gross Income (varies depending on project)
500 Monthly Expenses (food/lodging provided while working)
0 Debt (just finished 20k student loans)
10k Emergency Fund + Savings for car/travel
20k TFSA (70% Can. Equity, 30% Can. REIT)
0k Self-Directed RRSP (will be adding all of next month’s pay)
4k Company RRSP (6% employer contribution, no match, global fund with 1.4% fees)
Plan
20% Canadian Bonds (VAB) – 0.26%
20% Canadian Equity (VCE) – 0.11%
20% American Equity (VTI) – 0.05%
20% Developed Equity (VEA) – 0.10%
20% Emerging Equity (VWO) – 0.18%
Notes
-Treat TFSA+RRSP as one portfolio
-Put VAB and VCE primarily in TFSA with VAB bridging into RRSP
-Transfer money out of company RRSP quarterly
-Use Norbert’s Gambit to buy VTI, VEA, and VWO in USD
-Once these accounts fill up (about 50k for this year), move Canadian Equity to a taxable account using HXT (swap structure converts dividends to capital gains)
-After deciding to stop working for a while/ever, sell HXT at low capital gains tax and buy a Canadian dividend ETF for dividend tax credit
-Maybe diversify into REITs, US+Intl Small Cap, Intl Bonds once accounts get larger
Hi Will…
Sure, I’ll give it a shot. But please understand I have no experience with or expertise in the nuances of Canadian investing. So my comment will have to be pretty general.
First, at age 23 you are off to a fantastic start with your income, low expenses, zero debt and money already in place.
Your “global fund with 1.4% fees” is very expensive. Maybe that’s the only alternative, but if not look for a lower cost index fund.
My biggest concern is that you are very heavily invested in Canadian stocks and bonds. The problem is, Canada is a very small economy on the world stage. If possible, I’d look for index funds that invest all over the world or funds that focus on the USA with the American multi-nationals they hold providing the international coverage. VTSAX being my favorite example.
Finally, at your age 20% bonds is a very conservative position. Especially with interest rates at all time lows. With decades and decades ahead in your investing life, personally I’d want the growth power of stocks working for me. Assuming, of course, you can handle the wild ride that comes with them.
Hope that helps at least a bit.
For more specific insights from my other Canadian readers, you might post some questions here: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
There are a very interesting international conversations going on in the comment section there.
Good luck!
Hi JCollinsH
I’ve been following your blog for a while now. I found you through the Mr. Money Mustache blog. When I was reading the interview you did with MMM and your daughter (can’t think of the blog it was on now), I was reminded of a question that constantly comes up for me.
You mentioned that when you reach enough in savings to be able to live off of 4%, you can “retire” whether you keep working or not. Just, from that point on send all income from work or other sources to savings. I love this idea (I also have seen plenty of back and forth talk about the 4% rule not being perfect, but I’m all for it).
How do the mechanics of this work? I mean, since you aren’t earning 4% dividends you are actually selling off some of your shares to pay yourself right? I’m not the best at this, but here is how my brain says it would work:
Month 1 of retirement: I have 1.5 million in my stock accounts and I need to pay myself so I:
(1,500,000 X .04) / 12 = 5,000 and I pay myself 5,000 dollars
Month X of retirement stocks have been taking a bit of a hit: I have 1.3 million in my stock accounts:
(1,300,000 X .04) / 12 = 4333.33 and I pay myself 4,333.33 for the month.
Is this how it works? Do you maybe take out 3 months or 6 months or whatever at a time?
Thanks!
Darrel
Hi Darrel…
Great question. Do me a favor? Post it in the comments here:
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
It’s a perfect fit and more people interested in this will be likely to follow our conversation there.
Thanks!
Posted it. I think it went through. Thanks!
Hi Jim,
I’ve recently started reading through your blog and I realized we have something in common… we both live in New Hampshire! From reading your guest post on MMM it’s clear you moved here at some point in your life. So my question is why did you move to NH?
I have lived in NH my whole life, 23 years, and I really love this state so I’d like to hear what you think about it and what motivated you to move here.
Also if you have any NH-specific advice about being FI that would be sweet too.
Thanks for your time,
Joe
Hi Joe…
Welcome and thanks for commenting.
We moved here in 2000 when I was recruited for a job in Nashua. During the interview they said, “Of course you’d have to move to NH. Would that be a problem?”
“Mmmm…” I said. “You’re asking me to move to one of the most beautiful and lowest tax states in the Union. Yep. I believe we can make that work!”
It’s been a wonderful place to live and great fun exploring it on the motorbike. Sometime in the next few years we’ll likely move. But that has nothing to do with NH and everything to do with my restlessness.
I can’t think of any NH specific FI advice. Other than having no income tax is a wonderful boost to building your stash. And with everything to do around here, being FI and having the time is very sweet!
My hometown of Chicago is my favorite city, but NH has been my favorite state in which I’ve lived.
I just wanted to thank you for your advice, and let you know that you’re on my Books & Blogs I Recommend page. I also linked to a couple of your posts today (http://livinglifehappier.com/2013/07/28/figuring-out-how-to-invest-just-do-it/) I wasn’t sure how else to mention it, so I hope that here is ok. I’d be honored if you’d check out my site when you get back and offer any suggestions you might have. And on an unrelated note, you chose a great time to travel – you’ve missed some horrid heat waves here in New England! I can’t wait to hear about your travels when you return.
Thank you PFgal…
…you made my day! Especially in the awful weather we’ve been having. This is the worst summer I remember since moving here in 2000. Hot, wet and humid.
Yep. I am between trips and back in NH until August when I leave for Ecuador. Hopefully when I return in September a beautiful fall will be waiting. At least that’s the plan!
I’ll definitely check out your site!
Hi Jim
Mid-thirties year old Irish man here. Debt Free taking home about 24300 euros a year.
16000 in retirement account. 4500 in shares. 1000 in Cash.
From next month, September, onwards I’m embarking on a budget which will see me saving 49% of my annual take-home pay.
Advice needed – I’m Single (and ready to mingle !).
In Ireland the dating scene is heavily tilted to bars & clubs and wining & dining your intended (target/victim ). I’m concerned that my plan to save 49 % of my take-home will be scuppered by nights out chasing the opposite sex or dates with the opposite sex.
I’m not a monk and while the idea of sitting in watching Netflix saving like a Squirrel appeals to the Frugalo inside me, I am just dying for some excitement and to be brutally honest the touch of an attractive female who would condescend to suffer me as a lover.
I have very little relationship experience and would dearly love to get out and above and date women to both have fun and learn from the experiences. I don’t want to be 55 and look upon 20 years of Dating Wasteland like I’m doing now.
So how do I reconcile my goals of being an Irish Lothario and reaching Financial Independence on a modest (by Irish standards) salary.
Please help me. My libido needs release from self-imposed imprisonment !!
I thank you
Sean
Hi Sean …
While I Congratulate you on your savings rate, I’m afraid your relationship question is above my pay grade.
Having been married for 31 years I’ve not clue about dating these days. Only faded memories.
Well thank you anyways for the speedy reply.
All I can say is that I envy you having found your partner so long ago ! I’m a disaster when it comes to dating… when I guess I can only improve from here on in !
Enjoy the rest of your trip ! 🙂
JlCollins,
Thank you for this blog, you are mine and my wife’s favorite “frugality blogger” that we’ve read/heard so far. (One of the reasons is that you’re the only one I’ve seen so far who discusses giving, which trying to give 10% away makes it hard to do a lot of the other things the blogs suggest.)
One question (sorry if it’s already been asked, I did a quick search and couldn’t find anything): I’m trying to set up a budget to see what it would look like if we were to save 50% of our income. I deemed it necessary to assume 50% of income after giving and taxes, since 50% of gross seems impossible (at least at this point). However, since 401K savings are pre-tax, I’m having trouble trying to account for it in the “savings” part of my budget which otherwise consists of post-tax numbers. Anyways I’ve confused myself and this might not make any sense, but any help you can provide would be appreciated.
Thanks
Blake
Thanks Blake! I appreciate the very kind words.
For what it is worth, I don’t actually consider this a “frugality blog” — more a financial/investment blog.
In fact, as I said at the recent Chautauqua, I’ve actually spent every dime I’ve ever gotten. It is just that many, if not most, of those dimes were spent on buying my freedom thru investments rather than fancy cars, houses and the like.
I’m not frugal in the sense of never buy a fancy car (or whatever) but rather buy such things only when you can not just afford them, but easily afford them. That’s why I occasional take fancy-pants trips like the one I described here:
https://jlcollinsnh.com/2013/05/15/dining-with-the-ghosts-of-sarah-bernhardt-and-alfons-mucha/
As for your question about calculating a 50% savings rate considering pretax and post-tax income, I believe you are over thinking this. Keep it simple.
Focus on your pre-tax income and save as large a portion of it as you can, remembering that you are spending this money on investments to buy your personal freedom. Since will be the largest purchase you ever make, the more you save the sooner you’ll have it.
Hope this helps!
Hi,
I agree with Jim. The simpler, the better. One idea though would be to save 50% of your final check after taxes, 401K and all other deductions. That would be to save 50% of your net income. That is what I would probably do. Good luck.
Paris.
Hi Jim;
I am really enjoying your blog. I was wondering, would you be interested to help me with my road map for building my future! I am very new at investing and started some Vanguard accounts. But am pretty scared about doing oo many mistakes. If you could be so kind and mentor me I would deeply appreciate it.
If you are interested, please let me know, so I can write my financial break down for you.
Thank you in advance for your attention in this matter.
Sincerely
Paris Parsa
Hi Paris…
I’m honored you would ask and happy to help, if I can.
If you haven’t already, take a read thru the stock series here on the blog. Once you’ve digested that you’ll be pretty well able to figure my take on most any financial/investing question you might have.
But if not, feel free to ask!
The whole point of this blog is to share what has worked for me and what has bitten me in the ass. It is what I do and the advice I give my daughter. When I can get her to listen. 😉
Cheers!
Thank you for your kind response.
I’d have tried many times to read through all your posts and loved every bit of it. The problem is, due to my depression problem, my mind is not as sharp as it used to be and i have a hard time focusing and retaining information. I get lost somewhere in the middle every time I start. i even started taking notes about your posts that match our situations and still had a hard time and keep getting confused again. I would deeply appreciate your input since I trust your judgment.
It is going to be a long one. Sorry.
So, here it goes.
Few months back, the retirement scare came to me and i started searching all our options. (Luckily, that is when i found our blog too)
My husband is 46 and I am 41. Both dentist. We had a bad Bankruptcy two years ago and closed our dental offices. Short sale our home. Lost everything. I am staying home with our little ones and my husband works as an associate. I am frugal and he is a big spender. I separated our finances few month ago and it is much better.
Based on my calculations, i came up with this system and he agreed. His income get divided this way.
. 30% tax. (We owe IRS)
. 30% savings and investments. He is pretty bad with keeping up with this one since his jobs were very shaky lately.(reduced hours and tons of patients not showing up to their appointments).
. 40% gets divided by two and he gives me a check for my half. We share the bills and children expenses. This helped my to have a lot more control over our finances. I saved a ton from my share and he is always low in money. But he said it was a wake up call and helped him to reevaluate his spending habits. He is doing great 🙂
Now as far as retirement goes.
. 2. IRA
. 1. ROTH IRA
. 1. SEP IRS
We had two old IRAs that we haven’t participated in for the past few years due to financial difficulties. This year, I opened a Roth IRA in Vanguard and we contributed to my husband’s traditional IRA and my Roth IRA to the max for 2012. The problem is, I found out later that my husband’s income for 2012 barely passed the maximum amount for us to have a Roth IRA. So I still need to figure that out with our accountant.
I also just learned about and opened a SEP IRA which is for self employed. His income is significantly lower this year.
Now, at our age, I am trying to figure out, what is the best way to invest. I also invested in REIT vanguard and Health index. REIT lost big time and HEALT gained great. Most of my investments are taxed and are not in an IRA. I was reading about the tax harvesting and made me think deep about what needs to be done. Should I sell the REIT with the lost and move it to our SEP IRA? Should I wait and leave it alone. Will the loss help our taxes? How about the gain from the Health index? What should I do to reduce the tax responsibility. We are in a high tax bracket. Have very little in our retirement plan and not in our twenties any more.
We started very late due to tons of schooling, immigration, more schooling , opening our dental office, tons of loans to repay and finally our big fall at 2011 and bankruptcy.
The fear of future is making me very uncomfortable.
Oh and we have one 529 for one of our kids with only $10,000. Our second kid (6 years old) has none.
I would deeply appreciate any advise .
Thank you so much. You are awesome.
Cheers
Paris.
Hi Paris,
Welcome back, and thanks for the kind words.
I’m very sorry to hear about your bouts of depression. It is an issue for me from time to time as well. No fun.
I’m also very sorry to hear about your financial troubles. But they are in the past now and at 46 and 41 you are plenty young enough to build your fortune and as dentists you have strong earning potential.
Sounds like you’ve got a solid plan in place with your division of income. Once you get the IRS paid off simply shift that money to your investments. Your wealth will explode!
Key here is to keep your husband on the path. While you have the time to rebuild there is simply no room for big spending until you are FI. He needs to pull up his big-boy pants and understand this.
OK, now some specifics:
–Take those two old IRAs and roll them into Vanguard.
–If you have overfunded the Roth, simply let Vanguard know and ask them to remove the excess. I’ve done this myself and it is very easy.
–SEP IRAs are great tools once your incomes are back up.
Sell both your REIT and Health index, letting the loss from one offset the gain from the other. While I like the REIT for an inflation hedge in retirement, that’s not where you are.
–You should focus on wealth building and that means VTSAX.
–The fact that the REIT is down and the Health fund is up is meaningless – just the random result of this year’s market. It could just as easily reverse tommorrow. These are sector funds and too narrowly focused for your needs.
–You don’t mention where the 529 plan is or what it is invested in. But you should get this to Vanguard as well. For now I wouldn’t worry about further funding it or setting one up for your second child. Focus on building your wealth first.
Finally, since it sounds like you find this all a bit overwhelming, I’m going to suggest you consider Betterment.
If you look at the right hand column here on the blog you’ll see an ad for this company. In the next few days I should have a post up recommending these guys.
https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Not quite as cheap as DIY with Vanguard, they do provide an exceedingly simple way to invest in a portfolio of index funds.
Rather than choosing the funds yourself, you open an account and tell them your goals. The software then suggests the asset allocations to reach those goals. Very simple and effective, and maybe just the level of involvement you’ll find comfortable and without the risk of expensive mistake.
Hope this helps!
Thank you so much for your advices. All of them sound great and I will start implementing them. Will let you know how I am doing. I also have an HSA account that is used for my huge medical bills for uncovered Antidepressants and dr. Appointments ( hundreds of dollars per month) But I am trying to use it to the max. HSA allows me to invest in Admiral funds without a minimum investment. It is awesome.
I tried to move our traditional IRAs to Vanguard once online and it opened an Brokers account for me. But didn’t transfers the accounts and I forgot about them. I will do that ASAP.
I placed an order to sell the REIT and once that is done, I will place an order of sell the HEALTH.
Should I remove all the health or only the amount that is offsetting the REIT loss? I have more invested in HEALTH.
Should I place this money in SEP IRA and then invest them in an VTSAX?
I will have enough since VTSAX is an admiral account with minimum requirement.
Sorry to ask so many questions. I truly appreciate your time and care you placed in answering my questions and sooooo fast.
Thank you again. You are truly awesome.
Paris.
I would sell all the Health fund. You got lucky with it but you can’t count on that to continue.
VTSAX in a SEP is a fine choice.
Regarding your HSA, if you haven’t already, you might read this:
http://www.madfientist.com/hsa/
Hi Jim,
I’m yet another MMM reader drawn in by the features he had over your posts – specifically the Stock Market series. Great content there, and boy was my timing lucky! I was days away from fully funding a self-employed 401k program (for the business my wife and I run alongside my day job) with Fidelity only to have my eyes opened to the huge disparity in fee structures. I’d initially written off Vanguard due to their $20 yearly fee for members with less than $50k invested, but by comparison to the other Fidelity fees, $20 is quite a bargain!
But I digress… Between you and MMM, I feel like I have a good handle on everything leading up to the point of FI. The two questions I have for you revolve around determining when one is at the point of FI, and the 4% withdrawal rate.
First, I know that the basic idea for determining when you are ready to go FI is at the point that your living expenses are fully covered by 4% of your invested stash. Given that I know I will continue to operate our side-business for at least the first few years of “retirement”, how much should that impact the 4% concept? To put some numbers on things, we’re looking at a stash of $400k, with $350k in various investments and the other $50k in cash, pending a large dump into the self-employed 401k accounts once we get them set up.
Since we’ve always spent less than we earned, we never really tracked expenses until I caught the FI bug this year. We’re on track for yearly spending of $35k, with a 60% savings rate (after taxes) including my post-tax income of $60k and our business income of $25k. The business income is variable, but in the past 5 years, it hasn’t dipped below $20k. Finally, Question #1: should this business income factor in to the 4% goal for FI in any way?
And question #2 requires no rambling backstory: To what extent does the amount withdrawn in post-FI living vary according to the value of your investments? That is, if we grew our nest egg to the full ~$900k required for a 4% withdrawal rate of $35k, and then the market took a dive down to $450k, would we be forced to either get a job or live on $17.5k until the market recovered?
Thanks for your input,
Jeffrey
Hi Jeffery…
Well, I for one enjoyed your digression! Thanks for sharing and glad it worked out.
OK….
1. If you are going to continue to operate the business and it can reliably throw off 20k per year, then you need 15k more for your target spending of 35k per year. At 4% it takes 375k to throw off the 15k using the 4% rule.
So with the business you are pretty much there, although some would quibble that true FI would be having enough invested that you didn’t need the business. Semantics, I say. What matters more is how you feel about the business and how much of your energy it takes to create that 20k.
2. In the classic trinity study the numbers were run assuming a 4% withdrawal, adjusted for inflation with no changes no matter how the market performed. Made for a great academic study and it is heartening that in all but a couple of cases the portfolios survived just fine for 30 years. In fact most of the time they grew enormously even with the withdrawals.
All that said, I think that it is nuts to just set this up and let it run regardless of what happens in the real world. If markets plunge and cut my portfolio in half, you can bet I’ll be adjusting my spending. If I was working and got a 50% salary cut I would, of course, do the same.
By the same token, at the moment I’m spending about 5.5%. The market is climbing and that provides a strong wind at my back to support this. At the end of the year, after all this spending, I’ll have more than I started with.
But if the winds change, so will my spending levels.
The key is to use the formula as a guide post and flexibility to make it work long term.
For more: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Make sense?
Dear Jim:
I was reading through your stock series and really enjoyed it, but I have one question. I noticed that you recommend keeping stocks in a taxable account and bonds and REIT in a non-taxable account, which seems prudent, but how do you do asset reallocation? I can see it would be easy to move assets from the taxable accounts to the non-taxable accounts, but I can’t think of a way to move assents from a non-taxable account to a taxable account unless it is a qualified distribution. Let me know if you need any clarification.
Keep up the good work.
Thanks,
Steve
Great question, Steve.
In our case, we have about 3/4ths of our assets in tax-advantaged accounts. Since this provides enough of all three funds, including VTSAX, to do any rebalancing within, I just do it there.
The 1/4th we have in taxable accounts I just keep in VTSAX.
If I had to, I would keep some of the bands and REITS in the taxable account to maintain the allocation. It is not ideal, but being in the lower tax brackets now that I’m retired it is not the end of the world either.
Make sense?
Hi Jim,
We are in our mid 60’s. (Although we have always saved, wish we had known some of this stuff earlier in life so we could have retired years earlier.) Anyway, we feel like we have more than enough money saved to live off the rest of our lives. In fact, we have enough income right now between SS and pensions that we have not touched our investments. However, what about Long Term Care? Is that something we should look into?
I have been following MMM the last couple of months and have spent the last couple days reading many of your posts. Over the last couple of years we spoke to a handful of financial advisors about rolling over our 401k, and we just couldn’t decide who to go with because we just didn’t like all of their choices and/or didn’t understand all of the investments they were offering. We now know what were are going to do, and now will not have to pick which financial advisor we feel has the best advice. However, we still don’t know if my husband and I should invest in something like Long Term Care.
We are also working on changing our will now that our children are grown. Trying to decide if we need a will or trust. Any thoughts on LTC, will, trusts?
You have been a great help so far, and I have been sharing your articles with my adult children.
Thanks,
Sylvia
Hi Sylvia…
Great question, but a bit out of my pay grade. I’m no expert in insurance and in fact it makes my skin crawl. But here are my thoughts…
My basic rule of thumb is the more willing and eager insurance companies are to sell you a specific type of insurance the less likely the bad event is to happen and/or the more expensive the insurance will be.
These are very smart folks and they have very sophisticated analytical tools that allow them to predict with almost absolute certainly how frequently any specific bad thing is likely to occur within any specific group.
Personally, I carry as little insurance as possible. So no LTC for me. I prefer to put what would be very expensive premiums into my own investments and “self insure” in this fashion. I’m betting that we won’t need it or, if we do, we’ll have enough by then to handle the cost.
But this is me. I have a very high tolerance for risk and a willingness and ability to be very flexible with our lifestyle should bad stuff happen.
This is a very personal decision that has as much to do with your personal profile and attitudes as it does with any financial analysis.
As for wills and trusts, again a question outside my scope. This is very dependent on the laws in the state (or country) where you live, your net worth and your intentions.
But simple wills are cheap and if you have any kind of wealth, are worth having. We do.
Given where we live, the state and federal laws would pretty much distribute as we’d specify anyway:
If my wife or I die, the other gets everything.
If we both die, our daughter gets it all.
But if we all three die, say during one of our travel adventures together, our will specifies what happens then. It also makes for a much smoother transition. Or so I’m told. For around $500, I see it as money well spent.
Hope this all helps in some small fashion.
Jim,
On Sept. 18th I asked you a question about Long Term Care – I meant Long Term Care Insurance – obviously we should look into Long Term Care if we need it!!
I have also been talking to my son also about investing, and we were wondering what your suggestions are for college savings. He has 2 children with the oldest being 3 and they have about $2000 started for each child. I notice that a lot of the Vangaurd funds require bigger investments. Also would he set up one of these college accounts or just put the money in his name.
Thanks again.
Hi Sylvia…
It is great that you are talking about investing with your son, and that he is listening!
Oh, and in responding to your last question I meant to congratulate you and your husband on the fine financial situation you’ve created. Being able to live on your SS and pensions while letting your investments run is a very cool thing. Kudos!
College savings is a very tricky thing. The tools offered keep changing as does the effect such savings will have on the chances for future aid. Frankly, as my daughter is in her last year of university, I’m out of touch.
My suggestion would be to look closely at the tax-advantaged options, and their restrictions and rules. Costs, too.
Unless your son is in a 25% or higher tax bracket, and married with children that would be around 90k+ in income, I’d seriously consider avoiding the hassles and holding the money in my own name.
But, even in the 15% bracket, that money saved and compounded over time is nothing to sneeze at…
It also depends on your son’s total savings and investments. Funding his tax-advantaged accounts should come first.
You are correct that Vanguard typically requires around 3k for most funds, and this includes their 529 plans. The easiest thing would be to build the money to that level and then open the accounts.
For more: https://investor.vanguard.com/what-we-offer/college/overview?Link=facet
Hope that helps!
Jim,
Thanks so much for answering my questions even though you implied they were out of your pay grade. We keep thinking we might need LTC insurance, but for some reason could never get around to buying it. Your answers were very helpful, and I passed your answer about college savings on to my son. We put three children through college without saving for college because we were funding our retirement account. I went back to work part-time when the oldest started college and that is how we paid for their college expenses. Wish we had known so much of this years ago, we probably could have retired at a much younger age, but we have always saved so we are in a better position than most people our age.
Hello there jlcollinsnh, i have a question for you.
Its about how to invest in Vanguard from sweden. I do know of one way, but thought i could ask if you know a smarter way before i start investing it.
I am a 29yr old swedish gentleman, with a pretty new found interest for saving up for an early retirement.
Im very interested about investing thru the Vanguard Total Stock Market Index Fund
But i am unsure about my options for doing it from sweden.
I know i can buy them over the market as a stock traded fund (ETF). But im not sure if its the best way to get them for a person living in sweden. Or if i can buy the Admiral/Investor shares, and if so, if it is an option for me or not. Having a hard time understanding the info i see over the internet here, i did find a vanguard site for sweden, however, they have nothing like the Vanguard Total Stock Market Index Fund, the closest is a european index fund with about 450 different stocks. And thats not at all what im looking for.
Found it at this link: https://www.vanguardinvestments.se/content/se/en/investments/mutual-funds.shtml#pagetab1
From what i can se, the etf has an expense ratio of 0.05%/year just as the Admiral Share.
However, id have to pay a brokerage fee every time i buy into it. (would probably be around every second month, to keep the brokerage fees at a decent level).
Brokerage-fees for buying american stocks is at 13.95 USD, and buying every second month would be an investment of somewhere around 2000-2200 dollars worth, so a buying fee of 0.6% or so. Or would it possibly be better to buy every month, even though it bumps up the brokerage fee to 1.2%?
also, i noted someone talking about a 20 dollar yearly fee for ppl with less then 50k invested, does this apply to ETFs too? Couldnt find any info about it.
I do know where to invest it, we have something called Investersparkonto here in sweden.
Basically you dont pay any taxes on dividends, nor for the valueincrease if you sell off any shares later on, it gives you a lower tax then the others if your investments grow at a pace of more then 3.8%/year on average or so. Instead you pay a small tax thats around 0.4% of your portfolio each year. Its gives around a 30% tax decrease compared to the other options currently aviable in sweden.
Looking forward to see your take on the matter.
Best regards
Ralf
Hi Ralf…
…and welcome.
My I ask a favor? Could you post your questions above in the comments here:
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
More readers who would also have an interest in our conversation will see it there.
Thanks!
There, my question is now over at the link you posted instead.
so waiting for a response 😛
Hey! I’m running in my little hamster wheel as fast as I can! 🙂
Just put it up over there. Thanks for moving it!
Jim –
I wanted to layout my personal situation for myself and my girlfriend and get some feedback from you re: any things you think we’re missing out on or areas of opportunity.
Monthly Income
* Salaried at $12,500/mo with quarterly bonuses based on profit. Given past profit numbers this should equate to about $3,300-4,200/mo. Total comp: $15,800-16,700/mo.
Monthly Expenses
* Housing (own) = $1,315/mo (House mortgage + property taxes + pmi)
* Bills & Utiltiies = $423/mo (Gas, Water, Electric, Internet, Cable TV, Cell Phone for myself and GF)
* Transport = $287/mo (Car Insurance, Gas, Maintenance, Parking, EZPass, Transit Pass, Bike Maintenance)
* Food & Dining = $321/mo (Groceries, Restaurants, Bars)
* Shopping = $330/mo (House goods, clothes, electronics, gifts)
* Pet care = $59/mo (Dog food, annual vet visit, toys)
Annual Expenses
* Travel = ~$3.2k/year, $260/mo (g/f family is INT’L so we need to travel at least once per year)
Monthly Investment Contributions
* Roth 401k = $728/mo (pre-tax)
* 401k = $728/mo (post-tax)
^^ Note: Company matches to the tune of about $200/mo
* Principal Payment = $300/mo (Pay an extra $300 towards house)
* Vanguard taxable = $4k/mo (55% VTSAX, 15% VGTSX, 15% VGSIX, 15% VBMFX)
TOTAL INCOME: $16,250/mo
TOTAL EXPENSES: $2,995/mo
TOTAL INVESTMENTS: $5,028/mo
In terms of what I’ve gotten so far:
Assets
* House, Zillow = $255k
* CASH = $53k
* Car, KBB = $13k
* Roth 401k = ~$18k (Principal Target 2045 Retirement Fund)
* 401k = ~$18k (Principal Target 2045 Retirement Fund)
* Old 401k = ~$28k (Assortment of funds available in Fidelity)
* Vanguard Roth IRA = ~$21k (Target 2045 Retirement Fund VTIVX)
* Vanguard Taxable = ~$20k (55% VTSAX, 15% VGTSX, 15% VGSIX, 15% VBMFX)
Liabilities
* House Mortgage = $173k
QUESTIONS
* Anything good to do with some of that cash to keep it mostly liquid / safe as an emergency fund + life fund (marriage, new car, etc)? It’s just sitting in Capital One 360 + Bank of America.
* I just upped my investments, my plan is to up the contribution amount until I am breaking even every month and not growing my savings. Based on what my predicted income, taxes, spending, and current investment contributions are, I think that means I will likely push my monthly investments up another $3k/mo.
* I can rent out my house for ~$1,700 and move closer to my work for a monthly rent of ~$1,800. I would save about an hour per day by being closer to work, and given the the fact that utilities would be cheaper and I would make money on top of mortgage, it seems like a good idea. Thoughts?
* Should I consider saving some money and buying another house for myself as either an investment property or a house to live in (thus converting my current into an investment property)? Around me it is common to buy a house for between $250-350k that is pretty nice and it can rent out for $1500-2500.
* Are the target retirement funds decent?
* Am I missing out on any big opportunities in my portfolio?
* Does it seem like I’m on a good track?
Oh, follow up: I am 27 and my g/f is 24. I imagine that is relevant.
thanks Joe…
I might do this one as a post. A couple of questions:
Is the income and/or expenses you describe just yours or is it in combination with your GF?
If in combination are your money/expenses and hers merged?
looking at:
TOTAL INCOME: $16,250/mo
TOTAL EXPENSES: $2,995/mo
TOTAL INVESTMENTS: $5,028/mo (btw, totaling your figures I get $5756)
Subtracting expenses and investments from income, I get $8227 left each month. Where is that going?
The income is mine and the expenses are ours. My g/f is in school for her masters and makes enough to pay for her school but nothing on top of it, really.
Regarding the $7,499 difference (you are correct, it is $5,756 investment… I originally put my 401k contributions as half since I looked at the bi-weekly contribution not the monthly and forgot to update the total), I would calculate approximately $5,700 to fed + state + city taxes based on past paychecks. That leaves approximately $300 for miscellaneous smaller expenses that I didn’t outline above and $1,500 going to my savings each month. My goal is to increase my investments each month until the point that I get net-zero. OR save that money if I choose to go the house route.
Let me know if you have any other clarifying questions!
Posted:
https://jlcollinsnh.com/2013/09/25/case-study-1-joe-off-to-a-fast-start/
Two more things:
1) In my delirium I mixed up the pre and post tax notations for 401k contributions!
2) On top of federal taxes, my state tax rate is ~3% and my city tax rate is ~4%. I get 100% covered health insurance, dental, etc. I have disability insurance through work.
Well, you are One Good Writer and I am totally persuaded to take action on your investing advice but have hit a mental speedbump: My kids will be college age in about 5 years. I understand any financial aid package will be diminished if my Vanguard balance is too high. I was thinking of foregoing the VTSAX in favor of ramping up contributions to my 457 Plan and to our life insurance policy in addition to keeping on with the IRA contributons. Any opinions on this?
Thank you, Julie!
I work hard on crafting the writing part of this blog and it’s nice to have that noticed!
If you haven’t already, you might read my conversation with Sylvia a couple of comments up.
Threading the college aid conundrum is very tricky and ever changing. And I am no expert.
My understanding is they use pretty sophisticated analytical tools when looking at income and assets. I seem to recall they give “retirement” assets a pass. So, if has you indicated, that is still the case your idea has merit. But you are closer to this and very likely are a better judge than I.
Good luck!
As you sort it out, and if you are willing, you might share what you learn with the readers here. Putting it as a comment in this post:
https://jlcollinsnh.com/2012/05/23/the-college-conundrum/
will reach those most interested.
thanks!
Help a Hoarder Go Back to School!
Hi! I’m a huge fan of your site. It’s nice to see your investing optimism amid all the doom and gloom of the mass media. Anyway, I’d love your advice on my current situation.
I’m currently working in a high paying job. It’s as life sucking as can be but the pay is amazing. At the end of this year, my contract will end and I’ll have amassed $250k in a checking account. Foolish, I know. It was my dumb “let’s try to time the market phase,” but I’ve grown out of it. You’ve shown me the light!
After this job ends, I plan to study in Latin America (I’m from the US) for five years. During these five years, I’ll have no income and expect to spend $16k a year, which is a firm, inflexible requirement. Once I graduate, I plan to permanently relocate and work in Latin America and start savings again, albeit at a much more modest rate than now. I’d then eventually like to retire early – perhaps around the age of 40.
Here are some stats:
Age: 28
Liabilities: $0.
Assets Upon Getting Laid Off and Going to School: $250k in checking, $17.5k in a Vanguard small cap 401k
Cost of School (2014-2018): $16k/year x 5 years = $80k
Savings Once Back in the Workforce (2019-2024?): $6k/year in savings (low salary but worthwhile profession)
Retirement Goal: (2025/age 40-ish): $450k in investments (18k/year withdrawal rate)
As I’m now an enlightened reader, I’m ready and excited to invest and have my money work for me. How would you suggest investing?
Note: I can only invest in taxable accounts, since I’ve already maxed out my Vanguard small cap 401k for the year and I am not interested in a Roth IRA as I plan to be in a low tax bracket during early retirement.
My current investment ideas include:
1. Keep the 80k needed for school low risk and highly liquid (high-interest checking and CDs?) and invest the remaining funds (170k) in the VTSAX, which I wouldn’t touch for at least 10 years. I’ll stay strong!
Pro: I’m guaranteed to not have to touch my VTSAX fund since I’ll have cold, hard cash to pay for school.
Con: I stupidly have too much cash sitting around.
2.. Take the entire 250k and invest in one of Vanguard’s conservative balanced funds, such as the Target Retirement Income Fund, or Lifegrowth Funds, or slightly more aggressive VBIAX and make monthly withdrawals as I go through school.
Pro: An excessive amount of cash isn’t sitting around doing nothing
Con: I risk having to make my aggressive 6.4% withdrawal rate during a possible down market during my time in school.
What do you think? I’m dealing with two different time horizon heres, Short term 1-5 years for school and medium term 10-15 years for early retirement.
Keep up the great work on the blog!!
Best,
Tom
Hi Tom..
Sounds like a grand adventure and a very intriguing scenario.
I’m currently working on my reply which will appear as a case study shortly….
Fantastic – thanks! And please let me know if you need any more info. –Tom
Jim, thank you for all time, effort, and patience you put into helping us all. I really appreciate your advice.
Hi Kevin…
Glad you’ve found it useful and thanks for taking the time to say so.
You made my day!
Hi Jim,
I have been reading your site for a few months now and was hoping to get some feedback. We have had a slow start with many mistakes in the past. We are making a lot of money now and have been playing catch up. Early in 2005 we were 60K in debt. Out net worth is now 500K. We have just started with VTSAX but still converting CDs from a 5 year CD ladder I started 2 or 3 years ago. We are ages 52 and 49. Our financial scorecard is as follows:
Monthly Take Home Pay: $ 12,500 average (We are both self employed)
Monthly Expenses: $6,500
Home Value $400K
Mortgage $155K (about 11 years remaining on 15 year fixed at 2.625%)
Liquid Cash $ $70K (earning 2.5%-3.25% in reward checking accounts)
Retirement $101K (made up of the following)
20K (Socially Responsible Mutual Funds and Gold ETF) (TD Ameritrade)
40K (Credit Union 5 year CDs earning 1.96%-2.83%)
32K VTSAX (Vanguard)
8K VMMXX (Vanguard)
$1400 Company 401K
35K Investments (made up of the following)
10K (Credit Union 5 year CD)
23K VTSAX (Vanguard)
$2500 Lending Club (Currently 12.8% annual return)
$7K HSA (Earning 1.16%)
My biggest question is about dollar cost averaging. I have been converting $500 per week from VMMXX to VTSAX. I have been waiting to see what happens with all of the federal fiscal shutdown, debt ceiling, etc. before I accelerate into VTSAX. I also have been thinking that the market is due for some kind of adjustment. My TD Ameritrade investments will be fee free to cash in starting in November. I will be able to put more in VTSAX in the coming months. My biggest question is how quickly and when?
Any feedback you can give would be greatly appreciated. We just want to get to a place of financial freedom before retirement age.
Thanks so much,
Ron
Hi Ron…
First, congrats on a great turn-around from debt to wealth and growing.
You say, “I have been waiting to see what happens with all of the federal fiscal shutdown, debt ceiling, etc.” Of course, once those are in the rear view some new set of worries will take their place in a never ending parade. What you are talking about is market-timing and that is a losers’ game.
I go into this in some detail here: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
and that should answer your question. Take a look at the comments as well.
As for dollar cost averaging, I am not a fan. Better to decide on the allocation that works for you. When you DCA you are basically holding an allocation heavy in cash when that’s not your goal. Sure, if the market goes down it might work in your favor. If it goes up it works against you. More of that pesky market timing stuffola!
One last point. That’s a great mortgage! Don’t pay it off early. 😉
Thanks Jim,
I guess my own fears about the market have been holding me back. I have read the whole stock series but some lessons are harder to remember than others. One more question: I will have the ability to contribute to a SEP IRA (possibly 30K-40K) at the end of the year. What are your thoughts on converting to a Roth?
Thanks Again,
Ron
Hi Ron…
Maybe the most important lesson is that the the market will have crashes, bears and corrections going forward. These are going to happen and are completely normal, in-spite of the panic in the media, and best ignored.
Everybody makes money when the market is rising. But what determines if it will create wealth for you is what you do when the bad stuff happens.
Great that you have the SEP opportunity. Go for it.
And definitely fund Roths for both of you each year your income is under the limit: 178k for 2013.
Hi Jim,
Thanks for the great advice on this site and your rational and thoughtful approach to saving and investing. At this point, I have not only read all of the posts on your site…. Your site, along with that of MMM is one of only two blogs that I will recommend to friends. I am hesitant to ever give financial or budgeting advice to friends as it is a very personal topic, but I feel that the thoughts in these two blogs can make too big of a difference in people’s lives to pass up. I have one request… I usually refer people to your stocks series first, as I think people are less likely to shut down right away at reasons why index funds, Vanguard, very simple investments, and managing your own money are smart ideas than they are at starting with why saving 60-70% of your income is. However, with the way it is organized on the website, it is very difficult to read through the stock series one after another without digging through the archives. It would be nice to have a section for your stock series with a list of hyperlinks in order to these articles… or barring that, at least a hyperlink at the bottom of each stock series article that leads you to the next article in the series.
Hi Kevin….
Great to hear you have found such value and I’m honored you pass the blog around to your friends.
If you look at the right hand column you see every post here organized by catagory. This this the link to the stock series: https://jlcollinsnh.com/category/stock-investing-series/
MMM also created a post with links as well:
http://www.mrmoneymustache.com/2013/03/07/how-about-that-stock-market/
As did Shilpan over on Street Smart Finance:
http://www.streetsmartfinance.org/2013/06/28/how-to-invest-money-in-any-economy/
Of course as I add new posts that one will get a bit out of date. But anyone who reads all those should be able to find their way to the others. 🙂
Hope that helps!
Hi Jim,
Thanks for the quick reply! Those do help and are close to what I was looking for. I think there are two changes that might make them even more helpful, though. 1) If you could reverse the order that they show up on the link so that you go through them in the order that they were written rather than starting at the most recent one and working your way backward. 2) If you could put that link somewhere more prominent on the site… maybe as an additional tab at the top. As I said, I have read all of them and some of them several times, so I am already hooked, but I don’t think many first time visitors will scroll that far down the right hand column.
Here you go, Kevin:
https://jlcollinsnh.com/stock-series/
https://jlcollinsnh.com/2013/10/05/the-stock-series-gets-its-own-page/
and Thanks!
You rock Jim!
Mr. Collins,
I found my way to your blog through MMM and after reading through your various posts regarding investment techniques and strategies I’ve found myself in a somewhat unique situation. As a member of the U.S. military I have the TSP as an investment option. The recent addition of a ROTH TSP drew my attention as did the rock bottom expense ratio of the available funds. Military members are not eligible for any type of matching but I’m curious to know your opinion on which fund(s) I should place my money into moving forward. I currently hold a personal ROTH IRA through Vanguard investing in one of their target retirement accounts but would like to expand my retirement investment portfolio. Any advice/direction you could provide would be most appreciated.
Best,
Chris
Welcome Chris…
Glad you found your way over here.
TSPs great! Basically a better version of 401k plans and available only to military and other government employees. They offer a nice, but not overwhelming, selection of low cost index funds: only .027% last year.
Looking at the chart of ERs going back to 1999, their ER has ranged from a low of .015% in 2007 to a high of .102% in 2003. Seems the variation is due, to quote the TSP site, to:
“The TSP expense ratio represents the amount that participants’ investment returns were reduced by TSP administrative expenses, net of forfeitures”
Still, even at the worst these are very low ERs. And they seem to be coming down in the last five years or so. Good deal.
Also a good deal is that the funds are index funds. The C-fund for instance replicates the S&P 500 index. The S-find is the small cap index. Own both in about a 75/25 balance and you’ve basically got a VTSAX-like Total Stock Market Index investment. That’s what I’d aim for.
The F-fund is a bond index. If I’m correct in guessing you are a young guy planning to work a while longer, you don’t need that.
As to the question of funding a TPS Roth, it mostly depends on your income. The more you make the more valuable the immediate deduction of the regular TSP. Roth = funded with after tax money but free of taxes after that.
Either way, I’d suggest you max out your TPS accounts and then your Vanguard Roth, ideally in VTSAX.
Hope this helps!
Stay safe out there.
Mr. Collins,
Thanks for writing the stock series! Such thorough, yet easy to understand for the lay person writing on personal finance is very hard to come by. You are doing the public an immense service! The series should be required reading, if you ask me.
I’m writing to ask for your advice on 401k rollover. I left my previous employer last year, and left my 401k untouched with Fidelity. After reading your blog, I decided to move everything to Vanguard, probably putting 100% into VTSAX as I won’t withdraw for 15 years at least.
But I also suddenly remembered I should consider rolling over a portion of it to Roth. Plus I’m not working in 2013, so I’ve no income and should try to take advantage of low tax rate to do rollover to Roth this year. But I can’t decide if I should try to limit the rollover amount so my marginal tax rate doesn’t go over 15%?
A bit of background info:
– 44 years old, divorced, no kids
– high-tech worker and was making just about $100k at previous job
– with luck, hope to find similar job at similar pay level next year (I don’t code any more, thank God, so this might be a bit tricky to achieve)
– total 401k saving at about $350k
In addition, do you think that 350k is enough saving for retirement in 15-20 years, counting compound annual ROI at 5%? Provided I follow the 4% rule and keep annual expenses at below $40k? There’s also about $180k equity in a rental property, which can be extra cushion if stock market tanks and stays down for decades. Oh, and another $100k in Roth.
Would really appreciate your thoughts. Thanks! (BTW, like many other commenters, I also found my way here via MMM site.)
Hi Jian…
Thanks for the kind words! Glad you’ve found such value here.
You are on to something with rolling at least part of your 401k into a Roth. In fact, this is exactly what I am doing with our traditional IRAs each year: Rolling into our Roths consistent with staying within the 15% tax bracket.
My thinking is paying 15% is getting off cheap and once in the Roth it is not only tax free for our lives but, it passes to our heirs tax free as well.
Since you are not working in 2013 you have a window of opportunity to do the same. As a single tax payer the 15% bracket ends once you go over $36,250.
But you also have:
$6100 standard deduction
$3900 personal exemption
Add all those together and you have a total of $46,250 you can transfer to the Roth. Plus because of the the way the tax brackets are structured, not even all that will be taxed at 15%. Much of it will be lower.
So of that 350k, I’d move this 46+k into your Roth and the balance into a traditional IRA.
Next, to evaluate how your 350k might serve you 15-20 years out, let’s play this cool Compound Interest Calculator
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
I cribbed from Johnny Moneyseed’s recent post http://www.johnnymoneyseed.com/early-retirement/employment-to-retirement-in-7-years/#sthash.3LBGoS4R.dpbs
350k @ 5% =
728k after 15 years
929k after 20 years
But 5% is a very conservative guess for VTSAX over those kind of time periods. After all, the market historically has returned somewhere between 8-12%. Let’s look at the lower of the two:
350k @ 8% =
1.11 million after 15 years
1.63 million after 20 years
Of course, both these scenarios assume you don’t contribute another dime. And we haven’t considered the other 180k in RE equity and 100k in your Roth now. Just for kicks, let’s add them to your 350K:
630k @ 8% =
2 million after 15 years
2.9 million after 20 years
Again, not adding another dime.
Those results are another reason to move money into your Roth whenever you can.
You are in great shape and on a great path! Kudos on a job well done.
Thanks, Mr. Collins, for your detailed response and encouragement!
The compound interest calculator is awesome! About using the 5% interest rate, I should have mentioned that it’s after taking into account of inflation at about 2-3% a year. I read this approach on MMM’s blog and liked it, because it keeps things simple and the lower projected future value keeps me grounded.
Thanks for endorsing my plan to convert part of the 401k into Roth. Will do that before end of year. My recent binge on blog reading makes me want to start my own blog, then perhaps I won’t have to go back to the corporate world! Anyways, thanks again for answering my question. Keep up the great blog!
Hello,
I would greatly appreciate your follow up on the republic wireless phone plan. I believe you were going to give your opinion once you were back from your travels. Thank you.
Hi Chris…
I’m still sorting thru my impressions using it here in the USA. But in short, I love what RW is trying to do and their approach. The phone itself, not so much.
They have a new model out just now and I’d certainly go for that if I went for the RW service. But I haven’t actually tested it. They were planning to give me one to review, but I guess now they have only q few and more important people than I they want to have test them.
Because my needs are light and RW is cheap, I’ll put up with the phone and stick with them. Were I a heavy user, I’d look elsewhere until I was sure the new phone cut it.
Hope that helps!
Thank you for the feedback . I am not a heavy user of data if that is what you mean. In fact, my wife and I do not have smartphones at all. I am trying to decide whether to give up our verizon plan that runs a hundred smacks a month.
All the Best,
Chris
I had Verizon and came form a “dumb” phone too.
@ $100 v. $20 I’d move to RW just as soon as the new phone is available.
Great! will do. Thank you for following up.
Chris
and here, finally, is the post:
https://jlcollinsnh.com/2013/10/29/republic-wireless-and-my-19-95-per-month-phone-plan/
I love your blog and as such would like your opinion on something;
I understand typical term vs. permanent life insurance debates while you’re growing your assets. Once you’re retired, enjoying those dividends, and your kids are all grown up, though, maybe there’s no need for it at all. Then along come the grandbabies, you enter old age and realize your assets have still been growing because you’ve been so damned good at investing your money.
In your opinion does permanent life insurance make sense to pass these assets down to your kids/grandkids/charities/whatever? Is there any other way to avoid paying taxes (or, rather, having your heirs pay taxes) if you’ve built significant wealth?
Hey Eric,
I’m not Mr. JLCollinsNH, but I’ll take a crack at your question since it seems like an intelligent and sincere question that goes beyond the often flogged term vs. perm debate.
Permanent life insurance can be a valuable tool in the toolbox of a good wealth transfer/estate planner. It’s probably going to be best used in conjunction with other tools and it’s not a cure-all, but it is useful.
The answer to your question is going to depend on your specific situation; there’s a huge difference between planning a simple $1M estate consisting of a residence and an IRA and a $100M estate made up of private business stock in terms of how insurance could fit in. I suggest you talk your specific situation over with a qualified planner, but here are a few examples where permanent insurance can really be useful.
First, here are the features of permanent life insurance that make it useful:
-it has a permanent death benefit and can be counted on to deliver cash exactly at death, no matter when death occurs (unlike term insurance)
-life insurance death benefits are received income-tax free by the beneficiary
-the asset can be owned outside of the estate of the insured (useful when planning for estate taxes)
-the asset can be owned by any person or non-person, including businesses and trusts
-the death benefit can be purchased with a stream of annual premium payments which are heavily discounted in the beginning
-any inside build up of cash values occurs without current income taxation
-amounts can be very predictable (if general account based) or can have tremendous growth potential (if variable sub-account based)
Here would be some scenarios ranging from simple to complex and from low net worth to high net worth where a policy could be useful. I’ll not try to be complete with any of these, just to paint some concepts.
-A father owns a profitable private business worth $1M and has two sons. One son works in the business but the other son does not. He desires to leave an equal inheritance to each son, but doesn’t want the sons to be in business together. He could will the business to the first son who is working in the business and purchase a $1M life insurance policy with the second son as beneficiary to equalize his estate. This could also work with other estates where the decedent has not-easily-divided assets such as real estate.
-Older business owner has a younger partner. Older owner wants to sell business to younger partner but younger partner doesn’t have the full amount needed. Business can support older owner’s retirement salary or older owner has other assets. Children/older owner’s spouse don’t want business but want the value of it. Younger partner buys an insurance policy on older owner’s life. Younger partner is beneficiary. Younger partner uses insurance proceeds (received income tax free) to buy business interest at older partner’s death (gets stepped-up tax basis)…everyone’s happy. Younger partner got business for discounted price/steady payments (for the amount of sum total of life insurance premiums) and family got the value of the business.
-Client has $20M in assets and wants to pass assets to children but doesn’t want them to pay any estate tax. Client is charitably inclined. Client establishes a trust with the children as beneficiaries of the trust. Client gifts premium payments to the trust and the trust buys a$20M life insurance policy on the client. Assets are willed to charity. When the client dies, the charities receive $20M (and because all the assets went to charity no estate tax is paid) and the children receive the $20M from the life insurance policy held in the trust (and receive it free of income tax/estate tax/gift tax/generation skipping transfer tax/etc.)
There are literally dozens and dozens of examples that could be created. The key thing is that usually good planning involves a host of tools and is very individual. What assets someone owns make a big difference–if someone’s primary assets are marketable securities, it’s a lot easier/simpler planning than if someone owns a private business/artwork/etc.
The key thing to remember is that estate tax and generation skipping transfer taxes are largely optional taxes. The only people who really wind up paying them are the ones who didn’t put together a very good plan soon enough.
I’m happy to comment further if you have a more specific question, but hopefully this is interesting to you.
Thanks Joshua!
Hi Eric…
Joshua is a friend of mine and I asked him to weigh in on this. He works in the insurance business and, as you can likely tell, has an in depth knowledge of how these tools work and how they might be used.
One of the things you’ll notice in reading his reply, is that PLI is useful mostly for very high net worth people dealing with fairly complex issues of estate planning, such as passing a business or farm down to multiple heirs.
It is important to realize that the estate tax doesn’t kick in until an individual is leaving more than 5.25M in assets, 10.5M for a couple. So it takes very significant wealth before you need to consider this tool. Or a complex estate.
Personally, I’ve never owned any life insurance other than that employers have chosen to provide. But then, I didn’t take on the responsibility of children until after I was FI.
For those interested, a similar path might look like this:
https://jlcollinsnh.com/2013/06/04/my-path-for-my-kid-the-first-10-years/
Hope all this helps!
Dear jlcollinsnh,
My name is Rebekah, and I was wondering if you could review my savings plan?
Before I delve into the details, though, let me just say: this website is by far and away the best site on the Internet today! You are intelligent, thoughtful, clever, and articulate. You write with brevity and wit. And you reply to every.single.comment. That is incredible! I don’t mean to be flower-y, but damn! The content you publish and the culture you’ve created are to be commended.
I’ve been taking notes on your stock series (no joke) and have been making changes accordingly. As such, I was wondering if you’d take a look at my situation to see if I’m on the right track.
Basic Biography:
Age: 28
Salary: $66,941/year
Employer: Federal government (*volunteering at the moment: I am required to be at work but am not being paid)
Debt: None
jlcollinsnh Reader: One month and twelve days! I had never heard of FI or F-you money or even considered investing in the stock market until a month ago!
Current Asessts:
Roth IRA – $10,000 (VSTAX)
TSP – $38,500 (100% C-fund)
Regular Savings Account – $7,500 (earmarked for Vanguard, but I am holding the money until the furlough ends)
Checking Account, for emergencies – $2,000
Where I want to be in life:
– Retire from present employment in 7-9 years.
– Find part-time work in field I love (animals!).
– Continue to simplify life, reduce expenses, live minimally, love exponentially.
To make the above goals a reality, this is my plan:
$66,941 (gross salary)
– $10,041 (10% TSP — the gov’t matches 5%)
– $14,225 (estimated taxes; no state tax – I live in NH, too!)
– $5,000 (ROTH contribution, VSTAX)
– $24,000 (living expenses — this is a high estimate, but I am still working on reducing my monthly expenses)
– $13,675 (VSTAX contributions)
My questions to you:
1. Is the above savings plan too weighted toward tax advantaged buckets, given that I want to leave full-time employment in less than 10 years?
2. Do I need to add investments in bonds/REITs right now?
3. Am I on the right track for FI/f-you money?
Thank you SO much for any help you’d be willing to provide!
All the best,
Rebekah
The TSP contribution should be written as 15%, not 10%! My bad!
Welcome Rebekah!
Always nice to have someone from here in NH check in.
Wow! Flower-y or not, please do go on… 😉
You missed “clean, thrifty, brave.” 🙂
But damn, yours is still one of the nicest compliments ever. If you find yourself in Manchester, coffee is on me!
As the blog continues to grow I am finding it difficult to keep up with and respond to all the comments. Accordingly, I especially appreciate ones as well organized as yours: Easy to read details and specific questions.
So let’s take a look at yours:
1. Nope.
With your $13,675 VSTAX contributions each month you should have plenty of money to draw on between ages 38 and 59.5. Plus there are ways to access tax-advantaged accounts penalty free if needed.
Since the laws can change between now and when you might need to do so, I’d not worry to much about the details just now. As you read thru my blog and the comments you’ll see some ideas mentioned.
My pal the Mad Fientist has also published some cool ideas on this and this post is a good place to start: http://www.madfientist.com/retire-even-earlier/
2. Nope.
Right now you want to go for maximum growth. Even once you move on to your more rewarding part-time work you’ll still be in a position to leave your portfolio mostly untouched when the market drops for a while. Add REITS and bonds when you are fully retired and really need the protection.
3. Yep!
As we did in my reply to Jian above, let’s play with this cool Compound Interest Calculator http://www.moneychimp.com/calculator/compound_interest_calculator.htm I cribbed from Johnny Moneyseed’s recent post http://www.johnnymoneyseed.com/early-retirement/employment-to-retirement-in-7-years/#sthash.3LBGoS4R.dpbs
Adding up your Roth, TSP and savings (we’ll leave the 2k emergency fund to the side) you are starting with 56k. From this you are investing $28,116 a year across your TSP, Roth and VTSAX.
So using that calculator, here are some potential results across conservative to aggressive return projections and looking at your 7 or 9 year working time frame, plus a 10 year.
returns 5% 8% 10% 12%
7 years 319k 367k 403k 442k
9 years 412k 491k 552k 621k
10 years 463k 561k 638k 727k
Using the 4% withdrawal guidelines (https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/) to support 24k in annual spending you’d need 600k.
A quick look shows that only three of these scenarios get you there and, worse, all three depend on returns at the upper range. But the good news is that you don’t need your investments to fully support you. You’ll be working part-time. Plus it sounds like you’re still pulling your expenses down below that 24k mark.
If that part time work pays say 10k, that is the equivalent of 250k invested. (4% of 250k = 10%) Your investments need then only provide 14k and that only takes 350k.
The ideal situation, of course, would be to have enough part-time income and enough invested that it takes something less that 4% of your stash to fill the gap.
The lower the percentage you need to draw, the more breathing room your investments have to grow, ideally to the point where you no longer need to work at all. All but one of these examples does that.
Of course, no one can guarantee the future for the next ten years. But investing is about playing the odds and I’d say you are well on your way to stacking them in your favor.
You might also want to check out this Case Study: https://jlcollinsnh.com/2013/10/09/case-study-3-lets-get-tom-to-latin-america/
Good luck!
Hello Sir
Great posts I can’t tell you how many hours I have spent enjoying your blog.
Do you have any ideas for me I would like to be free in 10-15 yrs
I am 35 yrs old with a gross income of 100k and 15% paid to taxes because of my real estate and 401k deductions
180k in vanguard investments 401k
100k cash
900k in rental properties with mortgage of 760k 5% rate can’t refi bad fico score
Monthly rental mortgage + expenses 6k
Rental income 5k per month
I have a free car and live in one of my rental units so my living costs are low I save 50% of my take home pay
My current plan is to continue to invest in my company 401k up to match 600 +300 matched month And pay down my mortgages by paying extra 2700 per month.
Question should I pay down my mortgage or invest all in the market?
Any thoughts would be greatly welcome
Hi Brian…
You originally asked this, and I answered, in the comments over on this post:
https://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/
Check it out!
Hello,
love your blog. My request is a simple one; you had states that you would give yoir feedback on the Republic Wireless phone once you were back from your trip. So, what is the verdict?
Thank you, Chris
Hi Chris….
You asked and I answered back on Oct 6th. Check in the comments here.
Best,
jlc
Hi there, great blog. Been following a year now, looking for life advice. Want to retire early, or at least take a year off starting next summer. Have great job, and 2 cash-flowing rentals.. looking at $2400/mo cashflow by spring once finished with last SFR rehab. Hoping this is good enough security blanket for extended time away…
I have vanguard 401k at $200k, took $50K loan to buy investment property, invested cash savings into rental purchases. Have $350K in mortgages. Questions should I work to payoff one of the mortgages at $150K@4.3% which would add 6% ROI to rental cashflow, or keep investing in dividend stocks at this time? With stock prices high, thinking it might be best to sell ROTH(50K), sharebuilder(20K), lending club (10K) and 70K cash to pay off one of the mortgages, yielding guaranteed ROI of 6%.
Looking for recommendations for investing with 2013 money: dividend stocks, VTSAX, payoff mortgage, or buy another rental?? (Additional rental requires more time however).
Regards,
Joe
Thanks Joe..
and welcome.
OK, two things first:
1. I am not a fan of dividend stock investing, or really any sector specific investing strategy. For more: https://jlcollinsnh.com/2011/12/27/dividend-growth-investing/
https://jlcollinsnh.com/2012/01/02/magic-beans/
2. When you say “With stock prices high…” you are making an assumption that may or may not be true. Here’s more on that: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Personally, I would focus on building my stake in VTSAX…
—@4.3% your mortgage is attractively low.
—Leverage is one of the key things that gives RE its wealth building power. (as long as your cash flow covers your costs, if not you’ve a bad investment in place)
—it will balance your portfolio a bit and, over time, should give you a better return. Although, not as “guaranteed”
You certainly don’t want to sell the Roth. Over time this will become more and more valuable both in the growth of the investment and the tax advantage. I’d keep VTSAX in in as it should be your longest held investment.
As you point out, rentals take time and adding another is inconsistant with wanting to spend “extended time away.”
Good luck! Where are you headed?
Thanks JL,
Not sure where headed, wife and I want to do big trip before maybe having kids.. Possibly extended van/RV travel through North America, or slow travel another continent.. Just wishing I was leaving soon as winter in New England is coming. 😉
Good points about dividends, I just feel nervous dumping my paycheck savings each month in the stock market with it near highs, and the fragile banking system, US debt, QE3, etc.. I know there are strong companies with good financial sheets, but I think maybe I should put savings in land or things I can touch and feel instead of wall st. at this time..
sounds like great fun and living in NH I hear you about winter.
as for the market, don’t invest until you are absolutely sure you can and will ride out the inevitable plunges. everybody makes money when it goes up, but whether it makes you wealthy or not depends on your ability to resist panic when it drops. until you KNOW you can, stay away.
That said, there will always be crises going on. When those you listed are resolved new ones will take their place. These should not be what drives your investing.
Good luck!
Hi Mr. Collins,
Let me begin by saying how great of a job you’ve been doing, and how much of a help you have been to a lot of people. Thank you! I don’t think we can thank you enough.
My background:
I’m an immigrant to the US. I came here on a work assignment when I was just about to turn 26. I’m 32 now, married to an American and have a kid. For all purposes, I’m here for the long haul. I didn’t actively start saving for retirement until 2010. That’s when I made the decision to live permanently in the US.
Saving details:
– Have ~$70K in company 401(k), mostly Vanguard Index Funds; and increasing
– Have ~$10K in Roth IRA; and increasing
– Have ~20K in various checking and savings accounts; and increasing
– Have ~5K in 529 account for my 1-year old child; and increasing
– My wife has very similar accumulation in her 401(k), Roth IRA and savings & checking accounts
My situation:
– For the past 3 years, I’ve been maximizing contributions to my 401(k) – not just the 4% employer match, but putting in maximum dollar amount, and on course to put in $17.5K for this year.
– For the past 2 years I’ve been maximizing contributions to my Roth IRA, and on course to put in $5.5K for this year.
– Neither my wife nor I invest anywhere else.
My dilemma:
After going through your stock series, the writing on the wall is quite clear: I have to invest in regular (non tax exempt) investment vehicle, namely, Vanguard index funds.
Now the $17.5K that I put in the 401(k) is tax free (yes, I will pay tax on it when I take out money). To me, that’s a ridiculous amount of tax free money! Which brings down our AGI, and consequently our marginal income tax bracket.
I can’t help but think that this is something I should take every opportunity of. But if I’m putting in $17.5K in my 401(k) and $5.5K in my Roth IRA, that doesn’t leave me with a lot (read zero) to invest elsewhere.
One more thing: the money in the checking and savings accounts will be used in the very near future for the down payment of a house. So investing that stash is not currently an option.
Should I really put in less in my 401(k) and Roth IRA, and start investing in non-tax exempt vehicles?
Welcome kobelco…
thanks for the kind words.
First, congrats! Looks to me like you and your wife are off to a fine start.
once you reach 59.5 you can access your tax advantaged accounts without penalty. (taxes due on withdrawals of course) so unless you plan to retire early, no worries.
But even if you do retire early there are strategies to work around this. My pal the Mad Fientist has done some great work in this area. In fact, I’ve asked him for a guest post on this subject and that should be up sometime next month. Meanwhile, check out this post of his and some of the links: http://www.madfientist.com/traditional_ira_vs_roth_ira/
Bottom line? Keep funding your tax advantaged accounts to the max and before moving on to taxable accounts. If you can free up some extra savings beyond that for taxable accounts, that’s great too!
Also, please read my posts on homeownership here:
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Houses are poor investments and expensive indulgences. Nothing wrong with expensive indulgences as long as you can easily afford them and buy with your eyes wide open.
Good luck!
Mr. Collins,
Thanks for reinforcing that we’re on the right track. In a few years, our modified AGI will reach a point where we’ll be unable to contribute to Roth IRA. That’s when I’ll shift my focus to non-tax exempt investments.
I’ve already read both of your posts on home ownership. We also currently have a house. Or rather, have a mortgage on the home we live. The mortgage rate is a measly 3.25%. We took a decision to rent it out, and move into a smaller house closer to both our work.
This arrangement would serve 4 purposes:
1. The rental will generate passive income – After covering the entire mortgage payments, the rent will leave me with about $400 cash every month. I’m under no illusion that maintaining a rental isn’t hard work, but I want to experience being a landlord. I’m not entirely sure that I’ll enjoy being one, but I’ll never know if I don’t try! In a few months, or years, I can sell it off and pocket a neat profit. (Have about $30K equity)
2. We will be closer to our work places. Less time spent commuting, less mileage on car, less money on gas.
3. Smaller house = less energy costs, less time spent cleaning
4. The new place is in one of the best school districts in the state – better for our child
Looks like a solid plan to me!
I especially like point #4. That’s exactly why we bought the house we just sold back in 2000.
Our daughter is now in her last year of university and credits our town schools with great prep that has helped her enormously.
If you are going to buy an expensive indulgence like a house, there are few better reasons! 🙂
Hello Jim,
Let me start by thanking you for the valuable advice you provide through this blog. It is humbling, to say the least, that you are taking valuable time to assist other fellow investors.
I’m a non-US citizen living outside the US. I currently have a considerable amount of savings ($400k+) in bank savings accounts that pay a very low interest. I would like to move this money into 3 index funds (Total US Market Index, Total US Bond Index, & total International Market Index) for a long term investment.
With the current indexes hovering around all-time highs, would you recommend that I invest the whole amount in one shot (with subsequent additional monthly or quarterly installments) or better spread the $400K over 12 months to leverage dollar cost averaging & potentially a lower market over the next period.
As I’m targeting a long term investment, I realize that the above choice might not be as crucial as it might sound.
Looking forward to your advice
Cheers, Joe
Welcome Joe….
and thanks for the kind words! Glad to share what’s worked for me and what’s kicked me in the ass. 🙂
If you haven’t read my stock series, before doing anything please do:
https://jlcollinsnh.com/stock-series/
The stock market is an incredibly powerful wealth building tool. But it is also a very wild ride. Be sure you understand this and don’t invest until you are absolutely sure you can and will ride out the inevitable plunges. Everybody makes money when it goes up, but whether it makes you wealthy or not depends on your ability to resist panic when it drops. Until you KNOW you can, stay away. The Stock Series explains all this.
If you have read the series, re-read this post:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
as it provides my take on investing when the market is at record levels like now.
Finally, you might enjoy the interesting conversations regarding investing for non-USA folks in the comments here:
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
Do you still intend on finishing the posts on Uranium C?
Hi Andrew…
That’s a tough question. I gather you think I should?
I’m still trying to wrap my head around it myself and I’m frankly concerned that it makes me look like a wacko. Plus UraniumC himself points out nobody is going to believe it anyway, so why bother? Indeed, this is the reason he’s so willing to share the story.
Add to that, I don’t have the time just now. But once my investing book is done and published, maybe I’ll turn my attention to it.
All that said, I am contiuning the converstaions with UC, if only because I’m hooked.
If you are interested, please subscribe to that blog. That’s where I’ll post more if and when the time comes.
Thanks for your interest!
JL:
My 4 boys are 20 to 24 years old, still in school, working on the side and saving and discovering your site and wise council and life plan ideas. My boys have first savings goals of $2000-$ 4000 which is held in the bank. They are always looking to buy, sell and trade to make a few bucks on stuff, but they are now asking me for reasonable investment ideas for $250-500 at a time in the market and I have no good advise. What do you suggest for their first minimum investments?
Thanks,
J.D.
Hi JD…
VTSMX https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT has a minimum starting investment of $3000. Sounds like your boys are very close to that.
Once they cross over the 10k threshold for the Admiral Shares version, VTSAX, Vanguard will automatically roll them into it.
I would also suggest your boys open these account as Roth IRAs so they can enjoy tax free growth and, when the time comes, withdrawals forever. Of course this limits the amount they can invest each year to their total earned income or $5500, whichever is smaller. So at $500 a month they’d be at $6000 and slightly over the limit.
No worries. Just save the excess in the bank until they hit 3k and have them open a second, regular, account in VTSMX.
This is exactly what our daughter has done.
But, before doing anything, be sure you and they take the time to read my stock series. The market can make you rich, but it is a wild ride most don’t expect. And that’s why most lose money. Be sure you and they won’t panic and sell during the drops.
Dear Mr. Collins,
I was watching a financial show, Truth About Money, on PBS yesterday, and it seemed to me they gave some very bad advice to a teenage investor. The teen had saved $1000 and put it into a target date fund. Ric Edelmen told him that the bond portion inherent in a target date fund was inappropriate and he recommended the teen find a mixture of large, small, growth, and international funds (maybe some more, I couldn’t find the episode online). He didn’t even mention costs, but that sounds like a recipe for ending up paying a lot of money for a very small chance at improved results. Though maybe I’m biased, so was wondering if you might have some opinion on investing for minors. I have a 14 year old son who has been pretty good at saving his allowance and gifts and had amassed a similar $1000 savings. It was just sitting in a checking account and I felt I either needed to tell him to start spending it or get it invested in something that should keep pace with inflation. My little research indicated there is not much option for low cost investing of $1000 and went with the same as the teenaged caller on the show. My son is invested in a Vanguard 2060 target date fund. Vanguard pretty much only allows target date funds for starting amounts less than $3k. Can you think of any reason to make it more complicated? There is very little bond exposure in a 2060 TD fund, so why would one want to work so hard to avoid a 10% or less bond hedge? And even if one would want to, is there a way for a teenager of modest means to do so?
I’m predisposed towards Vanguard, but the process to open an account was a bit frustrating. Since my son has no earned income, IRAs were out. He is also already pretty well funded for college, so was not looking to force him into a college savings account. UGMA also didn’t seem appropriate as the money was his, though some was gifts, it would be him who would be deciding how much and when to add money. I had seen hints online that it was possible to open a Vanguard custodial account that did not come under any of these umbrellas, but after submitting the application, and talking with a few representatives, I finally just consented to the use of a UGMA account, as they could not come up with any other option. He does seem content at this point to just let the money alone and see what happens with it, but I just worry about whether he might change his mind at some point and really want to spend the money on something. Luckily he’s already saved another $300, so it seems like the risk is small. Anyway, are you aware of better options for minors who have some money to invest, and parents who want to let them do it, that lets the minor keep their money. I understand the need for a custodian as a legal matter, but it doesn’t seem like the minor should have to completely give up the ability to get the money before they are 18, or maybe I’m misunderstanding a UGMA.
Really enjoy your blog. Maybe this is a little too outside your interest, but if not I’d like to hear your take on it.
Thanks,
John
Welcome John…
Glad you are enjoying the blog.
Sounds like Mr. Edelmen has gotten caught up in the details and lost track of the actual situation: a 14-year-old with $1000.
The short answer to your question: “Can you think of any reason to make it more complicated?” Is: “No.”
Technically, Mr. Edelman might be correct. But practically speaking the young investor would be hard pressed to find low cost funds in those categories that could be opened for around $250 each. Certainly not at Vanguard. Any performance advantage in avoiding the 10% bonds in the mix would be devoured by fees.
More importantly, he has missed one of the key tenants of this blog: Simplicity. And simplicity is something TRFs do exceedingly well:
https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
My advice for that caller, and for you and your son, would be to go ahead with the Vanguard 2060 TRF (VTTSX).
Truth is, if you are both so inclined, your son could stick with that one fund for the long haul and it will serve him well. In fact, that is the advice I would expect you to get most often.
Since I am a bit more aggressive and value the lowest possible costs, I’d:
—Start with VTTSX, .18% ER.
—Once the account reached the $3000 required for entry, switch to the total stock market index fund, first in VTSMX, .17 ER. This will be a taxable event, however the amounts are so low this should be a non-issue.
—Once the account hits 10k Vanguard will automatically roll it into VTSAX with an .05% ER. This is not a taxable event.
As for UGMA, technically these are accounts opened with money that is a gift to the minor. The account is in the minor’s name, with an adult custodian. But once in the account, the money is legally the minor’s.
What you probably wanted was:
“Custodial account for a minor. Establish an account in a minor’s name, administered by an adult custodian, where the investment amount is provided by the minor.”
From: https://personal.vanguard.com/us/whatweoffer/mutualfundinvesting/accounts
While I’m not certain of all the legal technicalities, I believe a minor must have an adult custodian for all investment accounts. It is just a matter of choosing which one.
Personally, now that you have the UGMA set up I wouldn’t worry about it. But if you want to, it should be easy to change.
My bigger concern is that your son might decide to spend this money. By definition, only long-term money should be in the market. This means, at least five years out. Should he decide to spend it during a market drop, he’ll suffer a loss. More importantly, this could well turn him away from the wealth building power the market offers over decades.
You might have him hold some of his cash until he is sure he won’t be spending it. Like all of us investors, he needs to understand this is long ball and his fund will go down at times. But now is the best time to learn these critical investing truths.
Good luck and congrats to your son on the fine start!
Hi Jim.
Big fan here. I’ve read all your posts at least twice, and re-read them on sleepless nights. They’re an inspiration!
I’m 39, single, with relatively good savings (compared to my expenses), and a good flexible job that I don’t hate, but wouldn’t mind stepping aside from for a bit. I don’t know whether to rebalance into something more conservative or continue saving into my currently Vanguard index heavy portfolio. Here are my details…
I’m unsure about my expenses, as I’m recently single, but I’ve always been relatively frugal (though not extreme :)). A good estimate would be $2500/month.
I make about 160k/year, though 25k of that is company stock vesting at 25% a year over the course of 4 years. I try not to count company stock vesting in more than 3 years in my portfolio, since I may or may not be around by then. Company stock is so small compared to the rest of my portfolio (7%) that I tend to lump it in the same boat as my Vanguard funds.
My portfolio is approximately as follows:
$ 60,000: Vanguard Limited Term Tax Exempt (I’m in a high tax bracket)
$ 74,000: Vanguard Total Bond (401k)
$676,000: Vanguard Total Stock Index
It’s actually a bit more complex than the above, since I have an old Vanguard S&P 500 index fund, company stock, and some of the $676k is in my 401k (but thanks to the 72t exemption, I’m not really worried about cashing in on my 401k before 59.5). Over 500k of everything is in a taxable account with Vanguard, so there’s enough to withdraw upon when the time comes.
The above adds to $810k, which would yield about $2,700/month given a 4% withdrawal rate, and is definitely under my monthly expenses.
I have no plans for retiring in the next 2 years, but I may (or may not) seriously consider it after 2 years, possibly 3. At 83% I’m quite stock heavy, but I figured that with $134,000 in short and medium term bonds, I have a good 4 years of expenses covered should a bad turn in the market come about. Heck, even with my short term bonds, I have almost 2 years of expenses covered (should my medium term bonds take a dive when interest rates rise again).
My question is the following… if I *may* retire in 3 years, should I start thinking of rebalancing into your 50/25/25 allocation strategy, or do I do this in the last year? Or is a 3-4 year somewhat cash “insurance” portfolio good enough?
I have a relatively good tolerance for volatility. The bulk of my savings came from 2008-2011, so I am no stranger to buying stock while everyone is cashing out their 401ks. However, back then, losing half was not something I’d cry about. Having progressed so much (thanks to the upswing), I can’t say I am battle hardened in the ways of losing half after having achieved FI (if I chose to take it).
It may be relevant to the discussion to say that part of the reason I still consider working is (a) I actually enjoy my job, though I could use a break for a bit (b) it’s very good money for something that gives me pleasure and structure (c) I may or may not start a relationship in the years to come and I’d probably like a bigger stash should expenses rise a bit.
I look forward to hearing your advice, and thanks so much for your posts.
Welcome FI-b-u….
and thanks for the very kind words.
What I read into your comment is that you are young and enjoying your job. You might leave it in a few years, but you might also stay. And if Mr. Market were to move against you and you had to stay, it would be OK.
This gives you tremendous flexibility and power. I’d use it to maximize your returns for an even bigger cushion when you do decide to hang it up.
The 50/25/25 allocation can wait until you actually retire. Your “3-4 year somewhat cash ‘insurance’ portfolio,” along with the job should have you nicely protected during a crash.
You say, “I can’t say I am battle hardened in the ways of losing half after having achieved FI.” This shows a lot of solid self-awareness.
All market investors have made money this year and since 2009. But what determines whether the stock market will make and keep you wealthy is what you do in times like 1987, 1999, 2007-09.
Hint: Nothing.
You need to burn into your brain that corrections, bear markets and crashes are all normal parts of the process. No one can predict them. But we can predict with certainty they pass and the market moves ever higher.
Not understanding this in your gut, as well as your head, is as far as I can see the only real risk you face.
You’ve put yourself in a great position. Well done!
Thank you so much for taking the time to respond to my inquiries. I can’t really ask these sensitive questions to my friends because none of them understand having FU money and the lifestyle that goes along with it.
I am definitely taking your advice and continue building up my stash in the total stock index fund. You have read me well. If the market were to take a turn against me, I wouldn’t mind working a year or two more. And if I have decided to step aside for a year or two while the market takes a down turn, my cash insurance gives me enough time to continue my adventures and return and get a job before having to draw upon my stock in a down market.
Thanks again.
My pleasure!
It is interesting that you say these are not subjects your personal circle can relate to.
At the Chautauqua without exception everybody had a wonderful time, most describing it as one of, if not the, best weeks of their lives.
They loved the place we stayed, seeing Ecuador, meeting and hanging out with us four bloggers. But the thing that they all said, to a person, really made it special was the chance to let their FU lifestyle hang out too.
https://jlcollinsnh.com/2013/09/17/chautauqua-2013-a-week-of-dreams/
Oh, one more thing.
It has always been a mystery to me if the 50/25/25 rebalancing should be done right on the verge of retirement, or gradually on the years leading up to retirement.
Was your advice to rebalance right at retirement because I personally like my job and have a good cash fund, or would it be the same for everyone? I’ve scanned through your previous posts, and I can’t find a definite answer.
Thanks again.
Not surprised that you haven’t found a definitive answer, I don’t remember writing one. 🙂
Personally, I did our 50/25/25 rebalancing about a year after retiring.
As I think about it, for most people I’d say do it when you retire.
But, for those who are retiring with the bare minimum they need, moving gradually into it over a few years is the less risky approach.
For somebody like you, with as well as you’ve covered your risks and with your flexibility, when you finally make the move should be fine.
Hi Jim,
Let me begin by expressing my appreciation for all the time and energy you have devoted to providing the content on this website. I discovered both the MMM and your website just a few weeks ago and there has been a bit of an obsession consuming all the valuable information provided. Great stuff!
Let me fill you in on my situation and I’ll pose a few questions where I would greatly value your thoughts and input. If you don’t have the opportunity to respond, I totally understand as I’m sure you receive quite a few of these messages. If nothing else, my questions may provide some ideas for some future articles.
My wife and I are in our late 40’s and we have two early teen year children. My current take home income after taxes and 401K deductions (max) is approximately $120K. Already a big fan of Vanguard, this is where we have all our savings/investments. However, our investments are spread over many mutual funds (combo of indexed and managed funds) as well as we own several stock purchases. I know what I need to do as far as re-allocation goes based on your series. I believe we have achieved Financial Independence based on the 4% Rule (but this is the source for some of my questions that follow) and I’m ready to step away from my current job into semi-retirement as I explore possible 2nd career opportunities and other valuable ways to spend my time doing things that I enjoy.
Current State:
Annual Spend: $70K
We’re actually closer to $65K but through a combination of cost cuts that I know we can make while also accounting for an increase in our health insurance costs as we move off employer provided coverage, I want to cautiously plan assuming an annual spend of $70K.
Savings:
Non-Retirement/Taxable Vanguard Accounts: $1.1 million
Retirement Vanguard Accounts: $900k
Total Savings: $2 million
Current Allocation is roughly 80% Stocks, 15% bonds, 5% cash
Additional Assets:
529 College Savings Plan for the kids – $250K (Note: Our State’s plan is run by Vanguard and has the lowest fees of any 529 Plan in the country)
Home Equity – $350K (still have about $150K left on our mortgage with 13 yrs remaining on our 15 yr loan @ 3.5%; $1400 monthly mortgage)
Questions:
1. Am I able to include our Retirement Savings as part of the overall Financial Independence (4 % Rule) calculation? Or should I only be taking into account my assets in the Non-Retirement/Taxable accounts? I have seen some conflicting views on this point. I’m 48 so I won’t be able to access my retirement accounts for another 11+ years. My thinking is that the Retirement funds continue to grow untouched while we live off the dividends and capital gains in the non-retirement/taxable account to cover our expenses in the interim. Make sense?
2. Should one typically include their Home Equity as part of the 4% equation? I haven’t been and view it more as a surplus for the future if/when required.
3. With our home equity, does it still make sense to also invest in the Vanguard REIT index if for no other reason than diversification of Real-Estate ownership?
4. In doing the re-allocation of my many mutual funds to the select few index funds in my non-retirement account, will the capital gains on those funds that are moved to another fund be subject to Taxes? My understanding is yes which could have some bearing on when and how swiftly I do the re-allocation as I believe I could end up paying dearly in taxes.
5. Should I go with the suggested 50/25/25 allocations in both the Taxable and Retirement accounts or would you suggest that I place my investments in the Vanguard REIT Index and Vanguard Total Bond Index in the Retirement Accounts only? (I seem to recall you making this suggestion elsewhere)
I’m close to being ready to pull the trigger on semi-retirement and financial freedom but need to have my ducks in a row to help get my wife totally on board and comfortable with some aspects. I know more pay-checks will be in my future. I don’t know when, I don’t know what I’ll be doing and how much I’ll be doing it (full time vs. part time) but I want it to be on my terms. I haven’t experienced much work joy in my 25+ years of employment to date. Thanks again for sharing your experiences and wisdom and for considering my questions.
Hi EmJay…
Thanks for the kind words and the great questions.
I’ve decided to make this a Case Study post and should have it up soon.
That sounds great, Jim! I look forward to your comments and insights as well as any constructive feedback is warmly welcome. Thanks again.
Also, let me know if you desire any additional information to help fill in some holes in my story. My original message was already longer than I wanted it to be so there may be some information gaps of interest.
Thanks EmJay…
It seems complete to me and enough for me to work with. The post will focus on the 4% questions and asset allocations.
But if there is something more….
and here’s the post: https://jlcollinsnh.com/2013/11/12/case-study-4-using-the-4-rule-and-asset-allocations/
Jim, I’m getting close to retirement. I’ve been thinking about the 4% safe withdrawal rate, and how to implement it. This is what I have come up with:
Start of program – withdraw 4 percent of total investments to Current Checking. From the remaining investments, move 12% of my money to a Current Savings account, and leave 88% invested using Betterment. Keeping 12% of my portfolio in Cash Savings will allow for up to 3 losing investment years before I have to make withdrawals from investments.
Each year going forward, move 4% from investments to my Current Savings account, unless investments have had a net losing year. Then move one years portion from Current Savings to Current Checking (this may be 1/3, 1/2 or all of Current Savings depending on whether it contains 3, 2, or 1 years worth of 4% withdrawals from investments).
If Current Savings is down a year or two or three, replenish in even year increments depending on the current year investment gains:
Gains 0.00 to 7.99 percent – no replenishment.
Gains 8.00 to 11.99 percent – can replenish one year (4% of investments)
Gains 12.00 to 15.99 percent – can replenish two years (8% of investments)
Gains 16+ percent – can replenish 3 missing years (12% of investments)
Investments will be at Betterment, using a ratio of 75% stocks, 25% bonds.I’ll have two accounts, an IRA and a Cash investments account. Until I reach 70 1/2, make withdrawals from the Cash investments account to avoid taxes. After 70 1/2, make the RMD required minimum distribution from the IRA account, and if that’s less than the 4 percent needed, take the rest from the Cash investment account. If the RMD is more than the 4 percent needed, move 4 percent to Current Savings, set aside an amount for taxes in a cash taxes account, and move the rest to the Cash investment account.
Edit the above third paragraph to read
Each year going forward, move 4% from investments to my Current Savings account, unless investments have had a net losing year, then move nothing. Then move one years portion from Current Savings to Current Checking (this may be 1/4, 1/3, 1/2 or all of Current Savings depending on whether it contains 4, 3, 2, or 1 years worth of 4% withdrawals from investments). Exception – if Current Savings is zero, and investments have had another losing year, move 4 percent from investments to Current Checking.
Hi Kenneth…
Very interesting and much like what I propose at the end of this post:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
What I haven’t been able to work out is the replenishment after down years and I don’t quite understand your strategy.
Looking at the 2007-8 crash you would have 3 down years and will have depleted your 12% cash reserve using 4% each year.
Now the market begins to turn up again, but your 88% stash is at a low point. Plus now you have to draw both the 4% for living and something to begin rebuilding the 12%. Seems a lot to ask of a diminished stash before it has a chance to recover.
What am I missing?
Also, I’m very interested in hearing more about why you plan to use Betterment. As you may have noticed I’ve accepted them as an advertiser and I am in the process of evaluating them for a future post.
I’d be especially interested in why/how you feel secure in turning your money over to them.
Don’t read this as a criticism or a warning. I simply just don’t yet understand what prevents them from becoming a “Madoff” and am trying to learn.
I have tried other sites but no one wants to give me an answer….
I teach….have a 403b through FTJ Fundchoice. About $21,000 dollars invested in
–Vanguard Total Bond
–Fidelity Int. Discovery
–Vanguard Small Cap Growth
–Fidelity Spartan 500
I put about $200 dollars a month in these 30% in three and 10% in VTB.
Anyhow the company charges a Administrative fee of $25.00 dollars a year and I am getting charged a management fee monthly of about $30.00 (depends on how much I have in my 403b).
Is it just me or does that management fee seem outrageous. I have a representative but he doesn’t do anything since I am the one picking and choosing the funds. Can I move this 403B over to Vanguard without getting hammered?? Or is the $30.00 management fee justified and I should just sit pretty.
Love the website…stock series is simple to understand.
Thanks in advance
C
Welcome Charlie…
…glad you like the site.
401k and 403b plans have indeed become a cesspool of excessive fees. In fact I’ve devoted an entire post to this:
https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
The bottom line is that as aggravating as these fees are, the tax advantages still make the plans a worthwhile choice. For what it is worth, the fees you describe are not the worst I’ve seen. Plus it looks like your plan offers and you have chosen some fine funds.
As long as you have the job, your money needs to remain in the plan. Once you leave you can, and should, roll it into Vanguard.
Hope this helps!
Hi Mr Collins, I’m a 26 year old from South Africa and complete investing newbie.
Basically, I’ve had extra money throughout university which I’ve been investing for the past two years. SA has no index funds from what I can tell (unless I’m searching incorrectly).
So I’ve been putting a monthly amount into an actively managed equity fund and two different ETFs. ETFs work out cheaper than actively managed funds in SA. I know past performance doesn’t gaurentee future performance etc.
Some actively managed funds in SA (incl my equity fund) outperform some ETFs including both of mine. However, you emphasis expenses are a lot so I’m thinking of switching things around.
I know it’s only been two years but should I still keep my actively managed fund? What about switching to a better performing ETF from the ones I currently hold?
Is two years too soon/long to be switching things up? Would I be correct in making the switch based on lower expenses despite better performance?
Hope this makes sense. Thank you for your time
Welcome Mbali…
…always nice to have another “flower” here.
Congratulations on beginning your financial journey.
While I am unfamiliar with investing in SA, I would be surprised if index funds have not reached the investing world there. Perhaps they are the ETFs you hold?
Your question is a very insightful one.
Jack Bogle, the guy who created index funds, once said: “performance comes and goes, expenses are forever.”
It is not uncommon for actively managed funds to outperform the index in any given year or two. But to make them superior to the index, these managers have to perform this trick for decades. Almost none do. Plus, there is simply no way to tell which one will beat the odds until the race is run.
Add to this then fact that even if you were able to find this rare person, they might will move on, change jobs, retire, cash out or otherwise step away from the game. You’d then have to try to find another and incur the tax hit of selling out.
Meanwhile, the higher expenses are always there to put a drag on your returns. And the power of compounding makes this drag huge even with seemingly small expense percentages.
It is hard for me to say move to the ETFs as I don’t know what they are. If they are simply other actively managed funds there’d be no point.
But I can say you want to move to low cost funds. And the lowest cost funds are index funds.
There is an international investing community in the comments of this post:
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
Perhaps you should post a comment there asking if there are any other SA readers who might point you to index funds where you are.
Good luck!
Hi Jim,
I feel like I’m standing on third base and ready to come home. I’d appreciate any feedback you may have on my situation.
First, let me say thanks for all you do here on the site. I enjoy your perspective and the generosity you extend to your readers and commenters. I’ve had a chance to read many of your posts and I found them to provide a “wealth” of valuable information.
My first visit here was sometime in the spring. At the time I was worried about losing my job, and that fear was (literally) keeping me up through the night. Looking to get a handle on my finances, I came across your blog, among others, and I learned that I wasn’t in such bad shape after all. I had thought I would work another six or eight years, but then I decided I’d get out in four — i.e., work till the mortgage is paid, then go. That’s been my plan until this past week.
My company just announced a pension buyout, an offer I find hard to refuse. I plan to make (or confirm, really) my decision over Thanksgiving. Meanwhile, if you have any helpful guidance, I’d love to hear it.
Let me give you our numbers. Btw, there are three of us: me (just turned 56), my wife (48), and my son (about to be 8).
My retirement and savings accounts come to $897,000.
401(k): $743,000
Roth IRA: $7,000
Investment account: $121,000
Savings accounts: $26,000
My wife’s retirement accounts are a shade over $300,000, plus one annuity with $50,000.
Other than that, we have one 529 account with a balance of $18,000.
The pension buyout is a lump sum offer of $524,000 for leaving the payroll by the end of the year. I’d give up any future pension annuity. (If I were to do a regular retirement right now, I’d be getting a lump sum of $175,000 plus $1,452 per month. If I were to stick to my four-year plan, I’d retire right after turning 60 with a lump sum of $175,000 plus $2,480 per month.)
Here’s the real estate rundown:
House (residence): $625,000 (Zillow) – $137,000 (mortgage balance) = $488,000 (equity)
Condo (rental): $400,000 (Z) – $16,000 (m) = $384,000 (equity)
Our expenses the past twelve months round up to $65,000. That covers everything except the house mortgage (additional $3200 per month, or $38,400 per year) and all condo expenses, which are covered by rental income out of a separate account. (We get all our health and dental through my wife’s coverage at work.)
If I leave, I say goodbye to my paycheck. I grossed an average of $139,000 the past five years (much going to savings: $23,000 to 401k, ~$6,000 company match, and $18,000 to other accounts).
Income we’ll still have includes my wife’s pay, about $70,000 gross, with $17,500 going to her 403(b), leaving about $45,000 after taxes. Once the condo mortgage is paid, we’ll clear at least $12,000 per year rental income after expenses and taxes.
So the gap we’ll have for the short term is about $8,000 per year, plus mortgage payments. We also plan to have some work done on the house in 2014, perhaps another $10,000 to $15,000.
Future income includes my Social Security and my wife’s pension (she expects to work another 12 to 15 years, though that could change).
Biggest longer-term expense will be my son’s college education, starting in 11 years.
If I may, let me ask a few questions:
1. Is there any good reason not to go? I am so done with the job but I don’t want to leave unless I’m pretty sure I’ll never have to go back to corporate work, or really to any job where I’m doing it for the pay. I have things I want to do, things I’ve put aside for many years, though I don’t know if I’ll ever make a dime from any of it. I want to give it some time knowing it’s okay if I do it and I don’t make money.
2. What to do with the mortgage on the house? That had been my goal — get it paid off before leaving. Soon I could be able to pay it off at once, but my default position right now is to continue to pay over four years. Some options: pay $3200 per month until Nov 2017 (interest: $14,140), or pay minimum of $1970 per month until Nov 2020 (interest: $25,600). Rate is 5.125%. Faster payoff may mean additional taxes on drawdown, and some lost opportunity cost. On the other hand, I can eliminate the interest expense and gain the satisfaction of being done with it earlier.
3. When to start Social Security? Last I had checked, estimates were: Age 62: $1800 per month ($21,600 per year); Age 66.5: $2579 per month ($30,948 per year); Age 70: $3316 month ($39,792 per year). I realize there’s an advantage to waiting, except in my case my under-18 son will be eligible for 4 years of benefits through his high school years (~50% of my benefit, as far as I know). I don’t know if there’s a way for him to get that if I delay my benefits, but I wouldn’t want to leave about $40,000 on the table (a nice addition to the college fund).
4. Life insurance? My company covers about $180K on each of us right now, and I could extend that or bump it up for my wife, if needed. But is there any need for it?
I could go on with questions about roll-overs, investment options, etc., but I feel that I’ve asked plenty already. And I imagine your recommendations include Vanguard and staying away from annuities.
One note before I go, for anyone curious. The usual advice for retirement planning is to start early. Which I did. But I had some setbacks in my thirties, went through all my savings and went into the hole. At age 40 I was single, living in a one-bedroom apartment, and just getting back to zero net worth. Everything else has come since. The lesson, I guess, is that if you’re young and do it right, you can reach FI much earlier than I have, or if you’re older and haven’t started yet, it’s not too late.
Thanks very much for listening!
John
Hi John…
Glad you found your way here and thanks for the kind words. As for your situation let start by saying: Welcome Home!
Before we begin, let me say this would have made a great Case Study post (https://jlcollinsnh.com/category/case-studies/), and it may yet be one. But I’ve already done two back-to-back and have another in the queue, so it would be a couple of months out. Since you have decisions to make over Thanksgiving, let’s look at your questions here and now.
As you already know, you’ve put yourself in a very strong position to consider some attractive options. All the more impressive in that 16 years ago you were broke and on the ropes.
What I see here is:
–1.2 million in investments
–872k in home and condo equity
–524 pension buyout
–Total of ~2.6 million. At 4% withdrawal that’s ~104k in annual income.
Add to this whatever income the annuity pays out and your wife’s 70k in annual earnings. Plus you and she both, based on your incomes, should have 40-60k+ in annual Social Security when the time comes and depending on when you take it.
Against this you have 65k in annual expenses, plus 38k in mortgage payments = 103k.
You have only good choices here. 🙂
Ok, Let’s look at your questions:
1. Is there any good reason not to go? I am so done with the job but I don’t want to leave unless I’m pretty sure I’ll never have to go back to corporate work, or really to any job where I’m doing it for the pay. I have things I want to do, things I’ve put aside for many years, though I don’t know if I’ll ever make a dime from any of it. I want to give it some time knowing it’s okay if I do it and I don’t make money.
jlc: Nope. You can go when ever you please, and it sounds like the time has come. Of course, you will be leaving money on the table.
At the end of four more years you’d get the 175k plus an annual pension of $29,760. It would take about 744k at 4% to provide that. Plus research does indicate that people with pensions feel happier and more secure than those retired on their own investments. Take that for what it is worth.
In addition you’d have four more years of income at 139k.
Clearly, you’d be money ahead waiting. But against that you have to balance the one irreplaceable asset you have: Your time.
And, of course, if you were worried about losing this job in the Spring it might pay to be cautious in assuming it will last the four years.
Only you can decide, but I can tell you: You can afford to go with your heart.
2. What to do with the mortgage on the house? That had been my goal — get it paid off before leaving. Soon I could be able to pay it off at once, but my default position right now is to continue to pay over four years. Some options: pay $3200 per month until Nov 2017 (interest: $14,140), or pay minimum of $1970 per month until Nov 2020 (interest: $25,600). Rate is 5.125%. Faster payoff may mean additional taxes on drawdown, and some lost opportunity cost. On the other hand, I can eliminate the interest expense and gain the satisfaction of being done with it earlier.
jlc: Here again you can afford to go with your heart.
I tend to recommend keeping mortgages with rate 5% or less and yours is right on that line. My sense is that you’d like to be just done with it. If so, go ahead.
That’s what I did a few years back and my rate was lower than yours. Financially, I should have kept it. But the satisfaction of being rid of it and the increased simplicity in my life made dumping it worth it to me.
3. When to start Social Security? Last I had checked, estimates were: Age 62: $1800 per month ($21,600 per year); Age 66.5: $2579 per month ($30,948 per year); Age 70: $3316 month ($39,792 per year). I realize there’s an advantage to waiting, except in my case my under-18 son will be eligible for 4 years of benefits through his high school years (~50% of my benefit, as far as I know). I don’t know if there’s a way for him to get that if I delay my benefits, but I wouldn’t want to leave about $40,000 on the table (a nice addition to the college fund).
jlc: Deciding when to take SS is a matter of figuring out when you and your wife are going to die. The longer you live the better off delaying you are.
The other consideration is that since your income has been larger, your benefit will be larger than your wife’s.
Since she is also younger than you, and since women tend to live longer than men, (unless there are individual health issues) the odds are you’ll go first. When that happens she’ll be able to step up to your larger benefit.
Finally, you have plenty to cover your expenses and can easily afford to delay.
Your situation is very similar to our own. Our plan is for my wife to take hers at 66 and I’ll wait till 70. Not only is that what I’d suggest for you, it’s my very own plan. 🙂
As for your son, I’m not sure I quite understand the question. But if you are referring to survivor benefits to him if you die while he is still a minor, you don’t have to be taking SS at the time for him to get them.
4. Life insurance? My company covers about $180K on each of us right now, and I could extend that or bump it up for my wife, if needed. But is there any need for it?
jlc: Skip it. Life insurance is an awful product that should only be bought as a last resort.
Unfortunately this usually means by someone with big lifestyle they can barely support and with no assets to carry the load if they die. That is, those who can also least afford it.
This is not you, and kudos for it.
John: I could go on with questions about roll-overs, investment options, etc., but I feel that I’ve asked plenty already. And I imagine your recommendations include Vanguard and staying away from annuities.
jlc: Yep, and the blog is filled with info on those!
Last, thanks for your words of encouragement to others. There is a lot of talk about the advantages of starting investing early and the power of compound interest that drives impressive results for those that do. That is certainly true and the sooner one starts the easier this all becomes.
But as your story shows, amazing things can be pulled together in short time frames with a bit of discipline and work.
Well done!
Jim,
It was great to read your reply. Thanks for your insights and taking the time to answer my questions.
I’ll skip the life insurance, and I’ll probably pay the mortgage over a few years.
I may not have been clear about the Social Security question in regard to my son. Family benefits are available to unmarried children under 18 (or 19, if still in high school) if a parent is retired and eligible for SS. More info here (pdf):
http://www.socialsecurity.gov/pubs/EN-05-10085.pdf
The same month I turn 62, my son will turn 14. That leaves 4.5 years (thru h.s. graduation) for him to be eligible for his own SS benefit. He’ll get 50% of the benefit I’ll get ($21,600). That’s $10,800 per year X 4.5 years = $48,600.
I was hoping that I might be able to delay my benefit while he would receive his. But I spoke to the SSA today and that’s not the way it works. I will need to begin receiving my benefits for him to get anything. Once he graduates h.s., he’ll stop getting benefits and I’ll continue receiving mine at the level I began at age 62.
Though I’ll be locked into a lower rate — and my wife, assuming she survives me — over our lifetimes we’ll likely get a better SS payout by starting when I turn 62 and getting the child benefit for my son. And that ~$48K will help a lot with college expenses. Not a decision I need to make for another 6 years, but that’s how it looks now.
Regarding the job: even though I will be leaving money on the table, as you said, it’s likely I will take the offer. I probably could survive another four years, but why try? It’s more and more a battle to get my work done, and the more I have to fight to keep the job, the less it becomes a job worth fighting for. For my health, my happiness, and my family, I’m ready to go.
My dad worked till his mid-60s. The last few years were a grind and they weren’t worth it: 13 months after he retired he got cancer. At some point it sinks in that we only have so much time. Better to live it as best we can. If he were around now, I know what he’d recommend I do.
Thanks again, Jim. This has been very helpful.
My pleasure John…
and I learned something new as well.
I had no idea children under 18 could receive benefits just because one parent is retired. Amazing, and in your case it certainly tips the plan toward taking your benefit at 62.
As for slogging away at the job for a few more years, as you said, in your financial position: “Why try? …we only have so much time. Better to live it as best we can.” 🙂
Enjoy!
I hope this question hasn’t been asked before; I’ve tried to find the answer but have had no luck. It is just hard to sift through the wealth of information available on this site!
I’m new to the Vanguard game this year (thanks for pointing me in the right direction) but have some old investments in mutual funds with high expense ratios.
My question is this:
Would it be worthwhile to move my old investments over to VTSAX immediately, and thus pay taxes on the capital gains, or should I leave them there and just buy VTSAX going forward?
Or to be really terse,
What should I do with my old investments?
If this cannot be answered generically, here are some specifics:
+ I have around $60,000 I want to move over, which have around $15,000 in long term capital gains.
+ I’m in the 15% tax bracket right now, and these gains won’t move me into the next tax bracket.
+ I don’t quite understand it, but my tax person says I’d probably have to pay $3,000 dollars in tax on these gains.
So should I spend $3,000 dollars to have all my investments in VTSAX? This is what I’d prefer (and what my gut says to do), but I don’t want to be making a dumb mistake as I switch to this new investment strategy.
Thank you for taking the time to answer so many questions and to write so much useful and life changing stuff (at least you’ve helped completely change my attitude towards money–well, you and YNAB)! No worries if you can’t answer, this site is becoming quite popular, I’d understand!
Hi Benjamin…
Welcome and thanks for the attaboys!
Tough question.
It is always bad to see $3000 disappear. You lose not only that money, but everything it would have earned for you over the decades. But then again, high fees are a killer over time.
The answer depends on just how ugly those old investment are.
If you are in..
1. some high cost actively managed fund that will likely underperform and will definitely drain your account with fees, I’d bite the bullet and move it. Sounds like this might be the case?
2. a broad based, low cost index fund that happens to be with another firm, definitely leave it alone.
The closer to #1 the more worthwhile it is to sell.
The closer to #2 the more worthwhile it is to hold.
Remember, too, that over time that 60k will become a smaller part of your portfolio.
Hope this helps and let us know what you decide!
Hmmm… well, I’ll guess I’ll have to think about it some more.
They are actively managed mutual funds, and have an average expense ratio that is .81% higher than Vanguard’s. By my calculations (using the compounding interest calculator you mentioned above), that means my portfolio with these actively managed funds has to outperform Vanguard (VTSAX) by at least .6% on average over the next 30 years to make keeping my money there worthwhile.
Now, according to MorningStar, my portfolio over the last 15 years has been in the same ballpark as Vanguard (VTSAX), with a few of the funds even beating Vanguard by around .6%.
So, I guess I have to decide if I think these funds can keep doing that for another 30 years. At the very least, that seems like a difficult task for this other portfolio!
Thanks for the help!
Hi Mr. Collins,
I’m wondering if Benjamin can use ROTH IRA to help. He didn’t mention if he already had a ROTH account, but let’s assume he does (since he’s in the 15% tax bracket and seems very smart with his finances).
Then, he should be able to move $5500 worth of those high-fee funds over into the ROTH every year he’s qualified for ROTH. Once the funds are in ROTH, he can exchange them into other funds, and capital gains in ROTH are tax-free. His $60k would take roughly 10 years to convert into ROTH, but that still beats paying $3000 in taxes.
The only other thing I can think of is if he has any money-losing stocks or funds in non-retirement accounts. If so, he can use capital loss harvesting written so well by Mad Fientist.
I’d love to hear what you and other readers think. Thanks!
Brilliant idea, Jian!
Ben,
The way you’d do this is simply use these funds as the source for your $5500 annual Roth contributions.
Simply have the existing fund convert $5500 worth of shares into a Roth. It will still be the same fund so you haven’t sold anything so, no taxable event.
Once in the Roth you can easily switch to VTSAX and, since in the Roth there is no capital gains tax to pay, you are home free.
As Jian points out, this will take a while with 60k, but it gets you there and it is what I’d do.
He is also correct that if you have any investments that are showing a loss you can sell those to offset the gains from selling the high fee funds.
However, when harvesting tax losses this way remember that the first $3000 in losses you can use to offset ordinary income.
So, if you have 15k in gains you’d want 18k in losses to fully offset.
I also second Jian’s recommendation of the Mad Fientist. MF has really posted some great stuff and his is one of my two favorite blogs. Check it out if you haven’t already. This one is a good place to start:
http://www.madfientist.com/traditional-ira-vs-roth-ira/
That’s a great idea! And since I’m married, we’d have $11,000 we can convert over each year I assume. That will help speed things up considerably. Then the money I was putting in my Roth will now go directly towards maxing out my SEP IRA. Then hopefully at some point in the next 5 or so years, the market will tank and I can sell all of them for a loss, wash my hands of these other funds, and buy VTSAX at a sharply discounted rate! 😉
Mr. Collins,
Thanks so much for seconding my comments earlier. You just made my day 😀 !
Ben,
You got me on the 15% tax bracket and perhaps not having to pay long-term capital gain thought! In fact I’m personally interested in the answer to this one, as I plan to be in the same bracket this year, and if it’s true we won’t need to pay capital gains taxes, I want to sell some stocks myself!
I’ll call IRS hotline and ask them. You can do the same. Then we’ll compare notes.
I know IRS hotline is excellent source of information due to unfortunate personal mishap! With too much time on hand recently, I made the mistake of contributing to ROTH; mistake because I have no “earned income” this year thus do not qualify for ROTH contribution. So there’s some hoops to jump through to remove the contribution. But I called IRS and their rep was excellent!! After all’s done, I might have come out better, because I was able to swap out some lame stocks from my ROTH, and will be able to sell them for capital loss harvesting next year when I will make “earned income”! That’s how we turn minor catastrophes into little triumphs here at Mr. Collins’ blog. 🙂
I may have figured out the answer.
(and for those reading along on the website, I asked the question that Jian is referring to in my last comment, but then found the answer almost immediately in an article I was in the process of linking to, so I removed the question so as not to look dumb. I should have just left it! sorry!
I was confused about why I was having to pay any taxes at all. Since my tax bracket is 15%, my long term capital gains tax rate is 0%. So why would I have to pay any taxes on these gains?)
But, in reading about it on the Motley Fool website here, and then more on the Tax Foundation website here, it looks like the reason I’d have to pay taxes even though my long term capital gains tax rate is zero, is because that tax rate is for federal taxes. I’d still have to pay tax on the gains on a state level. And unfortunately, my state is one of the states with a higher Long-term State Capital Gains Rate.
Maybe I’ll move to one of the states with a 0% long term capital gains tax rate next year!
Unfortunately, what I’m finding out after researching converting my old investments to a Roth IRA over time, is that Roth IRA contributions have to be cash.
It says so here:
http://www.investopedia.com/university/retirementplans/rothira/rothira2.asp
And here:
http://www.businessmanagementdaily.com/23176/no-roth-ira-transfer-of-mutual-funds#_
Am I misunderstanding this?
Oh no! So sorry I was wrong about that. I called Vanguard and they confirmed your findings:
1. New contributions to ROTH have to be in cash.
2. Only exception is with IRA rollovers (regular IRAs to ROTH or another ROTH account to ROTH), when we are allowed to move investment holdings into ROTH.
Again, my bad! Thanks for doing diligent research and sharing your findings.
What do you think about a Dividend retirement strategy?
Where you hold dividend stocks, and live off dividends only?
If you never sell your capital, the stocks, then you can’t run out of money.
The problem would be in stock selection, how do you diversify enough against a sector meltdown in finance or energy, and choose reliable stocks. I like the Morningstar Dividend newsletter, it focuses on boring stocks with wide moats of economic protection.
I think you would have to accept that you are not trying to beat the S&P 500, but are just investing in real companies that give you a certain income. And that you don’t care of what Wall Street values them at, you care about what income they are producing. It’s like if you own a rental house that pays $2000/month, you don’t care if real estate valuations plummet, as long as you continue to get paid $2000/month.
For someone who is concerned about the market dropping, investing in these well known stocks could reduce their worry. Who wouldn’t feel better about investing in Proctor & Gamble vs Tesla?
And if you can weather the valuation fluctuations by focusing on income, then you could put more of your money to work and eliminate your bond holdings. Many of these dividend stocks are called bond substitutes for a reason!
They may grow slower than the market as a whole, but if they even out your growth, it will make you feel safer to retire early, and give you a specific income to spend.
Nevermind, I see you’ve been over this before, and agree with the smoothing of income, and less growth with dividends.
https://jlcollinsnh.com/2011/12/27/dividend-growth-investing/
Welcome Joe…
Ha! That’s exactly where I was going to point you.
In short, fans of the Dividend Stock approach like the idea of not having to sell any shares and living on the dividends. They liken it to owning fruit trees and enjoying the harvest.
And that certainly has some psychological appeal. But it also carries many short coming as I outline in that post.
Using that same tree analogy, the approach I prefer and describe on this blog is also like owning trees that bear fruit. But they grow vigorously enough that I can harvest some of the timber as well.
I really have enjoyed your blog. I have recently gobbled it up. I have a couple of questions that I would greatly appreciate your knowledge. Overall what is your opinion about using an S&P 500 low cost index funds?
When you rollover a 401k isn’t there an advantage of buying VTI vs VTSMX (if you have less than 10,000 than VTSAX is out of the question) as far as expense ratios and fees? I would not be trading the VTI (just holding) so I don’t believe any other fees would be charged. Am I missing something?
Thanks
Thanks David…
glad you are enjoying it!
S&P 500 Index funds are just fine. I prefer Total Stock Market Index Funds for the broader coverage in mid and small cap companies. Over time, this helps it outperform but the difference is slight and there are years when the S&P 500 does better.
As long as you aren’t paying fees to buy and sell the shares in VTI, your thinking is sound. The ER is the same as VTSAX as is the portfolio.
Mr. Collins,
Thanks so much for seconding my comments earlier. You just made my day :D!
Ben,
You got me on the 15% tax bracket and perhaps not having to pay long-term capital gain thought! In fact I’m personally interested in the answer to this one, as I plan to be in the same bracket this year, and if it’s true we won’t need to pay capital gains taxes, I want to sell some stocks myself!
I’ll call IRS hotline and ask them. You can do the same. Then we’ll compare notes.
I know IRS hotline is excellent source of information due to unfortunate personal mishap! With too much time on hand recently, I made the mistake of contributing to ROTH; mistake because I have no “earned income” this year thus do not qualify for ROTH contribution. So there’s some hoops to jump through to remove the contribution. But I called IRS and their rep was excellent!! After all’s done, I might have come out better, because I was able to swap out some lame stocks from my ROTH, and will be able to sell them for capital loss harvesting next year when I will make “earned income”! That’s how we turn minor catastrophes into little triumphs here at Mr. Collins’ blog. 🙂
Hey Jim,
Love the site. I have been a long time MMM reader and came over on his post of your stock series.
I have just a quick question. I’m lucky enough to have a few Vanguard options in my employer 401k, VINIX, VSGIX, and VBTIX. I have read most of your posts on stocks and was debating an allocation utilizing VINIX (very similar to VTSAX) and VSGIX, a small cap fund. Since I’m young, 24, I figured I could utilize the higher growth potential that are in small caps. I was playing around with a 70/30, Large/Small allocation.
What do you think? Is the extra potential growth in small cap worth it? I have quite a few years to ride out the volatility.
Thanks in advance for the input and keep up the good work here!
Jim, I was going to send you the following link just out of interest but, as it happens, it might also be a partial answer for Adam’s question. I wanted to learn more about the CRSP US Equity index, which VTSAX now tracks. This is the third index Vanguard has tracked for this fund since I started investing in it and I was a bit nervous that they keep changing it. After reading page 8 of the following I feel better because it doesn’t seem that much has changed from the original weighting of the Wiltshire 5,000:. http://www.crsp.com/files/Equity-Indexes-Methodology-Guide_0.pdf
Large caps make up 70% of the index, mid caps 15%, small caps 13% and micro caps 2%. So that’s a pretty healthy helping of small and medium companies and I see no reason for Adam (or me) to add more, i.e. the index is already essentially based on the 70/30 ratio Adam suggested.
Hi Adam…
As Mark A outlined for you, with a total stock market fund like VTSAX you are already getting mid and small caps stocks. This is the reason I prefer it over an S&P 500 index fund that focuses on the large caps.
Over long periods of time, small caps tend to out perform their larger brothers. But, as your comment indicates you know, they provide an even wilder ride.
If you add small cap VSGIX to total stock VINIX it has the effect of doubling up on your small cap allocation. This is a more aggressive allocation.
As long as you understand all this and have the stomach for the risk and ride when the next bear comes, I have no problem with it.
Good luck!
Hi Jim,
I’m wondering what your opinion is on how to pay back student loans.
I’m 32, and I work as a contract attorney (freelance), so my yearly income varies. Last year it was about $85k, but it’ll probably be about $75k this year.
When I graduated from law school in 2008, I had a hard time making my student loan payments, because work was hard to come by, so the bank allowed me to do the income-contingent payment plan for the big loan. The deal is that I make the minimum payment each month and in 25 years the loan is forgiven. So I’ve been making the minimum payments for the past couple of years, while trying to save money as well. Now that I have a bit of money saved, I’m wondering whether I should start paying the loan down more aggressively or keep making the minimum loan payments while investing.
Here are the details:
– The big income-contingent loan is $167k, at 7.25% interest. The minimum payment on it is like $500/month, but I’ve been paying about $1k/month to cover all the interest. Otherwise the total grows, and I’m worried that in 25 years (if it takes that long) when the loan is forgiven, that amount would be taxable income, and I’d have a huge tax bill on way more than $167k.
– There’s also another student loan that’s $27k at 3.62% interest, with minimum payments of $180/month.
Assets:
– Cash (savings and checking accounts): $35k
– Roth IRA (Vanguard 20xx fund): $12k
– Brokerage (ETFs): $2k
Expenses
– $2900/mth (including $1200 in student loan payments)
After expenses, I have about $2k extra each month to either invest or pay more towards my loans. I have no other debts.
Obviously, $35k is too much to have sitting in checking/savings accounts for how much my total assets are, so I was thinking of putting maybe $10k into ETF total market funds or just a normal IRA. But maybe it’s better to put that into my big loan. The math is tricky to me, because no matter what I pay into the big loan, it would all be forgiven in like 2036. Do you think just making the minimum payments each month until the loans are paid/forgiven is the way to go, or should I pay them down more aggressively, instead of investing my extra money each month?
Interested to hear your thoughts.
Thanks,
David
Hi,
I heard on NPR that lots of jobs in government and non-profit organizations can get student loans forgiven, if people work there for a number of years. I don’t remember any details, but you might want to check that out. Good luck!
Hi David…
Wow! That is an interesting scenario and it introduces a subject about which I know very little (student loans) and something I’ve never heard of: The loan forgiveness after 25 years.
Hopefully one of the readers here will weigh in with some insights and suggestions.
$167k, at 7.25% interest is a huge debt at a huge interest rate. At the $500 per month minimum at the end of 25 years you will have paid $150,000 and your balance will be still higher then than now.
If you are right that you will owe tax on the forgiven balance, and that makes sense, it will be a large bill. But since taxes are some fraction of the total, perhaps not as bad as you fear.
Still, if you remain unable to pay it, you now are in debt to the IRS. So, not an ideal situation by any stretch.
Then there is the ethical issue of paying back money you borrow.
Were it me, I’d:
1. Keep paying the $180 minimum on the $27k at 3.62% interest.
2. Delay my investing.
3. Go ahead and keep the investments you have, but
4. Take 30k of your cash and put it toward that debt.
5. Keep 5k as an emergency fund
6. Cut my expenses to the bone.
7 . Put every spare dime into grinding down that 167k ASAP
8. Once the 167k is gone I shift that monthly loan payment money to investments. At that pace they’ll grow as fast as the debt goes away.
It sounds like your expenses are $1700 per month ($2900 – $1200) or $20400 per year.
That leaves you almost 55k. Figure after the standard deduction and your personal exemption you will pay ~5k in income taxes, an admittedly very rough estimate, and you have 50k left to service the debt.
You should be done with it in less than 4 years. You’ll be 36, have a great minimum lifestyle/investing habit and be on the verge of explosively increasing your net worth.
For an example of what can be accomplished, check out my conversation with John in the comments above. He started flat broke at 40.
Good luck and keep us posted!
Help…I don’t want my parents moving in with me because of their investment ignorance!
My parents began investing during the last few years of their working careers and now that my father, the bread-winner of the family, took the first opportunity at early retirement to claim his reduced pension, they find that they need to withdraw $1k/mo of their measly $82k nest egg. As I am beginning to pry further into their situation, I have discovered this financial situation:
Current Age of Parents: 57
Nest Egg Sum: ~$82k
Investments: HBLAX (Hartford Balanced Income Fund CL A) ~$30k; MACFX (MFS Conservative Allocation A) ~$27.5k; Roth IRA: MAMAX (MFS Moderate Allocation A) ~$24k combined (all purchased on the advice of their Edward Jones advisor)
Monthly Expenses: $2500 (They need a punch in the face from Mr. Money Mustache, especially since they don’t have a mortgage and their property taxes are extremely low.)
Monthly Pension: $1500
Add’l Income currently taken from Investments: $1000/mo
Social Security Benefits once they come of age: unknown
Needless to say, I have my doubts about their financial future. Instincts tell me that this model certainly isn’t sustainable, at least not likely to last them through another 30-40 years of retirement. Is this an accurate assumption? Second, how do they get away from their current advisor? Every fund they own was front-end loaded with 5.5-5.75% “sales charge,” not to mention Vanguard funds have a much lower expense ratio! Their advisor obviously has HER best interest in mind, not theirs. Lastly, what recommendations can you offer for someone in their situation who needs their investments to provide needed income without harshly diminishing the principal? I’ve been looking into Vanguard funds, but am unsure of which one/ones are best for them considering their needs are both short and long-term.
Thank you,
Andrew
Hi Andrew…
Well my daughter doesn’t want me moving in with her either. Seems a lot of that is going around. 😉
Looking at the numbers I think I have good news for you, and them.
With monthly expenses of $2500 and a $1500 pension, they have only a $1000 gap to fill. Between the two of them Social Security should easily cover this and likely much more.
Have them go to http://www.ssa.gov to register. Once they have their accounts, the SSA will tell them exactly what their benefit will be, depending on what age they choose to take it.
The earliest is 62 and the longer they delay, the bigger their checks will be.
So the 82k they have needs only to last for five years when they hit 62. If they can stretch it for nine years, they can start collecting at 66 and should be in even better shape.
Even if they stuck the 82k in a bank account with less than 1% interest, at $1000 a month it lasts 82 months: 6.833 years. That takes them to age 64, well into SSA range.
Because this is money they need to live on they want to be very conservative with it, but even conservatively invested it should last them to age 66 and full SSA benefits. Maybe with a bit of luck, even more.
Click on the ad for Betterment on the sidebar here. This is a very cool new investment company I’ll be writing about, and recommending, shortly. For your parents’ needs it is a better fit than even my beloved Vanguard.
Plug in their goals and Betterment will produce a stock/bond mix to meet them using index funds, from Vanguard and iShares. It can more easily give you a more conservative mix than the Vanguard funds I’ll suggest below. With the short time horizon, that might not be a bad idea. And it will maintain that mix automatically while it doles out the $1000 each month, something that I’m guessing will be very useful to your folks.
If you prefer to stick with Vanguard, and nothing wrong with that, I’d look at the 2015 TRF: VTXVX. It holds 53.5/46.5 stock/bonds with a nice mix of funds and an ER of .16% — https://personal.vanguard.com/us/funds/snapshot?FundId=0303&FundIntExt=INT
Slightly more aggressive at 60/40 and with a slightly lower ER of .10% is VBIAX. https://personal.vanguard.com/us/funds/snapshot?FundId=0502&FundIntExt=INT
Set either of these up and have $1000 automatically transferred into your parents’ checking account and it should last them well into their 60s.
To get the max SSA payment, I have them wait until this money is fully depleted or they hit age 70, which ever comes first.
But first you have to pry the money away from their current advisor. If you read the comments in the post: https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
You’ll see advisors tend to cling to their gravy train long and hard.
There is no predicting how the advisor your parents are using will handle herself. Hope that it is smooth and professional. But if it is not, remember that it is your parents money!
Vanguard and/or Betterment can help in this process if you give them a call.
Those huge 5.5-5.75% load/“sales charges” are gone forever, but at least your folks can escape the outsized ERs.
Good luck to them, and you!
Hi Jim,
This does sound like good news for all parties involved. Thank you for your prompt and insightful response!
Do you have any additional advice on what kind of account (taxable, Roth, etc.) to open and roll over/transfer the funds into? Minus the Roth funds they currently have, all other investments were funded with post-tax money. I would hate for these to be taxed again, but I know there are limits on how much can be stashed into a Roth in a given year. Lastly, should they expect fees when leaving their current investments?
Thanks again for sharing your expertise!
Andrew
Anything that is in a Roth or other tax advantaged account they want to hold until they are at least 59.5 to avoid penalties.
So when they roll into Vanguard or Betterment, they should roll Roth into Roth, IRA into IRA.
There are limits as to how much one can contribute each year to a Roth, but no limit on the size of account you can transfer from one Roth to another.
The money it the Roth should also be the last they should spend and, in fact, if the non-Roth money lasts them to 66+ I’s suggest they hold on to the Roth when they switch to SS. It is a great vehicle to use to pass money to heirs.
You don’t mention what percent of their money is in Roths, but if this is going to be held for the long term, VTSAX is where I’d put it. This means more bonds in the taxable account to maintain the conservative allocation.
As for the exit fees, there shouldn’t be any. Some funds have redemption fees, but this is pretty rare especially if they charged a front end load.
If the advisor tries to charge some of her own, I’d protest long and loud. 😉
Thanks Jim. The more I research on your blog and the Mad Fientist’s, the more questions I have about investing as it relates to this situation. For example, I’m very much intrigued by both the tax-gain and tax-loss harvesting, as well as Roth IRA conversions.
If the Roth is the better investment vehicle, should my parents be converting their other non-Roth funds into the Roth? There seems to be a lot of tax law surrounding this and quite frankly, it all seems extremely complicated at this point!
Can they get away with gradually converting their other funds into the Roth without paying tax or penalties? Is it even worth it to them in their situation?
I’m informed enough to be dangerous (maybe more to myself and others), but clearly not competent!
Thanks for your continued support.
Andrew
Hi Andrew…
Sounds like you are reading the right stuff here and on MF to decide. You might also check out:
http://www.gocurrycracker.com/never-pay-taxes-again/
But this advice is more for younger people setting up decades of retirement on their investments.
You parents have a different situation:
Making 82k last them well into their SS years, remembering the longer they can wait to take SS the bigger the checks. Of course this assumes they are in good health and looking at many years of retirement.
By all means, gradually convert to a Roth. But only if they can without penalty or paying taxes.
Otherwise just have them draw down the funds as needed from where they are, leaving the Roths till last.
If the non-Roth funds get them to 66 and they want to leave something to their heirs, the Roths are the best tools for that.
Hi Jim,
My wife and I have been saving for the VTSAX and we have the $10,000 minimum now. I went to sign up at Vanguard choosing a Roth IRA and found myself caught between Vanguard’s minimum of $10,000 and the IRS’s maximum contribution amount of $5,500.
I take it that it is impossible to have VTSAX in a Roth IRA. So my question is what is my next best option? If I choose a joint savings account then I will be taxed, correct? Should I stay with a Roth IRA but downgrade to the VTSMX, putting $5,500 in now and the $4,500 in January?
Financial details:
I’m a 32 year old web developer salaried at $70,700. My wife is 34 and is self-employed teaching piano and voice out of our home and earns around $18,000 a year before taxes. The only debt we have is our mortgage. We also have a 9 month old daughter.
Thanks for your insights,
matt
You have exactly the right idea, Matt.
Put $5500 in VTSMX in the Roth and $4500 in VTSMX in a taxable account. Come January, move the $4500 to the Roth as part of your 2014 contribution. Vanguard will automatically convert it to VTSAX.
Remember, VTSMX and VTSAX hold exactly the same portfolio. The only difference is that VTSAX has slightly lower expenses. Definitely worth having for the long term but not a big enough difference to worry about for a few months.
Thanks for your prompt reply! I didn’t realize Vangaurd would convert up to the admiral class once the minimum was reached.
Thank you again for your time and knowledge,
matt
Hello!
We just had our first child and we would like to start an account for her college/post-high school plans.
I was wondering what you would recommend? I haven’t done a lot of research, but would a 529 limit her to using the funds strictly for college? Obviously don’t know if she will attend college or not and don’t want to be forced to use the savings strictly for college.
If this is the case, would we just set up a taxable account in her name so she can use the money for a wider array of options?
Thanks for your help!
Hi there…
Several things you need to consider with 529 plans.
The advantages are, of course, tax savings both at the federal and state level. So if your state has high taxes you’ll want to start there. But you don’t have to buy the plan tied to your state, and it maybe that better, cheaper plans are available in other states.
Vanguard has an easy review on how to choose the plan that is the best fit for you:
https://investor.vanguard.com/what-we-offer/college/overview
But before you do consider the disadvantages:
1. any money your 529 earns that is not used for eligible college expenses not only gets taxed, there is a 10% tax penalty from the Feds. Depending on your state you might have to contend with them too.
2. a nice fat 529 account will factor into the calculations for any need-based financial aid.
So the irony with these things is that the more you earn the more valuable the tax advantaged feature is and the more having one will hurt your child’s chances for financial aid when the time comes. 😉
Wow! I’m still amazed at how quickly you respond to things, very much appreciated!
I will look into it. I’m certainly leaning towards not doing one based off of my own observations.
My next question is then, would you just set up a taxable account in her name?
Thanks!
All depends on if I’m sitting at the computer when the question rolls in. 🙂
Depends on your tax bracket. Hers is likely to be lower. But remember, once she’s of age the money is hers and while you hope she’ll spend it on college, they are sure to still be selling red sports cars 18 years from now….
Happy Holidays,
My name is Nicholas and I am a 21 year old senior in college. I study business administration with a focus in entrepreneurship.
I recently came into $1,200 and thought that VTSMX would be a good option because my dad would provide the $1,800 to meet the $3,000 minimum. The problem I am having is justifying sending $3,000 for 20-30 years. Being a student I don’t have a full time job, and $1,200 can go a long way for a 21 year old student like myself.
I was hoping to get some advice on VTSMX if that is a good strategy, or a Vanguard account that can accommodate a 3-5 year plan.
Greatly enjoy the blog.
Nick –
Welcome Nick…
First, please tell your dad that I also have $1200 and…. 😉
Assuming his extraordinarily generous offer is conditioned on you having to invest the whole 3k to get his $1800 surely as a bright guy studying business administration with a focus in entrepreneurship you don’t need me to tell you that when offered an instant 150% return on your money the answer is: Take it!!
You are young, smart and energetic. If you want another $1200 for spending go and hustle it up.
My daughter was just home for the holidays. She returned to the restaurant where she works summers for one 12 hour shift and two dinner shifts. They were thrilled to have her, she worked like a galley slave and she walked away with over $700. In three days.
Second, don’t think about it in terms of being invested for 2-5 years. Think 3-5 decades. Put it in VTSMX and let it ride. Once it hits 10k, Vanguard will automatically roll it into VTSAX for you.
There is a range of historical returns people use for stocks. Jack Bogle, inventor of the index fund and founder of Vanguard, says 9.6% since the start of the last century. Let’s go with that.
Over on this post
https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
you’ll find a really cool calculator. Using it….
At 9.6% after 3 decades your 3k has become 47k. After 5 decades it is 294k. Without adding another dime.
At the moment I’m reading “Thinking Fast and Slow” by Daniel Kahnman.
Early on he describes research that asked students whether they’d prefer to get $3400 this month or $3800 next month. As he says, “This simple test has emerged as one of the better predictors of lazy thinking.” Those that choose the smaller amount immediately “tend to be impulsive, impatient and keen to receive immediate gratification.”
It’s not hard to guess which group will enjoy more success in life.
So, in a very real sense, your decision will not only determine what happens to your $1200, it might very well be a prediction of your future.
Good luck!
Hi Jim! My wife and I want to thank you for all the great work you are doing with this blog, along with the encouragement and inspiration it provides to us. We have been soaking up tons of research on financial independence (your blog, the Mad FIentist, MMM, and GoCurryCracker!) and want to consider every angle when planning for our post-work phase of life; from Roth conversions, tax harvesting, HSAs, etc. It’s been a lot to absorb and we want to make the most out of every opportunity available.
THE PLAN
Retire in 10-12 years in our mid-40s, the time when the wife’s defined-benefit pension will cover annual expenses. Invest all other savings.
STATISTICS
Our $115k mortgage at 3.625% is our only debt.
Current annual gross salary is $71200 for 10 years of teaching experience. Our annual expenses are $27000.
We have been saving $1400/month towards a six-month emergency fund. It will be fully funded in a few months.
We both have stagnant 403(b) variable annuity accounts, mine is Roth and hers is pre-tax, which total $18k. We stopped contributions to them several years ago.
We have a 20-month-old daughter; I’m in my second year of staying at home with her; three years of teaching pays significantly less than my wife’s 10! I will go back to work once she enters school. My salary will be around $45k-$50k.
My wife will be eligible to receive Ohio STRS defined-benefit pension in 9 years (20 years of teaching service). In 2013, a teacher in her district with 20 years of experience and the highest education level earns an annual salary of $93585. The same salary scenario for the 2014-15 school year pays $94052. Her salary will steadily increase over time. The schedule maxes out at 25 years and is currently paying $97479. The pension is based on the average salary of your last five years of teaching (Final Average Salary, or FAS). Pension disbursements at 20 years of service pay 29% of the FAS, 33% at 21 years of service, 37%/22 yrs, 41%/23 yrs, etc, up to 60%/29+ yrs of service. Wife will work until pension covers annual expenses. Investments, therefore, will be more of a safeguard.
QUESTIONS
We are seeking advice on where to invest our excess income after expenses are paid. When I return to work in 4-5 years we will be able to save 100% of my annual income ($45000-$50000 gross), in addition to my wife’s surplus income after expenses are covered. This should be a net total somewhere near $50k/year. Where do we put this money? Traditional IRA, Roth IRA, pay off the mortgage, something else, all of the above? Since our savings rate will exceed the contribution limits to either IRA, what is the progression of investment vehicles we should follow? Also, what do we do with the 403(b) variable annuity accounts? Both have a $30 annual fee in addition to their 1.29% expense ratio. We knew nothing of Vanguard when these accounts were opened. My wife and I would really like to move them into something else, but what and how?
We are excited for our financially independent future selves and want to make sure we are making wise decisions to get there. If we’ve inadvertently omitted any information, please don’t hesitate to ask.
Thank you for your analysis!
Best,
A+J
So, I’ve been digging into the STRS system and have realized that it will not be as simple as originally planned. They do not make it easy for a person to retire early. Sure, one can claim a pension with 20 years of service, but the income begins once a minimum age is met, in this case it appers to be 65. Therefore, my wife could quit her job in her mid 40s with 20 years of service, not withdraw her contributions, and a benefit is payable when she attains the qualifying age; she would also be eligible for health care coverage. This route requires us to have a large enough savings to cover the 20 year gap. The other option is to withdraw her contributions plus interest and 50% of the employer’s matching funds, but forfeit all other benefits, including health care. Won’t know which is the better option until learning the monetary value of her benefit and potential healthcare premiums under these circumstances.
Any advice, thoughts, or opinions are welcome. Also, we would still like your recommendation on investment options for our savings. This info may guide your answer: with one income we are in the 15% tax bracket, but when I return to work that will increase to 25%.
Thanks again, and apologies for the pension confusion!
A+J
Hi Andrew…
Thanks for the kind words and glad you are finding value here and in the other blogs you mention. Those are some of my favorites too.
If you haven’t already, check out today’s guest post from MF: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
It addresses some of the concerns you’ve raised.
Thanks for the clarification on your wife’s pension. Pensions are a dying breed and very valuable. Since your time frame is still 10-12 years out it is hard, and unproductive, to give specific advice about it just now. Too much can change. Just keep track of it and you can decide what to do when the time is closer and you have a clear view of the options.
In the mean time, you’ll want to concentrate on building your taxable and tax advantaged investments. As you’ll see from that guest post, there is really no concern about having too much in the tax-advantaged account.
So Step 1 is to fully fund them all: 403b, IRA and Roth.
With the investable money you have left over, and with your saving rate you should have a nice chuck, open a taxable account.
Because you are in the wealth accumulation phase, I would use VTSAX for the IRA, Roth and Taxable accounts. The 403b too, if they happen to offer it. But they probably don’t. Since I don’t know what is offered, here are some guidelines as to what you are looking for:
1. If you can do business with Vanguard, do so as they are the only investment company out there that puts the interests of their customers first.
2. Buy broad-based low-cost index funds.
3. If index funds are not offered, look for the fund with the lowest cost and the broadest base of stocks.
4. Costs matter hugely.
5. Keep it simple. One fund in your 403b should be enough.
As for your mortgage, you have a nice low rate. Just keep it.
Your emergency fund target is $8400. My understanding is that teaching is a very secure field. If I’m right about this, then you don’t need so much and the extra would be working harder in your VTSAX fund. As to the exact amount, that is as much about your comfort level and knowledge of what kind of expenses might occur as any financial formula.
Those fees on the annuities are truly ugly. And even small fees are a huge drain over time. I’d dump them and move the money into the better option you are going to find in your 403b plan. Be prepared. They will probably hit you up with a “surrender fee.” Bite the bullet, lick your wounds and move on.
One last thought on that 25% tax bracket when you return to work. It is likely not as bad as you think. Your three exemptions and deductions will pull you closer back to the 15% bracket than you might think. And remember, it is only the money over the 15% bracket that gets taxed at 25%.
You have some great factors in play here: No debt other than your mortgage, high savings rate, low living costs, your return to work in a few years and the fact you are starting young. This is a wonderful beginning and if you stay the course you’ll be stunned at the progress you will have made over the next decade or so.
Good luck and keep us posted!
Thanks Jim.
Neither of our employers offer Vanguard as an option for our 403(b) accounts. The funds are currently invested through AXA Equitable’s Moderate-Plus Allocation and their EQ/Franklin Templeton Allocation. Pretty lame performance with high ERs, but I have looked into other investment options within the account. Here is what I found: although they don’t offer a total stock index, such as Vanguard’s, they do have an Equity 500 Index Portfolio that fits with the large blend style of VTSAX and I can reduce the ER down to 0.63%. At this cost, do you still recommend dumping them, paying the surrender fees, and going with a different company? I notice that Vanguard’s Variable Annuity Total Stock Market Portfolio has an ER of 0.48%.
Are variable annuities the only option in a 403(b) account? Should my reason for dumping it have anything to do with it being a variable annuity, or only the high ER? Hypothetically, if our 403(b) was with Vanguard, should we have access to mutual funds like VTSAX, or would we have to choose some allocation within an annuity? I guess I don’t understand my options within a 403(b) account.
Lastly, I feel like I saw a comment you, or maybe one of your contemporaries, wrote on creating a VTSAX-like portfolio based on a mix of 75% Large Blend (like the Equity 500 Index mentioned above) and 25% Small Cap Index. Is this correct, or was I dreaming?!? Ha!
As always, thanks for the advice!
A+J
P.S. My wife’s 403(b) VA is out of contract and shouldn’t have surrender fees, but mine still has a couple more years to get to that point. What’s your thought on cashing them out and opening up a Roth or Traditional IRA at Vanguard? We did find out that my wife’s school district can add Vanguard if they get 10 people to signup for their 403(b). Sounds doable, especially if it will lower their cost.
Annuities are unique products with many variables, and there are many considerations beyond just the high fees and ERs.
Most basically, you are giving the insurance company your money in exchange for monthly checks until you die. Once you are gone, they keep your money.
You can decide when to start taking the checks, provide your spouse with continuing checks until her death and any number of other variables. All of which will affect the size of those monthly checks.
I haven’t written a post on this yet and am unwilling to do so in this reply. 😉 But you can find more info here:
https://investor.vanguard.com/what-we-offer/annuities/annuities-through-vanguard
If you decide that annuities work for your needs shifting yours to the Equity 500 Index Portfolio with the ER down of 0.63% is a reasonable idea.
Every 403b plan has different options, but most offer more than just annuities.
Yep. VTSAX is about 70-75% larger cap S&P 500 stocks with the balance in mid & small caps.
You cannot roll your 403b investments into an IRA until you leave your employer. So if you can get your plan to add Vanguard, that’s your best bet.
Thank you so much for sharing such great info! I love the site.
Hope you can help me. I already have an account with Vanguard and ironically enough I also choose VTSMX many years ago even before reading your site.
My question is this: The VTSMX account i have is set up as a Roth account so I can only contribute the Roth limit amounts which right now are at 5,500 a year. I also can’t touch it till retirement.
Any suggestions for other funds at Vanguard that I can set up in taxable accounts now? I am looking to invest for income.
I already have an emergency fund and a large TSP account so I have those covered.
I was thinking of venturing into purchasing high quality, solid company dividend stocks that would provide income.
Your thoughts on is it better to purchase individual stocks for dividend income or put it into another index fund at vanguard would be very much appreciated!
Tracey
Thanks Tracey…
…and welcome!
Great choice on VTSMX but don’t be so sure you can’t access it before 59.5/retirement.
Check out today’s guest post:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
VTSMX is a great choice for your taxable account too. Once you hit 10k Vanguard will automatically roll it into the lower cost VTSAX for you. These are both Total Stock Market Index Funds that hold over 3000 companies. In my opinion this is all you need if you are in the wealth building phase.
You don’t mention your age or closeness to retirement, but if you are really interested in dividend paying stocks, again indexing is your friend: VHDYX https://personal.vanguard.com/us/funds/snapshot?FundId=0623&FundIntExt=INT
But overall I am not a fan of the dividend investing strategies for reasons detailed here:
https://jlcollinsnh.com/2011/12/27/dividend-growth-investing/
And I am death on the idea of trying to pick individual stocks:
https://jlcollinsnh.com/2011/06/02/why-i-cant-pick-winning-stocks-and-you-cant-either/
Hope this helps!
Thanks for the reply!
I should clarify that I am 47 years old and I do have the VTSAX which is the admiral shares index for my Roth.
I read thru the links you provided, very helpful. I have been considering the Vanguard Dividend Appreciation Index as an alternative to investing in individual dividend paying stock.
I like the idea of index investing because it is so much easier than managing individual stocks and picking them etc.
But when I read other blogs that continue to extoll the benefits of high quality dividend paying stocks I feel like I am missing the boat. I am still undecided. With the market so high now I am hesitant to buy into any of the companies because the prices for the stock are mostly overvalued right now.
I do have one clarification….are you sugessting that I could open another VTSMX as a taxable account? So then I would have two VTSMX accounts one as a roth and one as a regular taxable account? I wasn’t sure if you were saying that but that may be a good idea.
My pleasure.
I like index investing not only because it is easier and simpler, but mostly because it provides the best results.
The fear of “missing the boat” has cost many an investor a fortune.
Trying to pick individual stocks, dividend or other wise, has lost investors even more.
Please, before you do such a thing do this first:
1. Read all my posts here: https://jlcollinsnh.com/stock-series/
2. If that doesn’t convince you, read a couple of Jack Bogle’s books.
3. If you are still unconvinced, go ahead a pick your individual stock portfolio. But do it on paper, not with real money. Track your results for a year and then compare how you did against VTSAX.
If after all that you still want to pick individual stocks, be my guest. You will still in all likelihood underperform your VTSAX account over time, but at least will will have learned enough to understand what you are doing.
Yes, that is exactly what I am suggesting. I personally hold VTSAX in my Roth, IRA and taxable account.
Good luck!
So you have 3 seperate VTSAX accounts?
I am also interested in the RIET index at vanguard that you suggested as a means of diversification. However, I read that is the one you should have in either an IRA or Roth because it occurs more tax issues. Maybe I should switch the Roth account to that one and make the VTSMX my taxable account. Not sure right now but I am getting a bit confused.
Thank you for the link and I agree with you however tempting it is to pick stocks I think I am going to stick with the Index funds. I do have a few stocks that i invested in for fun but I think I will just leave it at that.
Yep. 5 if you include the two in my wife’s name.
REIT and Bonds I like to keep in tax advantaged funds because they throw off dividends and interest.
VTSAX I keep in my taxable account because it is tax efficient and in the tax advantaged accounts just because it is a great investment.
Wow, five. You really are a true believer in VTSAX. 🙂
Thanks again for all your suggestions. I like that you keep things clear and simple: You invest in just a few index funds and then repeat.
Tracey
I recently started reading your blog and I really enjoy all the great articles and advice. I’m fairly confident when it comes to my own current investments, but I’d like to help my mother get her affairs in order and although I have ideas I’m a bit overwhelmed. I currently live in Germany so I’m somewhat limited with some of the help I can offer when I’m not in the US. I’m currently back in the US through the first week of January.
She was recently diagnosed with two types of cancer. One is a slow moving lymphoma and the other is squamous cell lung cancer which is large cell and less lethal than small cell lung cancer. She thought she was going to have surgery this week to remove a lobe of her lung but the date was moved to February. I came home with the intention to help her with her recovery but now that
we have more time and energy I decided with her consent to help her get her home and finances in order.
My mother will be 65 in March and is retired. She receives $1,200 a month from social security. She has $40,000 in investments with Edward Jones of which $30,000 are in a taxable account and $10,000 are in an IRA. I was fairly shocked when I looked at what the taxable account is comprised of;
Freeport-McMoran Copper & Gold – FCX $13,876
Dawson Geophysical Co – DWSN $6,464
Broadcom Corp – BRCM $720
Patriot Coal Corp – PCXCQ $42
Hartford Balanced Income Fund C – HBLCX $11,071
The individual stocks are all holdover investments from a previous advisor at a different company my mother used. I asked why no one at Edward Jones had sold the stocks as it is obviously very risky to have so much of ones money invested so narrowly especially at her age. She said that her current advisor wants to sell them but is waiting for the right time. That statement is a red flag to me. My mother did ask the advisor to take a small amount of her money and invest it aggressively.
I’d like to sell all of these stocks and the mutual fund and move most the money into Vanguard Total Bond Market with a small amount in Vanguard Total Stock Market and either a savings account, money market, or cd. I know bonds are generally placed in tax deferred accounts but her income is so low I think her taxes would be minimal. Patriot Coal Corp is in the process of declaring bankruptcy and I was thinking it may be possible to use some of the capital losses to offset any capital gains. I’m not sure how bankruptcy affects selling stock. I realize that the stock may just be a total loss. I think my mother would possibly like to stay with Edward Jones as they offer face to face advice (although I’m skeptical of the quality of it). I’m not sure if it would be possible to buy the Vanguard funds through EJ. Would it be better to wait until the new year to put off paying taxes on the sale of the investments until the next tax year? I believe the Hartford Balanced Income Fund has a deferred load of 1% so I should probably read more about possible costs of selling it. If I transfer the investments to Vanguard from what I’ve read it would be better to transfer them in kind but I’m not sure all that implies.
Her IRA consists of;
Franklin Income Fund A – FKINX $4,240
Income Fund of American Fund A – AMECX $3,700
Lord Abbett Short Duration Income Fund A – LALDX $2,467
I’m slightly less concerned with these investments, but I’m nervous about how heavily they are invested in junk bonds. I didn’t know that mutual funds existed that would invest in dividend paying large cap stocks along with junk bonds. It is an interesting idea but seems overly complicated and risky. I would probably like to move these investments to Vanguard and place them all in Total Bond Market.
She owns her home with no mortgage in West Virginia on 60 acres in a rural area. Overall the house is in good shape but could use some repairs to plumbing and eventually will need a new roof. I’m sure other expenses will come up as often happens in life. The value is in the range of 80 to 100k. She has no desire or plans to move.
I think a possible asset allocation would be 70% Total Bond Market, 20% Total Stock Market, and 10% mix of savings account, cds, and money market. I like the Total International Stock fund as well (I own some in my AA) but it seems more volatile than is necessary. She has a life expectancy as little as one year but possibly ten or more. It is really hard to tell at the moment. Besides the cancer she is very healthy and active. She will probably know more after her surgery in February but even then it is very uncertain. I think it makes sense to have her assets as stable as possible so she can access the money as needed to make larger purchases for car and home repair.
My mother has a will and living will already. My sister and I are her only heirs and we are close and generally agree on how to proceed with all of these issues. My mother seems hesitant to spend the money to go to an estate lawyer but I think it would be good to go to see her options to protect her remaining assets and especially her home from medical debt. I’m not concerned with inheriting the house or money but I also don’t want her to have to sign it over to the bank or hospital (she doesn’t either). She has been receiving a very generous amount of charity aid from the two hospitals she has been going to but the she has to reapply every six months. Currently she receives a 75% discount from one and a 100% from another. This won’t cover certain doctor’s fees though. She will have Medicaid until Medicare starts the month before she turns 65. In your opinion does my mother have enough assets to warrant going to an estate lawyer?
It isn’t easy for me to make decisions with someone else’s money, but I don’t feel that my mother’s money is being handled appropriately. I’ve read quite a few investment books at this point, but I have limited knowledge about issues she is facing. I’d hate to have someone from Edward Jones sell her another front load mutual fund with high fees and costs. I also don’t want her to lose her house. I know the decisions I make are ultimately my own and my responsibility but any advice would be greatly appreciated.
Thank you for your time,
Colin Smith
Hi Colin…
I am very sorry to hear of the challenges your mother is facing with her health and finances. She is fortunate to have you there to help sort thru it all. And it is very fortunate she is open to your help and that you and your sister are on the same page.
You don’t mention what her annual expenses are, but I’m guessing she gets by on the $1200 from Social Security. I’m also going to assume you and your sister are willing and able to kick in to help support her if needed.
I am concerned that your mother asked the advisor to take a portion of her money to “invest aggressively.” This is the last thing someone her age and with her limited resources should be doing. Hopefully the advisor was honest enough not to take advantage of that request, but in any event make sure it is off the table.
You are right to be concerned about her assets being in individual stocks and the advisor wanting to wait to “sell at the right time.” My guess is that this means some are trading at a loss.
I agree with your plan to sell them all and redeploy the money at Vanguard in the Total Stock and Total Bond Funds. It is also a good idea to hold some in cash for the house repairs you can foresee. You are correct in that at her income level taxes are not much of a concern.
You should be able to sell the shares in the bankrupt company, but of course not for much.
It might be possible to buy the Vanguard funds thru EJ, but why? You want to take all this and the IRA money out of EJ. Looking at what they have her in, the last thing your mother needs is free advice from them. Clearly, these investment were made to benefit the broker, not your mother.
Likewise, with the IRA roll it into Vanguard. You can call Vanguard and they can help with the process. Don’t be surprised if EJ drags their feet and otherwise makes this difficult.
Since your mother has minimal tax concerns, with the taxable account the easiest thing to do is have EJ sell everything and send her a check. You could also do this with the IRA but you’d have to be sure to reinvest it in the Vanguard IRA within 60 days to avoid any taxes. But again, not a big deal for her.
Since we are near year end and just to spread the tax liabilities a bit, assuming there are capital gains in those stocks (and if not, no tax worries at all), you can sell the taxable stuff this year.
Then in January move the IRA to Vanguard and convert it to a Roth. Theoretically this will be taxable, but again in your mother’s situation a non-event. Plus the Roth is much more advantageous to you and your sister should you inherit it.
Be sure she lists you as beneficiaries on all these accounts. This avoids probate and insures it passes seamlessly to you. Same with the taxable stuff.
And no, your mother doesn’t have enough assets to need an estate lawyer, but be sure her will is up to date.
As for the house, it sounds like that is where she is most comfortable and since she’s been there awhile and it is mortgage free I see no reason she shouldn’t stay as long as she is physically able.
My guess is that you might get some push back from her on leaving EJ. Sounds like she enjoys the interaction. But she is paying too steep a price.
If you look at the right hand column here on the blog you’ll see an ad for Betterment. In the next few days I should have a post up recommending these guys. Not quite as cheap as DIY with Vanguard, they do provide an exceedingly simple way to invest in a portfolio of index funds. Rather than choosing the funds yourself, you open an account and tell them your goals. The software then suggests the asset allocations to reach those goals. Very simple and effective, and maybe just the level of involvement that your mother will enjoy with out the risk of expensive mistake.
You mention a concern about losing it to medical debt, but it is unclear in your comment whether she has that now or is concerned she might in the future. Regardless, she might want to consider moving some of her assets to you and your sister.
The IRS allows your mother to gift you and your sister each $14,000 with no tax consequences to you or her. If she can get comfortable with the idea, it would effectively take her taxable account from 30K to 6k. Less worry for her and possibly helpful in insuring the charitable benefits she now enjoys. Of course, if the time comes when she needs the money, you and your sister must be prepared to channel it back to her.
Hope this helps. Good luck to you and all the best to your mom!
Thanks for your thorough and prompt response. I just wanted to clarify a few questions you had from my post. The $1,200 from SS is enough to cover my mother’s annual expenses but not enough to cover replacing a roof or other major expenses. The cost of living is very low in rural WV and one of the cheapest places to live in the US. My mother is frugal overall and lives comfortably. My sister and I are willing to kick in to and help financially, but my mother is unwilling to accept any money from us. She has been trying to give me money for my plane tickets even though she knows I’m not willing to take it and don’t need it. She just feels that a parent can help their offspring financially but not the other way around.
We were looking into a lawyer who specializes in elder law more than estate planning. We are hoping to lower or eliminate any contribution my mother might have to make to Medicare part B or D by her still receiving Medicaid. We were hoping a lawyer might be able to help us navigate some of the paper work. We were thinking a few hundred dollar investment in a few hours with a lawyer could possibly save thousands of dollars over the course of a few years in Medicare contributions. This is an area despite researching recently I feel very confused about. My mother currently has minimal medical debt and it may be retroactively paid for by Medicaid. We are worried about future medical expenses. We have a free consultation with an elder law lawyer next week.
I will take a look into the services offered by Betterment.
If you have any other questions or would like me to clarify anything else let me know.
Thanks again,
Colin
Note: This is now a Case Study Post here…
https://jlcollinsnh.com/2013/12/11/case-study-6-helping-an-ill-and-elderly-parent/
Thank you again. Wow. What an interesting article about HSA. So it means, it does not matter when and which year the medical expenses are from? One can request a refund any time?
Nice. I will research that farther.
I also wanted to agree with you that depression is not fun at all. i am so sorry to hear about your experience with It. I wish you feel better soon. I have been researching a lot and found a great book about depression.
Here is the link to the book on Amazon.
http://www.amazon.com/What-Your-Doctor-About-Depression/dp/0446694940
It has been a huge help for me and only few over the counter Amino Acid supplements helped me a lot. I am feeling much better.
I hope it helps you as well.
Thank you again for your help. I am going to check on the financial advisor you recommended.
With your help, I feel more confident about our investments for future already.
Sincerely
Paris.
Hi Jim!
Hubby and I are going round and round about something I hope you can clarify for me. I seem to be hung up on expense ratios and he is on net returns.
Hypothetically if you were going to invest $100,000 would you do it with:
Company A whose mutual fund has an ER of .5% and a historical net return of 8% or
Company B whose mutual fund has an ER of 2% and a historical net return of 11%?
Would you always choose whichever one gives you the higher net return? Since bottom line that is the $ in your pocket?
I can’t seem to get past the difference in ER’s because to me that seems like you’d have an additional 1.5% to reinvest.
I hesitate to ask this on the blog because I think it must be a stupid question and that I’m not seeing an obvious answer.
Have a very Merry Christmas Jim!
Hi Kim….
Always go for the lowest cost.
This might seem counterintuitive, but the reason is simple. Every fund prospectus carries these words: “Past results are not a guarantee of future performance.” They are the most important and the most ignored in the entire document.
Research has shown repeatedly that historical returns have no predictive value or likelihood to continue. Indeed, if anything, the data shows strong performance is more likely to be followed by weak. This is the reason buying “hot” funds is such a losing strategy.
Jack Bogle says it best: “Performance comes and goes. Expenses are forever.”
Not a stupid question at all, Kim, and in fact not understanding the answer is likely the source of the rookie investor’s biggest mistake: Chasing past performance.
Indeed, I made it myself.
Merry Christmas to you as well!
Thank you so much for all you do. You have really helped my husband and I get our retirement planning in order (a little too late for FI for us, but that’s ok. I love my job, and he’s retiring in 2 years.)
The reason I’m writing is not for me but for my sister and brother-in-law. I haven’t seen a post on your website yet for this situation, and I think you can help them.
My BIL is one of the lucky few who literally has a fortune coming to him from a rich granduncle. This gentleman set up a trust in the early 1940’s for his children, nieces, and nephews which gave them a stipend of $100/mo until their death – a lot of money back then.
Let’s call that Generation #1 (G1 for short). If/when someone in G1 died, their $100/mo was divided among their heirs. My BIL’s mother was part of G1 and died a few years ago. He is now collecting $33/mo for his portion of his mother’s stipend.
They were surprised in December of the year she died with a note from the trustees of the trust giving him an accounting of the money in the trust and to let him know that 2 people are still alive in G1. They also told him that, once those 2 remaining people in G1 passed on, the remaining money in the trust would be distributed to the people in his generation.
Let’s call them Generation #2 (G2). There are currently 33 people in G2 ranging in ages from their late 40’s into well into their 60’s.
My BIL fits in the middle somewhere, and my sister is in her late 40’s.
Anyway, the trustee also showed how the money was currently invested and then tallied the current balance of the remaining trust money at the bottom. As of December 2012, there was $26 million in the account.
Based upon what my sister told me, they are invested in individual stocks, all big name companies. She knows very little about investing, and they both want to make sure that money lasts them the rest of their lives and leaves a nice inheritance for their 2 girls who are in their early 20’s. Their biggest concern is handling the money when the trustee is ready to pass out the inheritance money.
I’m not concerned that they will go on a big spending spree. Once the initial shock wore off, they started planning for the few things they always wanted – a small house on several acres in the northern part of their (very cold) state, and a 5th wheel to travel the (very warm) southern states in the winter.
I got my copy of Jack Bogle’s book, The Little Book of Common Sense Investing, and started reading the section about receiving a large inheritance. I told her what I read and also told her to start interviewing accountants without getting too heavy into numbers.
I will definitely be sharing your website and giving her my limited knowledge about investing, and I think she will be off and running once she’s taken the time to really dig into it all.
I just wanted to know what you would suggest when the final 2 people from G1 pass on and that big check is waiting somewhere for them.
Hi Karen….
and welcome. Thanks for the kind words, I’m glad you’ve found this place useful.
What a delightful dilemma your BIL is going to face! It’s a smart move to begin thinking about it now.
When this money is passed on to the G2 people, the cost basis of the the stocks held will be stepped up to the price at the death of the last G1 member. This is one of the few cases that where taxes are actually avoided rather than just delayed.
It will be interesting to see how the trustee handles the stocks in the portfolio and the distribution. My guess is the stocks will be sold and the resulting cash will be distibued the to heirs. 26m/33 heirs = $787,879. A very nice chuck of change.
But not enough to start buying houses, 5th wheels, last the rest of their lives and and leave a nice inheritance to their girls. Before this windfall comes into their hands, they need to learn how to think about money. Start here: https://jlcollinsnh.com/2013/06/14/stocks-part-ixx-how-to-think-about-money/
Basically, tell them not to think about it as 788k in spendable money, but as a well from which they can draw about 4%. If they do that, it should last the rest of their lives and grow into a very nice inherence for the kids.
So, what they really are inheriting is an extra income of ~ $31,500 a year, $2626 per month. That’s what they can spend on vacation homes and 5th wheels.
If your BIL really sees this as multiple generational money, as did his wise Grand Uncle, this is the right approach. Spending more is taking it from the pockets of those yet to come.
This may come as a bit of a shock if he and his family have $$$ dancing in their heads. But then again, $2626 a month is a pretty nice step up from $33. 🙂
As for investing the 788k, that’s what the Stock Series is all about.
Hope this helps!
PS: I’ve also asked my pal and estate expert Prob8 to take a look at this and comment. Stay tuned!
Thank you so much for the quick response! You ROCK! I already sent the link to my sister for the stock series. I’ll make sure they read your link above twice. As far as the little house up north and the 5th wheel, I see their current house paying for most of that once it is sold. They aren’t counting the money yet, as G1 may live another 10-15 years. They still contribute to their 401k, but it has been a real godsend to know their retirement is covered, regardless of when the money actually arrives. That is, unless G1 decides to live to be 110.
I can’t wait to hear from Prob8.
Hi, Karen. Taxes are probably going to be the biggest concern. I don’t know how this trust was set up so it is difficult to comment on basis issues.
It may also be that the trust is not set up to pay to all next generation members equally. For example a common method is to say that each G1 member has share created for them and at death their share goes to their descendants. So if someone has multiple descendants that share will be diluted a bit. The trustees should be able to provide your BIL with a copy of the trust and tell him how how his share will be allocated.
As to basis, my first thought is that I am not sure there will be a basis step up at the death of the G1 members. There was probably a step up in basis to what the stock/trust assets were worth at the death of the trust creator. It seems to me that there would only be a another step up if the value of the shares were included in the estates of the G1 members. Basis issues are going to be a big deal so your BIL should inquire as to whether the trustees know how this will work. How the trust is set up plays a role and the trustees may need to get their attorney or tax professional to advise on this issue.
It’s also possible that generation skipping transfer taxes are at play here. Again, the trust attorneys will be able to comment.
Sorry I can’t provide more detail but hopefully your BIL has enough information to at least ask a few questions.
Good luck!
Thanks Prob8!
I stand corrected on the tax basis step-up issue and learned something new in the process.
James and Prob8,
Thank you both so much for the information. The tax issue was everyone’s main concern to start, and it is clear that the sooner they start on this, the better. It’s easy to see how, what looks like a huge windfall can just become a really nice addition to a current retirement portfolio.
Again, thank you, and Merry Christmas to you both.
Karen
I found your blog through Mr. Money Mustache, and I just finished reading your stock series.
I am in a very similar situation to your very first case study.
https://jlcollinsnh.com/2012/09/17/putting-the-simple-path-to-wealth-into-action/
I have recently received a windfall of about 40k, a 50k income and I currently save 50% of my income. (Hoping to get 60-70% at some point) and I have no debt.
5% goes into a 403b (2.5 VTSMX and 2.5 vanguard explorer) with an undetermined matching that will start in 2015. I’m thinking about reallocating to all VTSMX to keep things simpler though.
The rest is in a horribly low interest savings account while I try to decide the best thing to do with my money.
Here’s the difference between me and your first case study; there’s a possibility of me attending grad school in the next 3-5 years. I’m 24 so I’m in the wealth building stage of my life, but I’m wondering is it to risky to keep everything in VSTAX with grad school on the horizon. Should I have a bucket of grad school money? Should I follow your more conservative wealth stage advice? Should I just go to grad school when the stock market is doing well? ANy thoughts would be greatly appreciated.
Thank You
EMB
Hi EMB…
and welcome. Always nice to see another MMM reader here.
I would suggest you think of your money in terms of long-term and short-term.
Long-term I would consolidate into VTSMX. Once you hit 10k Vanguard will automatically convert it to the lower cost – same portfolio – VTSAX.
The money you need for grad school is short-term. Ordinarily, I’d suggest that belongs in cash, a pretty horrible choice with interest rates on savings near zero.
Recently I wrote about Betterment:
https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
In that post I explain how to use them for short-term goals.
Good luck!
What are you planning to study?
Thanks so much for responding. I’m pretty new to investing so your blog has been very helpful to me.
The jury is still out on what I want to study but most likely it will be in the engineering field. I currently work in clinical lab science and it’s a good job, but I quickly found out that health care is not for me.
I will give Betterment a shot and let you know how it goes.
My pleasure, and good luck in your new career!
I’ll be very interested in your review of Betterment. Please post it in the comment on that post when you are ready.
Have a wonderful 2014!
Hi, Mr. Collins. Happy New Year! I was wondering if I could get your thoughts on the best investment vehicles regarding college saving. I read the post you wrote on college and all the comments but I am looking for the specific investment advise instead of whether or not college is of value and I was wondering how you went about saving for your daughter’s college?
My husband and I currently have a 9 year old son, we max out our Roth’s, put up to the company match in my husbands 401K, and then put some in a taxable Vanguard Total Stock Index Fund for retirement. We save about 34% of our take home pay for retirement. We are also currently putting $400 a month aside in a 529 plan through the state of Iowa who uses Vanguard Index Funds. We live in a state without a state income tax so there is no immediate tax advantage that way. We currently have $12,000 put aside for his college.
Here’s the thing…we are happily expecting our 2nd child in May but are torn with funding another 529 plan so heavily. For all the reasons in your article about college, we also wonder what will college look like when both kids go, what if they don’t want to go, or a number of other scenarios. Anyway, we feel so confident in our retirement plan but we have always felt kind of queasy about tying up so much money into something that is so limited in what you can use it for with so many unknowns. However, it seems like all the advice you read about is to save in a 529. I would really appreciate your thoughts on this. Thanks so much!
Kristi
Hi Kristi…
Truth is I don’t really know much about 529 plans and never used one myself.
Instead, I maxed out our tax-advantaged accounts and invested the rest in taxable accounts. I’ve been paying college out of these.
In your case, I’d open a new 526 for the new arrival and split whatever I could comfortable afford between the two. But I’d also be prepared to fund the balance from other sources and I would make my own retirement the priority.
Maybe some of our astute readers might have more to offer?
Kristi — Jim invited me to read this comment to help out a little bit.
I was in pretty much the same predicament that you’re in now a couple years ago. I had one daughter, and one college savings fund that we were keeping in an T Rowe Price investment account. We were contemplating moving it into a 529 for the tax benefits. Shortly after, we found out we were pregnant with our second daughter.
Then, one day, it hit me like a Mack truck driving down the freeway. What happens if I’m putting all of my money into a 529 plan, then my kids don’t end up going to college? Similarly, what happens if they go to college on a full ride? Or, what if they join the military and are covered by the GI Bill?
That’s when we made the plan to focus on our own retirement. In your case, that would be taking the $400 and investing into your own Index Mutual Funds. Let them grow. Let yourself find freedom. You may find out that it ends up being easier to pay for their education when you have all of your own financial ducks in a row.
What’s the reason that you want to pay for their college? Just remember that you have no obligation to. I wrote an article about that here: http://www.johnnymoneyseed.com/saving-money/kids-can-pay-for-their-own-damn-college/
I hope this helps 🙂
Thanks so much for both of you taking the time to reply. I think the reason I have such a strong desire to pay for my children’s college is that my parents paid completely for my undergrad degree as did all my extended family as well. So I guess I feel a sense of responsibility to “pay it forward” to my kids. However, what I am realizing is the same college I went to just 12 years ago costs double now what my parents paid and who knows what it will cost when they go to college.
However, now I just feel like there is so much uncertainty about what college is going to look like 10 year from now for my oldest and 18 years from now for my youngest that tying money up in such a confining investment doesn’t feel right to me.
I clicked over to your post and really enjoyed your thoughts on the topic…as well as some of your other articles I just happened to click on. 🙂 It’s nice to hear different perspectives and acknowledgement that it is okay to fill up your own cup first and then help others with the overflow.
Have a nice evening!
Hi there jlcollinsnh,
Thanks for all you do here. Between you and MMM the wife and I are recommitted to FI. We became debt free except for our house around March 2013 and have been slightly clueless with our excess money until now.
We are expecting our third child in March 2014 and then the wife will be leaving the workforce.
The Plan: For me to leave the workforce as soon as its financially feasible to be able to enjoy the rearing of my 3 wonderful kids. I am 37 and wife is 36. Kids are 5,3, and not yet here. 😉
The 411: Income – Me – ~120k/yr Gross Wife – ~35k/yr Gross
Expenses/Debts – 156k @ 3.5% with 11 years left on Mortgage – $1689/mth and I add $2oo/mth to principal for $1889/mth (The house was appraised at last refi for $245k)
Other Monthly expenses add up to roughly $1600.
Our IRA and 529 plans get drafted out monthly as well for another $1175 ($450 each in the IRAs and $275 for 2 separate accounts for 2 kids.)
Investments – My 401k ~128k (VINIX 31%, SVF-N 18.5%, PTTRX 14.4%, FLMVX 14.4%, ICEIX 7.8%, VSMIX 7.1%, FSCRX 7.1%) After reading your Stock Series I feel you would recommend moving everything into VINIX with its .04% ER. But being a tax-advantaged is this still your recommendation?
My Roth IRA ~25k (SVSPX, TRREX, LEXCX, TWTIX, DIISX among other Individual Dividend stocks and Very High Risk Micro Caps) I have an Auto Investing setup with Etrade that allows me to invest in the Funds without fees. This is the reason I am not in Vanguard funds as they are not offered in this Auto plan.
Wife’s IRA ~6k (Similar allocation to my Roth)
I also have a 1.2% ownership in a Rehab Hospital which has to date paid out quarterly distributions of ~2k. We are hoping to sell this entity and i will profit ~ 40k at the current asking price.
Savings Account ~ 55k cash. Ive been accumulating this cash without really having a purpose for it except that I am currently looking to purchase a rental property that would likely require about 20k for a down payment. The rest I have decided to use to open up a taxable Vanguard account and invest in VTSAX.
Within my expenses above is Life Insurance (3 UL policies and ROP for wife) at about $290/mth. My UL policy is $200 of this and I believe it is a waste of that capital. My friend is the agent and he sold me this when he first started his practice. The policy guarantees 4% and it appears that the fees are around 5%. The surrender charge for this policy is $1386 and the current value is $8600.
1) Would you recommend cancelling this UL policy for me immediately and taking the $1300 loss and using the remaining $7200 to throw into Vanguard account? The surrender charge starts decreasing after another 4 years and becomes $0 in another 13 yrs.
2) Should I continue paying extra to my mortgage principal? Our expenses look so nice without the extra $1900/mth. I am debating using the $55k in savings to pay down a considerable chunk to get this thing done but after crunching the numbers it seems foolish to do this. I know it would feel so great to be done with all of our debt. I just don’t see us being FI with the mortgage hanging over our head.
3) What is your opinion of rental property? I’m not sure I can get ROI such as MMM gets in his area but I know many in my area that have success with rentals. We currently share one with my parents and know the pitfalls of being a landlord and am not afraid of the maintenance aspect and occasional headaches that come along with it.
4) And lastly, I’m sure I know your answer and please don’t be annoyed with the question but what do you think about my AA in my 401k and Roth? The 401k has VINIX which is cheap and follows the S&P 500. Should I funnel 100% into this? With the ROTHs, should I go with the Vanguard funds even though they aren’t offered in the Automatic Investing program?
Thanks in advance for you help.
I really feel as though I am fortunate to have found sites like yours and MMM’s as I have been in need of “mentors” in the area of FI.
There are not many people in my region who share these beliefs.
Sincerely,
Woodreaux
Forgot to add that I max out my 401k, both Roths, and the 529s get a bit for a total of $31,800 budgeted for upcoming years savings not counting what I will be throwing towards Vanguard account.
Hope that helps.
Welcome Woodreaux….
…glad you’re here. Not many in any region share these beliefs. That’s OK. While they’re busy buying stuff, we’ll just go ahead and buy our freedom first. 😉
If my addition serves, you currently have an invested net worth of ~254k and ~89k in home equity. Good start, but you’ve work ahead to be FI.
Looking at your questions:
1. While I hate life insurance, and especially that other than term, I think I might keep the UL policy. But you don’t mention the death benefit amount and I’m not sure I follow this: “(3 UL policies and ROP for wife)”
My thinking is the surrender charge is huge and if the payout is high enough, it might just be the best course.
You don’t have a large enough net worth to self insure and with three little ones you need some coverage.
You’ll have to run some numbers, but the life insurance you need should be on your life. Yours is the income that will need to be replaced if you die. If something should happen to your wife it would be tough, but financially you’d get thru it. Were you gone her road would be far, far tougher. Your kids DON”T need life insurance on them.
If you decide to dump the UL, pick up term insurance but just enough and just on you.
2. I’d be in no hurry to pay off a nice low 3.5% mortgage like yours. Better to channel the extra money into investments. Over time they should handily outperform 3.5%
3. Rental property can be a great investment but too often folks writing about it make it sound like a slam-dunk. It is not and it can be exceedingly easy to lose money: https://jlcollinsnh.com/2012/03/15/how-i-lost-money-in-real-estate-before-it-was-fashionable-part-i/
Keep in mind:
–It is not just an investment, it is a part-time job. You need to figure your time into your returns.
–Leverage is a key driver in its returns and leverage cuts both ways.
–You need to take the time to learn the business.
That said, if the experience with the one you share with your parents has worked out, and you understand the hows and whys it did, you’ve got a head start.
4. As you indicated, you already know the answer to this. 🙂
For me your current allocations are needlessly complex. I’d go with 100% in VINIX in the 401ks and 100% VTSAX in the Roths, IRAs and taxable accounts. With these you’ll be invested in virtually every publicly traded company in the USA.
BTW, you can easily set it up with Vanguard to have money automatically transferred from your checking account if you like. You can do this on their site or give them a call and one of their reps can walk you thru it.
Now for a couple of things you didn’t ask about but that jumped out at me:
1. Your Rehab Hospital ownership. If this has a value of 40k and is paying out 8k per year, that’s 20%. Of course, I don’t know anything about this investment. But that is a hell of a return. So unless it is very risky and/or unstable, I might just hang on to it.
2. If you want to retire ASAP your savings rate of ~32k against an annual income of 155k too low. I’d aim to double this.
The lifestyle adjustments needed are beyond my scope, but MMM does a great job of discussing these. You might also send your expenses to Johnny Moneyseed for a review like this one: http://www.johnnymoneyseed.com/mortgage/case-study-2-dumping-debt-taking-time-new-baby/
Good luck and keep us posted!
Thanks for the detailed reply Jim!
Sorry I was a bit vague with the details regarding my Life Ins situation but I already have a Term policy as well as coverage through work totaling ~500k without the UL policy.
I believe I have decided to cancel the UL policy on myself (which is a $200k policy) and get another 20-30 yr Term policy on myself.
I am also canceling the UL policies on the boys which will save me about$250/mth overall. The policies were started due to a good friend starting his insurance agency and in hindsight of course it seems like a really bad deal.
Although I will probably have a hard time dealing with the mortgage hanging over our head i know the math says to invest the extra cash rather than pay down principal.
I will be calling Vanguard in the morning to set up a taxable account and move enough over to qualify for VTSAX. I asked around today on MMM forum to see if there were any referrals for guys like you and MMM but to no avail. I will also start simplifying the AA throughout the other investment vehicles. Expenses never change right?
The hospital ownership is a Win/Win deal for me due to having recovered initial investment long ago and receiving distribution payments on a nearly quarterly basis. As far as the option to sell the hospital is not mine and the ~$40k will come only after the sale of the property. I’m happy with the arrangement since it’s all just “mailbox” money for me.
I guess I wasn’t as clear on our savings rate as I should have been either. We managed to save/invest roughly 60% in 2013 and are making strides to improve on this in the new year.
Our time frame is roughly 7 years to get me out of my current work environment and home more with my family. With help from sites like this we believe we can do it and it gives us a great goal to strive for.
Thanks again for the help and I will surely be around here and places like MMM and JohnnyMoneyseed going forward.
Woodreaux
My pleasure, W…
Sounds like you have the life insurance thing well covered so I agree, dump the UL. Your friend did you a real disservice here but, being charitable, perhaps he just parked his critical thinking and fully drank the koolade in his insurance train classes.
And congrats on the 60% savings rate. You don’t need lessons from me or anyone else on that! 🙂
Still, MMM and JM are fine reads, and here’s another: http://www.madfientist.com/tax-gain-harvesting/
That hospital ownership deal still intrigues me. I gather they are buying you and presumably other investors out? Sounds like it was a great run. How did you find it?
Thanks for the encouragement. Yeah the hospital deal was from a contact that I’ve made from past work history.
I was approached about buying out one of the previous partners. I purchased just a couple “shares” for cash in two different hospitals.
Both were failing hospitals at the time and this company goes in and manages them until they become profitable again. Then they try to sell the hospital for profit and all the “owners” receive their share of the profits.
Similar to flipping houses but on a more complicated scale.
Some of the deals work out. Some dont. It’s risky but can be profitable as well.
My ROI will be quite large if and when we sell the property.
I worked for 7 years in this specific healthcare field and still have many contacts there.
Hope that helps.
Happy New Year.
Yes I have been reading The Madfientist. Especially enjoyed his guest post here on 401k and his Travel hacking series.
He has the wife and I excited about a future celebratory trip after FI.
Woodreaux
Very interesting, glad it worked out!
Here’s another site to provide excitement about post-FI travels: http://www.gocurrycracker.com
Hi Jim,
I discovered your blog a couple weeks ago and since then I have ravenously read through most of the content on your site. 🙂 Love it!
I have two questions for which I would value your relevant personal insight.
#1. >>Is it a good idea to sell losing investments at the end of the calendar year for the purpose of taking a tax deduction on the losses?
You could then buy back the investments after January 1st and be right back where you were before, except having benefited a bit from your losses over the year. Is there any reason not to do this? (assuming transaction costs are minimal compared to the overall value of the investment)
#2. I’ve read that a home is not necessarily a good investment, due in part to the high opportunity cost of locking up all that capital. Well lets say I already have on hand the exact amount I would need to purchase a specific house.
>>From a financial perspective, would I be better off buying the house outright, OR paying 20% down (to avoid mortgage insurance) and taking out a 15 to 30 year fixed rate mortgage (I have excellent credit) and investing the rest in my favorite index fund? Perhaps that 80% would be better invested in a REIT fund to ensure that the money is linked to real estate and so would maintain a minimum of 80% of the home value, should the need to pay off the mortgage suddenly arise…
I appreciate any feedback you can provide, thanks!
-Mgraha
HI Mgraha…
and welcome! Glad to hear you’ve be captivated by the site!
1. Yep, it is a great idea. The loses can offset any gains you have and up to $3000 in earned income. Any loses that exceed this you can carry forward and use in future years.
You do need to be aware of the “wash rule” that says you can’t buy back an investment sold for a loss for 30 days. The easy way around this is just to buy a very similar investment instead. VTSAX for VFIAX as an example.
BTW, you might also consider harvesting your gains in a similar fashion. For more: http://www.madfientist.com/tax-gain-harvesting/
2. Depends on the mortgage rate. A REIT fund like VGSLX pays a dividend of about 3.5% plus the opportunity for capital appreciation. So if I could get a mortgage for 3.5% or less, I’d go for it. Between 3.5-6% depends. Over 6% I’d likely pay cash for the guaranteed return. But that just me.
The idea is to balance the mortgage rate against the potential returns.
Hope that helps!
Hi Jim,
Like many of your readers, I found my way here from the Mr. Money Mustache blog.
I’ve spent some time reading through the Stock Series, and was struck by reader Wendy’s question and your reply in “Investing in a Raging Bull”.
It has taken my husband and me five years to recover from near total financial disaster triggered by the 2008 meltdown and our own imprudence – having put way too much money into real estate at exactly the wrong time.
We recently sold the last of the investment real estate properties (all at big losses). Took some of the resulting cash and paid off a small house here in Florida where we live. For the first time in our lives we are 100% debt free and it feels wonderful.
Now to the dilemma. We have $300,000 in cash just sitting in a bank account leftover from the various real estate sales. I am paralyzed by fear of making the wrong decision yet again — that we will have (barely) survived the real estate bubble just in time to experience the latest stock bubble!
We are middle aged – my husband is 45 and I’m 51. He’s in a good place in his career, but I’m burned out and ready for a long sabbatical if not outright retirement. So we don’t have the long time horizon of some of your younger readers.
Let’s say I can finally get past the fear, and do something with the money. (Your blog is helping!) We already max out 401K and IRA accounts, so the $300K would be held in a taxable account. We have enough additional cash for 6 months’ expenses, and now live well below our means, so we don’t foresee having to dip into this money under normal circumstances.
Reading Bogleheads and other websites, it looks like Vanguard Tax Managed Balanced (VTMFX) might be a good conservative choice. What do you think? Other suggestions? I know Total Stock (VTSAX) is likely to be your recommendation and it is tax efficient, but if there was ever someone in need of a “smoother ride” it’s me, at least right now.
Thank you,
Susan
Hi Susan…
Your fears are perfectly understandable and since very scary things are bound to happen in the stock market you need to come to terms with them before investing.
At 45/51 you guys are still very young and have 30-40+ investing years ahead of you. That’s long-term in my book and were it my money it would go into VTSAX.
But over the next 40 years I can guarantee at least one 2008-type event and many more bears and corrections as the market’s relentless march up proceeds. You absolutely have to be able to ride out these tough times if you hope to succeed.
VTMFX gives you a 50/50 stock/bond mix and is indeed the more conservative choice. It can be expected to give a smoother ride, but with less return over time. And remember, when those bad things happen it will go down. Just not as much. But you’ll still need the same discipline to stay the course.
Remember too that your cash, especially with the micro-low interest rates of today is slowly being eroded by inflation.
So, my recommendation:
1. Read the Stock Series here https://jlcollinsnh.com/stock-series/ along with the related posts listed a couple of times. Relax and let the info sink in until you are completely comfortable with how this stuff works.
2. Once you have that comfort level, you’ll be prepared to decide for yourself what level of risk you can live with: VTSAX or VTMFX. Of course you can also create something in between using VTSAX and VBTLX https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT
The key is that it be something you can be comfortable with long-term no matter what the market does.
Basically, the same advice I offered Wendy. 😉
Thank you Jim for answering my question. I will follow your advice and spend some more time reading the Stock Series and getting more comfortable with the decision to invest the funds. Just reading your reply has been helpful. We did open the Vanguard account this week and moved the money into it – one step closer!
Regarding holding Total Bond in this account – which will be taxable (28% fed income tax rate, no State of FL income tax), I’ve been reading that bond and REIT funds should go into the tax advantaged retirement accounts, and not the taxable accounts if possible. If we decide to hold VTSAX and a bond fund instead of VTMFX, should we be looking for a Vanguard tax managed or tax exempt bond fund instead of VBTLX?
Thanks again,
Susan
Yep, generally speaking you want your bond and REIT funds in tax advantaged accounts. You’ll want to look at all your accounts together as a whole when figuring your allocations.
tax exempt bond funds invest in muni bonds and these gererally only make sense if you are in the higher tax brackets.
tax managed funds help, but also carry higher ERs.
Thank you. Will continue to do my homework, including reviewing our entire portfolio.
I am enjoying reading through your blog. In the one year since I started reading Mr. Money Mustache, we have saved thousands of dollars by making changes in our spending habits. I can see that your blog will be equally helpful on the income/investing side of the equation. To echo many readers – I only wish I had found both blogs sooner. You and MMM do a tremendous amount of good for people.
Thank you again,
Susan
Thanks for the very kind words, Susan.
Feels good to know this stuff is helpful and I’m always honored to be mentioned in the same breath as Mr. MM!
Jim,
Asking about the blog post about not benchmarking your investments. Think I finally found it, was it on Dividend Mantra’s blog?
Thanks,
Mark
Hi Jim,
I am a young guy, relatively new to the world of investing, after reading many of your articles, I have been convinced that VTSAX is a good place to put my growing F-U fund (low expenses, high long term returns).
I currently have an individual taxable account with Betterment that I opened 1 year ago. My goal was to transfer the funds from 100% Stock fund at Betterment to 100% VTSAX individual taxable account at Vanguard (mainly to slightly decrease fees), but I am being told by Betterment there are two options to accomplish this: (1) Direct transfer to Vanguard for a fee of $1000! or (2) cash out and pay taxes on gains (I am guessing that would be about 25% of ~$2000 of capital gains). Both seem like unfortunate options.. Any thoughts?
Otherwise, I am maxing out a 403b and 457b at work, planning on doing a Backdoor Roth IRA contribution as well this year..
Thanks for all the work you’ve put into the blog! I am sure I will have many additional work-free years of my life thanks to you…
Tom
Welcome Tom…
..nice to have you here. Sounds like you are off to a great start.
No matter how you move your taxable account from Betterment to Vanguard it will trigger a taxable event. You’ll be selling one investment to buy another and you’ll owe capital gains taxes on any gains from the one sold.
How big a hit this will be depends on your income and filing status. But my guess is, since you mention you are a young guy, it won’t be too bad.
I’m shocked to hear that Betterment is charging a $1000 fee and my guess is that you are misunderstanding what they’ve said. My guess is they are talking about withholding that money for tax purposes. This would be accounted for when you get the 1099 form from them and any money not going to taxes would be refunded to you.
Just in case, I’ve also asked a friend of mine at Betterment to offer her comments and clarifications.
As it happens, I’ve become a new fan of Betterment: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/ although VTSAX remains my favorite wealth building tool for those that understand it and the wide ride it will deliver.
If when you run the numbers your capital gains hit proves to be small, you can go ahead and move from Betterment to VTSAX.
But should the tax be large, there is no harm at all in sticking with Betterment. If you do, I’d go with a 90/10 stock/bond split. With their rebalancing this should allow you to take advantage of market drops and maybe even outperform VTSAX over time.
You can also just leave your current investment at Betterment and start building your VTSAX account with new money. This is probably what I’d do.
Hope this helps!
Hi Tom,
Katherine from Betterment here. Thanks for bringing up your issue — I do apologize for any inconvenience.
A direct transfer would prevent realizing gains only if you maintain the same securities (i.e. our stock ETFs), but in a different brokerage account. To move to a mutual fund (VTSAX), you need to sell the ETFs you hold through Betterment in any case and realize the gains. The best solution, if you want to convert your Betterment portfolio to VTSAX, is to withdraw from Betterment and buy the mutual fund at Vanguard. Directly transferring ETFs to Vanguard would mean you would have to sell them inside the Vanguard account and realize the gains anyway.
Thank you again and let me know if you’d like to discuss further. You can reach me at buck@betterment.com
Take care,
KB
Hi Jim,
Quick question: I am weighing paying of my grad school loans vs. investing the money in VTSAX. I thinking I’ve done the math right, here, but I just wanted to be sure.
My loans are about $14k at 6.8% with a fixed payment of ~$200/mo. I’ve got 9 or so years left on them.
We have cash available to pay them off in full, with enough left over to handle any cash flow problems in our life for the time being. But would it be better to invest the $14k in VTSAX, if the rate would reliably be >8%?
As far as I can tell, I’d pay about $5k in interest on the loans by the end of 9 years. The same amount invested would yield about $14k (total $28k). Even if that income is taxed later (for what, a couple grand?), it seems like a no-brainer… $14k-$5k-$2k = $7k profit.
Am I missing something?
Thanks, your posts have been heavensent.
Matt
Hi Matt…
and welcome! Heaven sent, eh? Nice! 😉
In many ways your question is similar to Mgraha’s above regarding mortgages.
6.8% is a very stiff interest rate and paying off that loan is the same as pocketing 6.8% guaranteed. Sweet! I’d grab it by paying off the debt.
VTSAX will likely outperform over 20+ years, but it will be a wild ride.
Were it me, I’d take the sure thing, be done with my debt and then pour all the money I’d been paying towards that debt, and my saving above it, into VTSAX and watch it grow like crazy.
Hi Jim, I’m not sure if this question has ever been asked, but I am curious if you ever considered investing in environmentally responsible indexes or an equivalent. I am starting to invest beyond my 401k (which doesn’t give me that option) and I am worried that investing in a broad index is just contributing to global warming. I know a green index contributes to depletion of resources but it would be better than VTSMX that invests in everything from Halliburton to Exon. What is the point in having money when i’m older if the planet is gone to hell.
Hi Mike and welcome.
Seems to me it has, but I don’t recall when or where and I’ve not written a post on it.
If you are so inclined there are many socially responsible funds from which to chose. And since socially responsible means something different to different folks, you should be able to find one that fits your preferences. But be aware of the drawbacks:
1. These funds are by definition actively managed, and that means higher fees. High fees are a huge drag on performance.
2. It also means the managers are stock pickers, and that is a loser’s game.
3. They are frequently “load” funds, meaning they charge a sales commission, typically 4-6% when you buy.
4. Some even charge redemption fees that can tack on another 1-2% or more.
So, in all likelihood you will pay a stiff financial penalty for your beliefs. Select very carefully.
What some choose to do is to invest in the index and enjoy the extra wealth that creates. They can then deploy that wealth to help the causes they support.
Good luck with whatever option you choose!
Thanks for the response.
There is the Vanguard FTSE Social Index Fund.
Looks like a good choice for what you are after, Mike.
I don’t know how socially conscious the fund can possibly be. Just look at its current top holdings (copied from Vanguard site). I almost thought it’s a joke!
Month-end ten largest holdings
(22.0% of total net assets) as of 12/31/2013
1 Google Inc.
2 Johnson & Johnson
3 Wells Fargo & Co.
4 JPMorgan Chase & Co.
5 Procter & Gamble Co.
6 Pfizer Inc.
7 Bank of America Corp.
8 Citigroup Inc.
9 Merck & Co. Inc.
10 Walt Disney Co.
Well, costs and performance are reasonable. That’s what I look at.
Socially conscious, like beauty, is in the eye of the beholder.
Hey Jim, I have two other questions. Completely unrelated.
1. Do you ever wonder if the trend of investing in index funds really takes off and everyone does it, it will somehow make index fund investing no longer the best way to go?
2. Have you ever heard of the solar investment company Solar Mosaic? Just wondering what you thought of them. You basically can invest with them, no minimum, which they in turn give out loans to schools and such for loans for solar projects. You make the interest in payments for 10 years. So from 4.5-7%. I’m thinking of using this as a more profitable allocation than bonds?
1. Nope
2. Nope
🙂
1. Human nature being what it is, large numbers of folks will always convince themselves that they can outsmart the market. Large numbers of other folks will always exist to encourage this belief and to prey upon — opps, I mean serve — them.
2. I’ve never heard of these guys, but from your brief description SM sounds like a mixing of goals and overly complex for the simple investing strategy I discuss here.
Some say that it is OK to set aside a small portion of your money to “play with” in alternative investments like this. I used to agree and still don’t have a strenuous objection if that’s what you want to do.
But as for me, at this point in my life, I no longer see any value, nor do I have any interest, in “playing” with my money. I like to keep it working as hard as possible, while I do the playing myself. 🙂
Hello,
I just stumbled across your blog which I found fascinating…lots to read LOL.
I noticed your link about investing in Vanguard if one resides outside the US. Tell me that I didn’t misunderstand Vanguard’s info. I clicked for Germany and then UK. If you’re an individual investor, you must have a whopping 100k of Euros or pounds to open an account and invest in Vanguard. Is it true or did I misunderstand something?
Hi Daira…
Glad you found your way here and are finding it all of interest.
I’m not sure what link you are referring to but up next is a guest post titled Investing with Vanguard for Europeans. It will walk you thru the process, even if you don’t have 100k in Euros/Pounds. Stay tuned.
Meanwhile, if you haven’t already, check out https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/ and especially the comments.
Good morning!
I am a recent reader of your blog and have a few questions.
The Data:
41 yrs old, married, 2 kids (6 & 8)
no mortgage
no debt
self employed /income avg. over last 4 yrs = $110,000/yr (no employees)
current total in bank account = $90,000 (after reading your blog we are eager to do something to get our money working for us)
we sold our last residence and owner financed $17,000 @ 4.5%
other assets in livestock and equipment totaling $105,000
In recent years taxes have been roughly $20,000/yr.
Questions:
1- Can tax liability be reduced with appropriate IRA?
2- Which IRA (Roth, SEP, etc.) is the best choice for us?
3-What are the contribution limits?
4-Can VTSAX, VBTLX, VGSLX be allocated to this IRA in the percentages you recommend?
Any other helpful suggestions would be greatly appreciated. Thanks so much for providing such a wealth of information!
Hi CK…
Welcome and thanks for the kind words!
Yep, being self employed you can create a SEP IRA and it is a terrific way to build your assets and reduce your taxes. Not only can you use those Vanguard funds in your SEP, you can create it with Vanguard: https://investor.vanguard.com/what-we-offer/small-business/sep-ira?WT.srch=1
That link provides a great overview of SEPs and how to use Vanguard for them.
ROTH IRAs don’t reduce your current taxes but provide wonderful long-term benefits. I’d fully fund — $5500 per year — for both you and your wife: $11,000 annually. Once your kids start earning money, it is a great idea to fund ROTHs for them too. Gives their money a nice long time to utilize the “magic of compounding”!
Another option worth evaluating for self-employed folks is an individual (or self-employed) 401k. It can yield a much higher amount of pre-tax per year investing options.
Thanks Jeffrey…
…good point.
For more on these: https://investor.vanguard.com/what-we-offer/small-business/individual-401k?Link=facet
I didn’t think a spouse had to have income to fund a Roth as long as the working spouse makes enough to fund both Roths. Am I wrong?
D’oh!
Nope. You are absolutely right.
Not only do I know this, I have taken advantage of it myself. 🙂
Thanks! Comment is now corrected.
Hello Jim,
I’m a huge fan of your blog and feel we have many shared life experiences. My wife and I are in our late fifties and I’m struggling with something that I haven’t seen addressed here directly. I imagine there are other baby-boomers out there facing this same dilemma and I’m certain you will have some invaluable input.
Financially, my wife and I come from nothing (paid our own way through college on welfare and food stamps!). We’ve made plenty of missteps over the years, but with much hard work and some luck have managed to put together a net worth of about $1mil. My goal has been to get to $2mil and then retire. My wife’s mother is deceased and her 81-yr-old father has given us power of attorney and has had us manage his portfolio of about $400k. He uses the required minimum distributions from this to augment his pension and social security. This provides a very comfortable living for him. He has excellent health and long-term care insurance. My wife is the sole heir, so we feel quite comfortable in planning on this $400k inheritance. So, this would get us to $1.4mil…not too far off my $2mil goal.
The latest wrinkle is a real corker. My 81-yr-old father-in-law just got married! Not quite as crazy as it sounds as the new bride is a long-time family friend that my wife and I have known for 30+ years. His new bride has no direct heirs and informed us that they signed a pre-nup to protect all my father-in-laws assets as-is. In addition, she has set up a trust fund for my wife that, upon the death of the 74-yr-old bride, will leave my wife an inheritance with a current value of $800k…a miraculous windfall!
My question now is this: How should my wife and I view these inheritances in relation to our target goal of $2mil? It’s hard to imagine a scenario where we would not take full possession of these funds at some point (as I mentioned, we already manage the $400k for my father-in-law and my wife is the sole heir). I would desperately like to stop the 50 hour a week rat-race and at least semi-retire. We want to travel and enjoy ourselves after 35 years of working hard and raising three kids. We are in great health now, but if we wait five, ten years or more before we retire to start this next chapter, who knows? I hate the idea of slaving away the next five or ten years trying to reach my $2mil mark when we essentially have that and more if we count the inheritances.
I’m sure there are other boomers out there who have sizable inheritances in their futures as well. I understand this is a great problem to have, but a problem none the less. I would greatly appreciate your opinion on this…thanks!
Hi Jim, I didn’t realize my full name would be posted…any way you can delete my last name? Thanks!
Thanks Michael…
Glad you like it and glad you are here.
Thanks for the very interesting scenario! Wow! Great story. I just read it aloud to my wife, who BTW has no such relatives. 🙂
First question I’d ask is just how much income do you want/need in retirement? 1m gets you about 40k and 2m – 80k. If you absolutely need 80k, that’s one thing. But if 2m is needed but only to provide a certain comfort level, that’s another.
While you tentatively have two very nice inheritances coming your way, as they say, it ain’t over till it’s over.
~Wills, circumstances and minds can change.
~The money can be spent down in unexpected ways.
~Even at 81 & 74 it still could be 15-20+ years before the money arrives.
~You don’t want to put yourself in a situation where your financial needs have you rooting for someone to die.
~Your father-in-law could die and his new wife move on, changing her will in the process.
Considering all that and more I haven’t thought of, my inclination is to say forget about it until and if the money actually comes your way.
But then you say, “I would desperately like to stop the 50 hour a week rat-race…”
If that’s the case, I would adjust your spending to make the 1m you have work without counting on the inheritance.
Then if the inheritance happens you can adjust your lifestyle accordingly.
Hope this helps!
Jim,
As expected, your sage advice sounds prudent and well-thought-out. I think that often those of us writing you for help are just too close to their own situations to see the forest through the trees. After sitting on this for a day, I feel much clearer about things now and have revised my strategy as follows:
I’m going to adjust my target goal to $1.2m for full retirement. I should be able to accomplish this in about 3 years (or one more year of stock market performance like 2013!). This would generate about $48k annually. Additionally, we will be 62 in 2017 and SS will add another $25k (PLEASE tell me it’s acceptable to count on social security!). This should be adequate for the retirement lifestyle we desire. We will treat the inheritances as a bonus if/when they come and use them primarily to create a financial legacy for our children, and someday, grandchildren.
I would appreciate your comments on my new plan.
Thank you for helping me gain clarity on this!
Hi Michael…
I think you are right. Many folks here have mostly figured it out and are just seek confirmation — a second opinion or peer review, so to say.
Never hurts to have a second pair of eyes take a look, I do it myself on important issues!
Sounds like you’ve come up with a great plan and, yes, you can expect SS to be there: https://jlcollinsnh.com/2013/01/29/social-security-how-secure-and-when-to-take-it/
When you hit 62, take a moment to consider your options as described in that post before you take early SS benefits.
If the opportunity presents itself, you might also share with your in-laws your plan to make the inheritances a legacy for the next generations. Would be nice for them to know and might help keep their plans in place. 😉
Hi Jim,
Thanks for all of the great information and perspective. I have a few questions about Vanguard funds, asset allocation, and how to distribute stocks and bonds among three pots of money as described below.
First, my situation: 43 years old, fairly late to investing but now maxing out a 403(b) and a Roth IRA every year. My employer also contributes 5% of my salary to a supplemental “Plan B” account. I don’t plan to touch any of this money for 20+ years. I may only stay in my job for several more years, but I should be able to save enough that it will compound nicely over the next two or three decades (knock on wood) even if I don’t add a lot more to it after I leave my job (for more interesting and probably lower-paying work).
Unfortunately, Vanguard recently informed me that the LifeStrategy fund I hold through my 403b and Supplemental Plan B is being discontinued and replaced with a target retirement fund. If I don’t manage the transition myself, they automatically put me in whatever target fund they deem appropriate–based on my age, I suppose, or whatever is closest to the LifeStrategy fund I currently have.
I like the simplicity of the LifeStrategy Growth fund (80/20), and I don’t want the target retirement fund, which has higher fees and does its own automatic rebalancing and other things behind the scenes. I’d rather invest in something simple and rebalance myself.
My employer doesn’t provide too many options for the 403(b) and Plan B, but I do have access to VITPX and VBMPX. These, as you probably know, are the institutional versions of the Total US Stock and Total US Bond indices, and the expense ratios are near zero. So, what I’ve done is move my money out of LifeStrategy Growth and into 80% VITPX and 20% VBMPX. (I took your advice that one can live without international exposure.)
I’m comfortable with the 80/20 AA, though I would consider going 100% stocks. Would that be foolish for a 43 year old? In any case, given my long-term plans for the money, would you suggest that I stay at 80/20 for a long while? Or should I smooth the ride as I go by increasing my bond percentage annually?
I read one of your posts about the bond market and your preference for intermediate-term bonds at this time. I only have access to the Total Bond index, but I do have access to the Stable Income Fund. Is there any reason I would want to consider the SIF at this point for my hedge against stocks?
One last question. I mentioned I have a Roth IRA. My current AA method is to have the Roth IRA 100% in VITPX, and to adjust my 403(b) money and supplemental “Plan B” to achieve the overall portfolio AA of 80/20. I read somewhere (Bogleheads?) that it makes sense to dedicate the Roth to equities, since they’ll have higher returns over time and will never be taxed. What do you say?
Thanks! And sorry for the length.
Hi Jonathan…
…and welcome. You are a great example of the kind of reader Michael talks about in his comment above. 😉
That is, you’ve really got this figured out and are checking in for a peer review. Happy to do it, and I like your plan.
Your replacement of Life Strategy Growth with an 80/20 mix of VITPX and VBMPX gives you an even lower cost, with matched performance, as long as you are willing to do a bit a rebalancing once a year or so. Which clearly you are.
The bonds will give you a bit of “dry powder” to take advantage of stock market drops. That will not only smooth the ride a bit, but might well equal or even slightly improve upon a 100% stock allocation. Just be sure you actually do reallocate when the time comes. It can be very, very hard to actually sell your current winner to buy your loser. 🙂
Don’t worry about my current preference for intermediate-term bonds. It is a short-term play and a slight preference at that. The Total Bond Fund is better for your purposes.
I wouldn’t worry about increasing your bond position as you go. As long as you are earning and accumulating more wealth thru your job and savings 80/20 is fine. Once you retire and/or move to a lower paying career you can consider changing it.
You might have read that stocks-in-Roths idea right here. (I’m not on Bogleheads, but it could be there too.) In any event, I like it and it is what I personally do.
My thinking is that our Roth accounts are our longest term money, in fact we don’t ever plan to spend ours. It is destined to be part of our estate and from there it can continue as a Roth for our heirs. Assuming they (hopefully!) so chose.
Since stocks provide the best long-term returns, our Roths hold the Total Stock Market index fund VTSAX.
But some people plan to draw on their Roths for tax free income in their retirements. For those folks, holding stocks in them is less important.
Basically, keep as much of your investments as you can in tax advantaged funds, starting with bonds and REITS. From there also keep your stock funds in tax advantaged, and I’d start with your Roth for those.
Investments in taxable accounts are best held in stock funds as these are the most tax efficient of the three. Make sense?
Anyway, great job! You sound like you are well on your way!
Thanks for the prompt and detailed reply, Jim! It’s very reassuring to have my investment decisions blessed by someone with your level of experience. I don’t quite have my head wrapped around all the tax implications of my investments yet, but I’m getting there.
Hi Jonathan…
My pal The Mad Fientist has done some great work on taxes:
http://www.madfientist.com/category/tax-avoidance/
Jim,
I would first like to that you for all the information you give to us who are in search of financial independence. I’m glad that I have found your website around a year ago and have told many others who share the same interest as I do about you. I have managed to max out my 401K, IRA and send the rest to Vanguards VTSAX. That being said I have some questions about my personal investing.
I have always lived a frugal life and have saved big percentages of the income I take home. Currently at the age of 26 I have a net worth of 132K excluding house, car ext. I set up my company 401k when I began working and didn’t know much about investing. I looked on the internet and found a website (smart401k I Believe?) which looks into your company’s funds and suggest them for a fee. Clueless as I was I decided to do this but the catch was they had a 30 day money back guarantee so I did eventually take their advise for free. Anyways, They had me set up about 8 different funds. Index as well as actively managed funds. My company offers some index funds through ING such as Russell 2000 and S&P 500 with very low fees. Now that I know I want to invest in index funds after reading your stock series multiple times, what one should I choose and when should I move the funds over? Does it matter that I will be moving my funds when the market is at all time highs?
Unfortunately I have a couple of issues with my IRA as well. I started it a couple of years ago through Vanguard and put all the money into a Lifecycle Fund. I want this money in VTSAX but am unsure on when to transfer the funds? I guess I just feel like I’m selling high and buying high. I also started a Roth which now after more research on this I have come to learn it would have been better to open a Traditional. Should I just open up a traditional IRA for the 2014 year and add all future money into this or continue to build up my current Roth?
My personal goal is to be financially independent by the time I’m 40. After following you and MMM I know I can accomplish this since my expenses are 21.5k yr. Thank you for all that you do and taking the time to teach us newbies- Brandon
401k – 72K
Roth IRA – 11.5K
Vanguard VTSAX- 25K
Prosper(P2P Lending)- 8.5K
Emergency Fund – 10K
Savings- 5K
Gross Salary: 80-115K (Depending on how much overtime I’m willing to work)
Welcome Brandon…
glad you are here and thanks for passing the blog along to others. That’s the highest praise of all!
At 26 and with 132k in investable assets, you are well on your way to being FI at 40.
The advice you got from that website might have been free to you (your company likely paid for it), but it lead you to an unnecessarily complex and fee heavy portfolio of funds. So it wasn’t without cost.
It is an unfortunate example of making investing seem complex to justify charging for advice.
Most 401k plans have tons of choices and all but a few can be immediately disregarded.
Start by eliminating all but the index funds. Then eliminate all the index funds focused on anything other than the broad market. Once you’ve done that, you’ll have 2 or 3 left.
Choose the one that covers the Total Stock Market Index. This will also likely be the one with the lowest expense ratio (ER).
When you do that with your 401k you wind up with these:
S&P 500 /17% /.05
Russell 2000/10%/.07
Unfortunately, neither is Total Stock Market, but that’s OK. You can just go with the S&P 500 and be fine. If you are willing to rebalance occasionally, you can add the Russell 2000 and you’ll be fairly close to a Total Stock Market fund. You’ll want an 80/20 split, the S&P 500 being the 80%.
I would make the change ASAP. You’ll drop your ER costs immediately and where the market is trading makes no difference. You’ll be going into a slightly more aggressive mix, so if the market continues to rise you might get a bump and if it corrects you might take a little hit. But over the decades you’ll be invested it is a non-issue. For more: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Same goes for switching from Lifecycle to VTSAX.
As for Roth v Traditional IRA, you can just leave the Roth alone and start funding the traditional, assuming it is the tax deductible IRA. But why not fund both? If you are planning to be FI by 40 your savings rate should be able to cover it.
In general, I suggest this as the order for your investable money:
401k up to company match
Deductible IRA to full limit
401k up to full limit
Roth up to full limit
Taxable investments
If you are worried about having too much tied up in tax advantaged accounts when you retire at 40, read this:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Hope that helps. Good luck and keep us posted on your progress!
I was under the impression that Traditional IRAs were off limits for people with 401k’s available. Is there something about this situation that allows that?
Hi Stu…
Thanks for raising this point.
If you are covered by an employer retirement plan Traditional deductible IRAs are still available, but income limits apply:
http://www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work
Still, good catch. Because Brandon is single and makes over 69k he is over the income limit and cannot deduct contributions to his IRA.
He can, however, make non-deductable contributions. The earnings of these will then grow tax free. Once he reaches retirement age he can withdrawal his contributions tax free, but the earnings from those contributions are then taxed.
Thanks Jim and Stu
I was not aware of the fact the rules change if your covered by a company retirement plan. I guess you learn something new everyday.
Also I’m still a little confused on the last part of your reply…..He can, however, make non-deductable contributions. The earnings of these will then grow tax free. Once he reaches retirement age he can withdrawal his contributions tax free, but the earnings from those contributions are then taxed……..
From what I’m getting is your still wanting me to contribute to both Roth IRA and Traditional? You stated why not contribute the max to both. I though you could only contribute $5500 combined to one, either or both?
If $5500 is the max wouldn’t I just stay with the Roth that way once I hit retirement age all the money will be tax free? Or are we talking about completely different things here?
Hi Brandon…
Sorry I’ve made this so confusing. My response to Stu was more a discussion of IRAs than additional advice for you.
You are correct that you are limited to $5500 across all IRAs.
Roth IRAs also have income limits for contributing, but the limit is much higher: 127k for singles and 188k married. So you can, and should, have a Roth.
In both a non-deductable IRA and a Roth your contributions are not deductible. The difference is, when you withdraw from them after 59.5, everything coming out of your Roth is tax free.
So forget about the non-deductable. The Roth is your best choice.
By the same token, my list in my original reply was just to run down the options, but not to imply you could use them all. For you specifically:
401k up to company match
Deductible IRA to full limit (but not available due to your income)
401k up to full limit
Roth up to full limit
Taxable investments
Hope this makes more sense?
Yup! Thanks.
Just a thought to Brandon, you may squeeze into a traditional IRA And get a deduction because it is based on your modified adjusted gross income. That calculation allows you to subtract things like your 401k contribution and HSA contributions from your gross income. So it may be worth waiting till year end to decide, unless of course you think you’ll be at the higher end of your income range.
Update…….
Current Fund %+Fees
Index Funds:
S&P 500 /17% /.05
Russell 2000/10%/.07
International/5%/.13
Bond Market/7%/.06
Actively Managed Funds;
US Large/30%/.34
US Small-Mid/17%/.72
International/11%/.58
Real Asset/3%/.72
Since I’m in the wealth building stage what would your recommendations be? Thanks again-Brandon
Hey Jim, first of all, thanks for posting all this awesome insight. Very helpful. I want your thoughts on 401k plans up-charging index funds. Here are some from my plan.
VASGX in my Transamerica 401k plan through work has an expense ratio of .92%. But out in the wild (through vanguard) it’s only .17%. So they can charge be .75% more just because they are linking the funds through their site!? That seems steep. The question is would you max out contribution to this account, or just put in my match and invest outside my plan?
Hi Mike….
My thoughts are it sucks!!
The fees ladled on to 401k are outrageous and damn near criminal in my view. In fact I wrote a post on this: https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
But, as you’ll see in reading it, once I was done venting the conclusion is that the best move is to hold your nose and max out your contribution.
About all you can do is lodge a complaint with your HR department. Most HR folks aren’t well versed in what reasonable investment costs should look like and that’s how the scoundrels slip them past.
Good luck!
Hi Mr Collins,
Love the info on your website, I sent the link to all my friends. I went through the questions, and still needed some advice. My spouse and I would like to semi-retire by 45. Currently I’m 35y/o. We are pregnant with twins, due June. Here’s our situation:
Income:about $150,000
Expenses: $3600/mos
Debt: $17,000 (2% interest-car loan)
Investing: total $87,000; $4000/mos starting jan 2014
457 Horizons: $65000 (all stocks) w/ 4% employer match–investing 17% of income
ROTH: VTIVX–maxing out
Hers: $10,400
Mine: $8800 (plan to increase to $10,000 by March)
403b: VTIVX–$820–still employed but taking time off so not investing
Taxable acct VTHRX–$2650 ( will change to VTSAX)–investing $2000/mos
ING Savings: $47,304–$22000 for house down pmt; $18780 ER fund, $5200 baby fund; all else is for insurance payments and other supplemental savings. Will take some time off work with babies where we are both not getting paid so will use Baby fund $$ and may use some ER fund.
Pension: will receive at least $2000/mos (will automatically adjust for inflation) at 65y/o and receive 25% medical benefits
Plan: Transfer $22,000 from savings and $2650 tax acct to VTSAX. The $22,000 is for a house, but since we live in California, we aren’t planning to buy a house anytime in next 5 yrs. Taxable acct should allow us to semi-retire in 10yrs and get us from 45 y/o to 55 y/o, we only need $24,000. Then use Roth for 55-65 y/o. Finally, use pension, 457 and whatevers left over. Thinking about transferring ROTHs to VTSAX. And yes I have a high risk tolerance. Move in 5 yrs to Washington or Oregon where cost of living is less.
Questions: Should we put all our taxable $$ into VTSAX, even though we may use some of it in 5yrs for a house? Or should we create 2 seperate accts for the semi-retirement goal, and house goal (which may or may not happen) What do you think of the set up to reach semi-retirment in 10 yrs? Should I invest some of the ER fund, if so, where? Any other brilliant ideas, feel free to share!!
Thank you so much!!!
Hi Sam…
Glad you like it here and congrats on the coming twins!
As you know from reading the blog, VTSAX is my favorite tool for building wealth long-term. So, yes, I’d put you taxable investments there.
The money for the house is a difference matter. ~5 years is short term.
You seem on the fence about the house and, if you can live without it, I’d put the money in VTSAX. If the next five years provide a nice run, you can buy the house if you choose. If not, forget it and let the money stay invested.
If on the other hand you are pretty sure you are going to want that house, I’d use Betterment as the investing tool for that money. For more on that: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
They have some pretty cool tools to get you there.
Good luck!
Thank you for your help. I’m comfortable with the idea of investing the $$ for the home in VTSAX, but since I’m fairly new to actually caring about my investments, wasn’t sure if 10 yrs is long enough to keep everything in stocks–would 10yrs be considered “long term” investing?
I think of it more as a sliding scale than a fixed mark to cross.
But if I had to pick one, I’d say anything 5 years or less is short-term. Greater than 5 years becomes progressively longer and longer-term.
Ideally, investing in stocks you should think in terms of decades. Plural. 🙂
Thank you for your quick responses. I appreciate you taking the time to help! It was my first time asking someone for feedbak via internet and really glad I did. Your website has really helped guide me.
Some people address you here as Jim, but since we’ve never met, I’ll start with Mr. Collins…
Mr. Collins-
Your blog is one of my favorites, and I’ve been keeping up with it for a while now. While your investing topics and recommendations are great, I think some of my favorite posts are when you write about your travel and perspective on travelling.
Last year when you and Mr Money Mustache were writing about your trip to Ecuador, it sounded incredible! I had been thinking about our next potential destination and well, soon after I set a trip up for me and my wife. So now we are going to Ecuador for a week in March and had some questions for someone who has been there before.
First off, we are thinking of renting a car so we can have some freedom while we are there. Little economy cars are pretty affordable, but could have issues with bad roads… SUVs on the other hand are silly expensive, but can handle poor conditions. Do you have any recommendations for transportation? All we are hoping for is a magic combination of reliability and affordability…
Second, we are planning on being primarily in Quito, and a small town outside of Manta. Anything you would recommend that we must see while we are there?
In advance, thanks!
Hi Alex…
It’s a funny thing. My closest friends call me “Mr. Collins” and I refer to them as Mr. or Ms. in turn. Kind of an inside joke and a response to the ubiquitous use of first names.
We really did have a great time in Ecuador and we’ll be doing it again this August.
I’ve never rented a car there, but I can say the roads are surprisingly good. Oil revenues at work. So unless you really intend to get off the beaten path, an SUV is overkill.
I also wouldn’t need or want one in Quito. Traffic is a zoo and taxis are reasonable. Good public transportation too, if you are adventurous.
My time in Quito has been focused on the old town and that’s where I’d return. Mariscal is the newer tourist area, but I don’t much care for it.
I’m afraid I’m not much of a tourist, so I don’t see many of the sights and remember even fewer. I prefer wandering about and sitting in cafes and parks.
What town outside of Manta? I spent three week last year in San Clemente. Right on the ocean, but a tiny town with little to do. Just what I wanted.
Dave is a friend I made there and he runs this blog:
http://figuringitoutinecuador.wordpress.com/2014/01/22/iguana-park-guayaquil/
As you’ll see I’ve commented there.
John and Mary are also new friends from there and here’s their blog:
http://johnandmarylivingitupinecuador.wordpress.com
They are all great people. If you are going to get over their way, let them know!
Have a great trip. As for me, in March I’ll be back in Guatemala!
Thanks again for all the advice! So the town outside of Manta that we’re visiting is Canoa. Seems to be right about 5 miles or so from where you were in San Clemente. It looks small and simple, which sounds perfect to me.
Also thanks for the contacts. I’ll read up on them. Have a safe trip yourself!
I’ve been thru Canoa a couple of times but have yet to stop. Small but seems like a lot going on there.
Have a great time and be sure to report back!
Well, we made it back from Ecuador! Again thank you for your advice, it was very helpful. We did end up renting a small car, and took it about 700 miles or so around Ecuador ($40 in gas, incredible). There were a couple challenging moments (driving a Chevy Spark through massive mud pits, and dodging large speed bumps), but for the most part it was just hours of beautiful scenery and relaxing driving on nice new roads.
We ended up visiting Quito, Canoa, Mindo, Otavalo, and the small village of Chugchilan over the course of a week. I guess it was a little hurried, but that’s all the time I had. Ecuador is definitely one of the most beautiful places I’ve ever been, so it’s easy to see why you keep going back. The Andes mountains and the massive volcanoes kinda blew my mind.
I saw your post today, so I guess you are back home. I hope you had a great trip yourself, and that your upcoming Ecuador trip is epic. One of these days/years I intend to come to one of the Chautauquas or something similar, but for now, need to save that money. Someday…
Glad to here you had such a grand time, Alex!
You’re right about the mountains and volcanos. Repeatedly when I’m there the thought bursts into my head:
“Holy smokes! I’m in the bloody Andes!!” 🙂
Hi!
I am very very very new to all this. I am worth less that 10k and I am 41 years old. I did not grow up with money nor was I around people who knew how to manage money, and thus did not learn that this was a thing I ought to be doing. I have, however, finally grown up enough to realize that this is something I can do. My question is this: Can you direct me to any of your articles or others’ articles of how to START this daunting process with minimal money. I am certainly not looking for high risk gambles, but I am a bit overwhelmed by all the options and terminology, I would love to read a good simple primer to help me make realistic goals and get me on the path to financial independence.
Thanks,
RC
Hi RC and welcome.
I didn’t grow up in a money savvy home either. Learning this stuff has been a long, hard and expensive road of countless mistakes. I started the blog for my daughter in the hopes of helping her avoid those. That’s what my Stock Series is designed to do and I’ve tried to make it as clear and simple as possible: https://jlcollinsnh.com/stock-series/
At the risk of sounding immodest, I suggest you start there. In those posts you’ll also find links to other sources I think are worth your time.
Once you’ve read thru them, feel free to check back with any questions.
In addition, and especially if you want to get started now and with minimal money (or if this stuff just makes your eyes glaze over), take a look at Betterment. I describe why I like these guys here:
https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Hope this helps, and congratulations on starting your financial journey!
Hi,
In your posts you always talk about making contributions to one’s employer 401k plan being an essential part of a retirement strategy, but I’ve not really seen much mention (one way or the other) about the benefits and drawbacks of choosing a Roth 401k plan instead. The rule I’ve always heard for whether you should contribute into a Roth vs standard 401k is your current tax bracket vs your expected tax bracket upon retirement. The logic being you should pay into lower taxes now so that you can withdraw tax free later when you would be paying higher taxes with a traditional 401k. As a highly paid technology worker in my mid 20s, I generally max out my Roth 401k $17,500 contribution based on this logic, as I assume that by the time I retire:
A) Tax rates will probably go up across the board
B) I will be making a significantly higher salary (and will over time develop a higher standard of living as a result, whether that’s a good thing or not)
My question then is twofold: Do you think these assumptions are generally correct ones to make, and am I correct in making my contributions to a non-deferred Roth 401k instead of the standard 401k?
Thanks!
Hi WT…
I’m not sure I’d characterize 401k plans as “essential.” In fact I have some serious reservations about them as described here:
https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
But in the end, with all their flaws, over all the best advice is to hold them. The tax advantages tend outweigh the problems. And the higher your tax bracket, the more true this is.
In principle, I also agree with the idea deciding between a Roth and a 401k depends largely on your current tax bracket and that you anticipate in retirement. The problem is that this requires us to predict the future, an impossible task.
For instance, I tend to agree with your point A: taxes are likely to go up. It is even more likely that as you build your wealth you will be in a higher tax bracket by then. Both these seem reasonable, common sense speculations, but they are speculations none the less. We can’t be sure.
But we can be sure (assuming you have a federal tax liability, some folks don’t) that funding a 401k reduces your tax burden today. And that your investments in the 401k will grow tax free. Bird in the hand.
Another factor to consider is your age and how long your investments have to grow.
So, there is a lot of personal choice involved here. But I’d say:
401k if your tax bracket is 25% or higher.
Roth if your current federal tax liability is zero.
If you are in the 10% or 15% brackets, it is more of a toss up. But if I were young and my 401k had decades of tax free growth ahead, I’d choose it over a Roth.
Then, when the time came I’d convert to a Roth as described here:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Hope this helps!
Hey Jim, I see your recommendation on an earlier question, that you order of investment priority is:
401k up to company match
Deductible IRA to full limit (but not available due to your income)
401k up to full limit
Roth up to full limit
Taxable investments.
Simple question but i’m having a hard time finding the answer by google.
1. Is a deductible IRA and Roth IRA held in different accounts. For example, can i open each of these in a Vanguard account? Then just deduct the taxes when i file?
2. Is the investment amount for both the deductible IRA and the Roth both 5,500?
Thanks for taking the time to answer our questions. This site has been so helpful to me.
Hi Mike…
1. Yes, you would hold your Roth and your traditional IRA in two different accounts. But both can be at Vanguard. In fact, both can be in the same fund. For instance, I hold VTSAX in both my Roth and my Traditional. And I also hold VGSLX and VFIDX in my traditional IRA.
2. Yes, if you are younger than 50, each year your contributions are limited to $5500 across all IRAs. For those 50 and over the limit is $6500. These are the current limits and they could go up in coming years as they have in the past.
For more: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits
Hope this helps!
Thanks for the info.
So you would suggest investing in both a roth and a traditional? Just split the 5500?
That depends on your personal situation.
Assuming you have a federal tax liability (some folks don’t), funding a traditional deductible IRA reduces your tax burden today. And then your investments in it will grow tax free. But you’ll pay taxes when the time comes to withdraw.
With a Roth you pay taxes now, there is no deduction for the contribution. But there is no tax due when the time comes to withdraw.
So, there is a lot of personal choice involved here. But I’d say generally:
Deductible IRA if your tax bracket is 25% or higher.
Roth if your current federal tax liability is zero.
If you are in the 10% or 15% brackets, it is more of a toss up. But if I were young and my 401k had decades of tax free growth ahead, I’d choose it over a Roth.
Then, when the time came I’d convert to a Roth as described here:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
You might also check out my conversation with WT above.
Hi! I was researching Roth IRAs and the like and saw a post by Mad Fientist and then stumbled onto your blog. Boy am I glad I did.
I’ve read a lot of your content over the last couple days and it’s taught me a ton. On to my question. I haven’t seen a lot about debt from student loans on here so I was hoping for some input on my situation. I’ll try to lay it out as best I can.
I’m planning to get married in late July of this year, and my fiance and I combined have about 60k in student loans. The interest rate is around 6.5%.
We’ve put together a rough budget and it looks like after all of our expenses we’ll have about 2k a month leftover.
We have a little less than 23k right now, with most (19k) of that in a high yield savings account (HYSA). We’ll probably have to shell out another 7k for our wedding.
After that, I’m thinking we will want 15k in an emergency fund, which we would keep in the HYSA.
The next goal is saving for a car. I drive a 1990 Camry that may not have much life left. I think I’ll want to put at least 10k down to get as low an interest rate as possible.
Oh, my fiancee has a 403(b) and is contributing up to her employer’s match, and that is invested in Vanguard Institutional Index Fund (VINIX). From what I saw, that’s the best option. Next best might be the JPMorgan SmartRetirement 2050 Instl (JTSIX). Once I’m eligible for my employer match I’ll be contributing enough for that and investing it in a similar option, depending what is offered. So, the questions.
1. Is a HYSA a good place to keep the majority of our cash that we’ll need for the immediate future? It’s earning 0.85%.
2. Once we’re past the wedding, is there a better option for short term saving for a car? Or should I leave it in our HYSA?
3. I was also thinking we would keep our emergency fund in the HYSA, thoughts?
4. After the car and emergency money is put away, should we be paying off our loans as much as possible every month? Say, 2k on top of the minimum payments?
5. After the loans are done, first step is a deductible IRA? Roth IRA? Maxing out one of our 401ks?
I think that’s all the questions I had. Thanks for your blog. It’s been a great read so far.
Matt
Hi Matt…
1. As long as your HYSA is FIDC insured, it is a fine place for short-term cash.
2. Depends on how short-term we are talking. But if you are going out a few years, Betterment might be a better choice. Here’s my post on them and why: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
But you should never, never borrow money for a car. Cash only, and 10k is plenty for a sound used car choice. Before you buy a new car read this:
http://www.mrmoneymustache.com/2011/11/28/new-cars-and-auto-financing-stupid-or-sensible/
3. Again, the HYSA is fine for your emergency cash, but why a healthy young couple without a house (which has the potential for very ugly surprise costs) would want 15k in it is beyond me. Maybe $1000. Put the other 14k towards paying down those ugly student loans.
4. Yes. With a 6.5% interest rate getting these gone is Job 1.
5. Max out both 401Ks to the company match, then deductible IRAs ($5500 each) at Vanguard in VTSAX and then fully max out your 401Ks.
Hope this helps.
Good luck and congrats to you and your fiancee!
Thanks! I’m looking forward to getting started on some of the goals.
Hi Jim!
I meant to update you sooner (I’m sure you’ve been anxiously awaiting it) but it’s better late than never. It was interesting to look over my questions to you and see how far we’ve come!
About a month ago we finished paying off our student loans (almost 80k in total payments). And about 2 months after I originally asked you those questions (April 2014) we ended up needing to buy a car, so we bought a used 2007 Honda Fit for a little over $6k, in cash. And fortunately we’ve managed to get by with only one car so far. And based on your recommendation we significantly reduced our planned emergency fund and have settled on $4k. And even with a fair amount of travel and other things we’re approaching a 40k net worth. While hanging out on the Bogleheads forum can make me feel like we’re way behind we are pretty happy with what we’ve done for being almost 3 years out of college. And you played a part in that! So thank you Jim, I hope you know that many many people have benefitted greatly from you and your blog.
Every night for the better part of a year now I’ve said to my wife:
“Gee, I wonder how Matt and his fiancé are doing? Did they get married? Pay off the student loans? Skip that stupid idea of financing a car?”
Welcome back, Matt! Congrats on your marriage and what looks like awesome progress in a single year: 80k in debt to 40k in net worth. Well played! Although I am wondering how the 60k in debt you first mentioned morphed into 80k?
$6000 on a Fit? Perfect! One car? Even better!
Don’t worry about what you read over on the B-forum. Just take those debt payments and invest them and watch your snowball grow!
Thanks for checking back in!
You’re welcome! And thanks for all that you’ve done in the personal finance/investing realm.
I’m guessing the 60k I referenced was the current balance of the loans, which we had already been making payments on. So 80k represents our total payments (principal + interest) on the loans.
Hi Jim,
My mother is 73.5 years old and was just terminated after a 35 year career as a legal secretary in Manhattan. She has saved pretty well and I just want to throw some numbers at you to see what you think.
She has 491K in a traditional 401K from her job. My brother has been managing those investments fairly conservatively within the plans offered and he made an 11% return last year.
She has 225K in a traditional IRA and her friend’s son has been managing the money and charging her .75% annually. He did not do as well and probably lost 1 or 2% on top of his fees last year.
He is also managing about 61K in a Roth for her as well. He is a bit of a pessimist and has her in gold among other hedge type investments.
Her expenses have been about $3K per month although that may rise with extra time on her hands. She has a pension of $900 per month and collects $1600 per month from social security.
She owns her coop apartment outright. She has 12 weeks severance and can then collect unemployment. She will now be responsible for her own health insurance.
How would you invest this money to keep it safe and make it last another 20 years?
Thanks so much,
Ron
Hi Ron, and welcome!
To start off, your mother is in excellent financial shape.
Her annual expenses are 36k. She has 30k in income from her pension and SS, and 777k in invested assets. Using the 4% guideline – https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/ – these assess can provide another 31k, for a total of 61k in potential annual income. Far more than it seems she needs even if she were to increase her spending by 33% to 4k per month.
Using VTSAX as a benchmark, let’s first look at how her managers did. This is the total stock market index fund and it returned ~33% in 2013. Of course, 100% stocks is way too aggressive for your mother, but it is a useful point of reference.
Your bother’s 11% return suggests to me he is managing your mother’s assets very, very conservatively, likely with a heavy bond concentration.
Your friend’s son, based on your comment and his negative 1-2% return in last year’s raging bull, suggests he is investing for Armageddon. A very poor strategy if Armageddon fails to arrive.
If you haven’t already, please take a moment to read “The Wealth Preservation and Building Portfolio” which is the second half of this post:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
In it you’ll find my reasons for the funds I’m going to suggest. You’ll also notice my suggested allocation for your mother is much more conservative than that suggested in the post. My sense is you and she will sleep better, and with her assets she doesn’t need to pursue performance.
This is what I’d do were she my mother:
389k 50% VBTLX -bonds- current yield 2.2% = $8558 annual income
194k/25% VTSAX -stocks- current yield 1.8% = $3492 annual income
194k/25% VBTLX -REITS- current yield 4.2% = $8148 annual income
Total annual income of $20,198, without touching principle. It also represents a very conservative 2.5% withdrawal rate on her 777k. In addition, she’ll have bonds as a deflation hedge and real estate as an inflation hedge. If we do have a financial Armageddon, it will take one of those two forms.
This boosts her annual income from 36k to 50k, a 39% increase. With the 2.5% withdrawal rate her portfolio will also continue to grow, likely leaving a substantial legacy for her heirs.
Hope this helps!
Thanks so much Jim. My brother has read your response and is on board. We are firing the financial adviser and opening up new Vanguard accounts.
All the Best,
Ron
Good to hear and glad it helped.
BTW, I am thinking of making this a Case Study post.
Anything you’d like to add?
Glad it worked out!
Here’s the link to the Case Study: https://jlcollinsnh.com/2014/02/13/case-study-8-rons-mother-shes-doin-all-right/
Jim,
I love your blog; it has changed my life. I have a quick question for you.
I’m 26, and currently a few months away from eliminating all of my student loan debt, which is the only debt I have. $40,000 in 4 years! Go me, haha!
Once the debt is paid off, I’ll have a significant amount of cash flow to dedicate to investments. My plan once my loans are paid off are to invest 50-70% of my income (more if I can downsize my lifestyle a tad bit more), and to essentially follow the “simple path to wealth” you so eloquently advocate. I’m already contributing to a pension fund, as well as maxing out a Roth IRA every year through Vanguard (since 2012) investing in index funds. The rest of my discretionary income is what my question concerns.
I’m a newly minted Police Officer about halfway through my first year (it’s been a blast!), and am eligible to contribute to a 457b plan. Our local government uses Nationwide as the provider. I’ve held off contributing thus far to pay off all of my debt, but will soon be ready to contribute. My question is in reference to 1) the fund selections I have available to me, and 2) the fees associated with it.
You can find the funds available to me here:
https://www.nrsforu.com/iApp/rsc/fundPerformanceViewPreLogin.x
My question is this: I want to be able to max out the 457b (as it’s fantastic in that I plan to FIRE and am not required to pay the 10% early withdrawal penalty, in addition to the tax benefits), and I’m looking for something that is as close to VTSAX as I can find to put my money to work in. From the selections I’m given, it appears to me that the closest thing is the Nationwide S & P 500 Index Fund with an expense ratio of .46.
**Is my best option to… 1) max out my 457b, and invest in this fund? 2) max out the 457b with another fund from my selection (or a combination of funds)? or 3) forgo the plan and instead open a taxable account at Vanguard?
High expense ratios kill returns, and in addition I’m not familiar enough with Nationwide to be able to make the call and establish whether or not their funds will provide me the benefit of utilizing the 457b or just open a taxable account.
Take your time in your response; I have a few more months of debt slashing and crime fighting until this is immediately pertinent 🙂
Hope all is well. God Bless!
Dexter
Hi Dexter…
Welcome and thanks for the kind words.
Congratulations on arresting that student loan debt and your plan to roll those payments into an awesome savings rate. I’m already looking forward to your book: The Millionaire Cop. 🙂
Sounds like you’ve already found the low-cost index fund in your 457b. An ER of .46 isn’t great compared to the .05 of VTSAX, but as these plans go it is pretty good. I’d max it out.
For more and if you haven’t already, read this: https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
Be sure to read to the end where, after all my ranting, cooler heads prevail. 😉
One last thing, if someday in the future you happen to pull over a speeding blue and white Triumph Scrambler….
cut me a break will ya, officer?!
Thanks for the quick feedback. It is much appreciated.
ps – If I pulled over anyone on a Scrambler, it would be to ask permission to take it for a spin, not to write a ticket!
Unfortunately, the officers who have pulled me over so far don’t share that opinion!
Well, anyway, if it ever happens to be me on the Scram you pull over, you’ve got a deal.
While you’re off on the bike, can I drive the squad car?? 😉
Here’s a post you might like: https://jlcollinsnh.com/2011/11/13/its-better-in-the-wind-or-why-i-ride-a-motorcycle/
We’ll work something out!!
That doesn’t include car loans, I trust. 😉
Jim,
I am 51 years old, an attorney, married, and have two young boys, ages 7 and 4. I work full time and earn, depending on yearly bonuses, from $125k to $155k. My wife works part time at home so she can take care of our boys. She earns $38,000 per year.
Our net worth (omitting personal property) is as follows:
Non-retirement investments: $465,000;
Retirement accounts (IRAs, 401(k)s): $635,000;
529 college savings accounts: $107,000;
Home value net of mortgage: $140,000;
HSA account: $7000.
We live in the midwest and enjoy a fairly frugal lifestyle. Counting retirement account contributions, 529 contributions, and non-retirement investing we saved very close to half of our net income last year. Our only debt is our home mortage balance of $107,000. My investment philosophy is very similar to yours as most of our investments are in Vanguard index funds, with around 70% of all investable assets in the Vanguard Total Stock Market Index fund. Our monthy expenses are about $4000.
Here is my question/issue: I’m currently stagnating at my current place of employment and am think about making a change. I suspect that unless there is a reversal of this stagnation the change could very well be “involuntary” and could happen as soon as next year. Because of the age of my boys I feel I cannot retire and need to work at least another 12 years or so when my oldest son enters college. If I am kicked to the curb I will likely wind up self-employed is a small general law practice and my income could drop substantially. As such, what do you think is the proper asset allocation for my investments? How much in stocks, bonds, REITs, and cash?
By the way, your site is great, I find most of your advice to be spot on, and I’d appreciate any words of wisdom.
Ken
Hi Ken…
Thanks for writing and I think I have good news for you.
I think you might be better off than you realize.
You have assets, not including your home equity, of ~1.214m. At a 4% withdrawal rate that’s 48k per year, exactly matching the 4k per month you are spending.
Now, at age 51 and with two small boys, were this all you had and your plan was to hang it up completely I’d be concerned. But that’s not the case.
You plan to open your own practice. Even if your income from it is only, say, 20% of the low end of what you make now, that’s 25k.
Plus your wife will still be bringing in her 38k. So that’s 63k, 15k more than you are spending.
Not only could you leave your investments alone to grow, you could add to them each year.
Because you won’t be drawing down these accounts, I’d be inclined to be more aggressive on the stock side where the greatest growth potential lies. But mostly the proper allocation depends on you and your risk tolerance. You certainly have enough that there is no need to swing for the fences. So if a more conservative allocation lets you sleep better at night, let that be your guide.
If I were as unhappy as you sound, I’d be planning my exit. Especially if the change allows you more time with those boys of yours.
Good luck and thanks for the kind words!
Thanks for the reply. Sounds like good advice.
My pleasure, Ken…
Keep us posted!
Jim,
I love your blog. I’ve read every single part of your “stocks” series, and send them to friends who ask me questions about investments.
I am a mid-20s man about to enter a very good financial situation via marriage to a great woman, also in her mid-20s.We are both fairly thrifty and are completely debt-free. We have college degrees and steady jobs. We each have reliable, working cars that are paid-in-full. Our annual combined salary is about $125k, but will probably drop to $70k as we have children in the next few years. Because a family member started a successful company years ago, we will receive about $6-7k per quarter in cash dividends. We have already saved about $100k in combined 401k/IRA retirement savings (in VTSAX and index funds, thanks to your blog) and are maxing out our 401K/IRA accounts every year. We have about $75k in combined cash savings. We don’t own a home or any other noteworthy assets. We live fairly frugally, and save about 40-50% of our after-tax income, and we plan to continue to do so in marriage.
Here are the details again in bullet form:
Total debt (student, credit, mortgage): $0
Combined annual salary (before tax): about $125k
Annual cash dividend: $25k (or $6-7k quarterly)
Current combined retirement savings: $100k
Current Cash savings: $75k
I know we have too much cash on hand, and I want to invest it. We’re not interested in buying a home soon, we would rather rent for a while. How would you invest our current cash on hand ($75k) as soon as we get married and how would you continue to invest $6-7k quarterly?
Any other investment allocation or other life-planning advice is MUCH appreciated.
Lars
Welcome Lars…
and thanks for the kind words and for passing the blog on to your friends. That’s the highest praise of all.
One of my pet peeves is people who look at the asset building strategies discussed here and dismiss them as accessible only to those who are very lucky.
You certainly appear to have been luckier than many who write me. But to your credit you are not squandering the luck that has come your way. Far too many would, followed by their complaints of how unfair life is.
So kudos.
The biggest risk I see for you is the lure of lifestyle inflation. So my first suggestion would be to cap your spending at 35k, half the income you’ll have when the kids start coming. Or, if you are feeling really badass, live solely on that ~25k dividend and invest all your earnings. Then let your lifestyle expand only at the pace those investments grow.
That said, it sounds like you’ve already nailed my nine steps as described here: https://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
Well done!
If you haven’t already, take a look at this path I laid out for my daughter: https://jlcollinsnh.com/2013/06/04/my-path-for-my-kid-the-first-10-years/
Again, seems you’re hitting most all these already but it never hurts to review as an aid for staying on the path.
The 75k in cash I’d put into VTSAX. With your dual incomes and cash flow you can afford to have little or no emergency fund. This is especially true since you don’t own a house. Since houses require a relentless parade of often expensive repairs, they are the single biggest generators of the need for emergency cash.
While I am blissfully back to being a renter now, I’ve owned houses for over 3o years. In each case, I’m glad I did. But only because I wanted the lifestyle. They are an expensive indulgence and as such should only be bought if and when that indulgence is worth the price and the price is one you can easily afford.
That may well be when your kids are around school age and school districts become critically important. But be sure to read this first, if only to be sure you enter homeownership with your eyes wide open:
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
VTSAX is also where I’d put your investable cash flow, either from those dividends and your saved income or from all your income as you live on the dividends.
First, of course, fully fund your 401k and deductible IRA accounts.
Congratulations on your upcoming marriage and the awesome financial start!
Awesome advice Jim, thanks for the attention. Love your idea about living off the dividends.
Clarifying question: would you invest the $75k in VTSAX in one lump purchase, or would you space it out somehow using dollar cost averaging? If so, is there a DCA time-segment strategy you would use in our case? (i.e. $5k every month for 15 months).
Glad you like that living off the dividends idea, Lars. That’s what I’d do personally.
As for DCA, I am not a fan. For three reasons:
— It messes with your allocation. Initially you are way too cash heavy. Better to decide what allocation works best for your situation and implement it.
–You have a 50% chance of it working against you. If the market rises while you are DCA you’ll be paying progressively more for your shares. Of course, it could work the other way and by choosing DCA you are betting it will. Basically you are predicting the direction of the market in the short-term. That’s market timing and market timing is a loser’s game.
–Since you are in the wealth building stage, as you invest your income over the months and years you are in fact stuck with a de facto DCA situation. This one you can’t avoid, but no sense adding to it with your cash on hand.
Make sense?
I’ve never heard that reasoning against DCA, but it helps me feel better about dumping the money into VTSAX as a lump sum. It’s basically a bet that the index will be higher in 20-30 years than it is now. I’ll take that bet.
Thanks A TON for your help.
My pleasure, Lars.
BTW, our conversation is now a Case Study post with my final thoughts there:
https://jlcollinsnh.com/2014/02/17/case-study-9-lars-maximizing-some-good-fortune-and-considering-dollar-cost-averaging/
Jim,
This is not a question. Just a thank you!
I did it all wrong for decades. Stocks, options, futures. Couldn’t understand why I couldn’t make money. Maybe it was the gambler in me, I used to have a problem, and actually went to GA for several years to cure it. You have changed my thinking about a great many things. I’m now quite content to be in index funds. Actually I’m using Betterment, and currently have a 60/40 allocation Stocks to Bonds. I just keep moving money over there, and it keeps doing well. I sleep better at night. Wish I had figured this out years ago.
I’m 685 days away from retiring. I don’t have much, but along with my paid for home, it will have to do. I could save $1,100/mo on social security and a small pension with a zero percent draw on invested assets. But I will do a 4% draw on assets also, so we have plenty of money for world travel!
One thing I’ve never figured out is how one could “run out of money” with a 4% draw on assets. If the market tanked 50%, I’d still get half as much out as my initial 4% draw. If the market tanked that much, I’d probably forgo the draw for a year or two anyways. If it was down 75% from the top, we would be in Great Depression 2, and we’d all have problems. At least I’d have a paid for home and able to start growing a vegetable garden etc. Somehow, we’ll all muddle through.
Thanks again for posting your thoughts over the years! Every time we have a decent market stumble, I reread parts of your Stock Series, and they give me solace and encouragement to stay the course.
Hi Kenneth…
..and thanks! Very kind of you to check in like that.
Like you, I’ve made many mistakes over the years. In fact, if I know anything about this stuff it has coming from the very expensive school of errors. 🙂
My hope is this blog will spare some that hard way of learning and move them straight to the front of the class.
Anyway, sounds like you’ve found the path and Betterment is a fine way to go: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Oh, and BTW, the way people run out of money using the 4% rule is by following the original recommendation: Take 4% each year AND adjust it up for inflation each year to maintain your spending level regardless of what the market does. Even with this, a portfolio lasts for 30+ years 96% of the time.
If you make sensible spending and withdrawal adjustments when the market is in one of its to-be-expected declines, as you plan, you’re golden:
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Congratulations on your pending retirement. Sounds like you’ll do just fine!
Jim,
My wife and I really appreciate the time you put into this blog. The resources have been very useful to us as a young couple seeking to walk the financial straight and narrow. We are recent (within the last few years) mustachian converts. We’ve recently paid off about 100k worth of student debt by paying upwards of 3k per month until the balance was 0…had to get those “shackles” off as quickly as possible. We’ve also recently both been given substantial raises. Coupling that with a no longer existing student loan, we are having trouble deciding what to do with the excess. I know, I know…our lives are so hard…haha.
Anyway, our “stats” are as follows:
We are both 28.
Income Pre-Tax – 175k
Monthly Expenses – About 4100 (Far from optimal, I know…but we’re still putting away quite a bit.
We max out the 401ks – with match, this comes out to about 45500 per year.
– This money is mostly in vanguard index funds.
This leaves us with about 8400 take home.
– After monthly expenses, we have 4300 left to distribute
We then max out the Roth IRAs – 11k per year
– This leaves us with about 3300 dollars per month to invest as we see fit.
Our Current Asset Allocations: About 50k between our two 401ks (mostly Vanguard index funds…70% Domestic, 30% International); 13k in individual stocks (my wife’s….her dad and her have been buying individual stocks since she was like 8….she’s been frugal far longer than I…haha); 11k in Roth IRAs (All Domestic Stock Index Funds); 13k – cash; House – 230k – ish; 2 cars – probably worth total of 15k
Liabilities – Mortgage – 195k at 3.25% interest; Car Note – About 4k at 0% interest (I know, I know…we’ll never borrow money for a car again);
Our goal is FU Money as soon as possible. So, I guess I have 2 questions:
1) Would you reallocate my existing assets?
2) What would you do with the extra 3300 per month? Would you pay off the mortgage? Invest? Where to invest?
Thanks so much. I look forward to hearing your opinion.
Thanks Brad…
…and welcome!
Sounds to me like you’ve got all the big stuff right.
I’ll leave it to Mr. MM to chide you for spending ~49k per year. 😉
I’m more interested in your awesome savings rate of 70%+. 🙂 For folks with your level of income, you are living very modestly. Well played, that!
As to your questions:
Your asset allocations seems OK, but as you read thru the blog you’ll see my choice for wealth building is:
VTSAX, Vanguard’s Total Stock Market Index fund, for. This is where I’d put the $3300 per month each month, and my IRAs.
While I hold bonds and REITS at this stage in my life, VTSAX is my stock allocation in my Roth, IRA and taxable accounts. https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT
Personally, owning VTSAX, I don’t feel the need for International Funds for reasons I explain here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
But if you feel the need, I don’t hate the idea of owning them.
I’m also not a fan of individual stocks, unless you’re Warren Buffett. Too much work for too much under-performance.
That said, if this is a tradition your wife enjoys with her father, let it be. Especially with only 13k in play. Sometimes it’s not about maximizing the money.
Your 3.25% mortgage is cheap money and I’d let it ride rather than pay it down. Over the next 20-30 years, VTSAX should do far better for you than 3.25%.
Same thing with the 0% car loan. Although, you are right. Never borrow money to buy a car! Or any other consumer good. Even at 0%. Too big a trap.
One last thing. I’d max out in Traditional IRAs instead of the Roths. At your income level, the tax deferral and the ability for those extra dollars to grow tax sheltered, is too good to pass up.
But don’t worry about the money you already have in your Roths. It’s just fine there and will serve you well.
When the time comes you can shift to Roths as described here: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Kudos on an awesome start!
They’re out of the traditional IRA income limits to receive the deduction.
Thanks Danny…
Good catch!
If they didn’t have a retirement plan at work, their 175k would have been just under the 178k limit for married filing jointly for the full deduction.
But of course they have 401k plans and that drops the limit to 95k.
Back to the Roths, where the income limit for contributions is 188k.
Hello Mr. Collins
I have loved reading your website! It is the exact information that I have been craving in regards to where the heck to park my money.
My wife and I are on the road to FI. We have a few more miles to go (10-15 years) but we are on our way. My goal is to never “have” to work a day after my 42 birthday.
With all that being said, my parents are 50 and 53 respectively and are not destitute but pretty poor. They have jobs that are a bit above minimum wage but absolutely nothing in the realm of savings or pensions.
My wife and I have realized that we will be ultimately responsible for them in roughly 30 years as my brother is not in the best boat financially and has expressed disinterest in taking care of them, because of different family issues.
I am going to help them get a Vanguard account and put a bit of money aside for them each month. The big problem is that they are currently spending 600 dollars a month in rent in the middle of Iowa, which is normal if they had kids living with them, but as my brother and I are gone, it’s a bit much, especially with them making just over ends meet.
My question is would it be prudent to buy a cheaper property and rent it to them so they could cut their rent in half, and then after it is payed off when they are in their 80’s that expense will basically be non exist? There are plenty of houses in their community that could be had for around $50K-$70K.
I have read your post about how real estate is not the best investment and I am realizing that I really don’t want to make a habit of getting rentals, but I am wondering since you have owned a house before, is it worth the extra costs that will be associated with owning a home, to provide that stability for them, or should we just find them a cheaper rental?
Thanks for all you do,
Josiah
Welcome Josiah…
…and thanks for the kind words. Glad you found your way here and thank you for the question. I have actually been planning a post about the time I did exactly what you are considering. It was a major mistake and I’ll share that story with you, along with some thoughts as to how you might evaluate the decision for your unique circumstance.
But first, congratulations on having your feet firmly on the path to financial independence! And for being clear-eyed enough to see that your parents are not and that this is likely to become your problem. The good news is you will have positioned yourself well to help.
Back in ’79 I was young, single, renting, making good money and very foolish. I bought my mother a condominium. It was just about the worst decision I could have made, both financially and psychologically.
My father died in 1974 and in 1976 my mother sold their house and moved to Florida to escape Chicago’s winters and to be closer to her brother and his wife. She took the proceeds from the house and invested in some dividend paying stocks to supplement her Social Security. She found a lovely apartment near her brother and settled in.
Unfortunately, her stocks failed to keep pace and her rent continued to rise. By 1979 she was expressing grave concerns.
Now, with the benefit of hindsight I can see her concerns were greatly overblown. But at the time I got swept up into them, as us good sons are prone to do. Plus then, like now, (like always, really) the vested interests in the real estate business were relentlessly pounding the drum of how wonderful owning property is.
On a visit I rashly told her I would solve her problem by buying her a condo. I gave her a budget of 40k, a fairly hefty sum in those days, and told her whatever she found in that price range that she liked was fine with me. We agreed she would pay me her current rent of $300 a month and I would absorb the difference and all future cost increases. Not surprisingly, this worked exceedingly well for her. For me, as we’ll see, not so much.
She found a beautiful 2-bedroom, 2-bath unit in a very nice complex. It was a step up from where she had been and it came in under budget. It looked like a pretty neat, if expensive, solution.
To see just how expensive, let’s run the monthly numbers:
$390 — Mortgage payment (interest rates were much higher in those days)
$125 — Association fees
$50 — RE taxes
$565 — Total
So I knew going in I would be supporting mom to the tune of $265 a month. And I was good with that.
But there were two big things I hadn’t counted on.
First, I was now mom’s landlord and as such she turned to me for improvements on the property. Not all at once, but over the years: New appliances, carpet, painting and other stuff I don’t remember. Maybe because they paled in comparison the the second thing I hadn’t counted on…
The Association. See this was a building owned and operated by geezers who were retired and had cash on hand. They were loathe to pay into a contingency fund. The monthly assessments covered only the monthly costs. So about once a year, sometimes twice in the bad years, I’d get a notice announcing a “Special Assessment” had been approved to re-pave the driveways or re-roof the buildings or some such, and telling me my share. Typically $5-6000. Oh, and by the way, it is due next Tuesday.
Now this is a perfectly fine way to do things for retired folks with money in the bank. But each notice sent me into a mad scramble to pull the cash together in time. At least the first couple of times. After that, I created my own contingency fund.
My mother lived there for about seven years, until 1986. Each year, of course, these costs marched ever higher. Fortunately, so did my income. Meanwhile, Florida went into one of its routine real estate collapses, just in time for my sale of the property.
So it was financially ugly. But expensive as it was, that would have been OK. It did solve my mother’s problem. But then there was the psychological factors that came in to play. Those started before the condo was even bought.
The Saturday after I returned from my trip to Florida, the one where I had told my mother I would do this, I got a call from one of my sisters. She was not happy.
She got it into her head that somehow I was exploiting our mother and that I was going to make a financial killing on this condo. Now I had no idea at the time just how financially ugly it would get (had I known I would have run for the exits) but I could certainly see that there was no monetary killing to be made.
When she got done yelling at me (and this took a while) I told her I really didn’t want to do this at all (I didn’t) and if she wanted to I would be happy to step to the side and it would be all hers. Unfortunately, she said she couldn’t afford it. She later suggested we buy it together, but after the harsh words I was uninterested in a partnership. That might have been the only smart decision in this sorry affair I made.
My other sister was considerably more financial savvy. She could see both the hole I was digging for myself and the way it would ease her share of the burden of providing help to our mother.
Now here’s where the psychology gets really interesting. My mother was a smart woman. She understood intellectually that I was supporting her to the tune of hundreds of dollars each month, thousands each year. But she never saw that money. What she saw was the $300 check she wrote and mailed to me each month. Wrote and mailed to her landlord.
Meanwhile, when my sisters would visit once or twice a year, they’d slip her $100 to “help with the extras.” A kind and generous gesture that she felt emotionally. Even if, in the overall scheme of things, an inexpensive one. And, of course, when I’d visit I would get to hear in detail just how kind and generous her daughters were and what a blessing in a mother’s life such children are.
Now, a better man would not have been bothered by this. I am not that better man. I was the guy doing the heavy lifting.
As a postscript to this story, and in fairness to my sisters, when my mother took ill and moved back to Chicago for the final two years of her life I was living in Cleveland. The heavy lifting of her care fell to the two of them. In retrospect, mine was the easier path.
So that’s my sad tale. What should I have done? That’s easy. I should have said to mom on that trip: “Don’t worry about your rent increases. Just let me know and whatever the amount over the $300 you are now paying I will send to you.” Much cheaper for me. Better psychology, too. 🙂
Oh, and then I’d have had plenty of hundred dollar bills to slip her on my visits. You know. To help with the extras.
So, enough about me, Josiah. How does this relate to you?
Well first, buying your parents a house is likely to be much more expensive than you might anticipate. While you won’t have association assessments, you will have an endless parade of repairs as all houses require. If your parents are unable to handle these repairs or arrange for them to be done, that will fall to you. As will the costs.
Of course, the house will have all the drawbacks I describe here: https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
So why isn’t my answer a simple short and sweet: Don’t do it!!?
The $600 rent and the houses available for 50-70k.
You may have read this post: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
If not, please do.
In it I describe just how to evaluate how your choices compare financially. In my experience, renting is usually clearly less expensive. But not always and, from the rough numbers you’ve shared where your parents live in Iowa, maybe not for you and them. So run the numbers and see where you stand.
But for me, the financial case for owning would have to be very compelling before I’d accept the downsides. When I owned houses they were expensive indulgences I could afford and the benefits made me willing to pay for them.
In your case, supplementing your parents rent might be the expensive indulgence. Only the numbers will tell. But, personally, I be willing to pay a fair amount to avoid the hassles and pitfalls.
Good luck and keep us posted.
BTW, Josiah….
I am planning to make this a Case Study post that will go up in the next day or two. But wanted to give you a chance to see my reply now. Cheers!
For more, see the Case Study:
https://jlcollinsnh.com/2014/02/20/case-study-10-should-josiah-buy-his-parents-a-house/
Jim, I want to thank you so much for your well-reasoned posts. I’ve made my share of financial mistakes; most from not being able to see clearly. My wife and I have only been seriously investing/saving money for retirement for about 10 years so hopefully we’ve learned early enough in the process. In that regard, your stock series was eye opening and, most importantly to me, made enough sense to get me to take some action. So, last year I sold my myriad of individual stocks — among them a number of laggards that should have been pruned long ago — and poured it all over into VTSAX. I also rolled over an old IRA (former 401(k)) into my current retirement account so that I could do back door Roths each year. Not a huge deal, but man, simplifying our investments by getting rid of the dead wood, freeing myself from rooting (and kicking myself for having invested in) individual stocks and having a plan has made me feel so much clearer about what we are doing with our money. Thank you! Also, thank you so much for your insight into your relationship with your daughter. I have a 3 year old girl so this particularly hits home for me.
My wife and I wouldn’t call ourselves Mustachian, but we do value making reasoned decisions about what we’re doing with our money and making sure that when we spend money on something, it is truly what we want. Do we deserve a face punch from time to time? Sure. I’m envious that some can live on $24k/year, and often think about what it would take to steer the ship in that direction, but we always come back to that we really enjoy the things we have and our willingness to delay FI in order to have them. I think some of it is that we both enjoy our jobs and we have relatively good flexibility to spend time with our daughter. Still, I’m often vexed (my wife not as much) over this issue and whether we are consuming too much. Yes, I know the answer is only we can answer that question entirely…
Anyway, here are our stats:
Me (40); Wife (37)
Combined annual salary (before tax): about $240k
Investments/Year:
Max out retirement account: around $46k/year with match
Back door Roths: $11k/year
529 for 1 child: $10k/year
Post-Tax Investment account: $14k/year (into VTSAX)
I know that some will find our monthly spending of around $9500/month gross. A lot of it goes to our house, which we actually do greatly enjoy, but I wouldn’t mind down-sizing in the future.
Debt:
416k on mortgage (14 years left on a 15 year mortgage @ 2.75%); House is worth about $600k (monthly payment is about $4k with tax+insurance — over $2000/month is principal)
No other debts (credit card, students loans, etc.)
Combined Assets:
Home — maybe $180k equity
Retirement Accounts — around $510k
Vanguard Post-Tax — $205k
Roth IRA — $100k
529 Fund — $70k (child currently 3 years old)
Cash — $40k
TIPS Bonds — $22k
Pensions:
Wife and I would see about $55k/year (today dollars) were we to retire in 15-20 years if we stayed with our current employers. Of course both of us staying with the same employer that long is a big if.
My wife and I are looking to retire when we can afford to maintain our current fairly high spending. Granted, once the house is paid off that will knock out $3k/month, but we’ll still have upkeep+tax+insurance. We would probably downsize but any savings would likely go towards money to travel. I’d figure we’ll want about $100k/year (post-tax) in today dollars.
With all that said, I’d really value your opinion as to whether you think we’ll make our goal in 15-20 years max? I’m sure you’d suggest lowering our spend and we will certainly try to get better about the spending. I know that we could be FI a lot sooner if we could get the spend down.
Thanks Jim!
Welcome Vexed…
Thanks for the kinds words. Simplifying really does feel good, doesn’t it?
As to your concerns, let’s work backwards a bit.
Since you are looking for 100k per year in retirement, using a 4% withdrawal rate you’ll need about 2.5M in assets. And you’d like to have this in 15 or 20 years.
Currently you have 1.127M and you are investing an additional 81k per year.
If we plug those numbers into this calculator http://www.globalrph.com/invcomp.cgi
and use a modest 6% return:
After 15 years you’d have 4.250M — 170k per year @ 4%
After 20 years you’d have 6.144M — 246k per year @ 4%
And if you’re curious: After just 9 years you’d have 2.6M, just over your target.
I’ll leave any face punching to my pal Mr. MM, but if 100k a year is what works for you and if you are willing to refocus more of your income to your investments, you are a very short few years from work being entirely optional.
It all depends on what you want to “buy” with your money: Freedom or stuff.
Good luck and keep us posted! I’ll be very curious as to what you decide!
Thanks Jim for the analysis. I’ll be interested to see which way we go too. And whichever way it is, I’m trying to enjoy the ride more. I have a tendency to get fixated on “the right decision” without taking the time to enjoy the moments along the way. What do they say? It’s about the journey, not the destination? I intellectually understand that if I don’t enjoy the moments, I may achieve financial freedom, but it won’t really amount to much. In some ways, the money end of things is the easy part — just plug in the numbers and figure out how to get from point A to B — but the mindfulness part takes more practice time.
If you get a chance, I’d love a post on the how/when/where of your achieving, what appears to me, a large degree of peace.
Thanks again Jim!
Sounds like we wrestle with the same issues, Vexed.
As for a post about achieving peace, that’s way, way above my pay grade. 🙂
Hi,
I am thankful to have come across your blog. I have found it so enlightening.
They thing that comes out your blog is “You love to keep it simple”, that’s something i love as well.
Background:-
I was going to commit to an asset management firm which charges .25% AUM , not that expensive but it would be a factor when my nest egg grows big.
I would love to follow your lead and example. I had few questions lingering in my mind i hope you can help answer.
Financial Background:-
401k:- options :- 1) VINIX (ER 0.04%)( Largecap)
2)VMCIX( ER 0.08%) (Mid Cap)
3) VSCIX (ER 0.08%)(Small Cap)
Roth IRA :-VTI,VWO,VNQ(Currently)
Taxable:- VT, Asset management company:- ER(.17%) + AUM (0.25%) consists of various index funds.
Questions:-
1) Which options in my 401k should i choose?
2) Why should i go with VTSAX versus VTI?
3) Is tax loss harvesting as beneficial as most advisors/Asset management firms say? Can I tax loss harvest with VTSAX or VTI?
4)Is now the right time to go the VTSAX route? as VTSAX is made a lot of gains?
5) As you say You should aim to be FI, I have a hard time figuring out how much we spend per year? what would help me figure that out? How do you do it?
I consider this blog to be something of a revelation to me.
Thanks a millions for your suggestions.
Hi Arsene…
Glad you like it here because by way of answering you I’m going to give you some reading assignments. 🙂
If you read thru this: https://jlcollinsnh.com/stock-series/
You’ll find the answers to most of the questions you are asking.
Pay special attention to these:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
As for how you figure out how much you are spending each year, it is a simple matter of writing down and adding it up each month. By the end of the year, you’ll know.
If you still have questions after reading the series, please feel free to ask. I’ll be back in April.
Good luck!
Thanks!
I did all my homework :).
What i did.
1) I converted all my funds to vti etf.
2) my 401k is 70% vinix and 30% VSCIX
3) Converting all my taxable accounts to vti slowly.
Questions i still have
1) is that 70/30 allocation what you would do?
2) I read about the stages in life you are( preservation and building) what if at the time i retire the market just crashed, it wouldnt make sense to convert to wealth preservation allocation.
3) Do you personally do any tax loss harvesting?
Thanks for your help.
Welcome back Arsene…
It indeed sounds like you’ve done your home work!
As for your questions:
1. Yep, that 70/30 allocation is just fine.
2. Since market crashes (-40%+) are pretty rare events the odds of one hitting just as you retire are slim. But if it should happen, I would stick with my full stock allocation as we worked our way thru it.
3. Yes. Tax loss harvesting can be very effective. If you have losses it is worth harvesting enough to offset any gains and to capture the $3000 that can be applied to ordinary income.
Gains are also worth harvesting at times. My pal the Mad Fientist has two great posts on these strategies:
http://www.madfientist.com/tax-gain-harvesting/
http://www.madfientist.com/tax-loss-harvesting/
In fact, his whole blog is well worth reading. There. A new homework assignment! 🙂
Hey Mr. Collins!
Like many, I stumbled across your blog from MMM. You both have transformed my financial thinking and given me budding motivation for a building a simpler, less complicated, financially independent life. Thank you for the bottom of my heart!
Some background: I am 26 yrs old and married to the love of my life(also 26) who is a homemaker with our 2 small boys(aged 1 and 3). I have always been rabidly interested in personnel finance but was pulled every which way by the flavor of the day.
Thanks to you and MMM I am currently enjoying a 42% savings rate post tax that has me speeding toward my FI goals.
I have two specific questions:
1) I own a single family home that I rent out for positive cash flow. The house was newly built in 2009 and I was able to refinance it at 3.25% 30 yr fixed. Your position on owning property is clear, but what do you think of the plan of holding this property long term, contributing extra to pay off the note early, and using the monthly income to assist in funding retirement?
2) I am a partner in a private REIT that I contribute heavily to(growing up I had always been told/believed that wealth was developed through real estate). It holds 43% of my total retirement investments. This is attractive to me because of its rich dividend and I know/ trust the manager personally. At my age (26) is this over-allocation dangerous?
Thank you so much for your time.
Hey Eric…
Welcome and thanks for the kind words.
Congrats on the savings rate, especially with your wife being an at home mom!
There certainly is a lot of financial nonsense written out there and I can see where it would be easy to be pulled this way and that. Good to hear what you’ve found here and on MMM resonates with you.
1. Your 3.25% mortgage rate is nice and low. I’d be in no hurry to pay it off. Better to invest the extra money. Typically, in my view anything 4% or less is a hold and over 6% is a pay it off. Between depends on circumstances, temperament and available options.
2. Yes. Very dangerous. But since you are young and since you like it, what I would do is keep it but stop future contributions. I’d invest that money elsewhere and in doing so slowly bring that 43% allocation down.
Hope that helps!
Hi Jim,
Thanks for the great blog. I’ve been learning much.
I’m looking for some advice regarding where and how to invest, allowing me to retire early.
Background:
38 Yrs. Hoping to Retire around 50.
My wife and I are in education. We both pay into our state pension system. We also contribute $22,500/year to our 403(b) accounts (combined – no match). Combined, we’re just into the 25% tax bracket with our current contributions and deductions.
I have a roth IRA with Vanguard
We have some taxable index funds with Vanguard as well. (just starting – about $20k)
In order to retire early, we’ll obviously need to be able to access some funds. So, I know I can add more to our 403(b) accounts and max out Roth IRAs, but I’m concerned that I won’t have money available at 50….
From looking at various calculations, I think our funds are looking good after age 60, even with less than what we’re currently contributing to 403(b) accounts.
In addition to what we contribute to our 403(b) accounts, we have about $2000/month available to invest.
I know I can benefit tax-wise from putting more into my 403(b) or Roth IRA right now, but I’m concerned that I won’t have the money when I want it (i.e. age 50) and also a bit concerned that withdrawal rules may change and force me to grind longer….
Can you also provide a little guidance as to how to plan for withdrawing money if it is in my 403(b) or Roth?
Are there better ways around this?
Indeed there are, Justyn…
…and my pal the Mad Fientist wrote a guest post here on exactly that: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
I would max out those 403b plans and, if you are within the income limits(95k AGI if married filing jointly), I’d fund deductible IRAs rather than the Roths. Better to reduce your taxes now and let that money grow tax sheltered.
Mr. Collins,
I’d like to thank you for outlining the path to financial freedom so clearly and simply. I’ve been reading your blog for a long time, and I’ve devoured each post. Your advice is like Occam’s razor for personal finance, and I’ve been able to apply it to each financial situation I find myself in. When I finished school I had 41$ in the bank before my first payday and 90k in debt. However, I now have an excellent income, and your blog has helped me lay down the foundation to financial independence.
I’m finally commenting because I’m having trouble calculating whether or not rolling over an old 401(k) is worth it. Before I give you the background information, I have to confess an obsession with making good things better. I look at something and my brain automatically thinks, how could this be improved. I don’t know if my tweaking will make a huge difference in my portfolio in the long run, but I hope it might help others with IRA conversions in the future. The mad fientist’s post on 401(k) rollovers is brilliant. I just don’t see how it’s applicable to people in the beginning of their careers when they’re in high tax brackets.
I have been working for total of 3 years and have recently changed jobs and married.
Yearly Income: 130k-150k
Roth IRA: 18k
401(k): 68k
I have always contributed to the Roth through the back door because I didn’t have any tax advantages in the traditional IRA due to my high income. My old 401(k) consists of 11k in a Roth 401(k), 14k in a traditional account and the rest is employer contributions. My former employer had a great 401(k) and it’s full of low-fee vanguard funds.
The last piece of the puzzle is my new household income. My husband makes the same amount I do and our combined income was about 300k last year when we married.
My IRA is through vanguard and I was hoping to simplify my finances by doing a roll-over. The following questions are holding me back.
1. Is there any benefit to my rolling my old 401(k) into an IRA other than streamlining my finances? Since I’m investing in vanguard funds anyway I have low fees.
2. If I roll over the 401(k) will it hinder my possibility to contribute through the back door in the future? I know when you contribute yearly to a traditional IRA you can re-characterize the account to a Roth, but only according to the ratio of traditional/Roth you have existing. I have no idea what my new ratio will be once I complete the roll-over. I don’t know how to figure out what amount I can contribute to a Roth without paying taxes. I am really motivated not to pay more taxes since I’m in the second highest tax bracket.
I would appreciate it greatly if you broke it down for me or even did an rollover/recharacterization post in the future. Have a wonderful vacation!
Ohhhh. Occam’s razor. I rather like that! 🙂
Welcome, Tweaker. Glad you find the stuff here useful.
Congratulations on your excellent start and incomes. If you can keep lifestyle inflation at bay you’ll be hitting FI in no time and your choices will be endless.
BTW, I’m sure my readers share my curiosity as to what kind of work you and your husband do. Care to share?
As for your questions:
1. Ordinarily, I like to roll 401Ks into IRA when possible for the simplicity and for the (usually) better investment choices. But in your case, your have the low cost Vanguard options available and your backdoor Roth strategy could be compromised.
2. This “backdoor Roth” article provides a nice overview, including some cautions:
http://www.recordonline.com/apps/pbcs.dll/article?AID=/20140202/BIZ/402020321&cid=sitesearch
In reading it, you will want to take into careful consideration the complicating effect having other IRAs creates with the backdoor strategy.
My guess is you are better off leaving that old 401k where it is.
BTW, given your high tax bracket, I wouldn’t use the Roth 401k option. Take all the tax deferral you can get.
Keep us posted!
Hi Mr Collins,
Checking back in here after a while. My husband and I are mid-level providers in the medical field. We are doing our best to avoid life-style inflation, but it’s harder since we’ve had our first baby and I’ve cut down to working part time. In regard to my old question, I’ve left my old 401(k) in place. I’ve heard rumors that the back door Roth might be closing in the near future and will re-evlauate if that happens.
I’ve taken your advice to take all the tax-deferral I can get to heart. Now my obsession is to lower my taxes as much as possible. I’ve noticed you recently recommend investing in a taxable VTSAX to buy a house. My story of warning about taxable accounts:
My MIL graciously paid for my husbands undergrad in full and last year she sold a stock that was meant to pay for his college that she held as a custodian so it had his name on it. It was about 3K and it was a long term capital gains sale. Well, with our income you can imagine we got hit with capital gains tax, medicare tax and alternative minimum tax. All in all it ate up about 75% of the sale of the stock. It’s made me quite wary of starting a taxable account. Right now we are maxing out our 401(K) (front loading), IRAs, and HSA. We’re also contributing 2K to a 529 (it’s the tax deduction limit). The rest of our leftover savings go to a savings account for maybe our dream of an outdoor kitchen or one day investing in commercial real estate.
I’m very grateful for the “problems” our high tax bracket creates for us. Our income is incredible and I know we’re quite privileged. However I prefer to donate to charities instead of Uncle Sam and am constantly looking for ways to decrease our current and future taxes.
Hi Jim,
Great, great site you’ve got here. I feel like I’ve gone back to college and have received the equivalent of a bachelors/masters of personal finance between reading through your site and many other great online contributors (MMM, Mad Fientist, to name only a few).
Looking for a quick peer review. I have a student loan balance of $25k and an investment property with a $62k balance. Both of these carry an interest rate of 5%.
I am currently throwing all savings beyond the maximum 401k contribution toward paying off the student loan debt because I hate the fact that I have it. After it is paid off (on track for September) I was planning on maxing out our family HSA. Going forward I was planning to create equal monthly payments to maximize 401k, traditional IRA (or Roth if our income increases past the point of getting the tax deduction), and HSA accounts with the balance of savings going to paying off the rental property.
My question is should I be so obsessed with paying off debt at 5%? We are a single income family and after 401k contributions would qualify for the traditional IRA deduction. In prior years I have only been contributing up to my employer match in my 401k so that I could aggressively attack student loan debt. I only recently ran the numbers on the taxes I was paying as a result of not putting more in compared to interest payments on the debt and it wasn’t even close, thus I upped my 401k contribution. But for some reason I don’t feel as strongly about an IRA even though it would be the same calculation, actually better since I could be in Vanguard funds. I just really like seeing progress on the debt repayment side I guess. Thoughts?
-Danny
Hi Danny…
If you haven’t already, check out my conversation with Eric a few posts above. In it I say:
“Typically, in my view anything 4% or less is a hold and over 6% is a pay it off. Between depends on circumstances, temperament and available options.”
So your 5% is right smack in that middle ground.
I think you are making the right choice to max out the 401k first, and I would extend that to the IRA. Tax deferrals in a sense immediately boost your returns and then they grow tax free until withdrawal. Too good to pass up.
Once I had done that, money I had available for taxable investments I’d plow into blowing out those loans.
Since VTSAX is likely to produce over time returns well over 5%, it is easy to make the argument that, strictly speaking, investing there is the better financial call.
But paying off the 5% is a guaranteed return with no volatility. Plus getting debt free is just so damn satisfying. 🙂
So, that’s what I’d do. Sounds like you might feel the same.
Then, once the debt’s gone, just keep making the payments, but now into VTSAX.
Oh, and thanks for the very high praise for the blog!
Do you have an example or template to use in planning out what to give to whom upon our death? This would include children, grandchildren and various charities.
I know tax regulations are complicated and may have to go to an attorney for best approach, but I’d like to have the basics of what we want to do in a reasonable format and to have thought through key points to consider prior to sitting in front of the attorney with the meter running.
Any sites or blogs you can point me to or if one of your past blogs covers this (I looked though quickly but may have overlooked it), please direct me to these.
Thank you, I’ve learned from reading several of your blogs. I understand you are traveling now.
Hi Merle…
Thanks for waiting so long for a reply.
Your question is a bit above my pay grade, but awhile back my pal Prob8 did a guest post on the subject:
https://jlcollinsnh.com/2013/11/25/death-taxes-estate-plans-probate-and-prob8/
Give it a read and if you still have questions post them there and he should be able to help.
Buffett’s plan for his widow:
90% S&P Stock Index fund, 10% short term bonds
http://www.cnbc.com/id/15840232/?video=3000251489&play=1
Thanks Joe…
…great clip! I’ve just added it as an Addendum on two of my posts.
J’ai lu dans votre blog que vous voulez étudier la belle langue. Aussi que Françe, il y a la Belle Province du Quebec qui on peux parlez francais. Venez ici, Montréal est une belle ville, avec beaucoup de vin. On ne bésoin pas d’etre bilingue, il y a des gens qui parle anglais aussi.
If you are comfortable in Spanish, you should be fine with nouns having gender and words with accents 😉
Bon Jour, Pat!
Well it is a very large stretch to say I’m “comfortable” with Spanish and French continues to elude me completely. As it has since college. 🙂
That said, Montreal and Quebec are beautiful places and I’ve always enjoyed my travels there!
Is that where you live? Want to set up a reader meeting to give me an excuse to visit again?
Jim,
What are you thoughts on Vanguard Specific Stock Sector Index Funds like: Healthcare, Materials, and Energy for example. All 5s by the way.
Hi FB23…
Sector funds are one step removed from trying to pick individual stocks and actively managed funds.
You are in effect trying to time the market for various sectors. You don’t have to read very far in this blog to know my negative take on market timing and stock picking.
I’ll stick to owning them all in VTSAX.
Dear Jim,
What a great blog you have! After I discovered your blog, I have been reading through all your articles in the stock series and others, and I must say that it really enlighten me in term of my personal financial life.
I have been trying to figure out what I am doing make sense, and hope you can help me.
My wife and me are in our mid 40’s, and have been working for about 20 years, and we have accumulated some money in the region of 1 million (excluding our house and funds in our retirement account). We have no debt other than a car loan that will be fully repaid by end of the year.
The funds are split into the following:
Stock – 10%
REIT – 40%
Bond – 30%
Cash-20%
Our plan is to move more of our cash into REIT and a little into stocks to produce income for us so that we can retire and live on the dividend from the investment. The intention is not to touch the principal.
Do you think it is wise to allocate say 60% into REIT so as to have a steady stream of dividend income from REIT for our retirement? I understand that your suggestion is 50% stock, 25% REIT and Bond.
Thanks!
Thank you Kenny…
and Welcome!
Sounds like you’ve done a tremendous job so far. Congratulations.
Without knowing how much equity you have in your house and how much, and where invested, you have in your retirement accounts, it is very difficult to comment on the allocation in just your taxable account. When considering your allocation you need to include all your assets.
That said, it sounds like you are already heavily over-weighted in the REIT and with your home equity, you already have too much in RE for my comfort level.
REITs are sector funds and for my opinion on those, see my reply above to FB23.
I hold REITs primarily as an inflation hedge and only secondarily for income. Holding more than 25% in them is far too risky for my taste.
You seem to be leaning in that direction to meet your goal of not touching your principle. But in my view, that is a very limiting and unnecessary goal.
Better to focus on keeping your withdrawal rate at 4% or less and build your allocation around investment results.
Hi Jim,
I was just introduced to your blog and love it. Great job! Looking for some thoughtful advice on my family situation.
I am married and have a soon to be 3 yr old girl. I am 35 and my wife 44. I am open to higher ‘risk’ investments and my wife is ultra conservative. Here is a look at our situation. We have no debt other than mortgage and about $10k car loan under 1% APR.
After all regular monthly expenses (mortgage, insurances, taxes, utilities, etc.), annual spend is about $50k.
HHI: $130-150k (wife stays at home)
401K: About $325k combined between my wife and I. I max out my 401k.
Schwab Taxable Account: $60k. About $46k cost basis.
Cash: About $125k in ING.
Mortgage: $270k remaining at 3.875%
529Plan for my daughter: About $3,500
What would you suggest for a ‘moderate’ risk strategy keeping in mind my wife’s ultra conservative approach?
Any and all insight would be greatly appreciated.
Regards,
Brett
Hi Brett…
Thanks for the kind words. Glad you like it!
My first thought is that ultra-conservative approaches are very risky. They lead people into high cash positions that get relentlessly eroded by inflation while fostering the illusion of safety.
Truth is there are no absolutely safe investments. Only investments that can smooth the ride but at the cost of long term results.
Second, with an annual spend of 50k against income of 130-150k you have a great savings rate. This gives you the opportunity to invest aggressively.
Personally, if it were me, I’d be heavily into the total stock market index in the form of VTSAX and I’d have my seat belt buckled for the wild ride.
Since that might be beyond your wife’s comfort level, I’d default to the wealth preservation portfolio I describe here: https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
The 125k in cash would drive me nuts as it slowly lost value to inflation while remaining completely unproductive.
The safest thing you can do is to focus on paying off the mortgage. But you have a pretty sweet rate I personally wouldn’t want to give up. Plus, with your savings rate, you’ll polish it off in short order and then be faced with the challenge of investing still more cash flow. Nice problem to have, that.
Hope some of this helps!
Hi Jim!
First off, I have been reading for about 2 years now and thanks to you an MMM, I have been able to turn my wife and I’s finances around. I am even in the process of transferring my wife’s Roth IRA over to Vanguard!
The question I have is not because of our personal situation, although I am sure it will eventually affect us, it is about my in-laws and the only living grandparent. She is my father-in-laws mother and currently lives in a nursing home in NY. I am still trying to wrap my head around the whole situation, but this is what I have gathered so far. She is in a nursing home, I believe through Medicare. I am unaware of her current income level with SS or any other benefits. My question comes from a conversation we just had with them, where they stated that they have spoken with a lawyer, and he has told them that when she passes they will owe money to the ‘government’. In my research he seems to be referencing the ‘estate recovery’ aspect of Medicare. From what I know right now, she does not own a home, that is already in my father-in-laws name and they are looking into selling it. At this point I do not know what I do not know and have just started to do my research to try and help out where I can. Is there any guidance or advice on how help them best keep their money and not end up loosing big twice at one time? Also, are there specific questions that my in-laws need to be asking?
Thanks again for the informative writing and enjoy your travels
-Luke
I would be very surprised to learn that your in-laws owe any money once the grandparent passes. Typically, Medicaid (not Medicare) is entitled to recover assets from the “estate” of the person who received benefits. They do not typically recover from other relatives. Although I have heard of laws or proposed laws that would attempt to recover from children, I thought those were the stuff of myths and legends. In any event, your might want to start your research here: http://www.health.ny.gov/health_care/medicaid/
and here: http://www.health.ny.gov/health_care/medicaid/publications/docs/adm/11adm8att1.pdf
I would not spend too much time researching Medicare as that is a different program that is not in the business of recovering assets or providing long term nursing home payments (although they do pay for up to 100 days of skilled care after being in-patient at the hospital).
Good luck.
Thanks Prob8!
I am gathering a list of questions, based on the information I have been reading through, that they need to ask/answer to make sure they have their ducks in a row.
I will update when I have more information.
Thanks again
-Luke
Found your blog after reading through Madfientist and love them both.
I am looking to join my company’s 401k this summer which is through John Hancock. I am 29, new to investing and understand the importance of using my tax advantaged accounts, but have some hesitation with this specific 401k due to complaints all over the internet. These include very high expense ratios and hidden fees. In general group annuity plans are not great I gather?
If I enroll, I am looking at the Total Stock Market Index Fund they offer (JETSX) which is the equivalent of Vanguard’s VTSAX I believe? I also have the option of a 500 Index Fund.
First – do you prefer one of these funds over the other?
Second – Should I skip this 401k altogether and focus on my Roth IRA for now until I come across a better 401k?
Thanks!
Welcome Zack…
Glad you like it!
I’ve written an entire post on ugly 401Ks: https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
Take a look and be sure to read Addendum I for the Mad Fientist’s take.
Looking at JETSX it does seem to be a total stock market index fund like VTSAX, but with 10x the expense ratio. (.56% v .05%) Yikes!
Typically I prefer a total stock market fund to an S&P 500 fund, but the difference is slight. I’d choose the one with the lower ER.
As ugly as your 401k is, you’re probably better off with it. But if you do decide to go with an IRA, make it a deductible to capture the tax benefit. You can convert to a Roth later:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Mr. Collins,
My wife and I are teacher who live very frugally. We are both 35 and we have our Roths 100% in VTSAX, currently valued, in total around $150,000. We max the Roths out each year. We are thinking we can weather a few ups and downs and then reallocate it within the next 20 years. Is this an insane approach? Or might we be better off with a targeted fund (2045). Do you have a suggested portfolio based on age–30s, 40s, etc… that includes the VTSAX? Also, we have two children, 1 year and 3 years old. We put $300 in each of their 529s(Maryland T-Rowe Price) each month. Any thoughts on if this is a good approach?
Thank you so much!
Hi Chris…
Well, it might be insane, but it is exactly what I recommend and did myself as I discuss here:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
and here:
https://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/
Those posts also describe how to smooth out the ride when the time comes.
As for TRFs, here’s my take:
https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
Dear mr. Collins,
Thanks for this wonderful site – after discovering it a year ago my husband and I are debt free and currently building a F-You stash.
I live in Denmark and have read all of your post regarding investing Europe. I found a website with very low fee’s: Nordnet. The problem is they don’t offer all the different options as vanguard but its a bit more accessible for danes. (since i have a really fun demanding job, I am willing to pay a bit more for less effort. :-))
My questions is as follows. our investing is for all our extra cash (meaning that we are all ready saving for retirement, emergency funds etc). So we are not relying on this but just want to have extra for retirement and of course F-you money. The money will probably be invested for 15-20 yrs at least.
We have our stocks in 80% spar invest global atier min risk. (meaning global stocks minimum risk) it focuses on stocks in MSCI World Minimum Volatility Index.
20 % are in Index C20 capped. As you can tell I am not a professional stockbroker – are these informations enough for you to determine anything? I read an article at Johnnymoneyseed saying: just get started! figure it out as you go along, which is the strategy :-). My question is if this is enough of a spread or I need to get to vanguard to get more options.
Hope you can help. Thanks again for your amazing site.
Welcome DB…
Glad you are here and have found this site useful. Sounds like you are making great progress and I agree with my friend Johnny Moneyseed, getting started is important.
I would urge you to post your comment/questions here: https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
This will give my European readers a chance to hear about your find in Nordnet and they may have some thoghts on the two funds you’ve chosen. Unfortunately, I am not familiar with either.
It sounds like you are on the right track with MSCI, assuming it is a low cost index fund investing in stock markets around the world including the USA. My guess is C20 is a world bond index fund? If so, this gives you an allocation of 80/20 which should serve you just fine.
Held og lykke!
Thank you so much!
Actually I think the C20 is in stocks…hmm…I will dig deeper… but its nice to know I am not completely on the wrong track. Thanks!
If ever in Denmark – we would love to host you! Keep up this amazing, funny educational sight. We need it! It’s a jungle of bullshit out there and your site is a very rare little beam of light. Thanks.
MY pleasure, DB…
…and I see you posted your question and my reply on that post. Hope you get some useful responses.
You might want to be careful offering to host me in Denmark. 🙂
I’ve always wanted to go there and my daughter has friends in your country who were exchange students with us for a couple of weeks.
She’s been to visit them and raves about what a beautiful place it is!
Haha, well the offer still stands even though you might actually take me up on it! You shall be more than welcome! I have travelled a lot in Scandinavia so feel free to contact me for hosting or just for tips if you’re going to the area – would be my pleasure. – DB
Mr. Collins,
Ive been reading your blog for a while now and I want to sincerely thank you for all of your writing, and for you stock series, it has been very helpful to me as I am new to investing and know very little about it.
My wife are in the wealth building stage and have saved up some money ($11,000) that we want to invest in Vangaurd stocks. We are planning to open an IRA for now for each of us and arent sure how to invest it. We want to eventually use VTSAX like you suggest, but we dont have enough right now. We want to max our Traditional IRA contribution for the help on our taxes. Can you suggest another Vangaurd fund to invest in for our situation? And then can we convert to VTSAX? And what would you recommend if we are expected to retire at the age of 40 (we are 26 and 24 now). Thanks for all of your help. We really appreciate it.
We are following the path of the Mad Fientist and will have a savings rate of about 75% of our total income. We have no debt, and would like to retire early.
Sincerely,
Joe.
You are very welcome Joe…
and thanks for your kind words.
What you are looking for is VTSMX. It is the “investors’ shares” version of VTSAX. Exactly the same portfolio, but with a slightly higher expense ratio. The minimum investment for it is $3000 v. $10,000 for VTSAX. The cool thing is that once you hit 10k, Vanguard will automatically convert your account to VTSAX and the lower fee.
Here’s the link: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT
Following the Mad Fientist is a splendid idea and he writes one of my favorite financial blogs. And not just because he has interviewed me!: http://www.madfientist.com/jlcollinsnh-interview/
Congrats on the awesome 75% savings rate. That should easily get you to FI by 40!
Hi there, one more question about investing: You guys are often talking about the good things one can do with their money when there is more than enough, – supporting projects or helping other people to become independent etc.
Great.
However: On the investment side the advise is to invest in tracking indices. That means however to also buy shares in very unethical companies: companies who export landmines, take profit in products they sell to support war all over the world, companies that don’t hesitate to contribute in ruining our climate etc etc. Get the point!? So how does that fit? Should we not look at putting our money to better use, not just where the money return is, but where the better return is in the broader picture? Appreciate your view on that! Thanks
Hello Christoph.
If you are so inclined there are many socially responsible funds from which to chose. And since socially responsible means something different to different folks, you should be able to find one that fits your preferences. But be aware of the drawbacks:
1. These funds are by definition actively managed, and that means higher fees. High fees are a huge drag on performance.
2. It also means the managers are stock pickers, and that is a loser’s game.
3. They are frequently “load” funds, meaning they charge a sales commission, typically 4-6% when you buy.
4. Some even charge redemption fees that can tack on another 1-2% or more.
So, in all likelihood you will pay a stiff financial penalty for your beliefs. Select very carefully.
What some choose to do is to invest in the index and enjoy the extra wealth that creates. They can then deploy that wealth to help the causes they support. This is what I do personally: https://jlcollinsnh.com/2012/02/08/how-to-give-like-a-billionaire/
Of course, you don’t have to invest in stocks or funds at all. You can find companies or projects that fit your standards and back those. That’s more work and higher risk, but if you feel strongly about this you should find it worth the effort.
In this post https://jlcollinsnh.com/2014/04/11/qa-ii/, for instance, in the first conversation Scott talks about his investment in a Columbian coffee plantation. If you choose to read it you’ll see he was drawn to the environmental and human benefits as well as the potential for monetary gain.
You might also be interested in my conversation with Mike right here in these comments back on January 10, 2014.
In any event, one of the great things about FI is you can deploy your money where and as you see fit.
I’d be interested in your choices if you are willing to share them.
Jim:
I recently moved my 401K from a full service broker to Vanguard. I used the tools Vanguard provides on risk tolerance; retirement date etc. The chose to put 42% of the funds in VTSMX, rather than VTSAX. Any opinion on the difference in these two funds?
Hi BLW…
VTSMX is the “investors’ shares” version of VTSAX. Exactly the same portfolio, but with a slightly higher expense ratio. The minimum investment for it is $3000 v. $10,000 for VTSAX. That’s probably why they directed you to that version.
The cool thing is that once you hit 10k, Vanguard will automatically convert your account to VTSAX and the lower fee.
Dear Mr. Collins,
I greatly appreciate the advice and insights you share on your blog. I find them informative, entertaining, and inspiring. You are providing an outstanding service and I appreciate that.
My question, in a nutshell, is how should I prioritize funding my different retirement accounts given a relatively low income ($400 a week after taxes), zero debt, and a relatively long working career ahead of me (I’m 24)?
The facts:
Annual income after taxes: $20,000
Roth contribution: 10% or $200 in a typical month, sometimes $300 in a Vanguard tdrf
Investment with Betterment: $100 a month gets auto-deducted
Savings in an emergency fund: $100 a month
Expenses in total run about $1000 every month
Whatever else I save gets divided up between Betterment, my savings account, and a high-yield checking account.
I have read the advice that bloggers like you and the Mad Fientist have given about converting a traditional IRA into a Roth and while I understand the benefits I can’t help but think that at my income level and the length of time until I retire, compounding interest will probably be a greater factor in my 401k’s growth than it would be for someone like the Mad Fientist. Also, financial independence is a much bigger motivator for me than early retirement so I don’t really anticipate having to worry about early withdrawal penalties. With all this in mind, what would you recommend I do differently in order to reach FI in the shortest amount of time?
By the way I hope you had a blast during your last visit to Guatemala. Lake Atitlan happens to be one of my favorite corners of the world and I read your travel posts with a great deal of envy.
Thanks David…
…you made my day!
First let me compliment you on what sounds like an impressive savings rate and an admirably low cost of living.
As for taxes, the idea is that you want to pay as little, ideally no, income tax as possible so you have more to invest and that money can grow for you.
For instance, assuming you are single, you have a $3900 personal exemption and a $6100 standard deduction. That means the first $10,000 you earn is tax free.
By then using deductible IRAs and 401Ks, you should be easily able to shelter the rest of your income. Here are a couple of great articles showing just how this works:
http://www.gocurrycracker.com/never-pay-taxes-again/
http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/
Then, when the time comes, you can convert to a Roth as described here:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Here’s a cool calculator that can help with your personal planning:
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
The point is that every dollar you pay in taxes is not just a dollar gone. Also gone is all the money that dollar could have earned you over the years. So it is well worth the time to figure it out. Doing so will help get you to FI that much faster.
Make sense?
Yep, I had a blast in Guatemala — thanks for asking! But don’t envy me. Envy another David who showed up at my hotel one day. He is an Aussie one year into his three year around the world motorcycle journey. He plans to finish in Bali where he is having a catamaran built that he will then spend the next few years sailing around the world.
He’s a guy about my age who did at your age what you are starting to do. His biggest problem now is he can’t spend his money as fast as his investment replace it.
Hi Jim,
I discovered your website while you were on your recent trip. I love the site. My wife and I are implementing a savings and investing plan very similar to what you advocate, though you’ve got me thinking about ways to save closer to 50% of our income instead of our current 30%, and you’ve got me thinking twice about our plans to buy a house in an expensive neighborhood in a few years for school district reasons (we’ve managed to not buy a house at all so far, but are saving aggressively for a down payment as well as for retirement).
My question is actually about salary negotiation. I know it’s not the main topic you discuss, but you’re so insightful on money stuff, I thought I’d ask anyway.
Here’s the situation. I run a medium sized non profit. I’m approaching the end of year six on a seven year employment agreement. Our board of directors has indicated to me that they’d like to enter into a new agreement when the current one ends, and my wife and I would like to stay as well. The salary for the first seven years was structured as follows:
Year 1: salary = a
Year 2: salary = a*(1.07) = b
Year 3: salary = b*(1.05) = c
Year 4: salary = c*(1.05) = d
Year 5: salary = d*(1.05) = e
Year 6: salary = e*(1.05) = f
Year 7: salary = f*(1.05) = g
The year 7 salary isn’t set in stone yet, but it’s a reasonable guess, and it doesn’t matter anyway for the purposes of the question. The raises were based on merit at the end of each year.
In addition to the salary, I had a deferred compensation arrangement as an incentive to keep me around through the 7 year agreement. It is paying out like this: The nonprofit set aside 15% of my income, and paid out 30% of what had accumulated in year 5, 60% of what had accumulated minus the year 5 payout in year 6, and everything not already paid out in year 7.
So, here’s my question. As a starting point for negotiating the year 8 salary, would you consider my year 7 salary to be g or g*1.15? The point of the deferred compensation arrangement was to keep me around, but the reality is that the year 7 salary is g*1.15. Or to put it another way, in year 7, the 15% isn’t really deferred compensation, it’s just compensation.
I don’t know want to ask for more than is reasonable, but I also don’t want to leave reasonable money on the table.
In case it matters, the board is very happy with my performance, and very much wants me to stay. I don’t know whether we’re going to end up with another multi-year arrangement, or just take it year by year from now on. Taxes shouldn’t be much of a consideration, as I’m in the 25% bracket, but have plenty of room to grow before I hit the 28% bracket.
Thanks for the blog, and for taking the time to answer questions!
Phil
Hi Phil…
It is great to hear the blog has been so useful to you, but your question is a bit beyond my pay grade.
I’m no expert at salary negotiations. Now that we understand that, I’ll offer some thoughts anyway. 🙂
First it sounds like you are very well positioned. You should go into these meetings expecting to be pleased.
Start by being very upbeat and positive. You want them to have the most upbeat and positive feelings towards you.
If the timing is appropriate, talk a bit about how much you’re enjoyed the last seven years and how much fun it has been to make the contributions you have made. Do this only before they share with you the new package.
Then let them talk. Be very upbeat and positive with your facial expressions and body language while they do.
Right up until the time they tell you what your new package is going to be.
At that point, shift your facial expression and body language into neutral. The contrast will be stunning. This is why you start so upbeat. Doing this, there is no need to go negative, which could only hurt.
At the same time you go neutral, go silent. Silence is very powerful because it is very uncomfortable for most people.
At some point they’ll say something like, “So what do you think?”
Staying flat neutral, reply by saying something like, “Well this is very interesting. I’m going to have to take some time to digest this.” No more smiles.
If they ask, “well what would make it better?” or “what are you looking for?”
Respond with something like, “I’m not sure. I just wasn’t quite expecting this.”
Very important not to be negative, just neutral. Rely on the contrast.
Try to avoid giving them any sort of counter. You want them to volunteer something better on their own.
BTW, I’d do this even if you are thrilled with the initial offer. That way, even if you accept is as is, they’ll feel like they got a bargain!
Hope this helps and maybe some other readers will have ideas to offer.
Good luck and keep us posted!
Thank you, Jim! I appreciate the advice, and the blog.
My pleasure, Phil!
And I appreciate knowing you saw the reply!
Hi Jim,
I’ve just gone through your stock series and was considering investing in VTS (the Australian equivalent of VTSAX), but came across some comments from other Australians in your comments suggesting the Vanguard Index International Shares fund, which is a managed fund. I’m confused. Wouldn’t the ETF be the best bet due to the lower management costs?
I ask because it would be nice to be able to automate monthly contributions (which I can do with the managed fund) but I don’t want to do it if I’m going to end up paying more in fees in the long run! I am 28 and expect to buy and hold for a very long time.
Thanks in advance!
Hi Nicole…
VTS is indeed the equivalent of VTSAX: The Total Stock Market (US) Index fund. It also has a nice low cost ratio of .05%. But, since it is an EFT, you’ll have to be careful of transaction costs buying and selling.
VTSAX is the stock fund I most commonly recommend and, unlike most commentators, once you own it I don’t feel the need for further international funds for the reasons I describe here:
https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
I suspect the reason the Australians in the comments are drawn to Vanguard Index International Shares Fund is for the international exposure. It is hard for most Americans to accept that a fund like VTSAX is all they need, so it is not surprising that many Australians feel this way.
But Vanguard Index International Shares Fund is a fairly pricy option. The ERs range from .35% to .90% and there are .15%/.10% in additional transaction costs. That’s a heavy drag on returns.
If you are comfortable with the case I make in that post I linked to, VTS is the better, lower cost choice. If not, you’ll have to pay to have the international coverage.
Good luck!
Thanks heaps, Jim!
Hi Mr. Collins,
I really enjoy your blog. Thank you so much for sharing your knowledge. I would like to get some advice regarding investing for my future. Here is where I stand. I’m 36 and single. My annual gross income is $108,000 and the only debt that I have is on my mortgage ($180,000). I am currently putting 10% of my income into my Roth 401k at $90k. I also have another IRA ($18k) from an old 401k that I rolled over. I have roughly $30k sitting in a local savings account earning basically 0% interest.
Where would you recommend that I start from here?
Thanks for taking the time to read and answer my question.
Daniel
Thanks Daniel…
Glad you like it!
First, at your income level, I wouldn’t be using the Roth version of your 401k. You want the tax advantages the regular 401k provides. When the time comes, you can convert to a Roth as described here: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Don’t worry about the money you already have in the 401k Roth. You can leave it there. But I’d redirect your future contributions.
I also hate the idea of 30k earning nothing in your savings account while the spending value gets eroded by inflation each year. That should be long term money and I’d put in in VTSAX.
Be sure you read the Stock Series first and be sure you will stay invested when the market gets rough. If you can’t do that, use it to pay down the mortgage.
You don’t mention your savings rate, but if having F-you Money — https://jlcollinsnh.com/2011/06/06/why-you-need-f-you-money/ — is important to you, you’ll want to get it up around 50%+.
Hope that helps!
Dear Mr. Collins,
I’ve been reading your stock series and have been learning a great deal and so appreciate the time and effort you have and do put in to writing the posts as well as answering in the comments.
My situation is that I m mid 50’s, married and have not done a great job of saving for retirement, but am now (better late then never) getting my brain around what is possible. Do you have a post that addresses the issues and concerns of older folks, still in need of accumulating savings specifically with regard to risk management?
I know that I want to invest in index funds to lower costs, but am not certain about how much bond exposure is good or right for my situation. If you don’t have a post about this and think it would be of value or interest to your readership I can supply the details of my situation. I figured I’d ask if it’s already been addressed before posting about me.
Thanks,
Brian
Jim,
I am a long time reader of your blog and have implemented a few changes since I started reading. My allocation is not perfect yet, I still hold a lot of cash, because I got badly burned in the stock market prior to finding you.
I have been living a life mindful of my expenses and live quite well on about 20k a year.
I am single in my early forties, no children.
I would like to have more time for travel and my volunteer work with a local charity and am not sure, what the best next steps are. I think I may have FU money, but it as is not optimally invested, I am certain the 4% rule does not apply to me. I wanted your opinion on my situation.
I currently am employed and make a decent salary. I would like to retire early (possibly at the end of 2015).
This is what I have:
Savings @ 0.012% 198
Savings @ 2.6% 11
Bank Account 32
Roth IRA 18
100% VTI
401 k 146
37% VINIX
30% VWNAX
18% VBTIX
10% VIPIX
5% VGSNX
Taxable Account 124
40% VTI
60% Stock
Taxable Account Vanguard 19
100% VTSAX
TOTAL 548k
In addition to that I have a paid off house. My roommate has recently moved out and
I am planning to sell the house when I retire. I plan to rent or buy a much smaller place
in a cheaper area of town. This may result in an additional 150-170k to invest after paying fees and commissions.
Conservatively, if markets don’t tank, I’d have about 700 k in FU money, much of it not in the market at this point.
At a SWR I’d have more than I need, but I don’t think the SWR applies to my case as a big chunk of my money is held in cash.
Can I still retire in 2015? Should I wait?
What should I do considering I am trying to get out so soon.
Is it wise to add some of my savings to VTSAX considering my plans to stop working 2015.
I have been pondering for several weeks, if I should write at all. I find it scary to share my financial picture with the world out there, but I would very much value your advice.
Jim, apologies just realized that part of my post is missing:
By the end of 2015 I will have added some more funds to the picture:
+31 k 401k (own contributions now through 2015 and employer match)
+5k in Roth IRA
+40k in taxable accounts
I credit you with where I am with my investments today. Had it not been for your blog, I’d still be in cash mostly, earning nothing, actually loosing money.
Thank you for providing valuable information in a very entertaining way, enabling me to slowly and carefully expand my comfort zone as far as my investments are concerned.
I place immense value on your advice. I know my decisions are my own and I am fully responsible for them.
Thank you for your consideration and for taking the time to read my comments!
Mark
Hi Mark…
If you can live on 20k per year you are certainly already at FI.
Using the 4% rule you’d need 500k to generate 20k annually, and you already have 548k in investable assets and another 70k coming if I understand correctly.
Of course the Trintiy Study (from which the 4% idea comes) is based on being invested in stocks and bonds. As you observe, you have 241k in cash.
The problem with cash is that while it is “safe” in the sense that in an FDIC bank account you will have the same x-number of dollars next year as this, each year those dollars lose purchasing power to inflation. That makes cash very risky if held for the long term.
To use the 4% withdrawal rate you’ll want to consider a stock/bond allocation as discussed in this post:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
Your 548K + 70K = 618k; If you pull 20k per year your withdrawal rate is only 3.24%. This puts you in a very strong position.
Taking your money out of cash means stronger potential growth but also more volatility. Be sure you understand and are ready for this before you make the move. It will be critical that you not panic and sell when the next crash comes; be that the day after you invest or a decade from now.
Hope this helps.
Thank you Jim for taking the time to go back and spell it out for me again!!
I have taken a decision to keep three years worth of expenses in cash as a buffer, so I don’t have to withdraw from the investments, in case the market is really bad.
Looking back at the “bad times” of the last couple decades that should give me enough coverage (maybe a bit too conservative in your eyes, but as you probably guessed, I am not a great risk taker anymore) to hang in there for a couple of years, without having to touch the stash. I will replenish when times are good and live off the cash when times are not so good. I will invest the rest of my cash in VTSAX over the next few weeks, as I get around to rearranging accounts to simplify investments
What do you think about that idea?
I had considered putting the money freed up from my house sale into REITS, once the sale is completed and to hopefully cover my rent from the REIT returns. What had me concerned, was that I need to buy the REITs in my taxable account.
Now I saw your recent post about REITS (great timing for me, thank you!) and I am second guessing this entire idea.
I will need to let that sink in some more, to weigh my options with the house money.
Thank you again for providing great food for thought!
Hi Mark…
I actually discuss that strategy at the end of this post:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
88% in VTSAX
12% in cash
The idea has appeal to me, but I could never get past how it would work after a crash like 2007-8.
The cash would be mostly used up and the assets from VTSAX reduced by ~40%.
From there you’d be asking VTSAX to do three things:
Provide 4% a year
Replenish your cash position
Continue to grow itself
That’s asking a lot, maybe too much.
Thank you Jim! I did read that part a couple of times actually.
Sorry, if that was not clearer, but I was going to continue to hold VBTIX, VIPIX, VGSNX in my tax deferred accounts and only put the now available cash into VTSAX. But thinking about it now, effectively that percentage would become really small if I do put most of my cash into VTSAX.
The 88%/12% strategy would be almost the complete opposite of what I am doing now, risk wise and would most likely rob me off my ability to sleep sound at night.
The concern I have is, that bonds should be held in pretax accounts, if I understand correctly. And the amount of money I can contribute to those is capped. So I won’t be able to offset this percentage in order to balance, even if I allocated all contributions to Bonds in the 401K
I could probably achieve it if I turned most of my 401k into Bonds.
Also what happens if I need to tap into the Bond funds in a bad year? I know I can get them out of the 401k via roth pipelines, but I have to plan ahead of time for 5 years to do that, which makes these things very complex for me.
I am probably overlooking something very obvious here? Not sure what it is though.
Hi Mark…
While it is best to hold bonds in tax-advantaged accounts, it does complicate rebalancing. You just have to do what you can, hold some in your taxable account and/or rebalance more slowly with the new money you invest each month.
When it comes time to withdraw the money, you’ll be in a lower tax bracket presumably and so where you hold the bonds will be less an issue.
This will help you prepare: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
I don’t hink you are overlooking anything obvious. It takes some juggling.
Thank you! I am willing to do the juggling, if that is what it takes.
I could in fact convert my entire 401 K to a Vanguard bond index and get to roughly a 28% Bond allocation
But what shall I do once the house is sold? Put everything at once into VTSAX? All 170 K? Even though I know I’ll retire at the end of 2015?
My pleasure, Mark.
I just put up a post on how to approach those allocation decisions: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Regarding the timing of investing the 170k, here’s my perspective:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Thank you Jim!!!!
I am an IDIOT! I knew that this:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
would be your answer! Knew it!
I don’t know how many times, I have read that particular post! I actually read it again this morning!
Still, I felt the need to ask that question! I just had to hear it again, maybe from you directly, to really believe it!
Thank you for taking the time to respond to dorks like me, who still ask the same questions over and over and over again.
Golly, you must be thinking, some people are incapable of reading (or at least this guy is)!
I appreciate you taking the time to ever so patiently respond to these questions!!
You have made such an impact on my life since I discovered your blog!!
I also had an new moment of clarity as far as rebalancing and asset allocation is concerned!
Heartfelt gratitude for all the time you put into helping dorks like me to see the light and for the reassurance!
Thank you Jim!!!
Ha! 🙂
No, you’re not an idiot. LOL
It is scary investing a chunk of money into a raging bull. At all other times, too. I can understand wanting to hear it again.
I remember many years ago when I first discovered discussion forums. There always seemed to be a click of old timers who would get outraged anytime a newbie dared ask a question if anything like it had ever been asked before.
That always offended me. It seemed to be asking a lot for new comers to have read and remembered everything on the site before they participated.
I confess that occasionally I have that reaction to questions that have been covered multiple times and I am always grateful when the comments indicate the person has read at least a little bit of the content here.
But at the same time, I remind myself that there is now a lot on this blog and even those who have read a fair amount can easily have missed something.
It’s not always easy, but kind words like yours make it worthwhile. 😉
Thank you for understanding Jim!
I suppose, I am a bit slow and need to hear the facts more often than others!! But it has sunk in now, really I promise!
Just one more question: Should I REALLY put it all in to VTSAX?….Ha! Just, kidding, just kidding 😉 Don’t rip your hair out 😉
I am planning to do some major juggling today and then I’ll stick to it.
Although I find it refreshing that Vanguard does not plaster the internet with sign up offers and bonuses and affiliate offers like many other financial institutions, I believe they should make you their brand ambassador or reward you in other ways!
Apparently, if you have a great product and reasonable fees, you can afford not to lure in people with questionable deals and promises, so that reassures me, my money is in good hands with them.
Still, in your case, I believe they should be offering you some sort of affiliate bonus, as you must have helped to send a great deal of funds their way over the years.
Again, many thanks for all your help! Hopefully our roads will cross on one of our many travels in the future, so I can thank you in person and maybe use some of my VTSAX income to buy you a beer or two!
Hi Mr. Collins,
An idea popped up while I was searching for a cool tax estimator you posted the link for a while back – how about creating a page that has all the calculator links? It would have saved me a hour furiously searching, and save other readers the same trouble. Thanks for maintaining such a high quality blog!
Oh, I was looking for this calculator:
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
Great idea Jain! There are times I have the same issue.
Are you volunteering to go thru the blog and find them all? 🙂
Not sure about “find them all”, but I can certainly start the effort by jotting down calculator links on the blog whenever I see them.
No worries, Jian…
I was actually just teasing.
But that said, if you want to keep track of the ones (and the posts they are in) you see going forward that would be helpful. I plan to do the same.
Once we have a few in place, I’ll launch the page and ask others to do the same in the comments. Over time, we should have them all in one place.
Thanks!
Sure, let’s do that. You’ve put in so much work on this blog, I’m only too happy to pitch in just a bit.
Note to Nicole, Daniel, Brian and Mark….
As you may have noticed in the last few weeks I’ve been having tech problems with the blog.
I just noticed that my reply to each of you has gotten lost. I hope you had a chance to read it first. If not, let me know and I’ll try to reconstruct it.
Thanks!
Hi Jim,
Unfortunately, I didn’t get a chance to read your reply to me. Would you mind terribly rehashing it? I’d appreciate it very much.
Hi Nicole…
Thanks for letting me know. You’ll find it is now rehashed! 🙂
Good morning Mr. Collins,
I was also not able to read your response. If its not to much trouble, could you answer again?
Thanks in advance.
Daniel
Thanks for letting me know, Daniel.
Just put my reply back up for you.
Hello Mr. Collins,
I did get a chance to read your response. It was very helpful. I have subsequently rebalanced my ROTH, selling several other mutual funds and purchasing a 90/10 split between VTI, the Vanguard Total Stock ETF and BND, Vanguards Total Bond ETF. I do not have access to the non ETF versions at Schwab. You mention to Nicole to be careful of transaction costs with ETF’s. Can you elaborate on that?
Thanks again for such great, straight forward advice.
Brian
Great to hear it Brian!
Maybe you can remind me about what I said…. 🙂
ETFs were created primarily to enable trading, and in reading this blog you know I am a believer in long-term investing.
So ETFs concern me to the extent that they lure people into more frequent trading and market timing.
My other concern is that sometimes buying and selling them involves sales commissions and I hate any additional expenses.
But if you can buy them commission free and resist the trading urge, I have no problem with them.
Make sense?
Glad you’ve gotten your tech problems worked out. They can be a real pain.
You basically said that you hadn’t written anything specifically for older people who need to accumulate and how that affects their risk tolerance. Regardless of age you could be in any stage of the process. Preservation or accumulation.
You also linked the story of your friend Tom and how he had everything go wrong and he’s ok.
The two ideas clicked with me and I decided that I am in accumulation and have a fairly high tolerance for risk. It gives me the best chance to retire with a decent income in about 10 years. If it doesn’t work out I’ll be no worse off than if I do nothing. Doing something sounds better.
As for the ETF’s, I do a pay $8.95 every time I make a purchase. At Vanguard it’s free to trade the funds I want. So I’ve opened a Vanguard account and moved all my finds over from Schwab.
Thanks again for the sane and simple advice.
Brian
Jim,
apologies, I have had difficulties connecting to the site for several weeks and as a result did not see your response either.
If you don’t mind I would very much appreciate your input.
I mostly need to know if I should dissolve my cash holdings and put them into VTSAX right now
Thank you for your time!
Glad to see the site back up!!
Mark
Hi Mark…
No, no. My apologies to you! These blog tech issues have been a nightmare but I believe they are now resolved. Knock wood.
Sorry for the delay!
I just put my reply up under your original comment.
Hope you find it helpful, and good luck!
Hi Jim,
I am a fan of yours writing. After reading your series, 1st thing is did was to open a vanguard account & transfer 3K from my checking account in Total stock fund. Its a year now & I have about 60K in it. I appreciate your efforts in telling us about investing in low cost index fund.
I have a question for you on 401K. The account I mentioned above is a taxable account, except $5500 which is Trad IRA. Initially i was in company where there was no 401K option. The current company is providing the option but without a match. I learnt from you that low index fund is that one I need. So found US large Cap Equity Index fund from Merrill lynch which has Gross expense ratio of 0.03%. I couldn’t find the Prospectus since its an unregistered investment. I contacted their customer service to know if there is any additional fees, the answer was No for mutual funds ( which is what the index fund is). However I am not sure which are the other things to look at before opting for this plan. Pls share your views, as I am very confused. Also let me know if I am missing something here.
I am planning to max the 401K if this fund gets the clearance from you. Rest will be in IRA and taxable account. I am 32 yrs now.
Thanks a lot again. Appreciate all your efforts.
Regards,
Sai
Hi Sai…
Welcome! Glad you’ve found this place helpful.
First, it sounds like you are asking all the right questions and I share your concerns.
I just spent about an hour and I can’t find anything on a “Merrill lynch US large Cap Equity Index fund”
My search took my to the ML website, but there is no information there on any of their funds. Seems they want you to contact their “advisors” to get the info. No good can come of that! 🙂 https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
Just poking around there made my skin crawl.
Morning Star has a list of ML funds, but this one isn’t one it.
The fact that you can’t get a prospective because it is an unregistered investment causes me concern as well. Typically these are hedge funds, not index funds.
I’d need to have a much clearer understanding of exactly what this fund is and where to get more info on it to give it my blessing.
That said, the name suggests that it is an Index Fund, as does the nice low ER of .03% — so you are looking for the right kind of fund.
Maybe some of our other readers are familiar with it and can offer some thoughts. But without more information, I just can’t tell.
Good luck and please let us know if you find out anything more about it.
Thanks a lot Jim for your reply…Yea when I contacted ML customer service they mentioned that its an unregistered fund. Also was informed that its fund of different funds which tries to match S&p500….That’s why I am writing to you, because I wasnt sure if that’s the type of Fund our jlcollisnh suggested….With further questing the CS, I am directed towards investment Fact sheet. I am not sure how can i share with you the sheet. Its a pdf document. Pls let me how I can share it with you safely.
Again thanks a lot for your time…Appreciate all your efforts….
My pleasure Sai.
I’m also not sure how you could share that fact sheet with me, but reviewing investment documents like that is beyond the scope of what I can/should be doing here on this blog.
My suggestion is that you have someone there explain it to you. Once you understand what it is, you should be able to evaluate how it fits with what is discussed here.
Good luck!
Jim,
We had a prior exchange in late November when I commented on your “Why I don’t like investment advisors post” and you were kind enough to reply to help out my wife and I. Your work along with a few other early retirement and financial blogs have been extremely beneficial to my wife and I in planning our early retirement. This has inspired me to start a blog of my own documenting our experience in planning the final couple of years as we prepare for early retirement at around 40. One of my first posts thanks and reviews a few sites we’ve found particularly useful and I’ve included yours. I also plan to next post an account of our experience with our former advisor in which I also cite your blog and which may be of interest to you and your readers as a case study.
This is a link to my blog if you have any interest in checking it out. http://eatthefinancialelephant.com/
Thank you again for what you do!
Cheers!
Chris
Hi Chris…
I received a notice that you had linked to a post of mine in yours. Thanks!
It sent me over to your blog to poke around a bit. Looks good!
I’ll look forward to reading your post on the advisor experience!
Good luck with the blog and may you be spared the tech nightmares I’ve been going thru of late! 🙂
Hi!
I discovered your website about a month or two ago and have been trying to absorb as much as possible. I finished reading the entire stock series and it made a lot of sense, but I had some questions. So I went back, and re-read it including all the comments the second time around (because I figured many of my questions were likely already answered in the comments). Now that I’ve completed that, I have a few remaining questions that I will attempt to post in the most relevant areas of your blog in the near future. But I thought I would start with an introduction here so that you might know a bit about me before you start seeing my name popping up here and there in the comments. I feel like I’ve gotten to know you a bit, and if I’m right, you enjoy hearing people’s stories and what they’ve learned from you, so I figured I’d share. And of course, if Im wrong, you can always skim over it or skip it completely 😉
As many others have indicated previously, I have also found your website to be eye opening in many ways. I have learned quite a bit from your experience and I am now feeling much more comfortable about the future. I have always felt a little unsettled about my savings. Not in the sense that I didn’t have enough, but more in the sense that I didn’t quite know what to do with them. This blog has been the perfect answer. Finally, I have the information needed to provide a clear and simple path to financial freedom.
I stumbled upon your site when doing some research about what to do with my savings. I started collecting a fairly substantial amount of money in my savings (that was getting essentially zero interest) and I wasn’t quite sure what to do with it. I had some “managed” accounts in e*trade as well as a brokerage account. I was buying some mutual funds here and there as well as putting money into the managed accounts. But I felt like the markets were getting high and was thinking that maybe I should wait until they went back down a bit before buying in with the rest of my savings.
After reading your blog I have learned several things wrong with what I was doing:
1) I was trying to time the market, which is a losing game. I should’ve invested the money instead of collecting it in order to get it working for me right away.
2) I shouldn’t have been buying specific mutual funds on my own. I did some research and tried to buy funds that sounded good, but still, I had no idea what I was doing and should’ve been putting it into index funds. Which brings me to ….
3) The managed account had a high ER as well as all mutual funds that I owned. I should’ve been putting this money into a Vanguard account to reduce ER’s as much as possible.
Since I found your website I have opened a Vanguard account, sold everything in the E*trade managed accounts, and moved it all over to Vanguard and invested most of it in VTSAX. I’m in the process of moving my ROTH account from E*trade over to Vanguard and will stick that in VTSAX as well. I still have some mutual funds in my brokerage account that I will sell off over time and move over as well (I’m holding off because some haven’t been held for a full year and I want them to be long term capital gains as opposed to short term gains. A few of them I think will go up higher still – I realize this is a bit like gambling, but I’m ok with that since it’s a small amount relative to the rest).
I have some funds with financial advisors in Canada that have ER’s of just under 2%. I plan to sell these and move them into Vanguard as well. Unfortunately, I also have some funds with those advisors in RSP’s (Canada’s version of 401k’s) that I don’t think I am able to move anywhere since I now reside in the US (I moved from Canada to California in 2008).
I’m lucky that naturally I tend to save well. I have some expensive hobbies, but I also have a pretty decent income. I’m single, somewhat young (mid-thirties), no kids, no debt, I rent an apartment (for way too much – since afterall, I live in California). I also enjoy math and spreadsheets, so over the years I’ve often looked at finances, and retirement outlooks, etc. I never realized how close to financial independence I actually am though until I started reading your website, and some of the articles on MMM and MF’s websites as well.
Investing has felt so complicated and foreign until now – I really like how your approach is simple and straightforward. I have really enjoyed reading your posts because they are very logical and explain all the reasoning behind the advice.
So thank you very much for sharing everything you’ve learned over the years. One of my new favourite quotes seems to apply: “Employ your time in improving yourself by other men’s writings, so that you shall gain easily what others have labored hard for.” (Which ironically enough, I found in the comments on one of your posts). I look forward to posting some questions and I hope you will enjoy some discussion as a result!
As I said, I don’t have a specific question for you here, but just wanted to introduce myself. If by chance, you have any thoughts, opinions, or suggestions on my situation, I would love to hear them!
Thanks,
Richard
Thank you, Richard…
..for the very kind words and sharing your story. Very much appreciated!
As is your taking the time to introduce yourself.
I look forward to hearing more from you around here and I hope in addition to your questions, some of your comments will be in response to the questions of others here. My guess is many will find your insights of value.
Cheers!
Congrats on being all caught up! I have a question that may not be all that common, but you’ve probably heard it before or at least thought about it. I’m 23 and I’ll be getting married in about 2 months. My Fiancee and I will have just under 60k in student loans together, with a sizable check being at 6.55%. My question is would you still consider doing some traveling while having that amount of loans, or would you just focus on the loans? I’ve read several times that you advocate traveling while you’re young, but I’m not sure how loans factor into that. At most, any trip we take would mean using one month’s net income for travel, instead of loans. And often times I think it’d be less. We’re planning to use credit card sign up offers for most the flights and some of the hotels.
Thanks!
Matt
Thanks Matt…
…it feels good!
Financial freedom was always my #1 goal and to get there I saved 50%+ of my income.
Travel was my other passion and it came out of the other 50%. This meant:
1. All my other expenses were kept very low. For instance, for many years I didn’t own a car.
2. My travel was cheap. When I was in my twenties that meant bicycle and hitchhiking. Maybe a cheap airfare to get me someplace, but mostly just stepping out my door.
But I’ve also never had any debt.
A loan at 6.55% is what my pal Mr. Money Mustache would call a debt emergency. Those payments are a huge drain on your resources. All my money and energy would go towards scraping that blood-sucker off. That includes taking on a part-time job. More income and less time to spend money on anything else.
Once it’s gone, take that monthly money and begin your investment program.
Lastly, spending one month’s income on a trip is way too expensive. I don’t think I’ve ever spent that much, even now. Step away from the glossy travel brochures! 🙂
My guess is this isn’t what you want to hear, but your financial position is currently very weak and a lavish trip will only make it worse.
You’ll be young for many years. Spend the next few getting on firmer ground. For now, travel can wait.
Thanks Jim. Whether I like it or not, it’s always helpful to get a wiser perspective on the issue! I’d like to throw as much money as possible at the loans, and that is our plan for what we have leftover every month. I made a budget with my fiancee and she probably would like it to be a little looser, and she doesn’t see the student loans as a debt emergency. And I think traveling a bit will make it easier to stay tight to the budget. I have randomly floated the idea of working a couple nights or weekends, and while it’s never been a serious conversation, I’m pretty sure she thinks that’s ludicrous. So we’ll see how that plays out in the next few months. Thanks again.
Love the stock series. I link it to anyone who asks me investment questions.
Curious why you view REITs as a inflation hedge though any more than stocks are an inflation hedge. I get the diversification point of view, but if we assume stock prices are representative of the value of the company then they should be just as much of an inflation hedge on average as REITs are, or am I missing something?
Thanks Paul…
..glad you like it.
Yours is an interesting question as I was just writing about this in the draft of my upcoming book.
Inflation is, of course, the process of prices increasing. For the last several years the Federal Reserve has been trying hard to ignite a bit of it into the economy. Mostly to stave off the prospect of deflation and collapsing prices, but also because modest inflation, as you suggest, is good for businesses. It allows them to raise prices and wages while posting greater profits.
The problem comes when inflation rages out of control. In that scenario, business finds it far more difficult to keep up and credit becomes tight and extremely expensive as lenders demand huge interest rates to compensate for the increased risk of being paid back with currency rapidly dropping in value, perhaps to the point of worthlessness as in Germany in the 1930s.
All of this combines to overwhelm a company’s business and in the process destroys the value inflation would have otherwise created.
In times like these, money flees into tangibles and real estate is perhaps the most favored.
Of course, REITs are made up of real estate businesses like office and apartment buildings. These are also not immune to serious hyper-inflation.
I confess that sometimes I wonder if I really need the REITS and holding just stocks and bonds appeals to my preference for simplicity. But each time I review it the value of the extra (if not perfect) hedge wins out. The higher dividends don’t hurt either. 🙂
Make sense?
I’d be very curious to hear more on how you, and my other readers, view this.
So this will be somewhat a whacky economists point of view (both my job and education).
I guess part of my reluctance to buy in to REITs is from looking at the fundamentals. Land itself is not a productive asset. Therefore, unlike stocks which are based on companies, it cannot increase in productivity. Any capital gains on real estate is due to some other factor.
Now, this can be legitimate reasons (I live in Houston and houses are getting more expensive due to an influx of people), but it can also be for silly reasons. Up until the late 90’s when we as a country decided everyone should own a home and incentivized it, housing prices essentially tracked inflation. There were no capital gains.
http://cdn.uncommonwisdomdaily.com/wp-content/uploads/moneyandmarkets.com/UWD/104/housing-prices.gif
That means if I am hoping for anything in excess of the high dividend I have to assume the REIT owns property where demand is increasing, or rely on the government to continue to incentivize or boost real estate sales somehow. I suspect (and this is my wild guess) that the latter is not sustainable indefinitely. I already rent on a 6 figure salary because housing is a poor deal and I live in one of the cheaper big US cities.
Now, the higher dividends are nice, but the economist in is doing some NPV discounting and wondering if that’s not just trading dollars now for higher dollars in the future. That’s not to say that’s a bad decision if my time value of money is lower than most people. I suspect that is a true statement for most people on this website.
To get back to my original question, as far as why REITs for an inflation hedge, the problem I still have is this:
At best, they will beat stocks when we are incentivizing home ownership. At worst, they are likely (on average) to match inflation from a capital gains point of view and provide a healthy dividend. Now, neither of those is bad, but neither captures the value of increasing productivity like the stock market does.
The reason I’m asking here is because I can’t find good data on the historical returns of real estate vs stocks. Most of it is focused from 2000 onward.
As far as the potential for hyperinflation, I’m not sure either asset will do great in those cases. I can’t imagine selling a house is much more fun than selling a burger in a time of hyperinflation.
Essentially I still kind of see REITs as similar to investing in gold. Any captial gains rely on changes in demand and supply rather than fundamental increase in productivity. Caveat here that real estate is at least far more useful than gold, which is why you see the higher stability in prices.
Anyway, thanks for your thoughts. I don’t disagree with any particular point, but like you I wonder if REITs are needed. Right now I own none, and I am leaning toward staying with just stocks and bonds.
Thanks, Paul, for the great and well thought out analysis. Very helpful as I re-evaluate my thinking on these things.
I’ve held them for the hedge against high to hyper inflation and to a much lesser extent for the income. In fact that was just a slight bonus.
While something like land might serve this role, it occurs to me once you start adding buildings RE has really become a business like any other and as such it is just as suseptible to the ravishes of hyperinflation as any other.
REITs, of course, hold mostly apartments and commercial buildings.
I’m very close to changing my position on this, a big step, and am thinking your response above along with my commentary might make for a great guest post.
With that in mind, any further REIT thoughts?
Also, what would your choice be for a hedge against hyperinflation? My guess is most would say gold. But I gather that, like me, you are not a fan of the metal….
You’re correct that it wouldn’t be gold for me.
Honestly, I take MMM’s wild optimism here. I assume it’s not going to happen. There’s a few reasons for this.
Primarily, hyperinflation is just hard to plan for and to truly be protected from it I think you’d have to allocate a huge amount of resources that will then otherwise underperform.
Secondly, if the US goes in to hyperinflation I think the saying “You can run, but you can’t hide” would become painfully clear to the whole world. The US economy is such a central feature to the world economy that I think it would be hard to avoid the consequences with any typical assets.
Thirdly, if we look at the German stock market performance during their hyperinflation, it’s really not that bad, even in USD terms. http://www.businessinsider.com/heres-what-happened-to-stocks-during-the-german-hyperinflation-2011-11
Not bad as far as hedging a black swan.
Lastly, I think it’s something you could somewhat see coming. Once you know hyperinflation has arrived, I’d do things like hold foreign currency and/or say, cattle. I’d still avoid gold because foreign currency is a better medium of exchange and a steak is way more useful to someone on a monthly basis than a gold brick. In basically every hyperinflation situation we see that people are remarkably flexible. Barter systems spring up, so goods that are useful short term (food, gas, clothes, etc) are going to maintain similar relative values.
Due to all of that, I just don’t really think it’s a situation worth hedging against. Ultimately, going back to MMM’s optimism, the most important asset during hyperinflation is me. If I can maintain my usefulness, I can make my way through hyperinflation. I’m sure it’d set financial independence back for me (or mess up plans for those already in it) but long run, we’ll be okay.
As far as last thoughts on REITs, after our discussion I’d have to say this. I think they have their place in more active portfolio (say someone who does growth, value, small cap type break downs). I think there they can make sense so long as you are following market conditions and keeping up with potential legislation as far as home ownership. Otherwise, in a fire and forget type portfolio, I have to agree with your conclusion, they’re essentially a specific business, and I think they won’t offer any substantial difference compared to a stock/bond portfolio. I think international exposure would give more diversification although even that seems to correlate more and more with US performance. I lean toward the keep it simple approach. I enjoy talking about this stuff, but I don’t enjoy tracking finance news to the level required for anything beyond a big dumb stock/bond index portfolio. If you want real estate as a hedge to hyperinflation (along the lines of my cattle ownership) I think you’d have to physically own the land with all the joys that entails.
I’d be happy to talk further if you need to for writing a post on this.
This is meant as humorous but…In prison cirgarettes are always worth something. Buy them now and hold for future resale. Now that’s an inflation hedge. Maybe sugar too.
Rich
This conversation has morphed into a post:
https://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
Prison cigarettes and all. 🙂
Thanks!
Jim,
Absolutely love your site and didn’t know that individuals like you, MMM or the mad FIentist existed. Glad to know like minded people are out there in the world and are happy to share their experiences and thoughts. My personal story is similar so if you’re curious, read the next paragraph, otherwise skip to the bottom for the question.
I was raised by two parents who believed very much in hard work and living below your means, so I find myself in my mid 30’s with nearly enough to retire, even though I’ve never considered not working a possibility (my parents are in their late 60’s and are still going strong though they had enough to retire decades ago). As a rule, I’ve only taken jobs that I found interesting/fulfilling and thus I’m on my third career in two decades of employment (Adult ADHD as you wrote about). I now have a job I enjoy very much as a financial analyst the healthcare insurance business (specifically Medicare). Would be happy to provide feedback on those seeking health coverage or those who have questions about future medical expenses or what medical care actually costs.
Enough rambling, quick investment question: Convert old mutual funds to Vanguard or leave alone?
I’ve been a Vanguard investor for several years now and have nearly the same portfolio as yourself, however we have about $350k in high expense (0.9%) mutual funds that we inherited years ago (sitting in a non tax sheltered account). I’ve largely left these funds alone and thus the avg cost is very low compared to the current market rate (i.e. large tax liability). My family is on the northern border of the 25% tax bracket after our retirement contributions and other deductions. I’m considering rolling these funds to vanguard (VTI) so I can continue to forget about them for another decade or two, however I’m worried about the tax liability. Also, these funds have for the past decade out performed the comparable index funds even after factoring in the taxes and expenses though I know that trend is statistically unlikely to continue. The math seems to point towards doing a multi-year conversion while paying close attention to tax liability.
Thanks again,
Travis
Hi Travis…
Thanks for the kind words and for sharing your story. Great stuff! Kudos to you and your parents.
As for your question on converting the old mutual funds, your last paragraph provides as good, if not better, an analysis of the problem and solution as anything I might offer. Seems to me your thinking is spot on!
I hope you’ll keep an eye on these comments, not only to weigh in on any health care cost questions that might come, but also to provide your perspective on some of the financial issues.
Such as my conversation with Paul about REITS immediately above. 🙂
Hi Jim,
Love your website. I have a basic question that you may have already answered. If so, you can just refer me to that. Here goes, I set up a taxable account in VTSAX. I am making automatic monthly contributions. Is it better to set up the automatic investment monthly with a smaller amount or to invest quarterly with a larger amount? Also, Since I can pick any day I want to set up the automatic investment wondering if historically there is a day of the month that is better to invest (i.e cheaper stock price). It may not make much difference but just thought I would ask.
Thank You,
Tracey
Hi Tracey…
I’ve not seen any research about this, but my guess is over the many years you should be planning to hold this investment it likely doesn’t much matter: Quarterly v. Monthly and for the day of the month.
Hello Jim,
Thanks so much for your blog. I’m very new to investing and you (along with some other blogs) are providing a lot of food for thought. My biggest difficulty is that I’m starting from a knowledge base of absolute zero.
My situation: My employer has an automatic contribution of 10.7% to my retirement account. Pretty sweet, in my opinion. Of the three options that they offer, one is Vanguard. When I became eligible for the retirement plan in the summer of 2012, I was unsure of what to do. I went with Vanguard because of the low fees and the fact that index funds made sense to me. However, I did not know what or how to pick beyond that, so I simply picked the Vanguard Target Retirement 2045 fund. I put 10% of each paycheck into the fund and my employer puts in 10.7%. Now I have about $30k in the fund. Again, pretty sweet (to my newbie mind).
But am I doing the right thing? I notice that the 2045 fund (VTIVX) has fees of 0.18%. Meanwhile, the funds that you recommend (VTSAX, VBTLX, and VGSLX) all vary from .05% to .10%.
1) Is the Target fund a ripoff?
2) I don’t know how to even begin figuring out whether I should MOVE my money from VTIVX to VTSAX, or just leave the VTIVX alone and now put all future funds into VTSAX (though that will require some juggling to get the minimum $10k in to get admiral), or … I’m just spinning in circles in a sea of too much information. Any thoughts on where to start?
Thanks so much!
My pleasure, Joe…
glad you like it!
For a guy who new to investing, it seems you have excellent instincts. 🙂
1. Nope. Target funds are just fine. They are a bit more expensive, but in return they are a bit more carefree. I discuss these in some detail here:
https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
2. VTSAX is 100% stocks and is the more aggressive choice compared to VTIVX which also holds bonds and international. So the decision really depends on your temperament.
If you are going to hold VTIVX, your 401k is the right place as the interest and dividends will be sheltered from taxes.
VTSAX is considered “tax efficient” and therefore a better choice in regular — non-tax advantaged — accounts. But it works fine in IRAs and 401Ks too. I have it in both IRA and regular myself.
So maybe, once you’ve maxed out your 401k you might consider VTSAX for your IRA and regular accounts.
Make sense?
Regardless, you are on the right path. Kudos! If FI is your goal, your savings rate is far more important than which of these fine funds you chose. Pick one and focus on adding as much to it as you can.
One last thing. As of today I am stepping away from VGSLX for reasons described here: https://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
Thanks so much!
Hi Jim.
First, I must say thank you so much for your blog. It has helped me a great deal in understanding financial concepts that were pretty foreign to me. Also, I must apologize in advance if someone with a similar situation has already asked, but I was wondering if you might be able to help me evaluate my own situation and figure out the next steps?
I am 32 years old, no kids, renting, and making only $15.00 hourly in a customer service job. I read your advice to your daughter, as well as the portfolio advice for growing wealth and then the advice for keeping/growing it once you have some. My problem is that I’m older than the age for “early saving and leaving it alone” I think, but I still want to build my wealth as quickly as possible, although obviously making a low income makes it difficult. I also owe $67,000 in student loans, and $300 on a credit card.
My monthly expenses are approximately as follows:
Rent: $450.00
Auto payment: $282.00
Auto insurance: $70.00
CC payment: $25.00
Cell phone: $35.00
Gas: $200.00
Groceries: $250.00
I guess I’m wondering what plan you would recommend for a thirty-something person with essentially no savings, a large student loan debt, and a job that doesn’t pay much-haha.
Thanks in advance for your help!
Hi Carol,
I’m going to try my hand at this. Jim can make some changes/corrections as he sees fit. To give the best advice, there are a couple of questions that need to be answered:
1) What is the interest rate on your student loan? For now, I will assume this is a low rate loan (ie. less than the rate of your car loan).
2) What is the interest rate and balance owed on your car loan? We want to get rid of the car payment (as long as it is the next best target after we pay off your credit card). For now, I will assume this is a medium-rate loan with a $5k balance.
3) You do not mention payments for the student loans. Are they in deferment or not-requiring-payment for some other reason?
Right now, you are in a bit of what we call a “debt emergency.” The answers to the questions above will show how much of an emergency it is. While in “debt emergency” status, you are not yet looking to build wealth. Instead, you are looking to pay off debts that will cost you more money than your wealth-building can provide. I’ll elaborate how to address this below…
My back-of-the-envelope math says that you’re bringing in about $2050 per month as after-tax income (based on paying 15% in taxes and working 40 hours per week at $15/hour). Your total expenses amount to just over $1300 per month (btw, I commend you for the low costs here, especially the cell phone plan. Those low costs will be powerful for helping you go further). Bringing in $2000 and paying out $1300 should leave you $500-$700 per month to leverage to improve your situation.
In month #1, that extra money should go to paying off your credit card debt completely. Never make the minimum payment on a credit card – the interest is WAY too high to do this. Pay it off completely and only use the card in the future if you are going to pay it off completely at the end of the month. Note that by doing this, you have an additional $25 every month going forward.
That takes care of $300. The other $200-$400 should go toward your next-highest interest debt. Chances are good that this is your car loan. From now until the loan is paid off, everything extra that you have remaining is going to pay off the next loan. Again, assuming this is the car, then once it is paid off, you will have an additional $282 every month as well.
Depending on the specifics of the student loan, you may be ready to start building wealth once the car is paid off. Basically, this comes down to how high an interest rate you are paying on the load. For rates below 4%, building wealth makes more sense than paying off the debt. From 4% to 6%, it’s a bit of a toss-up (I’d pay off debts under $10k, then build at least enough wealth to serve as an emergency fund and cover 3 months of expenses, then probably start paying off more). For rates over 6%, you are better off paying down the debt before trying to build wealth.
Hi Carol…
Welcome and thanks for the kind words.
I think Jeffery has done an excellent job of analyzing your situation and suggesting appropriate lifestyle adjustments. (Thanks Jeffery!)
At 32 you are still very young and you have plenty of time to make this happen. Please don’t think any of the ideas here work only for those starting in their 20s. With focus and dedication reaching FI can take as little as 10-15 years. You can be there in your mid-40s when most of your peers are still wondering where all their money went and how many more years they’ll have to work.
For an overview of how this might work, check out:
https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/ Be sure to look at the links in that post too.
After you’ve followed Jeffery’s path on your debt, turn your attention to investing. Since you’ll be starting small and are still on the learning curve, I suggest you look at Betterment. It is a great way to get started and they offer a steady stream of encouraging emails updating you on your progress. Set up an automatic monthly investment to your account with them direct from your bank.
https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Hope this helps and please keep us posted!
Thank you both Jeffery and Jim! That advice is invaluable and I don’t feel so lost now. I’m not sure of my student loan rate, but my car loan has a dismal $11,700 left and the interest rate is 7.99%, meaning I assume your advice would be to pay that off asap? 🙂
Hi Carol,
It seems like everyone is weighing in to give you advice here, but I wanted to add a couple of things to Jim and Jeffrey’s sage advice.
First, to answer your most recent question, definitely pay off the car loan aggressively. Using Jeffrey’s math, once you pay off your credit card in month 1 of this plan, you’ll have $700 to throw at the car loan in addition to $282 you’re already paying. At $982 a month, the car loan will be paid off in a mere 13 months, as opposed to over 4 years if you stick with the $282 payment. Over that time, with the larger payment, you’ll only be giving $531.53 to the car loan company, as opposed to $2038.79 with the $282 payment.
Second, and this is the reason I really wanted to weigh in, you may actually be in the catbird seat with respect to building wealth. You’re already living well below your means, which is the biggest problem most people have. Paying off debt aggressively requires basically the same behavior as building wealth aggressively – taking a significant chunk of your income and applying it to building your net worth. In this case, your net worth is negative, but soon enough it will get to zero. When that moment comes, the crux maneuver will be to simply take the amount of monthly income you’re applying to debt and start applying it to savings and investing. It sounds simple, but most people, when they get to the moment of pulling themselves out of their debt emergency, apply that $982 a month (or whatever it is at the time) to lifestyle increases, or worse, go out and get a new car and and a new loan along with it.
By the way, I speak with the vigor of the recovering addict. I was once in a very similar position as you are in now. I paid off the bad debt (in my case, it was a credit card), and transitioned the monthly income I had been using to pay down debt to wealth building. As my income has increased, I’ve been able to increase my lifestyle only a tiny amount, and apply most of the increases to wealth building. I now have a net worth around $250K, and will reach FI in my mid-forties (depending on how the market does). When I think about the despair I felt when I was saddled by bad debt versus the freedom I feel now (and the even greater freedom I’ll feel when I reach FI), and then I read your comment, it gives me great hope for your future. But it will only happen if you’re willing to do the counter-cultural thing – paying down bad debt aggressively and then, once it’s paid, applying that income to wealth building.
BTW, I’ve ignored a small issue here, but it’s an important one: Once you’ve paid off the CC and the car, should you build wealth and make the required payment on the student loan, or pay down the student loan aggressively? You’ve got to get this information: What’s the interest rate, and is it fixed or variable? What’s the payment schedule? Is the interest tax deductible (generally, true for government loans, not true for private loans)? You don’t list a student loan payment in your monthly expenses, so my guess is they’re still on some sort of deferral. Anyway, Jeffrey’s advice was excellent as to whether you should pay it down aggressively or not. Once you’ve got the details, you could post back here if you want and get Jim and others to weigh in.
HI Paul, thank you so much for the additional advice, and congrats on getting yourself out of debt and into a much better place! 🙂
I am in deferral right now on the loans, but only through October. I have about $67,000 in debt and that is spread out into a bunch of loans, 18 total-10 unsubsidized and 8 subsidized. They are all through Fed Loan Service and the interest rate is all over the place, varying from 6.8% to 4.5%, but they are all fixed rate, and the interest is tax deductible as long as I pay at least $600.00 in payments for the year.
Thank you again for your help!
Hey Carol,
If it were me, I’d probably attack everything over 5% aggressively, before building wealth, but that’s a bit of a judgment call.
Once your payments start in October, it will change all of this math somewhat, but I’m sure you’ve got the idea. Good luck!
Hi Carol,
I’d like to make 2 points, one short-term, another longer-term, about your situation.
1. You may want to read the MMM blog, if you haven’t already. Pay particular attention to car-ownership and its costs. To most Americans, it’s radical even to contemplate NOT owning a car; but it’s worth looking into. You might conclude that you can adjust your life, say, live close enough to work that you can walk/bike/take public transportation. Or, if that’s not an option, maybe consider downgrading to a less expensive and used car. Either approach may seem radical, but it’ll be a one-time action with significant reduction to your debt burden. Now that I’m thinking in this vein, why not also consider having roommate(s) to further lower your rent? For example, you can probably rent a nice single family house with multiple bedrooms/baths, if you can find the right roommates to share the house with, then you’ll end up paying much less in rent, utilities, etc. Do this until you’re debt free.
2. With a college degree, it seems to me you are only doing your current gig until you find something better. But as we get older, it gets harder and harder to get out of a sub-optimal routine. 32 is still pretty young, but then it’s not 22 either. So if you do plan to get into a better job, now is the time to have a concrete plan on how you’re going to do it, with a schedule and intermediate steps (I’m a project manager :D). Just thinking ‘one day, I’m gonna do this or that and make a lot more $$’ is not enough.
I even think #2 is more important, because it’s extremely hard to achieve FI on an annual income of $30k, even if you live in an inexpensive state (judging from your rent). Although it’s easier to LIVE on $30k a year, if it’s coming from investment returns after you’ve built a portfolio of $750k.
So I would say, pay off the CC debt and the auto loan (or get rid of the car altogether) first; then, focus on getting into a profession that can pay you at least $60k a year. With that level of income, you can achieve FI in about 10-15 years depending on frugal you want to be. Good luck to you!
BTW, I find it wrong and depressing that large number of young college grads are saddled with so much debts, esp. student loans, yet can only find minimum wage or near minimum wage work. Something is wrong with our policies. I came to the US in the late 90s to chase the American dream and luckily got on what seemed to be the last boat. Young people graduating after the early 2000s seem to be in an entirely different and much, much harder situation, esp. if they have mountains of student loan debts. These unfortunate kids seem to have been entering a depressing life in serfdom, making barely enough to get by, but never enough to better their circumstances. We need to have radical remedies for them.
In short, yes. It’s worth checking the rate for your student loan, but almost certainly the result will be that it is low enough to warrant paying off the car ASAP. The good news is that you’re probably only looking at about a year to 18 months until the financial drain from the car becomes a thing of the past. Then you’ll have that much more money available to continue improving your situation.
Hi Jim — I noticed some discussion by you and others on the Money Mustache blog about deciding to move from Wisconsin to either North Carolina or Colorado — I’m working on a story for stateline about people moving around the country, and I believe North Carolina and Colorado are two of the states that still get a lot of movers despite a general stagnation. So I was interested in hearing what your experience was, and if you eventually chose North Carolina as you indicated — anyone else reading with a point of view is also welcome to chime in, I’m thenderson at pewtrusts dot org. Thanks!
Wait– never mind — I think I have you confused with a James who posts on Money Mustache and is a different person from Rice Lake, WI. And yet your ideas on retirement are very interesting for another story I will be doing soon on retirement options — would still love to talk to you about it — thanks!
Yep, wrong James. 🙂
But happy to talk to you nonetheless. PM sent.
Hello- any way you can break down for a dummy like me to explain how investment companies break down their fee explanations and their fee ratios. Its like reading a different language to me.
Ha!
It’s a different language for all of us and most times I think it is intentionally done to keep the shroud of mystery in place.
Not being able to decipher them hardly makes you a dummy. 😉
This basic primer might help: http://www.asu.edu/hr/benefits/documents/informedinvestor.pdf
But more important, I think, is to do business with an organization you can trust. These are the only two I recommend:
https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
(If you’re on vacay – don’t read/respond to this anytime soon!)
Hey bud!
I finally got ALL my retirement accts with Vanguard now (moved it from USAA), and sitting on a pile of cash to dive in 🙂
After reading around your site and others in the same niche, I was convinced to just put it all in VTSAX, but then I read an article by Mike Piper over at Oblivious Investor (not sure if you’re familier with him? He’s pretty bad ass/smart too: http://www.obliviousinvestor.com/my-portfolio-updated/) and he actually put everything himself into just one fund as well – only in Vanguard LifeStrategy Growth Fund (VASGX).
I want to be aggressive being young and all, and I love the idea of having just ONE fund and that’s that. So every year there’s no wondering where I’m maxing out my Roth and SEP/etc… I don’t want to touch anything, and I don’t want to think about it.
Anyways, I’m sure you get a billion of these questions daily, but thought I’d get your opinion before pulling the trigger just in case there’s something glaring i’m missing…
The only thing I see off the bat (besides what the fund invests in) is the expense ratio is higher w/ VASGX prob since there’s more funds in it (and also they’re investor shares, not admiral).
Think it’s a dumb move? I can’t wait to finally have a fund to just kill it going forward.. no more playing around! 🙂
Hey J$…
(for those who don’t know, this is J. Money of RockStar Finance fame: http://rockstarfinance.com)
I’m honored that you’d turn to me for an opinion.
I’m afraid I am unfamiliar with Mr. Piper. But his advice to chose VASGX is certainly more traditionally in line with the common wisdom. That fund holds 80/20 stocks/bonds and includes international in that mix:
Vanguard Total Stock Market Index Fund Investor Shares 55.9%
Vanguard Total International Stock Index Fund Investor Shares 24.1%
Vanguard Total Bond Market II Index Fund Investor Shares† 16.0%
Vanguard Total International Bond Index Fund 4.0%
Total — 100.0%
as of 04/30/2014
VTSAX is the total US stock market index: 100% US stocks.
Holding VTSAX is very aggressive. Recommending it as a sole holding, as I do, is very much an outlier concept. In fact I am aware of no other financial writer who does. So Mr. Piper definitely has the majority opinion on his side.
Holding VASGX is also very aggressive at 80/20 stock/bond, but less so than VTSAX. Moreover, it will become steadily more conservative — adding more bonds — over the years. That’s the idea behind TRFs.
That’s also why, along with it being a fund of funds, the ER (expense ratio) is a bit higher. You are paying for that automatic rebalancing and the multiple fund diversification..
It is certainly not a dumb choice.
As you know, personally my preference is VTSAX. But I am Very aggressive in my investing and have proven my ability to stay the course during crashes. That’s absolutely critical, with either of these actually.
Looking 20+ years out, VTSAX will very likely make you richer, unless we go the way of Japan. But the race will be close and your savings rate will be the more powerful element in the mix than your fund choice.
Hope this helps!
Here’s more on my take regarding TRFs: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
I’ll be curious as to what you decide!
Well right now I’m thinking to go with what I originally was planning and dive head first 100% into VTSAX 😉
Deep down I’m super aggressive at heart and don’t get phased by volitility much, and since I’m still in my early 30s I feel like there’s plenty of time to let ‘er ride and grow…In fact, the % of bond stuff in that TRF was the part that I didn’t like as much cuz seemed like such a high amount? But then figured it was a “safe play” to make and thus didn’t allow it to sway me…
Honestly though, I just want to pick one and be done. And I do like being invested in every US stock for sure…
I feel like if you were me you’d go all in with VTSAX – am I correct? I think I might just pull the trigger and get back to hustling…
Thanks so much for all your help – it’s nice to get straight up REAL thoughts like this and not vague generalities. I’m sure others reading this agree 🙂
Yep, if it were my money I’d do VTSAX. In fact I do, 75% and the other 25% in bonds. Then I just rebalance occasionally to keep the percents where I want them, Easy peasey and cheaper ERs than with a TRF.
If I were still working and adding new money it would be 100% VTSAX like you’re planning. The new money has the same kind of smoothing effect as the bonds do for me now.
My pleasure. The approach we discuss here isn’t for everybody and everybody has to decide for themselves. But this is what has worked for me. 🙂
Thanks man! This helps out SO MUCH.
Hope you feel that way come the next inevitable market crash! 😉
That I can pick up funds for even LESS???
Of course! 😉
Hello! I found you via JMoney’s Rockstar Finance. Love that site and have been reading through yours for a little while now. So I have a couple of questions for you.
I’ve got a few accounts – I’ve actually pared down a few times in my life since I’ve had job changes, divorce, etc., so I have consolidated a few times and even did a ROTH IRA conversion a few years ago. Here’s what my current list looks like: 401K with current employer at Fidelity, a 401K still with former employer ($128K currently) and a ROTH IRA at TD Ameritrade ($32K).
I think I’m ready to move the old 401K and wondering if I should do rollover IRA to Vanguard? Funny thing is at one point I had an IRA rollover with them from old accounts and them moved it. What are your thoughts? I know you recommend VTSAX and VBTLX.
I’m also considering moving the ROTH IRA, but not really sure. What I need is simplification and honestly the TD Ameritrade site is a bit overwhelming and confusing.
I should tell you I’m 46 and have no debt, a good amount of savings in cash, and otherwise feel like I’m doing ok with my basic knowledge of saving for retirement but would love to hear your thoughts.
Back to reading more on your site!
Welcome Carrie…
Glad you found your way over here! Any friend of J$… 🙂
As you already know, with your current 401k you are stuck with Fidelity as long as you have that job. Not a big problem as Fidelity has some fine low-cost index funds and hopefully you’ve found your way into one of those.
You don’t have to read far here to know I am a big Vanguard fan and here’s some of the reasons why: https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
So yes I would, and have, move my money there.
Glad to have you as a reader. Sounds like you are already getting a solid handle on this stuff!
Jlcollinsnh,
First off I’d like to say I just got into reading personal finance blogs last month, found your blog a week ago, and I’ve been reading every post I can on yours in my free time ever since. Excellent blog, well written, and you’ve got some interesting travel stories that make me want to get my F-You Money as soon as I can so I can have some of my own.
I’m 20 years old, so I’m still pretty young, and I was never taught to save or invest my money growing up so I’m just now entering the game, and trying to figure out how it all works on my own. So I was just hoping for some advice to guide me right now…
I’m enlisted in the military, and the government offers us an IRA we can pay into called the ‘Thrift Savings Plan’. The net expense ratio for 2007 was o.015% and has risen to o.o29% for this year. Which I believe is lower than Vanguard, unless maybe that’s not the only fee involved and I’m being duped? It states, “The net TSP expense ratio represents the amount that participants’ investment returns were reduced by TSP administrative expenses.” My money is currently going into the Lifecycle 2050 fund, which I’m sure I don’t have to exlpain to you.
They have 4 different Index funds that I could be investing in. An International, Small Cap, Common Stock, and Fixed Income. Or if you’d like to look yourself. Now I’ve read enough of your blog to understand that you only recommend Total Stock Index’s, which none of these are. My question is should I still be investing my money in one of these Index funds for now however, until I can get the minimum due to rollover into the Vanguard Total Stock Index? Or should I stick with the Lifecycle, which so far has only invested my money in Government Securities?
On top of that, can you roll one Roth IRA into a different one without paying a penalty? If there is no penalty, should I do this at $3,000 or $10,000? Finally, if I buy in at $3,000 will it automatically become an Admiral account when I reach $10,000?
I know that was a lot of questions, I feel like I should be paying for this advice! haha, but if you can answer any of these questions it would definitely help me out a ton! Just trying to get my F-You Money in motion. Thank you for your time!
Welcome Nathan…
..and thanks for the kind words.
TSPs are great options, far better than what is offered in the typical private sector 401k, and they have even lower expense ratios than regular index funds like VTSAX.
Take full advantage of them while you can!
I wrote about them a bit in Addendum 5 in this post:
https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
TSP funds are index funds. The C-fund for instance replicates the S&P 500 index. The S-fund is the small cap index. Own both in about a 75/25 balance and you’ve basically got VTSAX.
Your Lifecycle 2050 fund should be heavily tilted to stocks and gradually over time will increase the bond holdings. The idea is to make the portfolio more conservative as you age.
You confuse me a bit when you say it has “so far has only invested my money in Government Securities.” That implies it is holding mostly government bonds which should not be the case.
Yes, you can roll from one Roth to another without penalty. Just be sure it is a direct rollover and that you don’t take possession of the money yourself. If you do, and fail to reinvest in 90 days, it is considered a withdrawal and penalties will be due.
Yes, if you have an investment in Vanguard that has the Admiral option, like VTSAX, once your balance hits $10,000 Vanguard will automatically upgrade it for you. You need do nothing.
Hope that helps, and congratulations on the fast start. Beginning this all at age 20 is awesome!! 🙂
Jlcollinsnh,
Thanks for the quick reply and information! Huuuuggeee help to me. This is all a bit confusing at first to try and figure out.
Just one more question… if I wanted a 25% bond, 75% stock portfolio and wanted to make my stocks imitate VTSAX, then I would want 56.25% C-fund, 18.75% S-fund and then 25% for the F-fund, correct?
I was thinking the same thing about the current investments with the Lifecycle fund, so I’m going to need to figure out what’s going on with that. But I think I might just switch my contributions to the 75/25 either way.
Thank you for the help! Much appreciated
Yep, 56.25% C-fund, 18.75% S-fund and then 25% for the F-fund would get you ~75% VTSAX equivalent and 25% bonds.
For somebody age 20 that’s very conservative in my view, but if you are more comfortable with it, that is what matters.
That said, if you want bonds as part of your portfolio, your Lifecycle fund is the easier choice.
Jlcollinsnh,
I just read your comment that you linked me to for the other TSP conversation. I think I’ve read enough so far to be comfortable with just the stocks. I know you recommended 10% for the other man, aged 26. Should that be less than for myself? Or should there even be any at all?
Again, I can’t thank you enough for all the help. I really feel like I should be paying you for this advice haha… Amazing blog, trying to read everything I can.
Nathan
What I said was “…as for your mix of stock v. bonds, at age 26 I’d go light on the bonds if at all. 10% maybe.”
Bonds smooth out the ride, but stocks power the returns.
The question as to what percent bonds has as much to do with your temperament and ability to stand the inevitable market plunges as anything.
Only you can decide that.
Reading the stock series here will help you understand just what you are dealing with when investing in the market.
After that, you have to know yourself. 😉
Jlcollinsnh,
Love, the blog and check it frequently for updates. I believe my wife and I are doing all the right things. I am a Military Officer and max out my TSP (Military 401k) $17,500.00 and we have IRA’s at Vanguard in your favorite fund. I also have 12000 in that taxable version. In the next three years I plan on getting out of the Active Duty Military, joining the Guard or Reserve and working. I have a Bachelors Degree in Computer Studies and a Masters in Homeland Security. My question is what do you think or have an idea what I should do with this GIBill. I have over 50,000 of free college to use and would like to do so. I have been pondering getting a decent management job will I get another masters or another bachelor.
Thoughts, Idea’s?
Thanks
Welcome Nick…
good to have you here. But, man, that is a question far above my pay grade. 😉
Would I be guessing correctly that you’ll be leaving with 20+ years in and a full pension? If that’s the case, along with the financial assets you’ve put together, you should have a solid platform from which to create your life 2.0.
If I had 50k in available college, I want to use it too. You sound like a guy with a love of learning. Maybe this is a chance to indulge?
Of course, if you are focused on corporate management type gigs, an MBA is the obvious choice.
It is a nice problem to have, but if you really need some guidance the most valuable advice I can offer is…
…to find someone with a more useful perspective than I can offer.
That said, maybe some other readers here have some ideas for you….
Hi Jlcollinsnh,
I’m trying to decide how aggressive my wife and I should be in our situation.
Other than a low-rate mortgage and student loan that should be paid off by the end of next year, we are debt free. If I was in my 20s with a 40-ish year horizon I would definitely be going with a 100% stock allocation.
But I’m 37 and really only started wealth building in the last couple years after finding your and MMM’s blogs. We never acquired a lot of debt prior to this, but the past several years were spent securing an emergency fund and digging out of the small amount we did have. Plus we both decided to work reduced hours so we could raise our kids instead of put them in daycare, meaning not a lot of extra money laying around to invest (or so I thought at the time).
I recently changed careers to become a firefighter and one of the benefits (unless something changes) is a 20-year pension which will put me at 56 when I retire. I could work up to 32 years if I choose, but given my late start in this career (compared to most new hires in the field) and the physical nature of it, I most likely won’t! I also have a 457 deferred comp account that I’m not able to max out yet, but I am contributing a good chunk and plan to max out as promotions/raises come my way. I will be able to access my 457 money as soon as a retire (don’t have to wait until 59.5 years old).
Given a 20-year time horizon, I’m on the fence…is 20 years long enough to still be 100% stocks, or should I smooth the ride with some bonds? If I do 100% stocks, at what point should I start adding bonds into the mix? Right now I’m using the 120-age formula for stock/bond split, currently at 84% stock, 16% bond.
Thank you!
Jason
PS, if it is relevant, my wife is a bit younger than me and has a 401k through her work, so we are more aggressive in that account due to her age and the fact she has to wait until 59.5 years old to access it.
Hi Jason…
Deciding how aggressive to be in your investing is a very personal decision. It depends more on your temperament and resources than any given formula.
For instance, in my retirement I hold 75/25 stocks/bonds. That’s considered very aggressive, but it suits me. If the market takes a sharp plunge I have the flexibility to adjust my spending until the storm passes along with a comfort level with the volatility.
If such a drop would cost me sleep or if I needed every penny of returns to pay the rent and put food on the table, I’d handle it differently.
For me, 20 years would be plenty long enough to be 100% in stocks. By 2034 that will very likely have outperformed the alternatives. But it will be a wild ride. 84/16 should provide an excellent result as well, and some studies suggest if you rebalance along the way it might even do better.
Here’s a cool calculator to play with to get a feel for this stuff:
https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf
I also have a post coming that will discuss selecting your asset allocation.
Meanwhile, very cool that you’ve become a firefighter at age 36. I didn’t know that was possible. Great, if dangerous, gig from all I hear. And it’s great that you and your wife are able to organize your life in such a fashion as to have more time with your kids. Well played!
Stay safe and enjoy!
Hey Jim,
As a fellow finance blog junkie, I happened upon this article today and I thought you might enjoy it. I think you and Mr. Bernstein should do lunch sometime as you seem to share a lot of philosophy and desire to share it with the next generation. I think he has come to many of your same conclusions although I prefer your slightly more aggressive approach with investment mix and saving. In any case, the two of you seem like you might hit it off and I thought I would bring this to your attention.
By the way, of all the blogs I read, yours is my favorite. Just the right mix of advice, philosophy, humor, and humility. Keep writing… I am 36 and my family and I are about 3 years from financial independence. When the day I leave my job comes, I am going to owe you a bottle of wine.
https://dl.dropboxusercontent.com/u/29031758/If%20You%20Can.pdf
Thanks Kevin…
Interesting article and you are correct, Mr. Bernstein and I are very much on the same page. Next time you see him, tell him I’ll even buy lunch.
Thanks, too, for the kind words regarding the blog. Glad you like it and I look forward to that bottle of wine! Meanwhile, if you are ever in the area, lunch with you sounds fun too. 🙂
One other article that I recently came across that you and your readers might also find interesting is this paper from Charlie Munger on how our psychology drives us to business, investing, and purchasing errors. I was surprised that I hadn’t come across it before.
http://law.indiana.edu/instruction/profession/doc/16_1.pdf
As to lunch…I would love that and will definitely get in touch if I am going to be in the area.
Just loaded it and read the opening. Very engaging. I’ll have to make time to read the rest.
Thanks!
Hello Jim,
I’ve very recently discovered this site and have been reading voraciously ever since. My eyes are open wider than before, but also glazed over just a bit. Congrats!
I will be inheriting a fairly modest IRA (I THINK it’s a Roth) from a parent who has recently died. I have read and re-read the rules on what I can do but must admit I’m still a bit confused. It seems to me I can just take lump sum, penalty/deadline free, and do whatever I will with it. I’ve already got a fairly healthy portfolio including a Roth IRA (Vanguard of course, thank you Dad!) Is it as simple as just adding it to my existing IRA (or taxable investments if I choose) once I take lump sum? Is there any advantage to keeping it as an inherited IRA, which comes with rules, deadlines, and other things I don’t like?
Thank you! Your check is in the mail…
Hi Mike…
and welcome. Eyes open and glazed over. Ha! I like that. 🙂
OK, here’s my understanding of how this works, but since it sounds like this is with Vanguard you’ll want to talk to them (or whoever the custodian is) to clarify and confirm what I’m about to tell you. There maybe variations in your personal situation that need to be taken into account.
But this should give you a start in understanding some of the issues.
First, you cannot add it to your existing IRA. Only an inheriting spouse can do that. All others, including you, have two choices:
1. You can take it as a lump sum or a series of lump sums. But you have only five years to fully empty the account. Within that five year period you can take as much or as little as you chose each year, but it must all be withdrawn by the end of that time. This allows you to spread the tax liability a bit, because this money will be taxable in the year you take it. It can be very useful if you know your income will be especially high or low in a given year(s).
2. You can take it as a series of yearly required minimum distributions (RMDs) over the course of your life, the amount calculated based on your life expectancy. Vanguard (and many other custodians) can do this calculation automatically for you.
This is basically the same as the RMDs required of all IRA account holders (except Roth) once they reach 70.5 years old. If the person you are inheriting the IRA from was taking their own RMDs from the IRA when they died, this is the option you MUST take.
These RMDs are taxable each year as you take them, but for younger people with a long life expectancy this method can keep much of the IRA growing tax deferred for a long time.
So,unless you need the money, #2 is the better choice.
You must begin withdrawing the money using one of these two methods, even if the IRA is a Roth. But if it is a Roth, no taxes are due on the withdrawls. Even though no taxes are due, it is still worth using option #2 to withdraw the money as slowly as possible. Doing so allows the money the investments earn to grow tax free.
Note: While the original owner of the Roth is NOT ever required to take RMDs, those who inherit them are.
For more, Vanguard has some good articles like this one: https://personal.vanguard.com/us/whatweoffer/ira/inheritediranonspousermd
and some of these:
https://investor.vanguard.com/search/?query=inheriting%20an%20IRA
and they are very helpful if you call.
This is another article that gives a pretty good review:
http://www.bankrate.com/finance/retirement/8-ways-go-wrong-inherited-ira.aspx#slide=2
Hope this helps!
Thank you for the informative and quick response. #2 it is. Your site is a tremendous resource; kudos to you.
My pleasure, Mike…
But as I said, be sure you confirm the info with your custodian. 🙂
We have just sold our home. I was just wondering what to do with all the cash from our home while we figure out where to build and while building? Obviously it has to be somewhere safe, and where we can easily get access to it. Thanks.
Hi SYL…
Assuming you are planning to spend the money on your new home in the next five years or so, you want to keep it in an FDIC insured bank account.
Do you plan to show or have a page that shows your current stock holdings? I am curious to see your portfolio and learn more about your investing style and methods for selecting stocks. Thanks!
Check this out: https://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/
Thanks Matt…
You beat me to it! 🙂
Thank you.
Hi DivHut…
This post details what we own and why we own it: https://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/
As for investing style, my stock series of posts covers that is some detail: https://jlcollinsnh.com/stock-series/
Hello Jim,
I been read your blog for the past 6 months. I love your blog. We don’t have any retirement account such 401 k or IRA. Because we both don’t have a job yet. But after I read your blog I open taxable account with vanguard, and of course I bought VTSAX. Now, I want to buy more. Do you think it a good idea? Or Should I wait until I get a job then open retirement account like ROTH IRA? ( by the way, we don’t have any debt, we own a house and car ) we still don’t have any kid. My husband want to buy some bond fund too. Thanks 🙂
Welcome Fon…
I’m glad you found your way here and glad you like it.
If financial independence is your goal, investing as much as you can whenever you can is the right idea. As for deciding how much in stocks and how much in bonds, my most recent post might help: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Good luck!
Thanks Jim. 🙂
Hello Mr. Collins!
Thanks so much for all of this great information you have provided. I searched your site but didn’t find anything about discounted stock options purchased through an employer.
First some details, my husband and I fully fund our 401ks, Roth IRAs and we also invest regularly in Vanguard mutual funds. In addition to these things, my husband also purchases discounted stocks through his company (a large oil & gas services company – it has historically been a very stable company). If it matters, he will receive a pension when he retires (which leads the golden handcuffs problem – a good problem to have!). I am 38 and he is 43. We would like to be in a position to retire when he is 50. We are on a pretty good path in general, but we could always do better.
Our issue is not quite knowing what to do with the company stock. If we sell it and reinvest we pay capital gains tax and we are in the highest tax bracket, with not many deductions at all (no kids). However, if we hold it we know it could be risky as this is a lot of stock in one company, which is also his employer.
I would love to hear your thoughts. Thank you!
Welcome CJ…
Interesting question and no, I haven’t written anything about this.
First, I gather your husband is buying these outside a tax-advantaged account, correct? If not, simply buy, sell and roll into your index fund.
Second, I assume the discount is very attractive correct? If not, don’t bother buying it.
Third, there is a required holding period, correct? If not, buy and capture the discount and sell.
The next question is how big a percentage of your total net worth is the stock in this one company? Less than 10-15% I wouldn’t worry too much.
But if it is a large percentage, it puts you in a very dangerous position. Even the best companies can and do take major hits and this risk, as you know, is compounded by the fact that this company is also his source of earned income.
So, you definitely want to get this holding down to a small percentage of your total. Seems to me you have only a couple of limited options:
1. Bite the tax bullet and sell a portion every year.
2. At some point the market will take another dive and this stock price will drop along with it. Move it then while it’s price and that of the index fund are both down.
Not great choices, I know. Maybe some of our readers will have some better ideas.
But don’t let this one stock, and a fear of taxes, dominate your net worth. Doing so leaves you open to having your wealth decimated.
Thank you so much for your reply! Your blog has been incredibly helpful, thank you for writing it and for making the information so accessible for non-finance people like me.
My husband basically purchases the stock every six months at 7.5% lower than the lowest price during that time period. There is no holding period, it can be sold at anytime, but we alway make it a rule to hold at least a year to avoid the short term gain tax. We have sold some of this stock in past years to fund home improvement projects. Currently, it does represent a significant portion of our portfolio.
My husband is reluctant to sell and take the tax hit, we have been hit hard in past years and it is a very difficult pill to swallow. He also feels like the company is very secure/stable (and it has been for a long long time) and if his company’s stock goes down the whole stock market is pretty much going down, so why does it matter if our money is there or in a Vanguard mutual fund (which we are also funding).
Intuitively I think your advice is the best path. I think we will always hold a year before selling but I’m going to work on convincing him we need to sell it and reinvest (as painful as that tax bill will be).
Thank you again!
Please someone correct me if I’m wrong, but if you are holding it for a year then that means you would pay 15% on the gain (unless you guys make over $450k / year, then 20%). That is pretty low, and I think I would consider that a bargain compared to how high income tax and short term gains can be.
So my thought is: take the discount, hold it for a year, then sell it and move it into VTSAX (or something similar) so that you aren’t too heavily invested in one company.
Richard
I agree with your strategy, Richard.
CJ, here are the capital gain tax rates so you can see what the impact might be in your case:
Short-term gains taxed at ordinary income tax rates.
Long-term gains and qualified dividends taxed at:
0% if taxable income falls in the 10% or 15% marginal tax brackets
15% if taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets
20% if taxable income falls in the 39.6% marginal tax bracket
Good day Jim! My wife and I would like to know which retirement accounts you recommend for married couples in the process of building an F-You stash and seeking FI? For example, is it beneficial for each of us to have multiple accounts?
We are both teachers and currently have funds in a state teachers retirement pension system, with additional funds in each of our 403b accounts (hers is pretax, mine is a Roth 403b). Thanks to our efforts, her district is now offering Vanguard and we will rollover her 403b annuity to a 403b(7) custodial account with them.
After three years of teaching, I became a stay-at-home parent and will be for at least the next three years; this leaves us living on one income, but we are still able to save 30% of my wife’s net income. However, it still doesn’t put us over the 403b/traditional IRA contribution limit of $17500, but it comes close. Once I return to work, every cent I make will be saved as well (this will definitely put us over the contribution limit). I’m not 100% certain that I’ll return to teaching. Therefore, we’ve been contemplating rolling over my pension (~$35k) to a Vanguard traditional IRA. Is this a wise move? Either way, I am in the process of moving my Roth 403b annuity into a Roth IRA with Vanguard.
The long-term plan is to reach ER/FI, rollover the pretax 403b to a traditional IRA, and begin a Roth conversion ladder with my wife’s account to minimize taxes, if not avoid them altogether. She will have 20+ years of paying into the state teachers pension at that point, which should easily cover our annual expenses, once she can collect on it! Therefore, if everything goes to plan, all other accounts will be icing on the cake.
However, we will need to save enough to bridge the gap between ER and “retirement” age, which continues to be pushed into the later years of life. Our pension system currently offers (it certainly can change, and probably will, in the next 10 years) an unreduced benefit at age 65, and an actuarially reduced benefit at age 60. This is, if my understanding is correct, where the Roth IRA will come in (contributions available five years after deposited/converted), because our gap between ER and age 60 will be 10-15 years. Therefore, we do need the “icing” to cover our annual expenses prior to age 60. I suppose, in reality, the safer goal is to build a stash with IRAs, and taxable accounts if needed, to cover our annual living expenses and let the pension be the icing.
If she has the pretax covered, and I have the Roth, is there an immediate need for her to open a Roth and me to open a traditional IRA, or do we wait until we reach the contribution limits of our current accounts? Also, how do we determine the priorities and contribution percentages of each one? We’d be sad to find out we put too much into the Roth and missed out on the immediate income reducing power of a traditional IRA and 403b(7).
We feel like there are many factors in play here, which makes visualizing our path to ER/FI fairly cloudy.
Thank you for your expertise and time!
Hi Andrew…
First, kudos to your wife for getting Vanguard into the district plan. It will be a benefit not only to you guys, but to everybody else working there.
OK, let’s walk through your questions.
I’ve always had a preference for holding my money in my own IRAs whenever possible. I’ve always been slighly paranoid about having my employers involved any longer than I had to. So, the moment I could roll my 401k, or in your case, 403b, to my own IRA I did. This usually means once I left the job.
Once you start working again, you too will be able to contribute $17,500. If you retire early there are ways to make early withdrawals: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Max that out and only then fund taxable accounts. It sounds like you’re saving rate is such that you’ll be doing that and those will be available in your early retirement too.
Anytime you have enough income to be paying federal income taxes, choose a tax deductible IRA over the Roth. Remember, any money you pay in taxes (or spend in any fashion) is not only gone forever, so is all the money it could have earned for you.
As for your pension, try hard not to have to take it early. The penalties in the form of reduced payments are often steep. When the time comes, you’ll want to run the numbers and be sure. Of course, if you are in poor health and faced with a shortened life expectancy this will influence your choice.
Sounds like you are on a sound path. Enjoy the journey!
Hi Jim
I recently discovered your blog and have been reading all of past posts. You have answered many of my vexing questions that I tried to reason for last 10 years.
I am close to 40, networth ~$2M. Mostly index fund investing.
Because of the meltdown in 2008, I stopped adding any more to my stock position . Any how, the past 5 years I have accumulated cash of $500K. I know I made a big mistake by not investing, but it gave me peace of mind at the time.
I am convinced that I need to deploy cash back in to the market, however, very concerned at entering all in when the market is at an all time high. Do you have suggestions on how to get my cash in to market?
Thanks
Welcome Kish…
Glad to hear it has been of help.
It is too bad you stopped investing, but at least it sounds like you didn’t sell during the drop. Kudos for that. If you’ve read much here you know that corrections, bear markets and crashes are to be expected. They are impossible to predict and best ignored while they run their course.
Your comment about not investing providing you with peace of mind gives me pause. Being invested in the market means being able to handle the inevitable wild ride.
Here is my take on investing in a raging bull:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Since it also sounds like you might want to smooth the ride a bit, this one might interest you as well:
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
While those two address your specific question, I highly recommend you read, or re-read, the full stock series: https://jlcollinsnh.com/stock-series/
It should help you understand the nature of the market and how to deal with the volatility it will surely provide.
Good luck!
Jim
Thank you for such a speedy reply. I have read some of the specific posts you pointed and will complete reading the stock series as suggested.
Yes, after the 2008 crash, I never sold any investment, continued to fund all our retirement accounts at max limits resisting the temptation to do the opposite. The cash accumulated nevertheless as I stopped putting my monthly savings into the market. Ironically, after 2000 crash, I continued investing my savings which has paid off well and should have known better second time around. However, as my assets increased and I grew older, I guess my fear took over.
For now, I plan to use some cash to pay off portion of my mortgage and plough the rest back into market.
Thanks for these great inputs.
Mr. Collins,
first and foremost thank you very much!!! Your blog has opened my eyes in many ways and just as Kish wrote earlier, since discovering your blog a few years ago, you have answered many of my vexing questions, that I was not able to answer on my own!
Today I am a few months away to retire from my corporate job to make time for unpaid work helping a cause that is near and dear to my heart!
If everything goes as planned this will happen in a year or less. I am certainly aiming for next summer, right after my 45th birthday. However if markets crash around that time, I am willing and able to work an extra year or two if I have to.
I have about 500k invested with Vanguard 75% stocks /25% bonds through both tax deferred and taxable accounts and will keep contributing until I plan to retire
I have 50k in cash in a savings account
I also own my house free and clear and am getting ready to put it on the market after this summer .
After all fees and commissions I will net between 420-440 k from the house sale, conservatively.
I can currently comfortably live on 21-22k/year, my projected expenses once retired will go to 26-28k because of increase in health insurance
My original plan was to invest about two thirds of the proceeds of the real estate sale in REITS and use the rest to purchase a Condo. I also consider investing the entire amount in REITS and use the gains from that investment to cover rent for a rental condo until I am sure I really want to buy.
This would result in 780 k invested plus 50k cash plus paid off residence, or 920k invested plus 50k cash whilst renting a residence. Either way, I believe, I will be alright!
Right?
I am a loyal and frequent reader and developed these ideas from reading your stock series again and again. The real estate sale/condo purchase/rent idea based on your previous articles
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
and
https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Now recently you mentioned stepping away from REITS and why you came to that conclusion
https://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
I understand what led you to question your position. Now I am wondering about the particular implications for my situation.
If I invest all the money, would I just distribute my 420k (or 280) 75/25 between stocks and bonds instead of REITS?
Also in the past you have made a clear point about just investing all funds in the market as soon as they become available. This means dump the 420 in the market (respecting chosen asset allocation) no matter what and call it a day? That is a LOT of money for one day. Do I need to toughen up cupcake?
I don’t know if it is the clock ticking with less than a year left or the recent change of your viewpoints and asset allocation, but somehow I am all of a sudden scared to just do it and run with it.
I am fully aware that I will need make my own decisions, but I your opinion matters a lot to me. My (early retired) parents always ask me who this Mr. Collins is whom I am referring to as if he were a close family friend? They retired early, by setting aside a huge chunk of cash and receiving early pensions so they are more worried for me than I am. As much as I love them and value their wisdom in other areas of life, I’d rather have your advice on asset allocation and investments. Thank you Mr. Collins!
So, Janet, you’ve been reading for years and only now you write?? 🙂
Welcome! I enjoyed your comment, in part because so clearly you have actually taken the time to read the blog. Thank you for that!
Before we get to your questions, let’s take a brief look at where you are financially. Once the house is sold, you’ll have ~920k invested and ~50k in cash. Using your higher number, you need 28k a year.
Using just the 920k, that is a withdrawal rate of only 3%, very comfortably under the more typical 4% as discussed here: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Plus you have almost a full two year cushion against downturns with that 50k in cash. You are financially independent with room to spare.
Now to your questions:
1. Yep. If you chose to step away from REITs as I have done, your allocation will be solely stocks and bonds. If you go with 75/25 your 920k would be 690k/230k stocks/bonds. But in looking at your allocation you should consider all your assets. So really you have 970k: 690/230/50 or 71%/24%/5%.
2. Yep. When the 420k becomes available it would all be invested at once and regardless of what the market is doing. Anything else is market timing, a proven road to disaster. It is your allocation that smooths the path, not any kind of timing.
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
3. Yep. You need to toughen up Cupcake. 🙂 Not only in making the investment at the time, but especially in dealing with the gut-wrenching drops I promise you will come over the years. You must be absolutely committed to ignoring these when they occur, and that is very tough to do. The good news is with your cash cushion, low withdrawal rate and allocation you are well postioned to do this financially. But only you can decide if you are well positioned emotionally.
In any event, congratulations on the great progress you’ve made and on being on the verge of moving into a new phase of your life. The point of all this financial stuff is, after all, to provide the freedom to lead ever richer lives.
As for your parents, given their own financial situation, clearly you come from good stock. 😉
But don’t keep them wondering who I am! Point them here and let them read for themselves. It might make for some interesting family conversations.
Keep us posted and enjoy your journey!
Thank you Mr. Collins!
See, I could not have written earlier, because it took me a long time and a lot of reading to get where I am now.
Reading the stock series for the first time I was in disbelief. Reading it for the second time, I was fascinated. Reading it for the third time I almost came around. It was not until after reading it for the fourth or fifth time before I finally took action with my finances.
Even then only tiny little steps to increase my comfort level little by little.
I was almost 100% in cash until not too long ago, with the exception of my 401k. Each time before I made any change I reread the stock series.
With the house sale coming up, the biggest single change is ahead of me now. This change will really make it happen and will push me over the number that I considered, relatively safe, based on my reading. Compared to what my parents think and what I used to believe, it is a relatively low number. So I need to make sure I get this one right. This is why I asked for some more personal advice at this point in my life. Looking at previous posters’ questions, I am not the only one, who knows the answer in her heart, but despite reading the stock series countless times, still has to ask, just to be really sure.
I would love to point my parents to your blog, but they don’t speak English. They are part of a culture, where a paid off house is the #1 investment for a good retirement, followed by a pension and a good savings account (they can check every box of that list).
Even if they did understand English, this post
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ would probably give them a heart attack right there, so maybe ignorance is bliss for them.
They did instill good values into me as far as avoiding debt and living below my means are concerned. Clearly their approach worked well for them in their time and country. I however, realized a few years ago, that what worked for them will not work for me here in the US. I knew I needed to adapt und had no idea how. Then thankfully I found your blog!
Now, besides volunteering, I’ll have more time to visit them and spend time with them, while they are still around. Priceless, truly priceless!
Thank you!
Hi Janet…
I am so pleased to hear how things are coming together for you. Well done!
Thanks for your persistence in reading thru the stock series. What was the thing that prompted your initial disbelief?
I know there is a lot here that is counter to the “common wisdom” 🙂
Sounds like your parents have done just fine without me. But if you do want to share it with them Addendum: Google Translate makes it easy. https://translate.google.com/#en/es/jlcollinsnh.com
Just click on the link, type in jlcollinsnh.com and choose the language you prefer. Click on the link for that language and you’re done!
Although, maybe not that post you linked to. 🙂 That one has upset a lot of people. It has become one of my most popular and has generated both the most love and the most hate. 😉
All the best in your new ventures!
What promted my disbelief?
It was in so much contrast to what I had been taught all my life! You save, you put it in a safe place. You get a house and pay that off etc.
Until then I was mostly invested in CD’s, “high” yield savings accounts and I had the house. That was it.
My 401 K was invested in the stock market, because I had no other choice.
I knew my parents’ strategies would not work for me in the US, and I knew I had to be in this “so called market” but I did not know what this “market” was and how to do it. I thought I had to pick the next Apple or IBM or something, in order to be succesful, but what if I pick the wrong one??? I was so so so scared.
The disbelief made way for fascination quickly and today, maybe a little late, but better late than never, a big part of my portfolio is invested with Vanguard. Whew!
Thanks for the Google translate tip. I had not thought of that! I will have to stand by while they ready though. As someone, who speaks several languages and has tried free translation services, such as Google, to make life easier, let me tell you, you get what you pay for 😉
Yours is a fascinating story, Janet.
Clearly, you parents chose a path that worked for them in the time and place they found themselves. Equally clearly, you were wise enough to recognize you were in a different time and place with different challenges and opportunities. Kudos for having the courage to explore!
Hi Jim,
Was hoping to get your thoughts on Vanguards VIMAX fund. Looking at the graphs since inception it appears to outperform VTSAX, and MorningStar seems to rank its riskiness the same as VTSAX (even less risk in the 3yr category). Given those features does it make sense to keep a portion in both funds during the wealth accumulation phase?
Thanks for any insights you can offer.
– Chris
Hi Chris…
VIMAX is an index fund focused on mid-cap companies and it holds ~377 companies.
VTSAX is a total stock market index fund and it holds ~3600 companies.
Since different sectors go in and out of fashion, you will always be able to find some that are out performing the total market index at any given time. You can look at such sectors by company size, which you have done, or by industry such as health care or precious metals. There are funds for each.
Buying those that have recently out performed is called “chasing performance” and it is almost universally regarded as a losing strategy.
Identifying those that have out performed recently is easy. But predicting which will out perform from here is the trick. And no one has shown the ability to reliably do that.
This is precisely the reason I use only the total stock market index fund VTSAX to do the heavy lifting for me. The Stock Series here on the blog explains this in some detail, if you are interested.
Hope this helps.
Thanks for the reply Jim. I guess I am misunderstanding what I am seeing as the graph since inception is outperforming VTSAX. I get that in any given month/quarter, or whatever, any segment may be doing great, but I thought a larger window would alleviate that smaller picture illusion or various market trends.
Of course both only have graphs since 2000 or so … is this window too short to be useful to us? If so how can we even evaluate what VTSAX is likely to do? The stock series seems to make it’s case using the DOW, but isn’t that only 30 companies?
– Chris
Chris…
If you see the stock series as making the case for using the Dow, I can only suggest you give it a more careful reading. VTSAX is the over riding theme.
If you do so, you will know clearly, or at least as clearly as I can make it, what my perspectives are. At that point they will make sense to you, or not.
Meanwhile, if you are convinced a focus on mid-cap stocks is the best long-term strategy, that is your choice to make.
Good luck.
First, thank you for your time in this. I appreciate you making this section available for these questions.
Second, I apologize if I am not being clear. I understand the stock series isn’t making the case for using the Dow per se, but many of the graphs showing the market always going up are justified with the Dow’s performance over time as VTSAX hadn’t been created. If it is a reasonable assumption that VTSAX, which invests in everything, would behave the same as something composed of only a limited number of stocks (like the Dow), then why wouldn’t a mid-cap type fund also composed of a limited number of diversified stocks not behave similar as well?
It appears I am missing something here. I totally understand that investing in *everything* is as close to a sure bet as one can get with the market. The series made that clear. Long term strategy this makes perfect sense to me.
However, in the wealth accumulation phase, when more risk is acceptable it seems that there could be benefit to keeping some percentage in the better performing mid-cap index fund. The risk I see here is that it may not continue to perform as well as those small/large cap stocks included in the total fund, but it doesn’t seem too likely that the majority of the mid-size companies will suddenly go under unless the entire market is doing so. As it has been performing better for the last ~13 years I don’t see this as the equivalent of something like investing in pharma because of the sudden ebola outbreak, or performance chasing of that nature. It is still an indexed fund that is diversified across all sectors, and it is still low expense ratio. I am not trying to hand pick stocks likely to perform amazing.
Given the above what reasons are there for not putting a portion into that fund. I understand the pure VTSAX approach is simpler, but is there anything else I should factor in?
– Chris
Chris,
I understood your thinking and answered your question in our first exchange.
Now you want to simply argue further or have me try to persuade you. I have no interest in engaging in either.
Good luck with your decision.
Mr. Collins,
I have finally read through all of the stock series and most of the comments as well. I would be honored if you would comment/advise on our particular situation.
My husband and I are both 53 and our combined gross income is ~$253,000. Annual living expenses of ~$85,000 including health/dental insurance. (ridiculously high I know…MMM face punch incoming!) I have set a retirement budget of about that amount for our living expenses, but that includes quite a bit of wiggle room during down markets.
I plan to retire at 62, and he still wants to work until 65 (at least he says that now!), so our horizon is 10-12 years to retirement.
Current holdings:
His:
401K $495,500 Annual contributions of $16,484 + $5500 catch up (as an officer, he can only contribute the average % of all employees. Plus company contribution of 3% =~$6,181.00
IRA $82,000 roll over from prior work.
Mine:
457 – $300,600 Annual contributions of $17,500 + $5500 catch up
403b $15,900 Annual contribution of $17,500. Just started this one last year. Would do the catch up to, but this basically taps out my salary. I get $20.00 twice a month!
Ours:
Taxable account: $188,100 annual contributions of $42,000 (this balance should be much higher I know, but we made the decision to pay for our son’s education (undergrad and Law School)….and well, we had/have a few expensive passions which are becoming more realistic in scope as we get smarter with our money!
REIT $10,500
Bank stock: $8,185.00 (Why? Cause we were too dumb to know better!)
Cash $30,000
Other:
He will have a small pension (Company frozen several years ago) of $26,712/yr with NO COLA, at age 65.
I will have a state pension of about $25,000 starting at age 62 that will have COLA.
Hopefully there will be social security for us both of about $40,000 combined. We both plan on delaying collecting until age 70, or using a claiming strategy.
Our housing situation is a little unique in that we live in my inheritance, which is in a trust. So no mortgage or rent, but until my parents pass and that trust distributes to our trust, the full value is not ours yet. Although we do have capital investment in the property in the form of a barn/shop/Hella gym we built.
He has access to VINIX and VBTLX in his 401k. (just found this out and will be changing allocations ASAP)
In my 457, the best choices that I see are:
SEI Institutional Managed Trusts S&P 500 index fund with ER .29%
Waddel & Reed Advisors High Income Bond fund ER .76%
Nationwide Bond Index Fund ER.68%
403b: These options kinda suck! But the best picks I see are:
EQ/Equity 500 Index ER .62%
EQ/Small Company Index ER .72%
EQ/Mid Cap Index ER .72%
EQ/Intermediate Term Bond Core Bond Index ER .72%
The IRA and Taxable account are currently with an advisor that we will be moving away from as soon as I can get my husband to read your excellent posts and come to the same conclusions I have! These will be invested in VTSAX!
Okay, that’s the background…here are the questions:
1. Asset allocations – given the fact that we will both have some pension funds coming in and I have been reading that pensions and social security can/should be treated as part of the Bond allocation, where to you think our bond percentage should be at this stage? (I know these will be your opinions, not “investment advice”) Do you agree with treating these as bonds?
2. Given the choices noted above in the 457 & 403b, which of those funds do you suggest? I have seen your other comments about the S&P 500 being a fair proxy for total market index, is that your suggestion here as well? Which bond funds would you suggest, or should we put the bond portion in his 401 as it has a much lower ER.
3. Do we include the value of the house in these calculations at all, or exclude completely? We plan to live here at least another 15-20 years before we think of selling and getting something smaller. (5,800 sq ft, value ~$650,000 will be too much as we get older)
4. Any other suggestions/comments would be greatly appreciated!
Sorry this is so long! I can’t stress enough how much your site has meant to me in simplifying and optimizing our finances! Thank you sooo much, you are definitely a ROCK STAR!!!
Rock star. eh? Well I guess if the Rolling Stones can do it old and grey…. 🙂
Welcome Lauri…
I’m afraid I have no face punches for you!
One of the few areas where Mr. MM and I diverge is on spending. Where he sees anything beyond a certain maximum amount as insupportable, I look at it more as a function of percent of income. His is likely the more ethically and environmentally responsible approach and I do agree that outsized lavish spending is unseemly. But in my view you are not near that level. But then, you are spending a bit less each year than I am. 😉
With 253k in income and 85k in spending you have a ~66% savings rate, and kudos from me!
Not counting the house, your assets are ~1.13M and at the rate you are going should easily be around 2-3M by the time you retire in 10 years. Kudos again.
Add to this the fact that your pensions and SS will bring in ~92k when you do retire, you are golden. Have I offered kudos yet?
BTW, in your case, I agree waiting to 70 to take SS is a good idea. Assuming good health and a nice long life expectancy as the time draws near.
OK, that out of the way, let’s look at your questions:
1. Yes, I agree that pensions and SS serve the same function as bonds in a portfolio. That is, they reduce the volatility risk of stocks. It is a useful way to think of them, especially for those as well positioned financially as you are.
2. It is very hard for me to recommend specific funds from your list as I am simply not familiar enough with them. That said, here are some thoughts.
You could mimic VTSAX with a mix of the large, small and mid-cap funds, but personally I wouldn’t bother. I’d just use the S&P 500 fund. Lower cost, simpler and any performance difference should be minor and random.
Given your strong financial position and the bond-like function of your pensions/SS I wouldn’t worry about holding too much in bonds – especially with those ERs! – unless you want the psychological comfort they can provide when stocks plunge. Of those choices, Nationwide Bond Index Fund sounds like a total bond index fund. If it is, that would be my choice. It also has the lowest – although still high – ER 0f .68%
3. You’ll notice I’ve excluded the house in my figuring. Yours is a unique situation and I just wanted to look at it as “cleanly” as possible. But if you are certain it will come to you, you can include it as you wish. Or, run the numbers both with and without it. That’s what I’d do.
The main point is, as I’ve said, with your income, spending level, savings rate and working plans you are golden and then some. Have I said kudos yet?
4. Nothing I have’t already said! 🙂
Hope this helps!
You are only as old as you act…I’m still 18!
Thanks for the kudos… that made my day! While our savings rate it not quite 66% (darn taxes!), it does add up!
One more question, if I may…would you advise doing backdoor Roth accounts until we retire and then trying to covert as much as possible before collecting SS and RMD’s kick in? It would be pretty straight forward for me I think, but I think I read something somewhere about when doing it when you already have a traditional IRA, there are some other things to consider? (Did I make that up?) Since so much of our investments are tax advantaged, I want to do everything I can to minimize the taxes later.
Again, thanks so much for your valuable advice!
Based on that, I’m about 186. 😉
Back-door Roths are something I am aware of but lack expertise in. I’ve never used this technique myself, but only because I wasn’t aware of it at the time it might have been useful to me.
I do know that you are correct in thinking there are some pitfalls to consider. These guys have a good reputation and this seems a good overview: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
You are also correct in being concerned about taxes once SS and RMDs come into play. This will be a serious issue, given that you are likely to have 2-3M plus when the time comes.
A ‘first-world problem” to be sure, but something worth planning for none-the-less.
Personally, I have been shifting money to our Roth accounts each year up to the 25% tax bracket line. The idea being paying 15% now is better than what it will be once we turn 70.
But typically it is better to delay taxes as long as possible. Converting now, I lose not only the money but all the money it could have earned up until age 70. While I know my tax bracket will be higher then, it could be that had I held on to the money instead, that growth would still make me better off.
But since I can only convert a small portion of the total at 15%, I’ll still have plenty untouched and earning. So, in a sense, I’m doing both.
Who knows what I’ll wish I had done once the dust settles. 🙂
Aloha Jim,
Thank you very much for all of your hard work on the blog. Reading your posts has been very helpful to me. I’ve shared links to your site with several friends and relatives. We’re looking forward to reading your book when it’s finished. Please keep up the good work!
Recently I’ve been running the numbers trying to decide when my wife and I should begin collecting our Social Security Benefits, and I’m curious what your thoughts on our situation will be. My wife is 57, I’m 48, and we have a beautiful 5 year old daughter. My wife and I have always lived comfortably, well below our modest means, and saved the rest. Right now, I’m working full time, and my wife is staying at home with our daughter, although we’re considering possibly selling our home and becoming location independent for some time, possibly within the next few years.
In 5 years, when my wife turns 62, she’ll be eligible for ~$800/month in SS benefits. If she waits until her full retirement age of 66, she’ll get ~$1100/month. If she waits until age 70, she’ll get ~$1400/month. All the SS benefits calculators I’ve looked at say that its best to wait until you’re at least full-retirement age or, better yet, until 70 years old to begin taking benefits. Since we’re living fine with only one income now, we could easily elect to delay taking my wife’s benefits until she’s 67 or 70 years old, but I’m thinking it might be better for my wife to take the reduced benefit of $800/month at age 62 and invest all of it in VTSAX. Assuming an estimated 7% yearly return, her $800/month deposits would add up to ~$110,000 between the ages of 62 and 70. Assuming a 4% SWR, that money could provide us with ~$400/month in additional income by the time my wife turns 70. Although this would be less than the ~$1400/month that she’d get from SS if she waited until age 70 to begin receiving benefits, my thinking is that taking control of the money ourselves, as soon as possible, might be better than waiting and hoping that my wife lives long enough for the increased benefits rate at age 70 to pay off for us. We look forward to hearing your thoughts on this idea and any other suggestions you may have.
Thanks in advance,
Shane
Welcome Shane…
…glad to have you here and glad you enjoy the blog. But you can’t open with a greeting like “Aloha” and not share where you are!? 🙂 Hawaii?
Anyway, I wrote this post a while back that explores many of the SS questions you are asking: https://jlcollinsnh.com/2013/01/29/social-security-how-secure-and-when-to-take-it/
My personal strategy is in there, but it might not fit your situation.
Basically, the government is pretty good at figuring out and making sure that all the options total up to mostly the same.
The big wild card, is how long you live. The longer the better off you are delaying. But it sounds like perhaps your wife is in poor health? If that’s the case, taking the benefits as soon as she can is the way to go, especially assuming your benefit will be greater when the time comes.
The other is how you see your SS payments. In my discussion with Lauri directly above, we explored thinking about them as a bond proxy that smooths the volatility of stocks.
As you point out, you could take the money early and invest it. But you take on more risk. Still, you’d close the income gap and you’d have the 110k in your hands.
In any event, a nice problem to have as problems go. The solution might just be what you feel most comfortable doing.
Give that post a read and if you have more questions, ask them on it and I’ll do my best to help. Plus you might get input from other readers following it.
Keep us posted!
Aloha Jim,
Thanks for the link to your post on SS and when to take it, but I’d already read that one before I asked my question. I almost posted over there, but it seemed more appropriate here…
We live on our farm on the Hamakua Coast of the Big Island of Hawaii. If you ever make it out this way, please shoot us an email. We’d love to have you and your wife up to the farm for dinner! If you take a look at our website, on the first page there’s a photo showing the view from our living room window. 🙂
My wife is healthy, and I always joke with her that even though she’s older, she’ll probably outlive me, just because I think she’s genetically predisposed to that. It’s hard to know, though.
Recent life experiences involving seemingly healthy family members and friends who everyone expected would live at least in to their 90’s but who died unexpectedly in their 60’s and 70’s have colored my perception of the risks associated with whether or not to delay taking SS benefits in hopes of getting a bigger check later in life. For some people that later in life never comes, and they end up with nothing. Your description of SS as a proxy for bonds to smooth out the volatility in a portfolio makes sense. I’ll have to think more about it. We have 5 years to decide before my wife is old enough to start collecting. Thanks for your help.
I’ll re-post my original question with a few more details under your SS article and see what happens.
Thanks,
Shane
Aloha Shane…
I saw your new comment on the SS post and added one of my own. I hope there are still enough readers tracking it to add to the conversation. You have me thinking about my own SS plans now. 🙂
Just check out your website. Beautiful photo and place. Family, too.
We’ve never been to Hawaii, but your kind offer is one more reason to add it to the list!
Hey Jim –
I had a quick question when it comes to investing. Do you advise people use services like Wealthfront, Betterment, or FutureAdvisor for the auto rebalancing, tax loss harvesting, etc?
They seem to take care of all of the diversification, tax advantaged investing, rebalancing, etc… but I’m wondering what you think.
This question was short and sweet.
Thanks!
Hi John…
Yes it was! 🙂
Of those three, I am only familiar with Betterment and in fact wrote a post about them: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Basically, I like the concept for those who truly want to be completely hands off and, in the case of Betterment, the fees are reasonable.
But, of course, those fees are higher than the pure index approach I mostly focus on here.
Here’s another option, but also with slightly higher fees: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
Thanks for the quick reply!
I took a look at the posts you linked to and a few more questions surfaced.
1) Did you ever evaluate the benefits of the tax loss harvesting they offer?
2) One thing you mention when you DIY is to “rebalance every year.” These robo investors suggest that they continuously rebalance which is something a human just can’t do without losing their life. Thoughts on the benefits here?
3) Wealthfront seems very similar to Betterment. Future Advisor has a unique proposition in that they let you deploy your strategy across ALL of your accounts… so they’ll look at your 401k, Roth IRA, Taxable Accounts, etc and suggest a strategy that diversifies you holistically and takes advantage of tax advantaged accounts. You can sign up for free to see the “analysis” – to get them to do the management costs money. Would love to hear your thoughts on Future Advisor too, you game? 🙂
What happened to “short and sweet?” 🙂
1. No, but in concept it should be useful.
2. Again, in concept is should be useful.
But for both 1 & 2, the lower costs of index funds rebalanced by the investor would be my first choice. So these benefits would simply be nice extras for those wanting to go this route.
3. Possibly, but this is the first I’ve heard of Future Advisor. It took a lot of time and due diligence once I decided to give Betterment a look. I only did that because I met the CEO and his PR manager at last year’s FinCon. They made an effort to reach out to me and I was impressed as I got to know them. Not saying I’m not open to doing the same with FA, just that they’ve never expressed an interest and I already have too much on my plate to go out seeking more. 🙂
Fair enough! I’ll keep digging to see if I want to use one of these guys 🙂
Hello Mr. Collins,
Thanks for your awesome blog and all of the helpful information you provide. I love your approach of keeping it simple!
I’m hoping this will be an easy question…I’m 43 and hope to transition to very part-time work (to cover expenses) in the next 1-3 years. My 44-yo husband hopes to retire or go part-time a few years later. Currently, I have about $700,000 in a 401k/457 and $128,000 in a Vanguard Roth IRA. My generous parents also set up some funds for us kids years ago: American Funds ICA now worth about $65,000 and a Vanguard (Wellesley & Wellington) fund worth around $40,000. My husband and I paid off our house last year and I’d like to invest any extra money (after 401k/Roth contributions) in a taxable account. I hope to not use this money anytime soon but I’d like to have it accessible. My question is should I put any extra money in a VTMSX account, or put it in the Vanguard fund my parents set up? I’d like the money in the ICA/W&W funds to be available my parents in case they ever need it down the road, so opening a VTMSX (or some other) Vanguard fund may be the way to go. I’m also wondering about your thoughts of the ICA fund. I don’t like its higher costs but I don’t know if moving it to a Vanguard fund makes financial/tax sense?
Thank you for your time!
Welcome Ricky…
Thanks for your very kind comments!
I haven’t looked at the Wellesley & Wellington funds in a very long time, but as I recall they are both highly regarded. However they are actively managed funds and carry higher expense ratios (although the Admiral share Versions which you likely own given the amounts you mention are only .18%). Interestingly, the one has ~30/70 stocks/bonds and the other ~70/30. An even split between VTSAX and VBTLX would have accomplished the same at less cost. For these reasons I’m not a fan, but it wouldn’t hurt much to leave the money there. When the time comes, you can draw down on these first.
The total stock market index fund VTMSX would be my preference and once your holdings in it reach 10k Vanguard will automatically roll it into the still lower cost VTSAX. Since both are the same portfolio, this is not a taxable event. This will also keep the funds separate should you decide to return the accounts gifted to you by your parents.
Regarding your American Funds ICA, I believe you are referring to AIVSX. I took a look and there is a lot to dislike in this one:
Actively Managed
Has underperformed the S&P 500 since inception
Has dramatically underperformed VTSMX since inception (Not surprising, actively managed funds almost always do)
It has a 5.75% load (sales charge)
It has a .61% expense ratio, compared to .17% for VTSMX and .05% for VTSAX
So this is certainly not something I’d want to buy now. But whether you should sell it is a more complex question involving how long you’ve owned it, your tax bracket and how large the capital gains. You have to do your own thinking on that.
Personally, I’d likely dump it and pay the tax. Especially if I were in the 15% bracket or lower. But that reflects the high value I place on simplicity, as much as wanting to be out of an over-charging underperforming asset.
Good luck and I hope this helps a bit in your thinking.
Thanks so much for your time and your response–your comments are very helpful!
Hello Mr. Collins,
Thank you for writing such an informative blog regarding money, business, and life. I admire the time you spend educating others.
My book, Outsmarting the System, complements the ideas expressed in your blog. As a former IRS Agent, I have unique insight into how ordinary people can outsmart the system in the same ways as the rich. Your readers can benefit from the strategies in this book.
Would you be interested in reading a complimentary copy of my book? If you like it, I would be honored if you would consider posting a review about it on your blog.
It’s free and informative: You’ll receive a free copy for yourself as well as a free copy to give away to your readers.
It’s a quick read: Outsmarting the System is an easy and short read. Many people have read it within 2 hours.
It’s a book that others have enjoyed: Outsmarting the System has more than 65 5-star reviews on Amazon. You can read them athttp://www.amazon.com/Outsmarting-System-Control-Financial-Freedom/dp/0991302974/
Please let me know if you’re interested.
Thank you,
Tony Campidonica
Outsmarting the System
Welcome Tony…
…and congratulations on finishing your book. I still hard at work on mine.
I’d be happy to take a look at it if you want to send a copy along.
If you are willing to share, I’d also be very interested in how long it has been out and how many copies you’ve sold. Also, did you use and editor?
I am and while I make his job damn near impossible, I find his input and efforts have been critical to keeping me on track.
Hi Jim,
I have read all your stock series. It’s very helpful.
I am 24 years old. Recently, I need to choose 401k through the company I worked for.
My company 401k plan offers few funds , but only has 2 vanguard funds are available which are VIIIX ( vanguard institutional index fund institutional plus shares) and vanguard total bond fund.
You recommended vanguard total stock market fund in your blog. But my company does not has this option.
I want to choose VIIIX, because of the low fees- 0.02%.
My question is that should I choose VIIIX?
Thanks,
Jenny
Hi Jenny…
Welcome, good to hear the Series has helped.
If your company is only going to offer two Vanguard funds, they chose two great ones. VIIIX = the S&P 500 index and as you have noticed, does it with remarkably low fees of just .02%. That would be my choice and I’d be delighted to have it for my stock allocation.
Like you, and at your age, I wouldn’t be interested in bonds. But if and when the time comes, the total bond fund is perfect.
Now all you have to do, is fund your 401k to the max! 🙂
Hi Jim,
Thank you for your quick response.
I looked at VIIIX fund price, 2008-2014, now the price is the highest. Isn’t people always say “buy low sell high”?
Now the price is so high , should I just save all my cash and wait 10 years for another recession. Then I use all my cash to buy funds?
Thanks,
Jenny
At the risk of stepping on Jim’s toes, I’m guessing he is going to ever-so-politely disagree with that, and probably steer you towards his thoughts on timing the market (which is basically what you are suggesting as a strategy.) I suggest you browse his Stock Series. Spoiler alert: Invest now and keep doing so!
I hope Jim agrees and doesn’t mind my replying.
No worries, Mike…
I’m always glad to have other voices here.
Jenny…
What Mike suggests is exactly right, you are proposing to time the market and over a rather sweeping expanse of years. A very bad idea.
You might want to re-read the stock series, and especially focus on this one: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Hi Jim!
Love your site and have shared your advice to your daughter with my own college-attending children. Thanks!
My wife and are wondering what to do with $50,000 we have in a Credit Union Money Market account. We hate getting .1% interest but at the same time are scared to lose it since it is our “emergency fund”.
I’m 47, shes’s 49.
We have a $160K mortgage at 2.625% but no other debt.
Net yearly income is $65K
Monthly expenses are about $8K
We have 20K invested in VTSAX with Vanguard
Roth IRA’s
Me: 23K (adding $350 per month)
Her: 18K (adding $350 per month)
Her 401K: 250K (funds it monthly up to the company match)
My IRA: 225K
What would you do with the 50K in the Credit Union?….it’s our 6 months worth of expenses emergency fund and we won’t need most of it anytime in the next several years barring any disasters, loss of jobs, etc…..like I said, we want to be brave but it scares the crap out of us! 🙂
Thanks!
—- Dale
Thanks Dale…
Glad you find it useful!
50k as an emergency fund for someone with 65k in annual income seems large to me. What kind of emergency are you preparing for, anyway?! 🙂
Personally, I’d roll most of it into my VTSAX account. But that’s me. You say that investing “scares the crap out” of you. If that translates into panic selling come the next crash (and come it will) stocks are not the place for you.
Since they are, however, the best place for building wealth, my suggestion would be to work on your psychology so you can handle the volatility. But be sure you are not just fooling yourselves. If you haven’t already, please read the Stock Series here. If you have, read it again. Doing so will help you understand just how the market works and how you can best take advantage of it. Once you’ve done that, focus on this post: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
All that said, here’s my real concern in your post: 65k in income and 96k in annual expenses (8k per month x 12) Yikes! Double yikes!!
If this is not a typo, you have a MAJOR spending crisis on your hands. With a low mortgage and interest rate on it, 8k per month seems incredibly high.
You are spending 31k per year more than you are taking in. At that rate, your 50k in cash will be gone in less than two years.
If this is the case, keep the 50k in cash and available (you’re gonna need it) until you get this spending crisis under control.
Good luck!
Hi Jim,
Thank you and Mike’s advice.
I set up my 401k plan today. 50% contribute to Roth 401k, VIIIX fund. My company has 5% match for me.
I am 24 years old. I have 50,000 dollar in cash. My monthly paycheck is $2000 before tax. I immigrated to USA from China a year ago. I stated my first job in USA 3 month ago.
Plan A,
I can live with my paycheck also 50% goes to 401k.
For now, I keep $20,000 cash in bank saving account. It will be my emergency money.
I kept $10,000 dollar in China bank , bought CD. It gave me $50 a month profit.
The rest $20,000 I don’t know what to do with it. Plan to open a Roth IRA in vanguard to buy US total stock market fund.
Plan B.
I always want to increase my income. I am bachelor now, and thinking about pay $70,000 MBA ,2 year tuition for graduate. But if I choose to go back to school, I may need stop investing , withdraw all my 50k cash, also need save extra 20,000 dollar cash(50k+20k) to afford graduate.
It sounds like Plan A is better for now. but my income is so low. It hurts my long term wealth. Plan B is risky, I am not sure if it is worth.
Any suggestion?
Thank you,
Jenny
Why not look for work with an employer who will fund your graduate degree? Here’s an example: http://www.madfientist.com/free-ivy-league-degree/
Hello Mr. Collins, I wanted to get your take on graduate study’s and when they are worth it. I have read your blog posts and have been unable to find your opinion on grad school. I am a 22 year old male currently one year away from being an RN. RN’s in my state start anywhere from 60-70k/year. I plan to graduate close to debt free (under 1k) from a loan from my parents who I am also currently living with. My plan no matter what is to work one year in a hospital to get some much needed experience before moving on the my other two options. Regardless of the option I go I intend to get my bachelors during my first year in a hospital as well.
Option A- I could go work for the state, get state benefits, and work my way up the management chain. By my research (talking to people I know who have done this) state nurse managers pretty much max out at 120k plus benefits.
Pro’s-less school
Earlier investing
Cons- lower potential salary
Ladder system- meaning if I left the state I would have to start at lower pay again
Management- meaning you get called when something is needed
Option B- grad school, at 24 I would be working at the hospital, at 25 I would get some specialty specific experience for a year, at 26 I would apply to nurse practitioner programs, and if all went well by 28-29 I would be a nurse practitioner. By my research, nurse practitioners start at around 100k/year, and max out around 150k in my state plus benefits.
Pro’s- higher max potential salary
The added education means no matter where I go I am worth 100k instead of 60k
More earning power- in bear markets more shares can be bought
Cons- later start to investing/less capital to invest earlier on
60k in tuition
At the end of the day I am a natural saver, I want F-U money, and I could easily make 60k/ year work (I am saying this as a young single male.) I don’t know how to calculate the opportunity cost with grad school (very hard to work while in training for nurse practitioners.) I think I will be in great shape financially regardless of which option I take but the f-u money would come sooner with option A. I know how the power of compounding interest works, so I would like to know from a purely numbers perspective, which one would more likely produce the better financial life for future nurse. And then, I would like your opinion on the two options from a non numerical stand point. Thank you so much!
Welcome FN…
While I flattered you’d ask, your question is way above my pay grade. 🙂
But I’ll take a stab at it. 😉
There are just too many variables to do a useful numbers analysis on this. While compounding is powerful, so is greater earning power.
It really depends on your objectives. If you want to retire from the medical field as soon as possible and you are willing to do so with a modest income from your investments, then option A is probably the best choice. No use investing time and money in the nursing profession with option B if your goal is to get out ASAP.
But if nursing is something that you are drawn to and believe you will enjoy for many years, the investment in B is worth it.
This is really more a choice about how you want to live your life than it is about money, seems to me.
Personally, the idea that A would tie me to one state and B would make me worth 100k in any state, is a big draw for B.
If I can make the assumption that the medical profession appeals to you and is the kind of work you think you’ll love, my vote would be B. Otherwise, A.
Not sure this is any help, but I wish you the best and hope you’ll let us know what you decide.
I suppose I see it the same way. Would your response change if I told you I wanted to maximize wealth by 40 years old? Assuming I follow the simple path you have laid out? The problem is there is no way to know when those promotions would come leading to the higher pay grade if I go the way of the state.
Also side question, I have worked out the math and think it would be worth it but want your opinion. The bachelor degree for nursing costs in the neighborhood of 10k, if I work for the state, they pay 5% more to people with bachelor degrees (the cap is still 120k.) 5% of 60k is 3k, a little more then 2k/year after taxes, so 5 years would be the break even point not including the opportunity cost on that 10k being spent. Did I do that right? The bachelor degree can be done while also working full time.
I think the variables are so many that it is really tough to pick one based just on the financial outcome. All the more reason to chose what will give you the most satisfaction. That frequently leads to more money anyway.
I would definitely go for your BA, especially since you can do it while working. You’ll make more money and education is the one thing that can never be taken from you. Plus, and this is just me, I see value education above and beyond any practical job benefits. But then, I’m an English Major. 😉
If i do decide to persue NP school how do you suggest I maximize my wealth in the long run? Do I max a 401k? A roth? Either? How much should I save in a money market account? Should I be focused on avoiding debt or maxing retirement accounts and then minimizing debt?
As it happens I’ve written this blog to answer exactly those questions. Clicking on the Stock Series tab above will get you started.
Sorry Mr. Collins, I think I should rephrase my question. I meant during the years leading to NP school how do you recommend I partition money. Should I take advantage of any retirement type accounts prior to grad school seeing as there is a maximum allowed each year? For example, do I put 5500 in a roth while also saving for grad school, what about in a 401k up to the match, or should my focus be entirely on getting through school debt free and saving later? Thank you for taking the time to respond.
Again, this is all in the stock series. Most specifically you can start here: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
But to fully understand, you should read the whole thing.
Dear JC,
I happened to stumble on your website about 2 weeks ago just by serendipity. I owe you and John Bogle thanks which I will never, ever be able to express appropriately.
Because of the two of you and and whole lot of self-education, my son now has a fighting chance. He is 21 years old and severely disabled. He will never be able to “earn a living” nor will he ever be able to take care of himself. Seeing as I assume that I will not live forever (I am 52), he will eventually be in a group home at the mercy of people I pray will be kind.
For those who love their children, you can imagine I have spent many sleepless nights worrying over what will happen when I am gone. Fast forward to now and leaving out many, many details which would make your head spin, after 50 you begin to realize your mortality. Panic set in and I began to explore options for funding his special needs trust.
Through a series of unfortunate events I ended up in the offices of two insurance agents who assured me that a whole life policy was the way to go. I would have ended up plunking down approx. $80,000 for a $300,000 policy.
These were “religious” men, don’t ya know, one of them had a special needs son in a group home, and they would never steer me wrong. Driving home for some reason I was even more scared than before.
I spent many sleepless nights worrying over this. I finally decided to educate myself. For hours I read everything I could about life insurance. I finally decided on a $350,000 20-year level term policy (I’m luckily in fabulous health, so it was cheap) and decided to start investing for him instead.
Both of my parents passed away and left me some money. I started a Vanguard for my son with $40,000 and will contribute another 20,000 this year, plus $500mo for the rest of my life. If I’m not hit by a bus, I should live to my 90s. Longevity runs in my family.
If I am hit by a bus, the life insurance proceeds go into the trust in Vanguard, earning for him for the rest of his life. Learning about investing from your website and JB has eased my worried heart and mind and I sleep at night now. Do you know what that is worth to me? You have my undying gratitude.
I do have a question. I also educated myself about investing, obviously, and am absolutely horrified at what I have learned about how fees add up. I have $122k in a well-known investing company (initials “EJ), and he so kindly invested me in American Funds. Is there a way to divest myself of these and move the funds to Vanguard with minimal tax implications? Any advice would be appreciated.
In the meantime, God bless you for doing this blog. My kids are on their way, and as I am sure you love your own daughter as much as I love my kids, I need say no more except thanks, thanks, thanks. I am a grateful mom.
L.S.
Hi Lori…
I am so sorry about your son and his difficulties, and I’m glad this blog has helped in some small way.
As for your question, assuming your 122k is in a taxable account and you have a capital gain in the investments, if you move it you might have to pay a capital gains tax.
The good news is that the long-term (held more than one year) capital gains rate is 15%, unless your taxable income is over 400k. If you are in the 10 or 15% tax bracket it could be zero. See: http://www.irs.gov/taxtopics/tc409.html
Short-term gains are taxed at your ordinary income tax level.
I’d use this calculator – https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ – from the calculator page above, and run some numbers to see where you stand. If your Cap Gain is zero, you can move the money with no worries and if you call Vanguard they’ll help you thru the process.
If you will owe a tax on the sale, you’ll have to think about the fees you are currently paying, remembering that they will reoccur every year. Were it me, I’d move the money and start fresh in the low-cost world of Vanguard.
Hope that helps and I wish you and yours all the very best.
Thanks so much. That reply was indeed very helpful. And believe it or not, my disabled son isn’t the one who gives me the gray hairs! It’s the rest of the bunch 🙂
Hi Mr. Collins! I came across your website, as well as a few others recently and have been reading as much as I possibly can! I’ve always been somewhat ignorant when it came to what was happening with my money, so I feel good to be gaining knowledge and really starting to understand my finances.
That being said, I would love your opinion on my family’s situation.
Background
me (35), wife (30), daughter (3), baby on the way
We are currently renting, which is working well for us for now. We will have to move in the next 2-3 years when our daughter starts school, but that could be renting still or buying. Here is a breakdown of our money situation. We feel we are on the right track, but are unsure of what steps to take next.
25% tax bracket
no debt (but also no house!)
Assets
Checking: we usually keep only enough for the month
Money Market Savings: $402,000
Investment w/ Citibank: $110,000 (planning on moving this to vanguard)
Investment w/ Raymond James: $65,000 (planning on moving this to vanguard)
401K: $225,000 contributing max, plus company match of 3% (with Fidelity, can’t change that though)
Roth IRA: $17,000
IRA: $53,000 (rolled over from my wife’s old 401K)
529 account: $34,000
TOTAL ASSETS: $909,000
We’re working on moving our investments over to Vanguard, and investing our savings. We do want to keep about 70,000 in savings for 1 year of living/emergencies as well as buying a new (used) car some time soon.
So! My main question is about investing. I understand the idea of thinking of all our money as a whole, and matching up tax efficiency with account types, but I am having a hard time actually going through with it. Having our IRA and Roth IRA 100% in bonds while our taxable account is 100% in stocks seems wrong to me (our 401K is in an age-based balanced fund which we have little options with), since we may be using our taxable account for things before we reach retirement age. (We would love to retire early)
Would having bonds in our taxable (VBTLX or VFIDX?) be awful? We are currently in the 25% tax bracket, so I was considering muni instead for taxable (VNYTX), but I’ve heard those are not as good of an idea as it seems?
Also, because we plan on buying a house at some point, but have no idea when (could be 2 years, 4 years, etc). Should we keep more money for a down payment out in savings, and invest our salary earnings as we can, OR should we invest everything now, and then start saving up for a down payment from our salary earnings (rather than investing them along the way – we save about 30-40k a year).
Any thoughts or advice would be greatly appreciated!
Welcome Nate!
Let’s start by offering kudos for closing in on $1,000,000 in your mid-30s!
You don’t mention your income or savings rate, but based on being in the 25% tax bracket, your income is high and your savings rate should be too. 50%+
It is a good move to shift your Citi and RJ money to Vanguard and, of course, VTSAX would be my choice.
I cringe to see the 402k in cash. That is a sure loser over time as inflation erodes its value. This tells me you are very risk adverse?
So does the fact that you have, or plan to have, so much in bonds you are worried where to put them. 🙂
I’m not sure why it seems wrong to you to have your bonds all in your tax advantaged accounts. Doing so is not a problem.
But that would be over 1/3 your net worth. Huge, especially with the balance being mostly in cash. You are sacrificing a lot of opportunity for growth with this allocation. Of course, if you know you will panic and sell out of stocks the next time the market plunges, you are doing exactly the right thing. Otherwise, click on the button above and give my Stock Series a read.
So. No, it is not awful to have your bonds in a taxable account. But it will be expensive as at your tax rate you will lose 25% of any interest they earn to your Uncle Sam. I can’t imagine why you’d want to do this.
As for the down payment on your house, if I am correct about your risk profile, I’d suggest you set aside the downpayment in your MM fund or an FDIC insured savings account. Personally, I’d also let this money serve as my emergency fund. In the unlikely event the worst happened, I’d then just delay buying the house.
I hope this helps. You are pretty much out of step with the approaches I discuss here. If what you have read so far resonates with you, again I suggest the Stock Series. Reading it will give you an overview of and context for what I’ve said.
Good luck!
Thank you for your response – maybe I wasn’t clear with my explanations. Our 401k is pretty much set as it is since we don’t have many options (10% bonds, 90% stocks I believe), so in keeping with that allocation since we aren’t completely comfortable with 100% stocks, of our $647,000 that is left, we figured 10% of that would be about $65,000 which would be most of both the IRA and Roth IRA. So we wouldn’t be putting 1/3 of our money in bonds.
Also, as I sort of touched on, but clearly didn’t quite get across is that we aren’t necessarily risk-adverse, we’ve (very stupidly) just been extremely ignorant and uninvolved with our money over the last 10 years. We have saved a lot because that’s just how we are, but had really not thought much after that about where to put it, or what it could be doing for us. It’s not that we were afraid to invest it, we just honestly hadn’t thought about it much. That clearly all changed after starting to investigate. After having read through your stock series and other websites as well, we have moved our IRA and are in the process of moving the Roth to Vanguard, and our next step is to move our Roth IRA, most of our cash, and brokerage accounts (Citi and RJ).
Hopefully that clears some up, though your previous advice is still appreciated!
Hi Jim,
About a year ago, I did the math and found I’d be over $100k ahead in the long run if I refinanced my mortgage to $189k at 3.5% and made minimum payments throughout. Since then, I have been doing exactly that. A recent discussion about the trade-offs between paying down debt vs investing brought a new consideration into the mix (of lowering expenses post-retirement), and I’d like to hear your thoughts:
Based on our current savings rate and expenses, my family will hit the $850k mark in about 3 years, shortly before age 35. This translates to 25x our $34k expenses, meaning we will have reached the point that relying fully on our stash translates to a 4% withdrawal rate. At that point, we’ll have roughly $175k left on the mortgage. By all accounts, this is a strong recipe for success.
However, in an alternate scenario, at the same point in time we could pay off the mortgage completely. That will leave us with a stash of $675k, however it removes the principal/interest mortgage payments, thus lowering our yearly expenses by $10,200. At this point, our expenses become $24k, which translates to a 3.5% withdrawal rate. That sounds like an even stronger recipe for success. It could also be stretched to potentially enable retirement several months sooner while still maintaining a reasonable SWR.
However, in sheer dollars, this means significantly less money in the long run. And paying off $175k that is fixed at such a low rate strikes me as madness.
How would you balance these two seemingly-contradictory factors?
Hi Jeffery…
Isn’t it great to have such lovely two options from which to choose? One of the many delights of being fiscally responsible. 🙂
Anyway, I don’t see a bad choice here and would suggest it depends mostly on your personal preference.
It seems you’ve a solid handle on the variables and the only one I see missing is that with the mortgage you have leverage in play. That’s a very powerful tool that cuts both ways. Assuming your house is in a stable area with a reasonable chance to pace inflation, it will accelerate your growth. Of course, if it’s not you should sell asap.
Personally, I’d keep the mortgage. As you point out, 3.5% is a nice low rate and this would allow me to keep the capital I would have used to pay it off more (hopefully) gainfully employed and more liquid. Plus, don’t forget as many do, once the house is paid off all that equity tied up in it represents a huge opportunity cost.
Hi Mr. Collins,
Again, thanks for the wonderful work you continue to do. I had asked you a question in October of 2013 (and you had answered that question and more). Since then, I have been thinking. Is it actually in my best interest to put in $17.5k per year in my 401(k)?
Here are the numbers:
– Current balance of my 401(k) is $100k.
– My current annual gross is $81k
– Company matches dollar-for-dollar upto 4%
– I’m 33
Assumptions:
– I’ll start the 401(k) distributions when I’m 60.
– No increase in annual gross salary (just for the sake of simplicity)
– I’ll put in 4%, and company will match 4%
– 6% annual growth (I know, very conservative)
So, putting all this in a calculator, in 27 years, the 401(k) account would have grown to $908k. That’s a lot of money!
The rest of the money that I am currently putting in my 401(k), up to the yearly maximum of $17.5k, I can just invest in VTSAX, in a taxable account. My current AGI will go up, and so will the taxes, but the other side to that is ensuring early retirement becomes a reality. The taxable account should take care of when I retire at, say, 48 (or whaterver), to age 60. If I put in $14k in VTSAX every year, for 15 years, at 6% annual return, I’ll have $336k when I’m 48. That should be enough to last me for the next 12 years.
What do you think? Is this a good strategy? Or should I just sock away the maximum in the 401(k) account?
Welcome back, kobelco…
The short answer is: Yes, fund your 401k plan to the max. And a deductible IRA to boot.
Remember, even at relatively low tax brackets, every dollar you keep can be invested to work for you for decades. And any dollar you pay in taxes you not only lose, you lose all of the money it could have earned for you over the years. For example, if you were to invest $5000 even if you were only in the 10% tax bracket, using a 401k saves you $500. Plus all the money that $500 will earn for you going forward.
401k plans have their ugly sides, as I rant about here:
https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
But much more important is Addendum 1 in that post.
Specifically, I recommend funding your accounts in this order:
-401k up to the match
-deductible IRA up to the $5500 max, assuming you are eligible.
-401k up to the max
-taxable
Funding your 401k and IRA to the max will take 23k. At your income of 81k that’s only a 28% savings rate. If you are anywhere near the 50% rate I recommend to start, you can also easily fund your taxable investments. Then, should you choose to retire early, these would provide the money you need until you turn 59.5 and have penalty free access to your tax advantaged accounts.
Should you, for whatever reason, be unwilling or unable to invest in your taxable account after fully funding your 401k and IRA, there are ways to access those penalty free before 59.5:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
So, what are you going to do? 🙂
What I have been doing, and what you recommend. Keep funding the 401(k) and Roth IRA to the maximum every year to the tune of $23k. I still do invest in the taxable account, approximately $200 a month. Thanks for the affirmation!
Good deal, kobelco…
but one thing. I have moderated my views on Roths and now favor deductible IRAs, for this same reason in my last reply:
“Remember, even at relatively low tax brackets, every dollar you keep can be invested to work for you for decades. And any dollar you pay in taxes you not only lose, you lose all of the money it could have earned for you over the years. For example, if you were to invest $5000 even if you were only in the 10% tax bracket, using a deductible IRA rather than a Roth saves you $500. Plus all the money that $500 will earn for you going forward.”
Later you can shift to a Roth using the strategies here:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
If you decide to do this, by all means keep your current Roth. Just make the change going forward.
If you prefer to stick with the Roth, there is no great harm other than paying more in taxes currently. But once you own it, it is a very sweet thing to have.
Best of luck!
When I was typing my previous comment, I had a feeling I would hear from you about the traditional IRA vs the Roth! My thinking goes something like this: our household income (my salary + my bonus + my wife’s salary + my wife’s bonus + rental income) is close to what the current limits towards contributing to a Roth is. I give ourselves 5 years, which is when our modified AGI will surpass the limits (even when the limits are increased for each subsequent years). When we hit that limit, I’ll just switch to a traditional IRA. Plus, with the Roth, I can withdraw the contributions to the Roth any time I want. That gives us a bit of a buffer.
Jim,
I would agree with you in theory, but is that allowable? I believe that if you contribute to a 401k or 403b you can not also contribute to a deductible IRA. We therefore use a Roth. Is this incorrect?
Hi Chris…
If you have both a 401k and an IRA, the amount deductible depends on your income and marital status.
If you are single and make 59k or less your IRA is fully deductible. Above 59k until 69k it phases out. Over 69k, it is not deductible.
If you are married and make 95k or less your IRA is fully deductible. Above 95k until 115k it phases out. Over 115k, it is not deductible.
This is why I added the line “assuming you are eligible”: Kobelco makes 81k and I don’t know his/her marital status.
If he/she (or you) can’t benefit from the deduction then, absolutely, Roth is the way to go.
Make sense?
Makes perfect sense.
I felt sure that there was more to it, but couldn’t remember the details or find the applicable rules.
Thanks for all you do to make us better informed investors!
Thanks for asking the question, Chris. Sometimes I forget to add that extra bit of important infomation that helps it all make sense. 🙂
Never-married at a healthy 75 with a million+ saved, living fine on Manhattan UES on $50+G income of pension, SS, annuity and divs – – yes, frugal. Fear – who would manage my LTC if needed? Only nieces & nephews would be available to “care”. Always considered savings as way to end my days comfortably assuming I can be in control. Hate to think of spending any of the million because of that. But dollars don’t equal trust/care. Some say spend it all and hope you die at the last dollar. Others tell stories of zombies in halls of horribly managed, expensive nursing homes or relatives mis-managing assets. Perhaps I need to meet Alfred E. Neuman to learn to say “What, me worry?” Any thoughts?
That’s a huge question, Paul. The thought of needing LTC scares me to death, both for the quality of the care and the frailty that would require it. And you are right. No amount of money can buy trust and care.
My mother-in-law had nothing and never a care in the world about it. She spent her last years receiving wonderful care from the Little Sister of the Poor by shear good luck. Other pay for expensive care and get, well, less.
Personally, I try not to worry as I have to trust fate a bit. In your case, seeing as you are living well without touching the 1M, I’d keep doing that. But if I wanted to splurge on something once in a while, like a nice trip, I wouldn’t hesitate.
Short of that, Mr. Neuman’s is the best advice.
Hi. I stumbled across your blog while reading about early retirement and I read your stock series, twice, and its really good!
I have some specific questions about my financial situation that I would like your input on. I live in Norway and im 30 years old.
My net worth is:
3.272.000 kr or 520.000 usd. I got most of this money as a gift or pre-inheritance from my family on the condition that I buy a place here with the money because I guess they want me to live in the same city as them..
I have 2.450.000 kr in a bank acc at 3,25% interest
I have maxed out 425.000kr in two special bank account that offers 4,7% interest.
I have 7000kr in bitcoins
I have a car worth 90.000kr
And I have paid a downpayment of 10% (300.000 kr) for an apartment which is still under construction.
In a few months I have to pay the remainder (3.000.000 – 300.000 = 2.700.000) to the company that is building my apartment because it will be finished and ready to move into.
After tax I have a job that pays 23.000kr per month after taxes. My pension fund is deducted from my gross salary at a fixed rate by the government and i have no control over it. That money should be available to me at around age 70 when i reach official pension age. So at around age 70 I dont need to have much money of my own because the government pension fund will support me.
So my question is what do I do in a few months? I will have 3.000.000 kr invested in my apartment. Its a 2 bedroom apartment so i guess i could rent out a room to a student, but im kind of the introvert type so i actually prefer to live alone..
What I was thinking is to take up the maxiumum loan i can get when I buy the apartment (maybe i can get a loan for 1,2 million kroners) and then use that money to invest in index-funds. The non-fixed interest rate in the market I can get is like 3,5% effective per year. Inflation wont be a problem because its not my money I’m investing and I will pay the loan back in 2014 kroners. The risk is that the interest rate on the loan goes up. I can buy a fixed interest rate on the loan at 4,9% over 10 years to mitigate the risk. But Im not sure if i want to do that.
The index-funds im interested in are these: https://secure.msse.se/SKANDIA/vips/ska/sno/no/quickrank?subtab=&sort=name&sortdir=asc&maincategory=&company=&freetext=klp+indeks&category=&Underkategori=-1&categorize=True&tr=TrailingReturns.OneYear&fq=SRRI&f=MaxFees.Management
https://www.nordnet.no/superfondet
One is a international index-fund and two are norwegian index fund. The international one has a fee of 0,3% per year, one of the norwegian index funds has 0,2% fee per year and it mirrors the main stock index in norway. The other norwegian index fund has 0,00% fees, but it only mirrors the 25 most traded stocks in Norway. These companies are big also international like Statoil, but the norwegian stock exchange is heavily invested in energy – oil. And I want more diversification and inflation/deflation hedge and thats why im willing to pay 0,3% more year for a international index-fund to give me this.
So I’m thinking if I will take that house loan for 1,2 million kr at 3,5% interest rate and then keep my 425.000kr in the special bank account with about 4,7% interest rate and then out of the remaining 775.000kr invest 33% in int.index fund and 33% in norwegian index fund and 33% in top 25 traded company index fund. I dont need a bond fund because the 425.000kr in the bank account is completely risk free. And should the bank go bankrupt the norwegian government guarantees all deposits up to 2 million kroners. And the norwegian government is one of the most solvent governments on the planet (the government bonds it issues are AAA and has the lowest interest rate yield of any government bonds).
Am I crazy or does this sound smart? I dont know anyone else in my situation and I really wanna reach FI. To me FI means living on 200.000kr per year. Im very frugal and I save about 60% of my income every month, but im not really happy with my current job.
Welcome Emil,
Glad you are here and glad you like the site.
After reviewing your situation I think I’d be inclined to simply use the cash to pay for the apartment and own it mortgage free. This, it seems to me, is in line with the intensions of those who gave you the money and it is the least risky option.
Plus, it will give you a lower cost of living (rent and mortgage free) which should allow you to implement an aggressive savings rate. It is these savings I would use to build your stock holdings and I’d focus on the international index fund. Norway’s economy is simply too small to make it a center piece of your holdings.
What makes me nervous about your plan is that the 3.5% mortgage is variable. Should interest rates start to rise and stock prices start to fall you’d be in a tight squeeze.
If that 4.7% interest special bank account is truly secure, I might take the 3.5% mortgage and hold the cash in the bank, collecting the 1.2% spread. Then, if rates begin to rise and that spread closes, simply take the money from the back and payoff the mortgage. I am assuming here that this bank account is not one that requires you hold the money there for a set period of time.
You might also post your question here: https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
Lots of my European readers hang out there and they might have some ideas for you that include an understanding of investing in Europe I don’t have.
Hope this makes sense and helps. Good luck!
Hello again Mr. Collins,
I’d like to start with saying I greatly appreciate you sharing your immense wisdom. You have so far, got me to switch from roth to traditional 401k(you in combination with your referral to mad fientist), got me on the edge and I’m very tempted to get out of my small percentage of managed funds, and also got me to get rid of international funds.
Time for my question, I really like the idea of rebalancing, effectively selling high and buying low. Which made me come up with a hypothesis, I believe that if instead of investing in VTSAX, I invest the corresponding percentages into vanguard small/mid/large cap and rebalance them annually, I will have better gains, even with the slightly higher expense ratios. This will be slightly more complicated, and if you are not able to rebalance without fees it is probably not worthwhile. However in my 401k plan I have an automatic rebalancer that is free and automatic. My question is, do you or anyone you know, have the ability to figure out if historically this would have produced better gains?
FYI: In my quest for rebalancing knowledge, I went on a search to find the best allocation of bonds to stocks and ran into this amazing calculator, it can rebalance and do anything you could want it to do http://www.cfiresim.com/input.php. According to this, not only has 100% stocks gotten better results than any other allocation(99%stocks/1%bonds, 98%stocks/2%bonds etc.), but it also has historically had a lower chance of failure(running out of money with a 4% withdrawal rate). I was astonished when I first seen this and didn’t think the calculator was correct, maybe it wasn’t rebalancing correctly or something? Alas I found another calculator that showed very similar results, so now I’m a firm believer of 100% stocks, not only for less complication, but even because it’s supposedly safer over time.
Hi Jeremy…
I’m not aware of any studies that show such rebalancing would improve performance. In a sense VTSAX does that as new companies rise and get added to the index while others fade away.
That said, if I were looking for an advantage with more aggressive rebalancing and was willing to pay a bit more for it, I’d turn to Betterment: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Overall most of the research I’ve seen indicates 100% stocks gives the best return over time. However, occasionally some suggest that adding 5, 10 or 15% bonds actually out performs. Such is the nature of research.
Truth is the difference is razor thin and could go either way in the coming decades. Since 100% VTSAX is simpler, that’s my call. But for those willing to do a bit more rebalancing work adding a bit in bonds will smooth the ride and come close, if not exceed.
Aloha Jim!
As you know, I’ve been a long time reader and share your perspective quite often …
I’m writing to ask for a second opinion. I’m lucky enough to be in a position to help my mom retire. After a long career of very hard work and being a single mom to 4 kids, she’s planning to exit the workforce in early 2015. I’m helping her navigate the path of 401k rollovers, insurance, and investing. I’m flattered that she has asked for my help, and would like a sanity check from you on my plan.
She has one 401k rollover that’s sitting at her local bank in a traditional IRA (before she talked to me about retirement planning). In addition, she has her current 401k and also will receive a lump sum instead of a pension payout. The values are modest, but should be able to fund a decent retirement for her. All will be rolled into a traditional IRA and will probably keep her in a very low tax bracket.
She’s been a smoker for a long time (much to our frustration) and has had some other health issues – along with a family history of less than average life expectancy – so we don’t anticipate a 30 year retirement. I think it’s prudent to plan for 15, even though she thinks it might not be that long.
As such, I think a ~7% SWR is acceptable. I’ve run through Vanguard’s next egg calculator and it shows a 90% success rate with 35% stocks / 65% bonds. After extensive research, I’m leaning towards investing her 401k rollovers as follows: 60% to Wellesley Income (VWIAX), and 40% to Target Retirement Income (VTINX). Expense ratios are 0.18% and 0.16%, respectively.
I generally avoid active management, but Wellesley has many characteristics that make it a good fit. In order to balance the downside of Wellesley (it only holds ~60 high quality stocks and ~500 inv grade bonds), I think a passive index that holds many more stocks and bonds is appropriate.
What do you think about this plan?
Thanks for the feedback!
Best, JA
Forgot to add: I plan to reinvest dividends, but set up automatic bank transfers every month in order to withdraw the funds.
I’ll throw in my 2 cents… Which be warned is about how much my opinion is worth…
Anyhow I think it would be better to receive your dividends rather than reinvest. Also I believe SWR stands for a 4% withdrawal rate. Regardless, I think you should only be up to a 7% withdrawal rate the first few years if the market is doing very well. Otherwise 5.5 would probably be a better bet. Lastly you seem to have too high a percentage in bonds, especially for a 7% withdrawal rate. These are just my opinions so take them with a grain of salt
Hi Johnny….
Always great to hear from you out there in paradise!
Basically I like your plan and agree that with her likely ~15 year time horizon you can be more aggressive on the withdrawal rate. Of course should the market take a major plunge you’ll want to reevaluate. The only true security is in flexibility.
As for the funds, I’d use VTSAX and VBTLX for the rock bottom ERs they offer and then balance them as you see fit.
If you were comfortable with a 60/40 stock bond allocation your could just buy VBIAX and for a .09 ER you’re done forever. https://personal.vanguard.com/us/funds/snapshot?FundId=0502&FundIntExt=INT
Reinvesting the dividends and withdrawing the funds as needed is exactly what I do. In fact later this month I have a post coming that talks about how to withdraw the money in retirement.
Hope this helps!
I only recommend receiving dividends because she will most likely be in a low enough tax bracket to be eligible for qualified dividends in which you wouldn’t be taxed on it and it wouldn’t be taxable income. Also I only worry about the high withdrawal rate because of unknown future health care/insurance expenses and unknown life expectancy (could be 20 more years, crazier things have happened).
Since her money is in 401k/IRA accounts the dividends are treated as ordinary income whether she reinvests them or receives them as cash distributions.
As for the uncertain life expectancy, this (along with market fluctuations) is why I suggested monitoring and flexibility is the key to success.
Dang, me being a rookie, I somehow thought qualified dividends from an IRA would be mailed to you tax free…. I was very wrong, luckily you were able to guide me to further knowledge before I got to early retirement and learned the hard way… Thank you very much
No worries, Jeremy…
Count yourself lucky if that’s your only error. Would that I could claim the same! 😉
Hi there, friend.
Firstly, I must thank you for this. You’re giving me the very education that was not accessible to me growing up, due to circumstances. I’m a little late in the game (35), but trying not to think in “what-if” terms. (i.e., what if started this 10 years ago).
Here’s a hypothetical: Once you invest in VTSMX (as I plan to with 10K very soon), and you continue to invest and ride it out over the next 20 years or more, what is the smartest way to begin living off such an investment, assuming the investor has achieved financial independence? I know there are expense ratios and taxes, etc., but I’m unclear as to how to intelligently live off of the recommended 4%.
The other hypothetical is, what if the investor needed some of the money in VTSMX, say, 10 years from now? What is the smartest way to access it without crying come tax time?
I hope these questions make sense. My goal is to not have too much invested cash lying around (i’m thinking 5k, at most), but am wondering how to access the invested cash via intelligent decision making. Also, please know that I’ve read through your blog, and I’m sure you cover some of this (if not all of it), but right now I’m on information overload and wouldn’t know where to begin to locate it again.
Thank you!!
CB
Welcome CB…
As it happens later this month I have a post coming addressing exactly your concerns. You are correct, until now I haven’t written about this. When it is out, please give it a read and if you still have questions you can ask them there.
One quick point, with 10k you can get into VTSAX the Admiral Shares version of VTSMX that has a lower expense ratio. If you start with less than 10k in VTSMX, once you hit 10k Vanguard will automatically roll you into VTSAX.
Thank you so much!
Also, as an unintended consequence of your writing, you’ve inspired me to start a blog about my own experiences trying to achieve FI. In fact, both you and Mr. Mustache are responsible for my blogging, so I hope you’ll take a look!!
Warmly,
https://scholarwithadollar.wordpress.com/
Congrats on the blog!
While I didn’t realize it was yours, CB, I have noticed the links to my site in it and have checked it out already.
Here’s to great success!
Are you coming to FinCon http://finconexpo.com in September?
Thank you!
FinCon looks so interesting. Perhaps when/if my blog gets a little bigger it would make sense for me to attend. It’s still in its embryonic stages.
Your thoughts on my “strategy”? Also, are you attending?
Yours truly,
https://scholarwithadollar.wordpress.com/
Well it is probably late to sign up for this year as all the early bird discounts are gone.
But it is great fun and worthwhile. Show up next year, introduce yourself and I’ll buy you a coffee. 🙂
HA! That was amazingly clever and adorable.
Thanks, friend. 🙂
CB
Hi, Mr. Collins,
I am very fortunate in that I am about to inherit approx. $70,000 from a beloved uncle who passed away earlier this year. I am 52 years old and would like to keep $20,000 in a Vanguard money market fund just as emergency cash. I also would like to start a Roth IRA. Given my age, I’m wondering which fund you would suggest I invest it in. I’ll be able to put a total of $13,000 in, 6500 for this year and then 6500 for next year. That would leave me with about $27,000. Any and all comments and suggestions for allocating this money will be appreciated. Also, what is your opinion of the Vanguard all-in-one funds? Thank you.
Hi Lori….
Congratulations on planning to invest your inheritance.
Here are my thoughts on asset allocation: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
And here are my thoughts on TRFs (all-in-one-funds): https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
Jim,
I am 55 years old, and have paid off all debt, except the mortgage,
and make about $39K annually at this point. My wife lost her job
recently, and I just began this one in February.
We followed Dave Ramsey, and have paid off that debt, and have
struggled to build a 3 – 6 month emergency fund. I have one now, and dip into it some since my wife is not working. She is looking.
For my retirement, I only have $38K saved in a Roth and IRA, unable to
invest due to lower paying jobs temporarily. But here is where I feel
like I need to diverge from our financial plan.
If I wait to get an emergency fund built up, neglecting my retirement,
I feel like I will never have enough to retire on in the next 10 – 15
years. So I would like to know about investing that “15%” that Ramsey
advises. It would not be enough for us, but I am not sure how much to
put into the Roth. I know about MDR’s and want to fully fund the Roth
yearly when I can.
What advice would you give about how much I should invest, and what to
put off temporarily until we get the retirement portfolio in a vibrant
place? I mean, scale down and live beneath our means kind of living. We
do that pretty much already.
I will work a budget again as soon as I start with my next promotion
! That is where the $39K comes in. $36K was the highest last
income.
Sincerely,
Rocky La Marr
Welcome Rocky…
First, congratulations on being debt free! That’s a huge step and getting there shows solid financial discipline.
My suggestion now would be to turn that discipline toward your savings channelling the money that was going into debt to building your assets. This will both increase your wealth and reduce your needs, bringing you closer to being FI sooner. My suggestion is a 50%+ saving rate.
Rather than dipping into your emergency fund, I would look to trimming expenses. By getting your costs down to, or ideally under, your income you can begin saving 100% of your wife’s income once she returns to work.
Since it sounds like you already have at least part of your emergency fund in place, I would split my savings equally between it and building your long term retirement investments.
I would fund the IRA before the Roth for the tax benefit, and I would fund it up to the $5500 limit if at all possible.
Hope this helps!
Hey there 🙂
We’ve communicated pretty recently, and man, I’ve been singing your praises to anyone who’ll listen.
I’ve updated my blog and would love to know what you think of this current post (basically in terms of whether my thinking is “on”). I think I’ve tagged you in almost all of my posts so far. http://scholarwithadollar.wordpress.com/2014/08/23/invisible-money/
With admiration,
CB
Hi there CB…
If fact I have been noticing the links and they are very much appreciated. I’m glad you like the content here and thanks the kind words.
Good luck with your blog and if you make it to FinCon I look forward to meeting you.
Hi Mr. Collins,
First, I really feel I owe you and MMM a bottle of scotch each, for turning me from an average young middle-class money-waster with a cobwebby savings account, to a hyper-thrifty, eager novice investor.
To that point, I’m in a pretty strange situation that I could use a lil’ advice with.
I left my glorious home of Canada, came to college in the US, graduated, then married a wonderful American. We decided to apply for my green card and stay here, since the work situation is a bit better for me here.
I sold my rental property in Canada so as to not get gouged with nonresident withholding tax, and turned a nice lil’ profit.
So here I am, waiting on my green card, with this six-figure amount (the proceeds of said sale) burning a hole in my savings account.
I understand from your previous posts that I should just (wo)man up despite current market conditions, and find it a nice new home in VTASX-land, but I want to fully understand the tax implications that will have, and my options for tax-optimizing it (if any).
See, we plan to retire back in Canada (where my maxed-out tax-deferred Canadian retirement accounts are legally and compliantly accumulating compound interest) well before I’m 59.5, so I’m honestly not sure if a registered plan is a worthwhile tradeoff.
Oh also, I just did a round-2 interview at an EXTREMELY desirable workplace, (it’s looking good! Fingers crossed!) but it’s an internship position which 1) pays peanuts and 2) I rather doubt will come with any kind of employer-directed tax-deferred plan… so for the meantime, I need to plan for something self-directed.
If you have any suggestions for the best route to go, particularly with my big, delicious lump sum of colourful Canadian dollars, it would be a huge help. Also I’m still a little shaky on all the American rules and acronyms, so I could use some explanations when they’re employed 🙂
Thanks in advance, and thank you for providing a very valuable service to all of us.
~Tera
Hi Tera…
Welcome and thanks for the kind words. As it happens, I never developed a taste for Scotch. But ice-cold Vodka with a couple of olives goes down nicely…
But I’m afraid your question is above my pay grade.
I have no idea of what the rules and tax implications might be for someone like you who straddles two nations.
Reading thru my https://jlcollinsnh.com/stock-series/ should give you an idea of how I approach investing, but as to how to apply these principles to your situation I simply don’t know.
That said, for my international readers trying to figure out how to apply the advice here to the investment options in their home country, there are two posts about that: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
Please check them out along with the questions and answers you’ll find in the comments. In them you’ll find a nice data base of international investing info.
And feel free post your own there. Perhaps some of my Canadian readers can help.
Good luck!
Jim- I have read your articles on owning a home and resonate with your message of caution. On the other hand, it seems like nearly everyone in the FI/RE community has “paid off house” as the cornerstone of their strategy.
My situation- married, late 30s, two elementary-aged children. We relocated to Florida 4 years ago so I could take my current job. We were renting out our condo in our former city until last year, when we unloaded it in a short sale (we bought it in 2005-worst mistake of our lives…) We have been renting here in FL, turned around our finances, and are now on the path for FI in 10 years or so.
Current job security situation is so-so. I believe I could find a new job before too long but it would almost certainly require relocation since there are limited alternatives in our area. Our families are spread all over the US so no other reason to stay in he area other than his job. We have been diligently setting aside money for a down payment, but neither my wife or I are sure we want to get back into home ownership given these risks.
My wife has recently gotten a job that is a bit farther away so we want to move within our area to cut down on he commuting costs for both of us, even though we’d pay more in rent. Mortgage payments are several hundred dollars cheaper than rent in this area, which was hit hard by the housing bust.
I’d enjoy owning my home, and love the financial predictability of a paid off home, but I just can’t guarantee that I’ll be in this area for the long term and am thus afraid of having to turn around and sell in a few years.
Above all, we want to hit FI so we can have that FU money to insulate ourselves from get arbitrary and capricious whims of employers.
What’s your take on all this?
Hi FS…
Your job situation and lack of ties to the area argue strongly for renting. Even the “always buy” crowd suggest that you should be prepared to own a place at least five years to break even.
On the other hand, if the area has been hit hard by the bust and mortgage payments are significantly cheaper than rent, owning becomes an option. Just remember mortgage payments are the tip of the iceberg of the costs of owning, especially if you plan to remodel what you buy as most owners seem to.
Personally, the numbers (monthly cost and appreciation potential) would have to strongly favor buying for me, especially with the goal of FI. You have significant risk in the potential of needing to move and money you tie up in a house is no longer earning for you.
Once I reached FI and could settle anywhere I choose without regard to employment, I would consider a house if I still wanted one.
But that’s me. You, of course, will have to balance these factors against your own needs and desires.
Good luck and let us know what you decide!
Thanks for the response, Jim. I was thinking along those same lines. There are still a few things that bug me:
1. What does the path to FI look like if a paid-off house is not in the equation? It seems to me that this is a cornerstone of the FI strategy of many of the sites that I read. However, I know that you have stepped away from owning a home over the last few years. Is the idea that you simply have a large enough taxable account that it is generating sufficient income to include monthly rent in your 4% SWR?
2. What if I change my mind in the future- we get more clarity on the job situation or ties to the area become stronger- I’m afraid that now I’ll have to incur a massive taxable event to transfer the cash for the down payment out of our taxable account. Right now we have a nascent down payment savings in a Capital One 360 account, but as you say it is not working for us- if we decide to stick with renting for now I will transfer that pot of money straight into VTSAX in my taxable account.
Thanks for your sage advice!
1. I think it looks much the same. Once FI…
If you have a paid off house:
–You have capital tied up in the house.
–You have capital invested to pay the house expenses other than mortgage: Taxes, maintenance, repairs, etc.
–You have capital invested to pay for everything else.
If you don’t have a paid off house:
–You have capital not tied up in the house to invest to pay the rent.
–You have capital invested to pay for things other than the house expenses other than mortgage: Taxes, maintenance, repairs, etc.
–You have capital invested to pay for everything else.
Owning a house, or not, is really beside the point when it comes to being FI. It is simply a matter of how much you need and how much you have invested to meet that need.
If you own a paid for house, you will need less but you’ll have some of your net worth tied up in the house. If you don’t own you’ll have all of your net worth invested.
2. This is only a problem assuming your investments prosper and create a capital gain. A rather nice problem to have as problems go.
Remember, too, that capital gains are taxed at favorable rates:
15% tax bracket or less = capital gains tax of 0%
25, 28, 33 or 35% tax brackets = capital gains tax of 15%
39.6% top tax bracket = capital gains tax of 20%
You can earn up to $73,800 married filing jointly before you leave the 15% bracket, plus your personal exemptions ($3900 x 4 = $15,600) and standard deduction ($12,800) = $102,200.
So unless your income is pretty high, another nice problem, you might very well have no capital gains tax to pay at all.
To be in the top bracket married filing jointly you have to be earning over $457,600
Thanks for taking the time to answer my questions- your blog is an invaluable source of practical advice!
Mr Collins,
Currently, I contribute to my 401k up to my employer’s match. Also, I plan to max out my Roth IRA this year. What would be the next step after that? I’m not really a fan of my current 401k plan, so I don’t want to put more in there than necessary. Thank you!
Hi MMMjr…
Many 401k plans leave much to be desired. That said, the opportunity to enjoy tax free growth is powerful enough to make them still worthwhile.
For more on this, check out: https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
and especially Addendum #1
Hi, Jim. I’ve really enjoyed your blog; thanks so much the help!
I have a question I’ve been wondering about for months. The Trinity Study fascinates me — and the widely accepted “4 percent” withdrawal rule puzzles me.
For two main reasons: The study assumes that no one will receive Social Security payments, or get any pension, and will never make any more money in the future, etc. These conditions probably are fairly rare.
Second: The “4 percent” withdrawal rule itself. I don’t have the chart in front of me, but IIRC, the updated Trinity study says that a 6 percent withdrawal rate, with a 75-25 blend of stock and bonds, would work 96 percent of the time over a 30-year period.
Of course, anything can happen. But that’s a 50 percent boost from whatever stash you have, and all I can say is that I used to be pretty darned happy when I got a 96 on my high-school quizzes.
So why do so many people emphasize the 4 percent withdrawal rule? Just to be very conservative? I tend to be cautious, and it seems to me that 5 percent — without adjusting for inflation for probably five years at a time — seems to me really quite cautious as well. Plus, the vast majority of people will eventually receive Social Security, at the very least.
Anyway, it seems to me if you can dial down spending in tough times, you could safely ratchet it up to 6 percent, without being foolhardy.
Thoughts?? Thanks!
Thanks Smith…
Glad you like it!
For what it’s worth, I agree with your take. It always amazes me a bit that people tend to focus on the rare times pulling 4% failed, especially since this can be avoided with a small bit of awareness and adjustment when the market declines. This is something I address in the last 1/4 of this post: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
In part:
“It (Trinity) made for a great academic study and it is heartening that in all but a couple of cases the portfolios survived just fine for 30 years. In fact, most of the time they grew enormously even with the withdrawals taking place. Setting aside that in a couple of the scenarios this approach would leave you penniless, in the vast majority of cases it produced vast fortunes. Assuming you neither want to be penniless or miss out on enjoying the extra bounty your assets will likely create, you’ll want to pay attention as the years roll by.”
My guess as to the reasons for the pessimism:
—the media loves to present things in the scariest possible way
—people don’t like to think and would rather be told: “This will work all the time with no thought or effort on your part.” Of course that’s never true and as I’ve said many times the only real security lies in flexibility.
Understandably, the Trinity Study focuses on only the variations in portfolios, withdrawal rates and adjusting for inflation or not. That’s enough. It shows what one might reasonably expect from a portfolio over time.
But, as you point out, in the real world many people have other sources of income beyond their portfolios. In fact, and this may be colored by the type of people I meet thru this blog, I’ve come to think that anyone with enough smarts, focus and planning skills to be able to retire early is very unlikely not to stumble into some sort of endeavor that generates cash flow post “retirement.”
So, yes, I think the greater risk for many is they will miss enjoying as much of the fruits of their labor as they might have by slavishly following the 4% rule.And that’s also why we don’t:
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Thanks for the response, Jim! I was beginning to think that I was missing something about the “safe withdrawal rate.” Those charts in the Trinity Study are fascinating (even though they illustrate the past, not necessarily the future).
4% WR makes a great target to shoot for since it’s simple and easy to understand. You can easily calculate your cost of living vs. your investments to see where you are at as a % WR.
Having said that it’s odd to see smart, successful people who can save/invest multiple $100Ks get fixated on a rigid target like this or worse shoot for a 1% or 2% WR to be even more saferest.
I wrote a blog post back in 2011 about bicycle safety that I now realize applies to personal finance when it comes to ultra-low WR fixation:
https://thelazyrando.wordpress.com/2011/03/24/the-safety-myth/
Most people who can get to a 4% or less WR understand that investment diversification is powerful so it’s puzzling that they don’t see the same applies for their FI risk management strategy.
If there is a big unheard of financial crisis that makes all the past ones look mild than 2% WR or 3% WR isn’t as effective as having the ability to adjust your cost of living and/or earning some non-investment income.
I often read something along the lines of “Once I FIRE I never want to work again!” as a rationale for getting to a 1%-2% WR.
Really?
I mean you are so worried about a 8% chance of having to work 10-20hrs a week for say 2yrs once during a 50yr ER that you’ll work an extra 10 years now full-time to prevent that from happening?
That makes zero sense. Like none at all.
— Vik
Hey jcollisnh,
First of all I want to thank you for your blog and great ideas!
A bit about myself, I live in Greece and right now we are suffering a greater depression than the Great Depression of 1929.
We have a 35% GDP contraction since 2008
More than 30% unemployment (more than 60% unemployment in young people)
Real estate prices have dropped 50-90%
Greek Stock market has dropped 90% and HAS NOT recovered
Taxation is extreme
We were very close to defaulting and still we have not escaped danger. Our real income (after taxes) has more than halved and we are the lucky ones as my parents have not lost their job yet. They probably will though, but at least they have enough money saved to survive a few years until they retire and get their pension.
I could go on, but I think you get the picture…
Luckily, I am a US citizen. I have a very good Electrical and Computer Engineering Degree. I am currently doing a PhD (simultaneously working on research projects so I make ends meet) and in 5 years I will be well qualified and completely student debt free.. and guess what? I am going back to the States 😀
I find your view on the stock market is very convincing (the market always goes up long term theory) but having seen the devil here I am afraid of what may happen to the US or the dollar in the following years.. I am not worried about the stock market, I am worried about the state of the United States Debt, the economy and the dollar.
a) what is your long term view on the dollar? what if it ends up severely devalued? or hyperinflation occurs..
b) what if the US defaults (trade deficit and national debt problem etc.)?
10 years ago we could not imagine what happened here in Greece.. I know the US is not Greece but I am still worried about the growing National Debt and trade deficit of the US and the implications it will have in the economy.
Please ease my worrying with your reasoning and ideas… 🙂
Welcome Thanos…
Always nice to see another Greek around here! (I’m 1/4 myself)
What’s happening in Greece is truly a tragedy and the very definition of a Great Depression. But as ugly and hard as it is, at some point it too will begin to recover.
You mention the reduction in Real Estate prices. Has that happened to the prices of other goods as well? Depressions tend to be deflationary and I’d be curious as to how that is playing out in real time there.
The reason I’m comfortable recommending investing only in the US market for my US readers is that it represents a huge portion of the world economy and the largest US companies are international businesses providing access to global growth no matter where it might occur: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
This is why the tragedy in Greece, despite all the dire fear mongering, was barely a ripple for the US and the rest of the world.
For my international readers, I recommend World index funds that include the US market.
As for your questions…
A. The US dollar is a very interesting situation. In my view it will continue to erode in value due to inflation. In fact, our Federal Reserve has spent the last few years trying hard (with virtually 0% interest rates) to light an inflation fire. In small doses it can be very healthy for economic growth.
This is why I hold almost no cash, preferring to keep my capital at work in companies that can adjust to this inflation and even profit from it. This is what I own in VTSAX.
However, despite all its many problems, the Dollar remains the world’s default hard currency. Part of this is because even with all its problems the US remains a powerful economic engine. And part is because there is really no viable alternative. The Euro is saddled with with problems of multiple counties and their interests. Japan has faded from the world stage and nobody seems ready to trust the Chinese in this role. This allows the US to borrow at incredibly favorable rates.
B. I don’t see the US defaulting on its debts. It doesn’t have to. Instead, as discussed above, my guess is we will inflate our way out of the mess. Bad for the holders of bonds and cash.
Again, this is one of the reasons I hold VTSAX — I’m betting the companies in it will be able to prosper thru this inflation. Interestingly, during Germany’s hype-inflation between the world wars their stock market actually did well.
If you are interested, here’s my take on our own depression: https://jlcollinsnh.com/2012/04/29/stocks-part-iv-the-big-ugly-event/
And another I found interesting: http://www.joshuakennon.com/it-did-not-take-25-years-for-the-stock-market-to-recover-from-the-peak-of-the-1929-crash/
Perhaps they’ll give you some reason for optimism even in these dark days for Greece.
Of course none of us have a crystal ball. But more success has been achieved by investing optimistically than by trying to plan for disasters.
Not sure if any of this eases your worries… 😉
Finally, congratulations on holding two passports. As the world gets smaller, that is a great option to have.
thank you for your reply jcollisnh 🙂
didn’t know part of you is greek, a nice surprise!
about the deflation you mention. Yes you are right prices have fallen with the exception of basic needs.
Prices of
a) basic food (bread,milk, meat, cheese) have not fallen and maybe 5-10% up
b) gas is very expensive. both for transportation and heating
c) utilities. kWh costs here 17 euro cents!
keep in mind minimum wage here is 5000 euro annual. And a good salary is 12-18k annual.
Prices have dropped in rent and everything considered a luxury. Like bars, hotels (especially places international tourists don’t visit), cinema etc. You can also find good deals on pretty much everything.
Cash is king here 😀
About the US dollar I agree that there is no viable alternative. The euro is messed up, you can’t have Germany and Greece share the same monetary policy. China could be a threat, but countries like China, Russia are not safe. I believe nobody wants to have his money there. If the government doesn’t like you, especially in Russia they just make your property state property and have you shot.
The problem in the US I believe is extreme consumerism. You have a country with so many advantages. Sparsely populated, abundant natural resources, educated people.. it could be heaven on earth.
I have read your two links already, like most of the blog.
One last question, if you had a lump sum amount now would you put it all in VTSAX(or VTI the etf equivalent), or dollar cost average it to 5 years? I know your theory about never try to time the market.. but I just want to know if you believe the market is even slightly overvalued right now and it’s worth it to keep some cash earning nothing for a few years and slowly poor the in the market.
Thank you!
PS I understand everything we say is pure speculation. You are more experienced than I am and I am curious to know your guess 😉
Maybe it’s a good time to visit? I haven’t been in decades and my wife has yet to go. Beautiful country, wonderful people.
My mother used to say all that was good in Western Civilization came from the Greeks. She got no argument from me. 🙂
I’m not a fan of DCA for allocating lump sums and neither is the research I’ve seen. The problem is you only benefit if the market happens to go down while you are doing it. Then you are buying at lower prices.
But if the market goes up, then you lose. Since the market goes up far more often than down, it tends to be a losing bet.
Plus, the market could always rise for the time you are DCA only to collapse the moment you’re fully invested. 😉
The indicators seem to say the market is a bit pricy just now, but that has no predictive value as to whether it will rise or fall short term.
Protection comes from your bond allocation if you are no longer working and in your income and ongoing investments in the lower prices during the dips if you are: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
I would now, and have before, invest any lump sum the moment I had it and according to my asset allocation at the time.
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Hello Jim:
First of all love your blog and have found your advice to be extremely helpful, wish I would have found this web site thirty years ago! I have a question regarding social security and hope you can point me in the correct direction (or perhaps write a post). In particular, I wonder when is the correct time to file for social security? Almost all financial advisors recommend delaying as long as possible since the amount compounds at 8% (I believe).
However, I wonder about this advice for the following reasons:
1. Spending patterns tend to decrease as you age. Therefore, money early in retirement may be more “valuable” than money later in retirement especially if it allows more early retirement options (given the caveat that you do not run out of money). I have no desire to leave a large nest egg when I die.
2. If you delay taking social security, you may have to dip into tax deferred accounts earlier. This may result in taxes. In addition, you lose the potential gains (and tax deferment) on the amounts taken out of these accounts. Moreover, if you delay social security, once you take the higher social security and RMD, this may place you into a higher tax bracket (in effect you are paying a higher marginal rate on the social security). Therefore, SS taken out early in retirement may be at a lower tax rate.
3. Also, for some strange reason, I feel more comfortable retiring earlier if I take SS earlier. Probably an irrational intuition.
Another complication is a spouse’s SS: I have heard of “file and suspend” strategies but have not done much research on these strategies.
Perhaps you can use my current position as a case study. I am 57 years old (married with a spouse who is already retired and has a smaller social security pension along with a small defined benefit plan) and plan on working at least two more years. I have a fairly substantial nest egg (greater than $2.5 million). I own my home ($400,000, roughly) and have no debt. Hmmm…when to take social security?
Again, love the blog. JF
https://jlcollinsnh.com/2013/01/29/social-security-how-secure-and-when-to-take-it/
Welcome JF…
Jeremy zeroed in on exactly the post I was going to send you to. In it you’ll find my thoughts and an explanation of our personal strategy. Give it a read and maybe ask any further questions you have after over there.
For now let me say you seem to be thinking clearly on the subject, and as you’ve already guessed there are no obvious or easy answers.
With your net worth RMDs will most certainly push you into a relatively high tax bracket and your SS will suffer for it.
I suppose the good news is you are in a position where the advantages could fall either way and you are able to afford to do whatever makes you feel most comfortable. That being the case, what makes you feel most comfortable seems the deciding factor to me. 😉
Thanks to you both and I will take a careful read of your post. I will probably will have some further discussion. Again, thanks much for your blog.
Hi James,
I’ve done a little bit of reading lately, well that’s an understatement, I’ve been doing a LOT of reading and listening to podcasts lately. I’ve come across your comments on Mr. Money Mustache, heard your podcast appearance with the Mad FIentist and been reading though your stock series posts ever since. My life has been a wild ride over the past 5 years but I’ve finally grabbed the bull by the horns and I’m ready to take some action. Your content has definitely helped me get back into the right mindset!
I’m writing because I would love to get your opinion on how I should allocate the funds in my employer 401K. I don’t have access to the Vanguard funds you readily talk about, but I do have access to other Vanguard funds.
I have listed all Vanguard funds available to me below. My employer has been contributing to the TRowePrice Retirement 2045 fund. I haven’t contributed anything yet, but I plan to begin this month. TheTRowPrice Retirement fund they have me in has an expense ratio of 0.75%.
I spoke to a financial planner at ING where my employer 401K is hosted and she recommended I go into one of these two portfolio allocations mentioned below. I’m ok with taking an aggressive approach, but since I don’t have access to VTSAX I’m wondering if buying the small-cap, mid-cap, large-cap and value Vanguard funds would be close to buying the VTSAX and if so, what would be a good percentage breakdown for allocation? Would it make sense to include a small Vanguard Bond allocation as well 10%?
I’m new to all this and trying to learn as much as possible so any insight would be greatly appreciated. I also recognize and have done the math on having higher expense rations and completely agree with you about keeping them as low as possible for maximum long-term return.
As mentioned, below are all the Vanguard funds available to me in my 401K I have also provided the portfolio suggested to me by the ING rep.
Vanguard Funds Available:
Vanguard Retirement Savings Trust II – ER 0.33%
VBTIX – 0.07%
VIPIX – ER 0.07%
VIVIX – ER 0.08%
VINIX – ER 0.04%
VMARX – ER 0.25%
VIGIX – ER 0.08%
VMCIX – ER 0.08%
VSCIX – ER 0.08%
VIDMX – ER 0.07%
Portfolios suggested to me:
Aggressive:
Vanguard total bond VBTIX – 10%
Vanguard institutional index VINIX – 31%
Vanguard developed market VIDMX – 34%
Vanguard mid-cap index VMCIX – 25%
Moderate:
Vanguard total bond VBTIX – 30%
Vanguard value index VIVIX – 11%
Vanguard institutional index VINIX – 21%
Vanguard developed market VIDMX – 33%
Vanguard mid-cap index VMCIX – 22%
Looking forward to your response and reading more of your great blog posts! Thank you kindly!
-Nick
If you want to copy the total stock market, this might help, http://www.bogleheads.org/wiki/Approximating_total_stock_market
Thanks for the link Jeremy.
I actually came across this page a couple days ago while doing research and before posting this comment.
I didn’t see any of my available Vanguard funds on that list and I am worried I’m still a little too amateurish to make an assumption that a small-cap index fund on that list is the same or comparable to the small-cap index fund I have available to me.
I also read that the percentages on that page were calculated back in 2008 so I’m not sure how relevant they are today.
Would it be wrong to assume that the funds on the page you provided are the same or very similar as the funds available to me?
Thanks for your help,
-Nick
The vanguard institutional index (vinix) is the same as vanguard 500, so do 81%,
Vmcix is the vanguard mid cap so do 6%
Vscix is the vanguard small cap so do 13%
This is not exact but it will be close.
You will get a little bit more of the mid that is in s&p 500, and a little bit less of the mid that isn’t in the s&p 500, but it is close.
Thank you Jeremy for this, this is great feedback and I really appreciate it!
-Nick
Welcome Nick…
Good to hear you are sorting thru this stuff at such a young age. It really just takes getting a few things right to make a huge difference.
You now know how to duplicate VTSAX with the funds available to you, but I’m not sure I’d bother.
Graphed over time the performance differences between
VTSAX – Total Stock Market index fund
and
VINIX – S&P 500 index fund
are pretty slight. Plus, that’s all looking backwards. Going forward the differences are likely to remain slight and, who knows, over any given period the advantage might even go to VINIX.
All other things being equal, that slight historic advantage is why I prefer VTSAX. But this is all about The Simple Path to Wealth.
If I were you, I’d focus on VINIX and it’s wonderfully low .04% ER. You can build your other holdings in VTSAX outside your 401k.
At the end of the day, maxing out your 401k, having a strong savings rate and staying the course when the market dives are all far more important than trying to duplicate VTSAX over VINIX.
Good luck!
Thanks for the warm welcome Jim! I appreciate you taking the time to provide your opinion.
A little more about me, I’m 32 years old, happily married with one child and another on the way. I’m Canadian and I moved to the U.S. 2 years ago with my wife who is American and wanted to be close to her family.
Back in Canada I did start at a young age with investing but I worked with financial advisors and I never felt in control of my money or that anyone cared about it other than me. After reading your blog along with other FI blogs I’m ready to take it all over myself.
I really appreciate you answering my questions and I look forward to interacting more on your blog.
Thanks again,
-Nick
So I was in the process of writing you a massively long post filled with questions, and in so doing, researched and I think got a handle on most things.
I have a retirement plan with my employer. I put 7% towards it, they match that 100%, which I will get in two more years (5 years to vest). It’s been languishing in a crappy Fidelity “balanced fund” with high fees. We don’t have a lot of options, but we do have VINIX. So, I’m going to move all of it (11k) over there. Sound good?
Next up, should I use my employers supplemental retirement fund? Well, it doesn’t seem to have any benefits, and it’s leaving me with the same crappy options above, so I’m thinking, start my own supplemental funds with Vanguard on my own. Good?
Since I’m going to have $238/mo going to VINIX (matched by employer), and I’m hoping to put an extra $400-500/mo away for retirement in my additional accounts with Vanguard that I’m going to start, do you have any recommendations for what funds to use to balance out the chunk in VINIX, since my understanding is that its all large cap? Just go with the VTSAX, or maybe split into a couple? I’m also thinking maybe some in a Roth bucket… I read your posts on that, but I don’t feel totally confident in what direction to head there…
Next up: I have two distinct goals I am saving for: retirement, and money to use within the next 5-10 years. I’m 26, I plan on having kids by about 30 ish, and I want to be able to take some time off work to be with them. A mini short term retirement if you will.
So my question is, what do I do with money that I’m hoping to use in the short term, starting say 5 years from now? I’m thinking again, maybe $400-500/month if I can. I saw that you use the VMMXX for your upcoming expenses. Is this TOO conservative for 5 years from now? Do you have any suggestions for my goal? If this is somewhere on the blog already, I apologize, point me there!
Do I sound on track-ish overall? I also have a dusty old mutual fund from my grandparents with about 15k in it. I’m planning on moving it over to these goals as well (retirement, kiddo fund). Right now, I don’t see any glaringly obvious way to move it (all into retirement, all into short term, some combo thereof). If you are reading this and are like, “Dummy, the answer is obvious! Move it here!” Let me know, otherwise I may end up doing a roughly equal split between the two goals.
I just want to say this blog is awesome. Even though I feel a little lost at times, there is so much valuable information, and the more you look around, the more it clicks!
Welcome Rebecca!
Well, there are quite a few questions in your comment as it is, so I guess I’m lucky you posted the short version! 🙂
Let’s go thru the list:
1. VINIX is an excellent choice with a very low ER. See my comments to Nick about it above.
2. Your employer’s supplemental retirement fund offers further tax deductions and tax-free growth, so it is well worth considering. Especially if you have VINIX available in it. Remember, not only is every dollar you pay in taxes gone forever, so is all the money those dollars could have earned for you compounding over the decades. As a rule it is best to keep as much of your money as possible working for you as long as possible.
3. Yes, for your investments outside your tax-advanted employer accounts I would use VTSAX. Again, see my reply to Nick on this.
4. For your 5-year short-term goal a money market fund or bank saving account is what you need. Stocks are for the long-term — 10+ years out.
5. If you are flexible as to when you plan to have your kids and your mini-retirement, you can be a bit bolder with the money. You could invest some of it in VTSAX and VTBLX in maybe a 75/25 allocation. If the market breaks in your favor over the next five years, you’ll have that much more to meet your needs and goals. If it breaks against you, you’ll have to be prepared to wait a while longer. Deciding on this path is a matter of your tolerance for risk and your flexibility with your plans.
6. Yes, you sound on track overall. 🙂
7. As for that “dusty old mutual fund” from your grandparents…
If it is already in a tax-advantaged account, you can move it without tax consequences. You’ll want to roll it over into an IRA. Assuming you use Vanguard, if you give them a call they’ll walk you through the process.
If it is in a taxable account and you have a capital gain in it, you may owe a capital gains tax when you sell it to reinvest it else where. This depends on your marginal tax rate, but the good news is capital gains are taxed at favorable rates:
15% tax bracket or less = capital gains tax of 0%
25, 28, 33 or 35% tax brackets = capital gains tax of 15%
39.6% top tax bracket = capital gains tax of 20%
For example, you can earn up to $73,800 married filing jointly before you leave the 15% bracket, plus your personal exemptions ($3900 x 4 = $15,600) and standard deduction ($12,800) = $102,200.
So unless your income is pretty high, a nice problem, you might very well have no capital gains tax to pay at all.
To be in the top bracket married filing jointly you have to be earning over $457,600
Thanks for the kind words about the blog. Glad you like it! Hopefully the more time you spend here the more comfortable all this stuff will feel .And if you get stuck, feel free to ask more questions!
Good luck!
To Nick and Rebecca and others interested…
Throughout this blog I express a preference for investing in the total stock market index, as represented by VTSAX. But as I explained in my response to each of you, my preference for it over the S&P 500 index, as represented by VFIAX, is slight.
Over on the Bogleheads forum, in response to a question, a guy called Nisiprius gives a great overview as to why this is so, right down to why the total market is preferable if available: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=114954&p=1671962
Now both the Total and the S&P 500 Vanguard index funds come in multiple flavors, each holding exactly the same portfolio. Both VTSAX and VFIAX are what are call “Admiral Shares” versions. For more on this: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
In short, when available, go with a total stock market index fund. When only an S&P 500 index fund is available, as is often the case in 401K/403(b) plans, you can chose it with confidence. In my view, tying to replicate a total stock market index fund with multiple funds, while possible, is not worth the effort.
Hope this helps a bit more!
I am retired and have a life savings of about $280,000 in a 401 that I want to rollover to Vanguard. I am 64 years old and know I will have to take contributions when I am 70-1/2 but will not need to withdraw any more for 10-15 years because of other incomes that I have. I’ve been looking at Vanguard Target Retirement 2025, Wellington, Wellesley, and also a 4 fund portfolio of Total stock Market Index, Total Bond Market, Total International Stock and Total Inter Bond. Do you think investing in the Target Retirement Fund and maybe little bit in Wellington would be the way to go. I would very much appreciate hearing from you on this matter. I know I can’t make a killing at my age but would like to increase the amount I have now. Thanks
Welcome lindad…
While both are fine options, of those two I would chose the 4-fund portfolio of the index funds. The performance is likely to be better, the costs lower and you can precisely tailor your allocation to your own needs and preferences.
Hope that helps!
Hi Jim,
I hope you can clear something eating at me about our 401k options. Here it is: I can’t find evidence that the generate dividends. I’ve looked at my activity history but only see when I contribute specific amounts plus employer match.
My concern is that if I left the company, and if the market is in a slump, my money will sit without generating dividends at all. Obviously I wouldn’t want to rollover into an IRA at that time. Please note that our plan is not administered by one of the traditional brokerages like Vanguard or Fidelity. It’s a 3rd party.
What little information I gather so far, being very difficult to talk with someone who knows, the dividends in these funds do not purchase additional shares but rather influence the NAV. The funds are not public, so I can’t give you a ticker symbol to look up. I can send a Perspectis of the S&P 500 fund I invest in if you’d like.
The bottom line is that I am afraid of leaving money sit in a fund like this after leaving the company. I would rollover the fund into an S&P 500 if that happened now because the market is crazy up so no sleep lost. I may not have this chance if the market tanks and lasts for a couple years at the time I resign.
I hope you’ll shed some light on this.
David
Hi David…
I’m afraid you don’t provide me much to go on here. It sounds like the info you have is limited and what I have in turn, being second hand, is limited still more.
I have no idea what your 401k is invested in, although you seem to suggest it is in an S&P 500 index fund?
For what it is worth, dividends earned inside a 401k plan are almost always reinvested. If they were paid out to you, you would owe both tax and penalty on them.
There are many good reasons to roll your 401k plan into an IRA once you leave your employer. If you don’t understand or like the investment choices, you have two excellent reasons right there.
Is it possible you work for the government and have a TSP plan?
Can you tell me the name of the fund in which you are invested and the investment company?
If you can provide some details, I’ll try to help. But for now, I am at a loss… 🙁
Hi Jim, I continue to enjoy your articles. We are retired and are in the process of moving our 401k into Vanguard VTSMX and VBTLX. We also have Roths that need to be moved. I am just wondering if there is a point like a million or 2 million or less or more or whatever, where you say that is enough invested in these Vanguard funds, and other money needs to be invested in something else? Also most of our money is invested in IRA accounts, but we now have some money that we need to invest that is not in a tax deferred account. Should we also invest that money in the same two accounts and pay the yearly tax or are there other tax advantage accounts that we could use? Thanks for your input.
Hi Sylvia…
The only two funds I hold are VTSAX and VBTLX, and we hold them across our Roths, IRAs and taxable account. I describe this in some detail here: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Even if I had considerably more money, these two funds would be all I’d use. The only exception might be to provide some venture capital to start-up companies as an “Angel investor” but this would be mostly for fun.
When you say, “most of our money is invested in IRA accounts..” I wonder if you might not be confusing investments and IRAs? VTSAX and VBTLX are investments. IRAs are a type of “bucket” in which you might hold your investments. For more: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
So you might be able to add the extra money you have to your investments in your IRA, or not, depending on your income (which can limit your IRA contributions) and the amount. If you can’t invest in your IRA or other tax-advantaged account, then investing in a taxable account is the next step.
Hope this helps!
Thanks for replying so quickly Jim. Most of our money is in IRA’s and Roths. My husband had a 401k that we rolled into an IRA, and we also have individual Roths. We are investing in VTSAX and VBTLX in those accounts. Because my husband is still working some we can invest $6500 each into our Roths this year. We are sitting on some cash because we just sold our home, and we are currently renting. Wish there was a place to make a little money right now with this cash without putting it at risk. wanted to make sure that it was good to put all of our money in one place.
Rental homes can be another investment option, but it requires lots more work and research to increase your chance of high profits. It could make your portfolio less risky if you don’t invest too much of your total retirement fund and you do your research thoroughly.
Thanks for responding so quickly. I think I am addicted to reading your articles, comments, etc. on the web. I’ve read many others but yours is the best by far. I really believe you care about people and how they invest their money. You recommended the 4-fund portfolio but you had said somewhere on here that a person didn’t need to invest in International stocks so I was wondering if just the VTSAX and VBTLS would be ok. Do you still like the VGSLX? I am really scared in trying to select funds by myself because I don’t want to lose all my 401k but I’m going to do this instead of going to a financial adviser and paying them. No doubt about it, you love the VTSAX but if I didn’t want to put all my eggs in one basket, what specifically would you recommend. The more I read about investing, the dummer I think I am so PLEASE help me and also what allocation do you recommend. Thanks so much.
My pleasure, lindad…
I’m glad the posts here have resonated with you. Really everything here is about what has worked for me, what has kicked me in the ass and what I tell my 20-something daughter.
I’m also glad you like reading them because I’m going to suggest you read some more. 🙂
When I suggested the four-fund portfolio in response to your original question above it was in preference to the other choice you presented. But you are correct, it is not what I use myself.
Other than a little cash, everything we own is either in VTSAX or VBTLX as I describe in some detail here: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
How to chose the allocation between them I discuss here: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
I used to also hold REITS but stepped away from them for the reasons described here: https://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
You also remember correctly that, unlike most, I don’t feel the need to hold international investments for the reasons I present here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
Now if it seems I am giving you reading assignments rather than answers, here’s still more. Start here: https://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/
and read the entire series.
You express fear of losing your 401k and investing in the market by definition means accepting volatility. The market can and will plunge at times and always unpredictably. You have to be willing to accept these drops without panic selling. You must be invested for the long-term.
If you take the time to read the series you will have a much better idea of how the market works and the risks you must accept to enjoy the gains. By the time you finish you’ll be able to chose what best suits your temperament and needs.
And that is the best and most honest help I can offer.
Hope this helps!
Jim,
Thanks for responding and I will go back and read those assignments again. It’s all so confusing to me and I guess I’m just looking for someone to tell me exactly what funds and allocations I need to place my 401 in. Hopefully I will make the right decision so I’ll try and learn more about it during the next month before making a move. I appreciate your input.
Hi Jim,
Thanks for all the helpful and inspiring writing you’ve done.
Curious what you think of my situation. I would be happy to post this in your Ask section but I haven’t seen much activity there for about a year.
I just turned 27 and am fairly Mustachian. I have no debt and $279k invested in VTSAX. I live very comfortably on $30k year (I could cut it to $25k if I kept my travel local). I have a high paying job but I don’t want to continue with it much longer.
For the past two year’s I’ve been following MMM’s advice and just trying to get to FI as quickly as possible. Now that my job is really starting to drain me, I’m rethinking things.
My current thinking is that my runway buys me the time to find work I will enjoy more and to work on some of my own projects (some of which could generate income in the future). This may mean FI may take longer, but presumably it will be a more enjoyable trip. It’s more akin to your concept of F you money than early retirement, I guess.
Do you think I’d be crazy to get off the treadmill for a bit and to use my savings to find some work that I love to do? Or should I just keep my head down and power through?
I would welcome any thoughts you can share.
Thanks!
Welcome Jack….
Yes, you’d be absolutely crazy to do such a thing.
At a 4% withdrawal rate your 279k should provide ~11k per year, less than 1/2 your 25k minimum.
Then again, while not enough for FI, 279k is a nice chunk of F-you money. And that’s exactly what F-you money is for: Doing the crazy things.
Nobody can say how doing this will turn out for you. But I did it several times and it worked out fine: http://www.mrmoneymustache.com/2012/05/26/guest-posting-financial-independence-23-years-later/
Good luck!
hello,
i’ve been reading your stories here for awhile now and most of the stories are very helpful…. if you don’t mine can you talk about some of your past business ventures (successful or failed)…. if you already have can you link it for me? i tired searching and didn’t find any think.
thanks
Well this is an interesting request, Chris…
…you trying to make me look bad? 😉 🙂
I’ve scattered some of these stories throughout the blog, but can’t remember exactly where off hand. If you read thru it you’ll come across them.
One of my biggest blunders I describe here: https://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/
This was one of my very earliest posts and it describes my early blunders: https://jlcollinsnh.com/2011/06/27/stuff-ive-failed-at-the-early-years/
It’s pretty embarrassing, but really doesn’t cover my business and investing failures. I’ve been meaning to do a second post covering those but have yet to write it.
When it comes to investing failures, I’ve got several worth writing about one of these days. But they all have the same things in common:
—Being slow to accept indexing
—Believing in the idea of being able to pick individual stocks
—Believing that star fund managers could pick individual stocks and out-perform the index
—Failing to understand bear markets and crashes are normal and best ignored.
thanks for the quick response… i’ll start with the link you posted and continue on to other post
Mr. Collins–
I am a long time Dave Ramsey and MMM reader and fan and have bookmarked your site as well. I have been struggling with the best direction i should go to be FI and have the option to retire early, slow down, do something different. Most times I think just pay off all debt, save and live my life. I was wondering if you may be so kind to offer me some direction as to how I may obtain FIRE:
Debt:
main house- 870k mortgage is approx 6800/m. We have land and horses. Want to purchase land next to house for more grass and view/privacy protection for 400k I have negotiated. 2 lots in our neighborhood just went under contract for 650 each. All lots then would have been sold from developer.
rental 1: owe 360k. could sell 900k. Mortg is 3520/mo 15 y fix. rent for 5k summer, 6200 winter. Expenses are basically 1600/month. Generally speaking we have it rented most if not all months.
rental 2: owe 402k. Could sell for 825k. Mort is 2288/m rent for 3600/m long term. expenses: 575/m.
rental #3: owe 235k. could sell for 375+. Mort is 1440. LT rent for 2150/m. exp: 400/m
Assets:
condo bought for 225k cash. Makes approx 20k per year after all expenses.
Roth IRA: approx 15oK. I have s corp with employees now and setting up profit sharing and contributions to help employees and taxes.
Bank accounts: 175k, 335k, 75k, 30k, 372k, 155k. All business accounts. I spend approx 50k/month in overhead right now. My salary is 110k/year and the rest goes back into the corp but my main residence mortgage is a draw from the corp.
I have 4 full time employees and we are very busy most of the year and looking for another provider or two.
Right now I rent for my business but am looking to expand services and buy, however that is 1.6M. I have options to master lease for 10 years and have this entity do the remodeling in the tune of up to 400k, and then rent back from them. I also have a second office location that needs to grow and also consider building and having better office space and rent out to other professionals. (very little if any nice professional office space here)
I have had an over riding feeling for 2 years to be prepared. My feeling is that if I have no debt, then I can always work to put food on the table for my family and reform cant hurt me too bad, and I could always have the ability then to do something different as well (I am looking at investing into a sport and health drink mix/formula).
I love what I do, but i am getting close to burn out if not already there in many aspects. My children are 11 and 13 and i only have so much time left with them while they are home. I want to be stable. The rental houses were meant to be a second income stream once paid off and they do make some, but after reading here I may have been better with investing differently. Rental 1 we do use as a vacation home when not rented spring and fall and I always planned to go there someday in the winters when I wasn’t working so much.
Main question and point: What are my best options to be FI asap personally so that I have more time with my family and sports/hobbies and stability from the changing health care market?
I am very fortunate, however I work extremely hard and long hours. That said I think I have done well enough that I should be able to arrange this so that I have time with me and my family and continue to work some too running my business instead of being ran by it and accumulating bills.
thank you,
dp.
Wow, DP….
..that’s a big life you’ve put together. Big in debt, big in cash flow, big in (I gather) business income. Big in hobbies and work and family.
In your post I read conflicting goals. You say you want to downsize, spend more time with the kids and become FI. In the next breath, you talk about buying more property and expanding your business. Only you can decide what’s best for you, of course. But step one it seems to me is to be more clear on your goals.
If your goal is really to slow down, be FI and have more time, consider first your four big life elements:
Your land, house and horses
Your rentals
Your business
Your family
Put them in order of importance and consider eliminating (or dramatically cutting back) the last one or two.
You could sell the rentals.
You could sell the business.
You could scale back your active involvement in the business.
You get the idea.
One caution regarding your kids. At 11 and 13 they are reaching the point in their lives where they will want to have steadily less to do with their parents and will be more focused on their friends and personal activities. This is natural and as it should be, but might prove a disappointment for you if you create time for them and find them off on their own.
Perhaps a solution would be to actively engage them in your business and or rental operations?
Seems to me you have some major decisions ahead with no right or wrong answers. The clearer you are on your priorities, my guess is the clearer your path will become.
Good luck!
yes. thank you. True, true on the dichotomy. First choice- FI. That way I am ready for reform and obama care can’t hurt me much. How do I best reach FI? Do I have to sell the house?
Hi Jim. Thanks for keeping up with this blog; I find your advice most useful.
So, I was in bed last night thinking about becoming a landlord by renting out my current home and buying another one to claim as owner occupied. This is all foreign territory to me, but let me run the numbers by you and ask if I’d be a fool to NOT act on this notion.
My current mortgage is $540/month with roughly $100k left on the loan (purchased for $129k). Property taxes are $275/month, for a total of around $815/month. My homeowners insurance is about $250/year; the home is only five years old, appraised around the $170k mark (however, most comparable homes in the development have been selling for between $180k-$200k), and I keep a high deductible. I do have substantial equity in the house, but I like the idea of using this property as income. I know of several neighbors who are all renting similar homes in the same development for $1450-$1550/month. Doing the math, if I rent this house, I’d gain between $635-$735 in income every month.
With this said, I’d would love to find another property on the cheap so I’m not just pumping that income back into a second mortgage. Is this an opportunity I should be taking advantage of?
Other variables that may or may not be relevant: we are a single income family, saving 40% of take home pay (in addition to the 11% already going to the state teachers retirement system), spouse will return to work in four years when child reaches school age, planning to be FI in 10-12 years (maybe becoming a landlord will shorten the sentence?).
Can’t wait to hear your thoughts! Thanks.
Andrew
Hi Andrew….
It has been decades since I’ve owned rental property so I might not be the best person to ask. But since you did, here’s my thoughts:
—in your quick analysis, you have left out opportunity cost for the 70k in equity and the cost of maintenance and repair.
—Two things make investment RE powerful: Sweat and leverage.
—Sweat. Understand that in buying a rental you are buying a part-time job. Compare the desirability and income potential of this against other part-time jobs you might pursue.
—Even if you plan to hire a property manager, another cost, you still have to manage the manager. Don’t make the mistake of underestimating this.
—Leverage is the the use of borrowed money to inflate your returns. But it also inflates your risk, as many learned the hard way in the ’08 collapse.
Before you go forward, invest a lot of time in educating yourself. My friend Paula is very successful in this space and her blog should help you get started: http://affordanything.com/category/real-estate/
If you want more of my thoughts on RE, here are the posts I’ve written:
https://jlcollinsnh.com/category/real-estate-2/
https://jlcollinsnh.com/category/how-i-lost-money-in-real-estate-before-it-was-fashionable/
Good luck!
Hi there,
I’m 24 and about to start investing in the share market. Would you say it is a wise idea to leverage into the market on perhaps a 1:2 basis for the first 5-10 years then drop to 20%given that I have a timeframe of 20 or so years in the market.
I care very little about year to year fluctuation and only care about the final balance I will hold in roughly 20 years, I suppose this means I have a high tolerance to risk (though from my understanding the chances of ruin are slim).
Is this approach likely to outperform the standard approach you advocate? I ask because I am not certain if the fee’s and interest repayments will erode much of the benefit?
Thanks I look forward to your insight!
Hi Nikky…
Using leverage in the stock market is a terrible and very dangerous idea. It is what ruined so many in the 1929 crash and one of the reasons the market plunged 90% before the dust settled.
The appeal, of course, is that leverage magnifies your gains when the market is moving up. Certainly in those bullish years using it will outperform not. But it magnifies your losses during the inevitable downturns and can easily wipe you out.
It is great that you care little for market fluctuations. That is a key to long-term success, but the next time the market plunges 30-50% your resolve will be sorely tested. Even without the leverage that would take those losses to 60-100%.
The fees and interest payments would certainly erode any gains, but these are pocket change in comparison to the risk.
hi, im 21 will finish paying debts off in 2 months, have looked at my spending and can save 50 percent of my income , i am always intersted in the idea of setting myself up for the future but never actually go outand put it into action(if i had started a year ago id be so much better off). i am going to do it now but just looking for best option. i like the idea of VTSAX being in invested in the whole market and super low fees. 2 questions, whats your opinion on investing directly in the shares yourself do you think it would be more costly? but my main question is, there is a managed fund with australian ethical (smaller companies trust) i like the idea of my money doing good things for the world ie not investing in fossil fuels. but they reckon they ve had 9.9 percent return since inception about 20 years. net of fees, that is after all the fees have been taken out.
so to me that sounds better than VTSAX, what do you think, just another bs managed fund trying to sell you high expense ratio mutual fund? will really appreciate your time and insight, love the blog, has really made me understand the market in a much clearer way. also just to clarify when you say down the road having f u money is that the money that is i vtsax.
Hi Paul…
Congratulations on having your debts almost paid off and getting ready to invest. Starting at age 21 puts you far ahead of most.
1. Buying individual shares is a losing game and more expensive. Low cost broad based index funds like VTSAX are the way to go.
2. I am not a fan of ethical funds. They have higher costs and making money by investing is hard enough without adding restrictions. Plus it can be hard to find a fund that matches your particular ethics precisely. That said, for some these are the only way they can be comfortable investing. It is a very personal call. If you read thru the comments above you’ll find more discussion on this.
Please take the time to read thru the entire stock series a couple of times before you invest. Doing so will help you fully understand the “why” behind the approaches we discuss here.
Good luck!
Hello, Mr. Collins,
Thanks for creating such a compelling blog for those of us working towards FU money status. I have a simple question, which I hope you can help me with. I recently moved an old 403b over to Vanguard and plugged it into a target date fund to coast on for the next 25 years or so. While I was in the neighborhood, I opened a taxable brokerage account with Vanguard for the sole purpose of buying shares of the VTI ETF when I have a few bucks laying around. I have the dividends set for reinvestment. I will likely not buy any other ETFs in here. Should I be taking the dividends in the settlement account and waiting to buy whole shares of VTI? I’ve literally only bought one share of VTI, and will probably only buy a share here and there. I’m currently in the 15% tax bracket, single income family with wife and two kids. I know That I should be maximizing my retirement account and match, but this is just my fun account, I guess. Thanks in advance for your advice!
Hi Matt…
Thanks for your kind words.
From a tax perspective it doesn’t matter how your take your dividends in your taxable account. Reinvested or no, you will owe tax on them. The good news is that dividends receive very favorable tax treatment.
That said, assuming you don’t plan to spend them, I just have them reinvested. It is simpler and fractional shares are no problem.
Hi Jim, I have been reading your blog for the past week and find it very useful. I have a question that maybe you have answered before but hope you can help me here; I would like to invest 1 million in to your reccomended VTSAX. Do you reccomend doing it all in one go or over time? if over time what time period/ intervals do you reccomend?
Hi Thomas…
Yours is a fairly frequently asked question and if you read thru the comments above you’ll find it discussed a few times.
In short, the research indicates that investing in a lump sum outperforms spreading it out over time, which is commonly called DCA (dollar cost averaging).
The reason is that DCA only provides an advantage when the market drops and the market rises far more often than it falls.
Further, by using DCA you are basically creating an asset allocation heavily weighted toward cash in the beginning.
Of course, DCA does protect you from the risk of the market plunging just after you invest, but at the cost of the more likely scenario that you will be steadily paying more for your shares. If you are very worried you could consider this as buying insurance.
While an initial hit is always tough to take, remember you should only be investing for the long-term.
If it were me, I’d invest it as soon as I got it. I like my money working for me ASAP.
For more:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Do you ever recommend growth funds and why or why not?
Nope.
Their focus is too narrow.
Hi Jim!
Love the blog…found you thru MMR. So I’m hoping you can add some wisdom to my situation…I know other folks have posted similar scenarios, but I don’t think anyone is in my situation.
I have a house in SF with my brother/his wife. We owe about $840K total (our 1/2 $420K), have a 3.25% adjustable mortgage rate, I cannot refi for at least another year because of a CH 13 bankruptcy and even when I am eligible I don’t believe I will get the lowest rate because of the BK. I am building credit so hopefully sooner than later my credit score/history will be good enough to get a good rate. I have been paying down the mortgage as much as possible thinking that when interest rates do rise and not being able to lock in a rate made me want to pay down the mortgage principal as much as possible.
I currently do not contribute to my company 401k (no company match, don’t offer Vanguard, only American Funds and their Target Funds expense ratio/administrator fees come to about 1%), but have been maxing out our ROTH IRA just to keep some exposure to the market (make too much to contribute to Trad IRA to receive the tax benefit).
I know there is a chance (probably a good chance) that the market + tax benefits of maxing out 401k is better than paying down the mortgage, but I was afraid of the worst case scenario where the adjustable rate goes up to 5 or 6 or 10% and that if I don’t pay down the mortgage I will be stuck paying a hefty mortgage payment on the higher mortgage principal. I was OK with missing out on the market gains at first, but now I must admit I think I was wrong and that there is just too much $ discrepancy between the 2 options. I would be able to max out my 401k and ROTH’s and still make a dent in the mortgage and UNTIL the rates rise I think I’m now better off maxing 401k and ROTH’s and then whatever’s left use it to pay down the mortgage. Your thoughts???
background $ info:
me/wife’s income is ~ $140K
retirement – IRA’s/401k’s ~ $300K
wife’s annuity – financial advisor locked her in before we met ~ $200K
equity in SF house ~500K (our 1/2 ~$250K)…think I might want to sell this in the next few years…I always felt like owning a house was more trouble than it is worth, but couldn’t put my finger on it until I read a few blog articles (yours/Go Curry Cracker/and some of the comments). I live so close to work and rents are so outrageous that I couldn’t afford to rent a 3BR house for less than $5000 (2 kids/wife/grandma/dog all live with us)and still bike to work as I finally do now (even with all the hills thanks to MMM).
paid off cabin ~ $100K (think I want to get rid of this and just visit the area from time to time).
Oh and I want to retire early!!! maybe in the next few years…
Welcome Brian…
glad you found your way here.
You are right to worry about your adjustable rate mortgage: It is like sitting on a ticking time bomb.
The simplest thing to do is what you have been: Channel every spare dollar into paying it down.
Don’t worry about having lost out on the market’s great gains these past couple of years. Nobody could have predicated those, or what the next few years hold. But there will be plenty of market growth to be had in the coming decades.
Here’s an alternative you might consider. Put your extra money in Betterment for as long as your mortgage rate stays low. I’d suggest a conservative 50/50 stock/bond ratio as this might be short term money if rates rise. This could still outperform your current 3.25% and you’d be more liquid as well.
Here’s my take on Betterment: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Thanks for the feedback! I had heard of Betterment not too long ago so I have checked them out, but I didn’t want to pay the fees and potential capital gains taxes (both short term and long term). And i just don’t feel comfortable with where my interest rate is going and where the market is at now (not trying to be a market timer, but it feels like it’s got a dip coming). Even if it doesn’t we still are contributing some to the ROTH’s as mentioned before.
I must admit with my bad habit of still playing with individual stocks that I could see them doing better than me even with the fees, but all in all most of our retirement $ is where it should be (either VTI or a Vanguard Target Fund).
And I like to be aggressive so a 50/50 split between stocks and bonds doesn’t seem to fit the short term outlook…mostly a hunch (just think stock market will pull back a little and interest rates are going to rise). Wouldn’t a 50/50 split in stocks and bonds get beaten up when (if) interest rates rise (really the bond 50%)? Would this sort of allocation likely outperform the roughly 3.25% I can lock in by paying extra?
I guess it’s hard to know for sure, but at least with paying down the mortgage I know I’m at least saving 3.25% on the next months payment…and when rates do go up obviously the goal is to owe less.
I think I’m going with your first response which seems to be the safer less sexy option…in this scenario I’m OK with that.
Keep up the good work!!! Really amazing you find the time to read and post to help all us out!
Hi Mr. Collins,
I’ve read your posts on home ownership and understand you’re not a big fan :). BUT, of course, my situation is different and the small condo I bought in downtown San Jose at the tail end of the housing crash (mid 2011) at a decent discount is now yielding a nice chunk of positive cash flow. So I’m keeping it, at least until I quit the day job, probably in the next 1-2 years (building up a bigger cushion than the 4% rule dictates as I’m financially conservative).
My question is really about condo insurance. I’ve been carrying a minimum insurance policy in case something bad happens and the expenses are not covered by the HOA insurance, like, a bad water leak. My premium is about $250/year, not bad at all, esp. I get to deduct it as rental expense. But that’s still $2,500 over 10 years! I’ve always wondered, would I be better off not carrying the insurance and just pay out of pocket if something bad does happen?
MMM’s philosophy on insurance is to buy the minimum allowed (highest deductible) if one has plenty emergency fund. That’s what I’ve been doing, but I’d like to hear your thoughts on it too. Hope you have time to respond to my question. Thanks again for keeping up the blog. It has changed my outlook on life since I started reading you last fall and I’m forever grateful!
Hi Jian…
Welcome and thanks for the kind words.
I agree with MMM that the best insurance is least insurance and the more financially strong you are the less you need.
That said, the next thing I look at is cost v. potential loss.
The potential cost of damage to the interior of your condo from water or fire, which wouldn’t be covered by the HOA, could run to tens of thousands of dollars. Against that, $250 is chump change.
I’d keep the insurance.
Hi Jim-
I have an asset allocation question for you prompted by two of your recent excellent posts that I’ve been chewing on since you published them: “Stepping Away from REITs” and “Pulling the 4%.”
I have read and re-read the REITs post at least 4-5 times and over the summer since you published it have gradually come around to your way of thinking. I, too, am ready to step away from REITs.
At the same time, I had a major forehead-slap moment while reading the “Pulling the 4%” post regarding maintaining my asset allocation and re-balancing across our entire tax-deferred and taxable portfolios. Makes sense! But what we have been doing is maintaining the asset allocation just in each individual account, rather than across all of our holdings.
I hold a 4 fund portfolio in my traditional IRA (50% VTSAX, 20% VTIAX, 5% VGSIX, 20%VBTLX) and just VTSAX all the way in my taxable account and ROTH. My wife has a traditional IRA and ROTH constructed the same way, and we hold the taxable account jointly.
So…the quarter is coming to an end and I have some rebalancing and re-allocation to do. Now for my question- I want to get away from the REITs, and since we have been exclusively contributing to VTSAX in our ROTHs and taxable account, we need to bulk up our bond allocation. Seems simple enough to just exchange the REITs into the bond fund and we’ll be right about where we want to be. But- going forward- since all of our contributions to ROTH and taxable accounts are going into VTSAX, and we will only hold the bond funds in the traditional IRA- won’t we reach a point where the traditional IRA will become almost entirely composed of VBTLX?
Unless the market takes a serious nose dive to the point where VTSAX and VTIAX under-perform VBTLX, I’ll slowly but surely re-balance all VTSAX/VTIAX gains in the traditional IRA into VBTLX, and the bulk of our VTSAX holdings will be in the taxable and ROTH buckets. Has this happened to you? You are a bit farther down the road in your investing life than I.
Is this even an issue? Maybe even ideal? Interested in your thoughts…
Welcome back FS!
Most of my IRA is now in the bond fund and, if and when the time comes, we may have to open in my wife’s IRA as well. But I don’t see this as a problem.
So, no, I don’t think it is an issue. Or an advantage. It just is what it is and I wouldn’t worry about it.
Hi Jim,
First of all I want to thank you for this wonderful blog. I’ve read the Stock series and feel now confident in investing in 100 % stocks. Being a European, I’ve also read Mrs. EconoWiser’s blog and tips for investing in Vanguard.
We live in Finland. I’m 33, my husband is 39 and we have two small kids. My take-home income is about €65000 and husband’s €40000. We have a big mortgage and although the rate is low, we personally want to get rid of it fast and are reducing the principal by €2500/month, which equals debt-free in 10-ish years. The current monthly amount available for investing is between €500-1000.
I’d like to invest in a Vanguard ETF, but there aren’t many online brokers available here, I haven’t found a fuss-free way to get my hands on the Irish-domiciled funds of Vanguard Global and the fees and taxes for the US-based Vanguard funds are quite remarkable. If I would invest in Vanguad Total World Stock (TER 0.18), I’d have to pay a fee of 0.3% or minimum €15 for every transaction, compared to e.g. iShares Core MSCI World (TER 0.2), which would be completely transaction-free for me with a monthly plan. The biggest drawback, however, is the current Finnish taxation of dividends: I would have to pay 30% tax on all dividends, even though I would manually reinvest them, but when the fund automatically reinvests dividends, there is no (Finnish) tax until I some day withdraw money.
I’ve tried to look at Morningstar and to my understanding the iShares Core MSCI World is otherwise pretty similar to the Vanguard Total World Stock, but it invests in fewer companies (1500 vs. 6500) and lacks emerging markets.
1) Fees and taxes are so much lower that I’m inclined towards the iShares option. Do you think that’s a good idea? Is the number of companies very important?
2) If I go for the iShares, should I add an emerging markets fund?
Thanks in advance. I really appreciate that you are taking the time to answer all the questions.
Welcome Heli…
and thanks for your kind words.
You question is similar to that I get from my US readers regarding the Total Stock Market Index fund (~3600 companies) and the S&P 500 Index fund (~500 companies). While I prefer the Total Market and its performance over the decades is slightly better, the difference is in truth very slight. An S&P 500 fund works just fine.
While I am unfamiliar with the funds you mention, if iShares Core MSCI World holds 1500 companies it should also be just fine.
With the S&P 500 fund, some people elect to add a small cap fund. In an ~80/20 ratio this is pretty close to the Total Market, but the cost of the small cap fund is a bit higher.
But personally, I wouldn’t bother.
You could do something similar with the emerging market fund if you like and if the costs are still low. But with 1500 companies in the iShares fund you should be well covered.
Hope this helps a bit.
Thanks for your feedback, Jim! I think I’ll go with the simplest option with only the Core World fund, at least for now.
Hey Jim,
I’d really appreciate your thoughts on this:
A few days ago I received a notice in the mail that I had the option of taking a lump sum payout of a pension from my former employer. I was only there for a few years. This is a very large company, in the S&P 500.
My options are as follows:
1. Take $9,362 today, at age 35.
2. Take $34,581 at age 55.
3. Take $58,689 at age 65.
4. Receive $364 per month from age 65 – death.
Assuming I take the lump sum at any age, I would immediately roll it into a Rollover IRA and not touch it. It would be allocated entirely to VTSAX.
Which option would you take and why?
Hi Clint…
These companies have excellent actuarial tables so you can be pretty sure all the options are financially equivalent. To a large extent, the choice depends on your goals and temperament.
I actually faced much the same situation years ago and I chose option 1, rolling it into VTSAX as you plan to. More control and very likely greater growth over the next 30 years.
Of course, this depends on you actually leaving it alone over the decades, thru all the market plunges sure to come. 😉
Thanks, Jim! Something to consider, for sure. Hope you’re well.
Jim – Bottom Line Up Front (BLUF): I have an opportunity for a pension buyout, where the company will send the taxable component to my Traditional IRA w/Vanguard, and I will use whatever is left over to retire some of our student loan debt. I’m inclined to take it, but my wife is not yet convinced. I included my analysis below, and would please like your feedback on if you concur with my analysis, or if there might be a better path.
—–
For the reasons you mention above and elsewhere on your site, gut reasons to take the buyout include:
* I control the destiny of the money (I trust myself and VTSAX more than other money managers)
* I don’t need to worry about prior company going of business prior to full eligibility (30+ years from now)
* I can simplify retirement planning by eliminating accounts
* I worked for the company directly out of college for 7 years, so the total benefit is not very large, which also makes me want to “take the money and run”
Specific numbers:
* If I do not take the buyout, the normal benefit is approx $500/mo at retirement age, so using an inflation value of 3%/year and a 30+ year outlook, Net Present Value is a bit less than $200/mo in today’s money
* If I take the lump sum buyout, I get in the low 5-figures by the end of the year (approx $30+k in the future using 3%/year)
* I could also take a “substantially equal payment” route, but that is about $50/mo, so we’re not considering that option
Taxes & How I would use the money:
* There are a number of different redemption options, but I’m leaning towards having the company send the entire taxable component to my Traditional IRA and sending me the balance so we can make a big dent in some of our student loan debt
* They can also simply send the entire amount directly to my Traditional IRA
* I’m maxed out on Traditional 401k and IRA contributions for 2014, so we’re not leaving any tax saving opportunities on the table there
Main questions:
* Am I missing anything from a numbers perspective? Specifically, is this plan still worth it if it pushes me into a higher tax bracket for 2014?
* What are my unknown unknowns?
I really appreciate your site. Your stock articles helped me clarify what to do with my Vanguard accounts, and we are well on our way to FI, especially when we pay off some of our student loans.
-Tom
Oops. I thought that I had checked all the comments to make sure I wasn’t duplicating questions . . . and then I see that Clint already asked a similar directly above.
I hope my question is slightly different considering that the company gives the option to move the taxable component of the withdrawal into a tax-deferred account, which I’m not sure if Clint’s company does.
One follow up: my wife wants to negotiate with the company about increasing the buyout; what do you think about this strategy?
Perhaps the multiple questions on pension buyouts indicate that this subject could be turned into a post?
Thanks again for your help.
-Tom
Hi Tom…
As you’ve guessed, my suggestion for you is much the same as that to Clint above and for the same reasons.
However, you have confused me a bit with your reference to the “taxable component.”
Are you suggesting this is an option or that part will be distributed this way if you take the lump sum?
I’m not an expert in pension rollovers, but the idea that part of it would be taxable is new to me. My understanding is that if you take a lump sum distribution you can roll it directly into your IRA tax free. That’s what I did and what I would recommend.
Perhaps it is possible to take part of it as taxable current income without penalty. But even if that is the case I wouldn’t do it. Losing part of your money, and all that money could earn over the decades, is something to avoid. Especially if it pushes you into a higher bracket.
If there is a chance to negotiate a higher buyout or better terms, by all means go for it. Smart wife you have there. 😉
Good luck!
To clarify, I understand there are a number of options:
* Take everything as taxable distribution (pay income tax plus 10% early withdrawal penalty) – Obviously not ideal
* Roll everything into a Traditional IRA with no income taxes until you withdraw
* Take everything as a taxable distribution, but whatever the taxes are will be sent to your IRA (unsure if 10% penalty still applies)
I was thinking that the third option would be a good compromise since we can pay off one of my student loans (5.125%) or one of my wife’s student loan’s (6.8%), while still saving on taxes by placing into an IRA.
I’ll call the pension center to clarify my understanding of how the taxes are handled in the third scenario, but based on the above would you still go for total roll over of everything into an IRA, or the last scenario for partial student loans and partial IRA. I know that stock market returns on average 8%, so by numbers alone we should roll everything over, but having loans paid off sooner is enticing from a gut perspective.
Thanks again, and I definitely agree that my wife is one smart cookie. 🙂
My guess is that anything you don’t roll into an IRA will be subject to both tax and penalty. Too steep a price to pay to have access to the cash, even if to pay off your debt.
Better to roll it into your IRA and let it grow.
Tackle the debt by aggressively cutting spending and funneling every dime to it. Especially that ugly 6.8% loan.
Good luck!
Jim – Wanted to let you know that the pension buyout went through from my prior company, and I took your advice to roll-over the entire amount into my Traditional IRA.
Regarding the student loans: my wife just got her first job out of law school, and we are both in total agreement that her entire salary will go to pay off her loans. Plus we’re cutting back on existing expenses so that extra capital from my paycheck will go to the loans, too. (Essentially, we ask ourselves with each big purchase: is this X dollar item worth not paying off the loans that much sooner, and the answer usually is “no, through it on the loans!”)
I really appreciate your stock series and advice. Your site has helped clarify investing tremendously, and if anyone asks me for advice, I use your wisdom and refer them to your page.
All the best for you and yours as we begin 2015.
Hey Tom…
Thanks for the follow-up and congrats to your wife!
Great plan for paying off her loans. Once that’s done you’ll have the saving discipline in place and can put that cash into building your F-you fund. 🙂
Jim,
What are your thoughts on umbrella insurance for people approaching the point of early retirement?
Hi Jeffery…
Mostly I dislike and try to avoid insurance. But I do have an umbrella policy.
I don’t think it has much to do with your proximity to retirement, other than that is a reflection of your wealth.
It is something worth having once you have wealth to protect, regardless of your work status. The policies are cheap, I think we pay a few hundred a year, and provide great peace of mind.
Like all insurance, I hope to never need it. 🙂
What are your thoughts on Valuation-Informed Indexing? Would you be willing to write a blog post on it?
Hi Che…
Please read the post above introducing these comments and answers.
“If your question doesn’t really fit with in other posts, right here is the place. Put it in the comments and I’ll try to answer as many as I can.”
“Occasionally in the comments I am asked to read some book, article and/or blog and dispute the ideas in them. I simply don’t have the time or inclination to do this.
I’ve been investing for close to 40 years and in that time have read countless papers on countless strategies. The newer ones I’ve seen are all variations on past themes. Been there, done that. Perhaps something truly new and revolutionary will make its way onto the scene. Should that happen I’m confident I’ll hear of it from multiple directions.
If you read my blog you’ll soon have a very clear idea of my views. You can then read other sources, compare and decide for yourself what resonates.”
I suspect you’re either not aware of it or you are and don’t care to comment.
I can get behind the idea of anything being overpriced- even the market as a whole. Can I ask you you then, what are your thoughts on pricing the market? Not to be confused with timing the market, which I’m fully-aware of your position on the matter having read through your series twice in the last month. I found it to be very informative/inspiring/helpful. Thank you for writing it.
Hi Mr. Collins,
My husband and I are 25 y/o, renting a very liveable basement from my parents (happily!), and sitting on $80k in the bank, wondering what to do with it.
His salary is $58k as an entry-level contractor for NASA.
Mine is $43 as an X-ray Tech.
We have 40k in student loans from his Bachelor’s degree.
The 40k is made up of three private loans, each have a current interest rate of 3.8%. They are variable rate (3.3% + the LIBOR). They can be adjusted once per quarter, up to a maximum of 18% (AH!).
So, we are wondering… How aggressively should we pay off the loan? Should we kill it now? Or invest the money and just be ready to kill it if the interest rates start shooting up?
With the rest of the money… If we both started IRAs (5,500 w/ VTSMX, not VTSAX, right?)… It would make more sense for us to do traditional IRAs, not Roths, correct? And what would you recommend doing to invest/save the rest of the money? Taxable account in VTSMX?
We do eventually want to buy a house, so maybe it would make sense to keep some savings in a place like Betterment or Ally savings?
Thanks so much for your input!
-Maddie
Hi Maddie…
Congratulations on a fine start and for taking advantage of the low-cost living opportunity.
Adjustable rate loans are very scary and you are right to be crafting a plan to deal with it. The simplest, and safest, strategy is to simply aggressively pay it off. However, as with most “safe” options it doesn’t provide the opportunity for maximum growth.
Personally, I would open a taxable (read readily available) account using VTSMX which, BTW, Vanguard will roll automatically into VTSAX once you hit 10K. The risk, of course, is that your interest rate could rise just as the value of your shares are falling.
But doing this could get you to the finish faster. Once there, if the rate is still low you can just keep the money invested and growing. Once the rate rises, sell the shares and blow out the loan.
So the decision is based on your tolerance for risk.
Yes, you also want to fund your traditional IRA rather than a Roth, the goal being to keep as much of your money working and compounding for you (by paying less in taxes) over the years as possible.
If you have concerns about accessing this money before 59.5, this will help: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Don’t even think about buying a house until the loans are gone.
When the time comes, a conservative allocation to save for the downpayment, closing costs and inevitable (and sometimes very high) costs of updates and stuff you’ll need makes sense.
Ally is a good choice if you want to be very conservative and use bank savings to get there.
Betterment allows you to create a conservative stock/bond allocation — 50/50 or 40/60 that might get you there faster.
I haven’t written about Ally, although I do like them and use them personally. I have written about Betterment: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Great blog! I just read a report about how the us economy has slipped down from 2nd place in 2000 to 12th place in terms of economic freedom. I believe it is a cato.org report. Does a long term, sneaking burecratic overreach cause you any concern? Or is your basic position that if there are better places to do business top public companies will find a way to do business in these other places so you are protected?
thanks
Thanks Andrew!
The US has been slipping over the last few decades steadily and in many categories.
Part of this is simply the rest of the world improving and part is a genuine deterioration here in this country. It is sometimes shocking to me to return home from “Third World” countries to a US infrastructure that is more shabby and run down.
This does concern me from a quality of life perspective, but not from an investing one.
When you own the US economy thru an index fund like VTSAX you own mostly international businesses, as I describe here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
These business also carry great influence in government policy and they can seek out the best places in the world to do business.
The upshot is, I think the US will remain the best place to invest my money for a long time to come. Even as it becomes a less attractive place to live.
Hello Jim,
I’ve been a big fan of your blog for some time now. You and I are on the same page about index investing through Vanguard.
A question for you on Index Investing. My grandparents’ retirement is currently in a Merrill Lynch managed account. It had to be passed over to ML’s guidance after my grandfather, who had handled their finances all their lives was diagnosed, with alzheimers. He was previously a fan of dividend investing and had done well to grow their account to just over $700k.
Unfortunately they don’t trust the portfolio manager they’ve acquired at ML and my grandfather doesn’t agree with the investing approach the ML portfolio manager is using. Of course this supremely upsets my grandmother who doesn’t really understand much about investing other than my grandfather isn’t happy and is brought to tears of worry whenever the market dips a bit. At 84 and 87 this is the last thing anyone would want them to worry about.
I suggested Vanguard index funds as a way to take the portfolio manager out of the equation, and lower their investment expenses. But what index funds will do? Their monthly bills are a modest $2750 / month and that puts their spending at just under 5% of the net worth per year. I’m leaning towards a 80/20 split of a bond index fund for smoother seas and 20% dividend index fund to appease my grandfather’s love of dividend stocks. Possibly the VBTLX, total bond fund, and SPDR S&P Dividend ETF (SDY). Both my grandparents like the idea of the index funds, and removing the portfolio manager, now I just have to come up with some funds for them to move to. They are also concerned of any expenses they might incur while transitioning from one bank to another.
If you have a moment to share a few words of wisdom I would be deeply grateful.
Hi Josh…
Thanks for your patience in waiting for a reply. If you’ve been reading my posts you know last week was a bit of a tech disaster and I am still catching up.
First, if your grandparents disagree with the approach of the ML manager they should simply instruct him/her as to their preferences. In fact, he/she should be asking them what their wishes are.
But since ML is high-cost and they don’t trust the manager, I’d suggest they move on over to Vanguard without delay. In fact, I’d suggest this even if they did trust the manager.
Even more troubling is the trauma market dips seem to cause them. There is simply no way to be invested without some volatility.
Your idea of an 20/80 allocation of VBTLX and SDY will certainly smooth the ride, at least in theory. But I would be concerned having so much in bonds these days. With interest rates at historic lows bonds currently carry considerable risk.
I’d be more comfortable with a 50/50 split, but then you are introducing more volatility.
Given your grandparents health and age, I absolutely agree that the last thing they need is to worry about market fluctuations.
I might consider 80% in cash in the form of FDIC CDs and 20% in SDY. Then you can have them spend from the cash as needed.
This is absolutely a losing strategy long-term, given interest rates and inflation. But it is a s-l-o-w losing strategy and unless your family history is filled with centenarians, candidly long-term planning is not the key goal here. Peace of mind is.
I hope this helps. They are blessed to have someone like you in their corner.
Hi Jim,
I’ve read all of your blogs up to June 2013 over the past week or two, in addition to hundreds of Jacob’s blogs at ERE and almost all of MMM’s posts over the past year or two. I’m wondering if you can confirm my investing plan before I initiate it.
I am 20 years old. I am a 2nd-year at Amherst College in Amherst, MA (very close to you!) majoring in geology. I have raised $10,000 through frugality, and I’d like to invest this amount, and any proceeding savings–my savings rate is above 80% at the moment–in Vanguard’s Total Stock Market Index Fund. I will invest in VTSMX and then VTSAX using my Roth IRA, since I’m in the lowest tax bracket until the end of college.
I will add $5,500 in VTSMX through my Roth IRA during October 2014 and another $5,500 on January 2015 through my Roth IRA, this time combining the first $5,500 with the second $5,500 into VTSAX. I then want to continue adding money to VTSAX until I have enough to pay for my annual expenses on a 1.5%-3% withdrawal rate. I have decided that 500k in invested capital will be more than enough return for me, yielding 15k at 3%.
After reaching the 500k in capital, I’ll shift a percentage of it to Vanguard’s Total Bond Index Fund and a Money Market Index Fund, as well as some cash in a savings account in my credit union.
Investing through Vanguard’s Total Stock Market Index Fund seems to be incredibly simple and returns all the yield I’d ever really need. I’m also completely okay with my money swinging wildly on a short-term basis (daily, weekly, monthly, yearly), but growing steadily on a long-term basis (decades, a century).
After I’ve invested the $11,000, I’ll keep my remaining $2,000 to $3,000 in my savings account of my credit union for about a year’s expenses; this amount accounts all of my annual expenses–I don’t have to pay tuition, housing, utilities, or health insurance at the moment. (Housing, utilities, and health insurance would add 3-4 k a year in expenses, for a total of 5-7 k in yearly expenses).
I think my current yearly expenses–$2,000 to $3,000–lazing around in my savings account is acceptable, though I wonder if I should only keep half a years expenses in my savings account–$1000 to $1500. I also remember reading something on MMM’s blog about a strategy of using a credit card paid at the end of the month to pay for daily expenses. This method would allow all of your money to be invested. I can’t remember whether it was investment capital, or some other money source, that paid the credit card bill at the end of the month.
——————————————
I’d like to be financially independent by the time I turn 30 or 35. My question is this: to the best of your knowledge and my description, is the investment plan I’ve written above going to provide me the best chance to achieve financial independence by age 30-35?
Also, is 10 to 15 years too short a time period to invest 100% in VTSAX before I start withdrawing? Once I reach my 500k goal at age 30 to 35, and I start withdrawing money at a 1.5% to 3% withdrawal rate (7k to 15k), I plan to have the money I don’t use for expenses invested for the rest of my life in VTSAX, VBTLX, and VMMXX (or similar investment vehicles).
Thank you for reading and I look forward to reading your reply, (:
Zalo
Welcome Zalo…
And congratulations. You are off to a fine start and it is great you are putting together a plan.
Your idea to fully fund your Roth IRA first (since you are in a very low tax bracket) and then fund a taxable account using VTSMX/VTSAX is exactly what I’ve had my daughter do for the last few years.
Once she has a higher paying job I’ll suggest to her that she shift to funding her then available 401k and/or traditional IRA for the tax breaks. I suggest the same to you.
Turning to your specific questions:
1. From a purely investment point of view, stocks are the most powerful wealth building tool, so focusing on investing in the total stock market index fund is the fastest way to FI.
Now, something like investment real estate could get you there faster because of leverage. But now you have taken on additional risk (that leverage) and a part-time job.
2. 10-15 years is a good solid long-term start. But remember, you will (should) hold these for decades longer. Even after you start withdrawals, those won’t deplete your holding all at once, or even ever at your projected 1.5-3% rate. In reality you’re looking at 7 or 8 decades. Maybe more with good genes. 😉
Finally, I wouldn’t shift into bonds just because you reach your 500k goal. Rather I’d make that move after you “retire” and begin living on your portfolio.
In fact, if you get your withdrawal rate down to ~2% you’ll be right around the dividend payout of VTSAX and, since you can handle the volatility, you might never need bonds at all. You can just live on the dividends.
Wish I’d been this smart at 20!
I am a state employee and I make $55k. I have a side business, where I average $25k a year in profits.
I have $960,000 in the following 12 funds (listed in order of biggest to smallest fund):
• Mutual Global Discovery Class A
• Vanguard Healthcare
• Templeton Foreign Class A
• Vanguard Managed Growth and Income Adm.
• Vanguard Mid-Cap Index
• Vanguard Small-Cap Index
• Vanguard Wellington
• Vanguard International Growth
• Vanguard International Value
• Vanguard Emerging Markets
• Vanguard REIT
• T-Rowe Price New Era
My wife maxs-out to her 401k/457. I contribute 30% of state salary to my 401k/457. I also contribute 17% of my salary from my side business to a 401k.
My wife (who is also a state employee) and I seem to be paying a significant amount in taxes this year and last. We paid almost $20k in taxes last year and $24k this year.
I did close two accounts in 2013:
• An Equity Fund from Comerica Securities that had $81,000 in it; and
• Janus Growth and Income with $8k in it.
My questions are:
• Does it appear that my current funds are tax efficient?
• Is there a way to have more tax efficient funds?
• How do I determine how tax efficient my funds are?
• Are there other things I can do to lower my tax burden?
Hi Dennis…
Taking your questions in order:
–I’m not familiar with all those funds, but overall they look like a fairly mixed, in terms of tax-efficient, group.
–Index funds tend to be tax efficient because they don’t trade stocks inside the fund like actively managed funds do. Trading inside a fund creates taxable capital gains distributions.
–You can look at their taxable dividends and capital gains distributions. These are taxable and so the more a fund throws off, the less tax-efficienct it is. So, for instance, an actively managed fund that focuses on dividend paying stocks will be inefficient. An index growth fund which doesn’t trade much and tends to hold stocks that don’t pay dividends, would be more tax efficient.
–Reduce your holdings of actively managed funds and focus on index funds.
A simple rule of thumb would be:
Index funds tend to be tax efficient
Actively managed funds tend to be tax inefficient.
This is probably a bit niche but I thought I’d ask for your two cents, as a fan of the blog!
I’m from the UK but moving to the US soon for a new job. I currently invest in UK mutual funds within a tax free wrapper called an ISA, which is like a Roth IRA that you can withdraw from penalty free at any time – i.e. it’s awesome and I’d rather not lose it. The problem is, when I move to the US, I can’t hold non-US funds without being massively penalised with forms and tax (search ‘PFIC’ for info). So I’ll have to sell the funds, but then there are two options:
1. Withdraw everything in cash, convert to $, and invest with Vanguard US. Pros: Easiest tax return (get 1099-DIV to help). Easy to get broad diversification. Cons: Currency conversion costs ~0.7% in commission, which I’d have to pay twice if I convert back on return to UK. Lose several years of UK tax wrapper allowance.
2. Buy UK stocks (not funds) within the ISA wrapper. Pros: Simplest to execute. No loss of UK tax wrapper. Cons: UK market only = less diversification (although new earnings would be invested with Vanguard US, so this would change over time). Manual dividend calculations at tax return time.
The US doesn’t recognise the UK wrapper, so the tax treatment would be the same either way (as qualified dividends), I think. Obviously 1 is best if I remain the US long term and 2 is best if I return to the UK. Trouble is I’ve no idea yet! I’m leaning towards 2 for hedging my options (I can always switch to 1 later), but it means buying individual stocks whilst accepting I probably won’t beat the market, which is a tough thing to do.
Thanks!
Hi Alex…
Wow, that is an interesting dilemma and far above my pay-grade. 🙂
I suggest you post it again here: https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
That where my European readership hangs out and it may well be that someone there has some useful perspective to offer.
I will say, based on your comments, I agree that option #2 is likely your best choice until you are sure how long you’ll be in the US.
I’d also add that the UK is a fairly small market on the world stage and were I you I’d be concerned about having all my investments tied to it.
Finally, were I forced to buy individual stocks, I’d look for the 10-12 largest companies with the most international businesses and I’d just buy equal amounts of each. Kinda like a mini-index fund.
Good luck!
Thanks Jim and 2l2r for your helpful comments. I’m actually thinking I should use an option 3 – stick with UK version of Vanguard Lifestrategy, at least for the first year. Low risk and diversified, but it’s a ticking tax timebomb. Completely tax free if I leave the US without selling up as 2l2r says… but if I stay it’s taxed at the highest marginal rate of 39.6%, plus backdated compound interest! The whole situation feels like playing chicken with the IRS…
For those interested, there’s some further discussion over at MMM’s forum. Thanks!
I suspect you also posted over at MMM, here is some useful info I posted over there with regard to PFIC
With regard to the PFIC – there is an option to delay payment of any taxes until such time as you actually realize gains, downside however is that interest is payable on any tax on gains when sale is made, backdated to earlier years. But there is a potential upside, if you leave the US without a sale of funds in the PFIC you have NO US tax liability. If you decide to stay you can elect to continue with the delayed option or change to paying yearly at ordinary income tax rates ( backdated tax and interest will be due when you make election ) . Keep in mind once you have been on a GC for 6 years you are getting into “exit tax” territory, but that’s along way off.
With PFICS I would advise professional guidance.
PS -I have been through these steps after moving here from overseas, started on the delayed option until it became clear that I was here for the long haul, now pay the taxes yearly. Depending on which state you are living in the taxes may also be significant, you can however delay state tax’s until a sale is realized irrespective of federal election.
Have a read of this –
http://www.deblislaw.com/understanding-the-pfic-rules-without-suffering-a-migraine.html
“A taxpayer who does not make a QEF election is taxed under the pure PFIC tax regime of Section 1291. Under this regime, taxpayers are permitted to defer taxation of a PFIC’s undistributed income until the PFIC makes an excess distribution. An excess distribution includes the following:
i. A gain realized on the sale of PFIC stock, and
ii. Any actual distribution made by the PFIC, but only to the extent that the total actual distributions received for the year exceed 125% of the average actual distribution received in the preceding three taxable years (or, if shorter, the taxpayer’s holding period before the current taxable year).”
hi so after doing lots of research i have come to the conclusion that for me in australia my best option is to invest in vts, Vanguard® US Total Market Shares Index ETF. but i have a big concern about currency risk eating away at returns. as many of your readers must be investing from outside the us do you think its risky? or like dollar cost averaging do you think currency v ariations will average out over time so it wont matter?
thanks again
Paul
Hi Paul…
No question that if you own an investment denominated in US dollars and you live in a world of Aussie dollars you have a currency risk at play.
Moreover, there is no reason to assume that the variations will average out over time.
They could, and that might be the most likely scenario. But equally the US or Aussie dollar could enter a period of extended decline relative to the other. This would benefit or hurt you depending on which side of the fence you were.
I talk about this a bit here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
But there is a possibly more profound way to look at this.
In today’s environment I avoid holding cash, US dollars in my case. The interest rate for cash accounts is below the inflation level. This means the holders of cash accounts are guaranteed a long-term erosion of their wealth.
Instead, I hold thru my total stock market index funds, the ~3600 publicly traded companies that make up the US market. In a very real sense, the dollar value of these doesn’t matter. What matters is that they continue to be viable thriving businesses that continue to create value. The dollar is only the measuring stick, it is not the value itself.
If this is the case, the Aussie dollar is also just a measuring stick.
So, using the English system, I stand 74 inches tall. One inch = 2.54 centimeter so using the metric system, I’m 187.96 centimeters tall. A very different number, but my hight remains exactly the same. Only the tool varies.
Now fortunately the ratio of inches to centimeters remains fixed.
But suppose, like currencies it varied. Suppose one day the value of centimeters as related to inches rose to 3 to 1. Now my 74″ is worth 228cm. Whoo Hoo! My CM value has risen by 40 or 21%.
But of course, my actually height, no matter what the measuring tool, remains unchanged.
So too when you own VTS. It’s value will rise or fall based on:
—The success of the underlying companies in increasing their sales, markets and profitability.
It’s price will rise or fall based on that and:
—The variability of the measuring tool.
Only the first really matters.
Make sense?
Jim,
Your advise is great and I really appreciate your work you do in your blog. I am almost 31 and have just started investing, (I know finally right?) anyways I opened up a IRA roth account VTTSX. I started with this fund because I did not have that much cash on hand and the start up cost is only 1,000.00. I have been putting a little in each pay check and was wondering if I should transfer this fund to VTSMX when I have 3,000.00 in the account, and then it would transfer automatically to VTSAX when there is 10,000.00 in the account. Also, do you think it is a good idea to buy more on a given day when the market is down? I have done this a couple of times toward the end of the trading day because the fund is bought at the closing price of the day.
Thank you for your help and love your site.
Thanks Ben…
Glad it resonates with you!
VTTSX is a fine fund and a great choice with which to start having only $1000. You could continue to hold it with fine results.
That said, personally I would move it to VTSMX once you hit $3000. As you mentioned, once you reach 10k Vanguard will automatically move it to VTSAX and you’ll enjoy that funds super low cost ratio for decades to come.
As for your idea of trying to buy when the market drops, it can be a trap. You are assuming VTSAX, for example and which closed today at 49.72, will at some point be lower. Could be, or maybe not.
Let’s say you have a chunk of money ready to go and you wait. And the market rises and VTSAX reaches 57 and then it corrects by 10%, the very move you’ve been waiting for. A 10% drop takes the price down to only 51.46.
Of course it could drop further. Or maybe rise further. There is no way to predict.
But here’s something to consider. From 1970-2013 the market was up 33 of those 43 years. 77% of the time.
The odds are, at any given point in time, the market is more likely to rise than fall.
Good luck!
Jim,
Thank you for your thorough response and keep up the great work.
Dear Mr. Collins,
My girlfriend and I have been excitedly reading your blog over the past few weeks as we have just now started to discover the world of investing. We realize that you may not be comfortable with offering advice or feedback, but we were hoping to run an idea by you. Here goes …
BACKGROUND:
I’m 34 years old high school teacher and have accumulated $44,000 in my saving account and put additional funds into my state teacher retirement account, which has since grown to $28,000. My girlfriend (soon to be fiancé, shh) is 30 years old, has $58,000 in savings and $35,000 in an old 401(k). So, in total we have $102,000 in savings and $63,000 in retirement accounts.
CURRENT STATUS:
At the moment I am on a one-year, unpaid leave of absence from teaching and my girlfriend quit her job so that we could travel for a year. We have been in Mexico for the last two months and we will be continuing our travels through Latin America and other inexpensive areas of the world for the next 10 months. We have calculated the total cost for this year of travel to be $10,000-$20,000, which would leave our savings accounts with about $82,000-$92,000.
INITIAL INSPIRATION:
With all of this free time (our idea of “travel” is not to see the sights, but to relax) we stumbled upon a few blogs about financial independence (FI), including yours. The concept of FI that you write about has been very inspirational and at the same time we have been developing a theory we like to call “partial financial independence” (PFI).
OUR THEORY OF PARTIAL FINANCIAL INDEPENDENCE (PFI):
One thing we noticed in common about all of the bloggers who achieved FI was that they actually continued to earn income once they no longer needed it. Our guess is that once you no longer need to work your creativity, imagination, and passion really begin to flourish, thus creating more happiness and income. I have already experienced this phenomenon twice in my life while on “intentional unemployments” like our current travels. We have decided that we cannot go back to the 9-5 rat race. We believe that PFI will give us the freedom to generate income in a more organic, satisfying way … rather than depending on and being held to a paycheck from a “job”.
OUR DEVELOPING LIFE PLAN (upon return from traveling):
1) Continue to live on $20,000 per year
2) Rollover our retirement accounts to IRAs with Vanguard
3) Invest a large chunk of our savings with Vanguard
4) Ensure our Vanguard investments are diversified, rebalanced, and in harmony with their (and your) investment principals
5) Withdraw 4% from Vanguard every year (~$3000-$4000) to supplement income
6) Use new found free time to generate remaining funds (~$16000-$17000) for annual living expenses
OUR QUESTIONS FOR YOU:
1) What percentage of our savings (the $82,000-$92,000 we’ll have left after traveling) should we invest and what percentage should we keep as cash on hand? Our current thinking is to keep about 3-6 months worth of living expenses as cash so as to ensure a smooth transition back home and into developing our new income stream (which may be a business or some other idea we come up with).
2) What are your general thoughts about PFI and/or anything else we’ve written above?
NOTES:
We wanted to note that we are not the least bit worried about “failing” as we’re more than willing to tighten the belt to survive a hiccup (i.e. living in a tent, eating rice and beans every day, exercising my union right to another teaching position, etc). In addition, we are also what you would call “die brokers” – we’re not planning to leave behind any inheritance for anyone.
Thanks for reading,
Cory & Vickie
Hi Cory & Vickie…
and welcome!
First off, I like your plan and I love your attitude about “failing”!
You are absolutely right…
Every early retiree I know is an actively, bright, energetic and enthusiastic lover of life. They are not ones to sit on their hands once they reach FI. Instead they follow their dreams, passions and interests and almost inevitably and frequently without intention, this leads to earning additional money.
Further, I see the journey to full FI as having an intermediate step: F-you money. That is, enough money to step away from a traditional pay check for a few months or years.
As opposed to full FI which would mean enough to support your lifestyle at a 4% withdrawal rate. So, in your case, since you need $20,000 a year, $500,000 makes you FI.
But as you’ve learned, the $165,000 you have is plenty of F-you money to take a year or so off. This is something I encourage and, in fact, did myself several times during my career.
So, those are my thoughts on your question #2. 🙂
As for #1, I hate holding cash. It is very unproductive in this super-low interest rate environment. That said, you will need a cushion. Personally I’m make that cushion the lowest I felt personally comfortable with. The more you keep invested and working hard for you the stronger your chances of long-term success. I’m assuming here you’ve read, understand and are comfortable with my endless cautions here on the blog regarding market volatility, the absolute need to be able to ride out the storms without panic and the inherent long-term nature of investing in stocks.
Looking at your 6-point plan, I would rethink #5 & #6.
Personally, my goal would be to leave my invested money untouched for the first few/many years. I’d want it to grow and make my financial position steadily stronger. This means not pulling the 4%.
Instead, either learn to live on the 16-17k you anticipate making or figure out a way to earn the 20K. Shouldn’t be much of an issue for two incomes.
If you haven’t already you might read the financial example in this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
The numbers are different, but you can see how the concept would apply.
If you feel you must have some income from your investments, I’d restrict it to the dividends. For a total stock market index fund like VTSAX that would be ~2%.
Hope this helps!
Enjoy your adventure and drop back and share with us once in awhile. 🙂
Jim,
I’ve been studying up on index investing for some time and I really enjoy your blog.
I have a low six-figure portfolio sitting all in mutual funds and want to make the switch to index funds. I’ve have an idea of what products I’ll use and the asset allocation. But I’m now stuck on when to pull the trigger. I’m looking long, long, long term. I just don’t know if I should go all-in or do 25% a quarter over the next year.
Your comments are appreciated.
Geoff
Hi Geoff…
What you are talking about doing is called Dollar Cost Averaging (DCA) and, as I’ve said elsewhere in these questions, I’m not a fan.
In fact, I have a post coming on DCA shortly which will explain why. Stay tuned.
If it were my money, I’d put it to work ASAP in the index fund. Especially since:
1. You are “looking long, long, long term.”
2. Have the money already in other mutual funds.
Here’s the DCA post, as promised:
https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
Hey Jim,
It’s interesting that lately, both Mad FIentist and MMM have posted that they are moving their money to Betterment.
Honestly, I’d rather not move my money from my simple 90% VTSAX/ 10% VBTIX portfolio at Vanguard, but their mentions of automatic re-balancing (something I can do on my own) and tax loss harvesting (something I don’t understand and definitely could not do on my own) makes me wonder if it’s worth it? If it eeks out an extra 1%ish annually, it seems like it might be worth the hassle?
Hi Clint…
Well to be technically accurate, they are both moving some of their money and only money in their taxable accounts. 🙂
In the context of their recent posts, the key question is will the benefit of automatic (and maybe more reliable than doing it on your own) rebalancing and tax loss harvesting out weight the extra fees. The answer is, it depends.
Vanguard has some research that indicates too frequent rebalancing is counter productive. I can’t lay my hands on it at the moment and I forget the reasoning, but the point is that while frequent rebalancing might provide an advantage, it also might not.
Tax loss harvesting simply means that when you have a capital gain that you will owe tax on you sell an investment where you have a loss. This offsets the gain and avoids the tax. Since the government allows you to deduct up to $3000 of capital losses from your earned income, harvesting some losses even without the gains to offset also has an advantage.
Now clearly the value of all this is directly related to your earned income tax bracket. If you are in the
–15% bracket or less, the tax on capital gains is 0%
–25, 28, 33 or 35% bracket or less, the tax on captial gains is 15%
–39.6% bracket the tax on captial gains is 20%
I like Betterment and see a value in certain situations as I describe in this post: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
But your cost with your 90% VTSAX/ 10% VBTIX portfolio at Vanguard will always be lower, and costs are always a drag. Personally, I’d keep those and rest easy.
Just remember to rebalance once a year or so. Maybe an extra time or two if/when the market moves 10% or more.
JL,
Talk to me about Tax Loss Harvesting when you are dealing with one fund (VTSAX) in your taxable account. Seems everyone is falling for Betterment and others who do this daily using complex robots to capture evey penny of gain. For a person like me in their early 30’s with 5 years to FI, who expects to be in the 15% tax bracket indefinitely after FI what are your thoughts? While I am in the 25% bracket now and file single I could use any additional tax breaks I could get, I am not sure all that extra diversification and complexity they seem to introduce will be worth the fees and splitting my consolidated portfolio up. I appreciate your feedback on these specific points and anything else related that crosses you mind. Thanks.
Hi RJ…
Check out my reply to Clint above and the link my post on Betterment
If you have only VTSAX in your taxable account, as I do, you don’t have any losses to harvest. 🙂 But maybe someday.
If that were to happen, and since the IRS has rules against “wash sales” and Vanguard has rules against frequent trading, I’d simply sell my VTSAX and move into VFIAX, their S&P 500 index fund for awhile.
Since the captial gains tax in in the 15% or lower bracket is 0%, once you are there you might consider some Tax Gain Harvesting with your VTSAX. The idea is to sell shares to capture the gain while it is tax-free, thus adjusting your cost basis up in case you’re tax bracket is someday higher and your capital gains are again taxable.
But be careful. Remember that any capital gain is added to your ordinary income. You don’t want to push yourself into the 25%+ brackets where your cap gains are taxed.
As for Betterment, it might be a good fit for you, at least as long as you are in the 25% or higher bracket. I wouldn’t worry too much about the extra complexity of investments as they handle that pretty seamlessly.
Once you are retired and in the 15% bracket you can sell (remembering the caution above) and move back to VTSAX, owing no capital gain and resetting your cost basis.
Still, there is also nothing wrong with holding VTSAX.
So Jim,
1. It sounds like you think the .15 fee may be worth the additional tax benefits gained now while in the 25% bracket on a 100K taxable portfolio with them.
2. I also hold VIIIX and VBTIX in my 401K with Vanguard. Does this not complicate things when it comes to “wash sales”? Would not VFIAX be substantially similar? Just curious?
3. In that same thought then could not the robotraders at Betterment also be creating a number of potentially adverse tax transactions since I assume they can only transact in light of what is invested in the Betterment portfolio?
Thanks for your thoughts…
1. Yep. Being in the 25% tax bracket makes it worth a look.
2. VIIIX is the institutional version of VFIAX, both being the same S&P 500 index portfolio. I don’t know if the IRS would consider going from one to the other a wash sale, but my guess is they would.
3. This concept of Betterment creating wash sale problems is a new twist for me. I’ll need to think it through a bit, but candidly it won’t be for awhile. Too much else going on just now. But it is a concern. I’d ask them directly before you switch.
But, yes, Betterment has no way of know what else you hold. They will be trading based on the portfolio they create and hold for you.
Hope this helps!
Hi Josh,
Thanks for the great blog. I had a question about the backdoor IRA. I currently have $5500 in a traditional IRA that I opened this year. I am married and our combined income this year will be ~$170k. My thought with opening the traditional IRA is that I can then deduct the $5500 for takxes. However next year our income will be ~$400k. I will no longer be able to deduct traditional IRA moving forward. I plan on using the backdoor conversion going forward for IRA.
My question is should I convert my traditioanl IRA to a Roth IRA before the year is out? Or should I hold it, get the tax deduction and roll it over into an individual 401k next year? Or should I hold it get the tax deduction this year and roll it over to a Roth IRA next year? Any guidance would be appreciated.
Thanks,
Kevin
Hi Kevin…
I afraid I don’t know who Josh is, but I’ll take a shot at your question. 😉
Here’s a chart on IRA deductibility: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-if-You-are-NOT-Covered-by-a-Retirement-Plan-at-Work
Based on this and your question, I gather either you or your spouse (but not both) have a retirement plan at your job. If this is the case, at 170k this year you are just under the limit for deductibility and at 400k next year you are over.
By all means, take the deduction this year if you can — especially in your tax bracket. Every dollar you defer from taxes has a chance to grow, earn and compound for you over the decades.
Next year when you are no longer eligible for a deductible IRA contribution you can use the back-door strategy to make a non-deductable contribution and convert to a Roth. Here’s a nice overview of this: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
In any event, you can’t roll into your 401k, nor would you want to.
Hi Jim!
So far I’m lovin’ your stock series! But I have quite a bit of reading to get through it all. Your writing style is awesome… Feels like we’re sitting in a room together and you’re telling me a story! 🙂
I’m just curious…. Do you have any suggestions for funds similar to VTSAX at other brokers, such as Schwab for instance? And how do you feel about ETF’s as compared to mutual funds (ie. VTI rather than VTSAX)?
I’m in my mid-40’s, wife is close to 50, and I just can’t wrap my head around investing in ONLY a stock mutual fund or ETF. 🙂 Granted, we plan to “retire” in the next 10 years, so I’m a little paranoid about what the market might do over that time. However, “retirement” for us involves moving out of our current house and moving closer to our rental log cabin so we can manage it ourselves and build the next one or two. With only 3 rental cabins, we figure I won’t have to work for The Man anymore, and we can live comfortably off of that income alone.
Of course, that plan isn’t 100% until it happens, so until then I have to think about the possibility of tapping our investments for living expenses.
That raises the other big question for me…. Retirement account(s) or non-retirement account(s)…? To date, I’ve been maxing out my 401K and our ROTH IRAs each year, while putting a smaller amount into a taxable account at Betterment (our F-you money I suppose). Schwab is getting ready to launch a Betterment-like service in Q1 next year so I may be pulling that money back to Schwab since they plan to offer the same service with NO fees (and I love Schwab, been with them 20+ years).
So I’ve been confused as to the best approach at my age. Do I stop investing into the tax-advantaged retirement accounts, and just pour all of our savings into non-retirement accounts so we have plenty to live on prior to reaching 59 1/2? Or do I keep doing both?
Would love to get your thoughts. Thank you!
Thanks Dave…
“Feels like we’re sitting in a room together and you’re telling me a story!” is exactly the effect I’m striving for!
Your questions are mostly covered in the Stock Series so as you read thru it things should become ever more clear. That said, let’s look at them here too:
1. VTSAX is a total stock market index fund. I don’t know what they call theirs, but Schwab is sure to have one. You can start by looking at their lowest cost funds. It will be in there. See: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
2. VTI and VTSAX hold exactly the same portfolio, so ETFs are fine. My only objections to them is that they were designed for trading and that only benefits the brokers and that there are sometimes commissions to buy and sell them.
3. It might help to get your head around owning only a fund like VTSAX once you understand that when you do you own a piece of virtually every publicly traded company in every industry in the USA: ~3600. Traditionally a portfolio of individual stocks was considered well diversified if it held ~20 across 5 or 6 industries.
4. Max out your 401k and deductible IRA accounts first and then add to your taxable account as you can. You can convert to Roths and after you early retire. See: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
Living in a log cabin has always seemed cool to me! 🙂
Thank you for the thoughtful response Jim! I’m loving your stock series, and still working my way through it. Thank you so much for writing it! I’m going to “prescribe” it as required reading for both of my early-20’s kids.
Schwab does have a nice selection of low-cost index ETF’s that trade commission/fee free. SCHB for instance is their US Broad Market ETF which appears to line up very nicely with VTI. And the ER is only .04%.
I’ve been analyzing the portfolio that MarketRiders.com has constructed for me, and it’s interesting because they are selecting several of the Schwab ETF’s already (US Broad Market, Foreign stocks, REIT, etc). So I’m sitting here asking myself… Why I’m paying $150/year to use their service?? Granted, their system removes the emotion, and they send me rebalance alerts with detailed buy/sell instructions. But hey, I’m a smart guy… I can figure that out with a spreadsheet. 🙂 And if I greatly simplify my portfolio down to 2 or 3 ETF’s, it becomes dead simple to rebalance.
OK Jim, I can’t help over-thinking this stuff (it’s what I do!), so I have one more question. Sorry if it makes you cringe… I’m in the process of looking at my current portfolio allocation, and coming up with a plan to simplify & streamline it down into just 2 or 3 ETF’s based on what I’ve learned so far reading your stock series. I am currently invested in a bunch of low-cost index ETF’s across every asset class: bonds, US stocks, foreign stocks, foreign small cap, foreign emerging markets, commodities (gold), and REITs.
Here’s the question… With the market currently at an all time high, is it prudent to cash out a bunch of those ETF’s and consolidate the funds into the 2 or 3 ETF’s I plan to stick with long term? It seems to make more logical sense to at least wait for a little pullback to below all-time highs, and then make the switcharoo. But I know what you’re probably going to say…. That’s market timing, and nobody has a crystal ball. Right? I mean, what if the market didn’t pull back again for 5 years — I’d be sitting here waiting. But I’m actually scared that I might dump a huge chuck of money into one or two funds, then the market crashes again and doesn’t recover for years.
🙂
And in thinking it thru you’ve answered your own question. 😉
No matter when you make the move, you run that risk. Let’s say the market plunges 50% tomorrow. Would you invest then? What about the risk it could still plunge another 50%?
For more: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Also, I’ll shortly be posting on dollar cost averaging and touching on this a bit more.
Ugh! I hate it when you use those Jedi mind tricks on us! LOL 🙂 The Force is strong in you.
I’m only halfway through your stock series so I haven’t hit that post yet. I don’t plan to make any rash decisions until I’ve read every word (maybe twice). And I definitely look forward to your post on dollar cost averaging. You have officially been added to my Feedly as a “Must read” feed!
You’ll like the cartoon in this one, young skywalker….
https://jlcollinsnh.com/2012/01/06/index-funds/
As promised:
https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
Hello. I am 29 years old and I’m from the UK. I absorbed your stock series and seeing a new post pop up in my RSS reader is always a highlight.
Except for a modest company pension from a job I had for 3 years, I have no investments. I want to fix this. The UK has two nice tax (including capital gains)-wrappers for investments: ISAs (Individual Savings Account) and SIPPs (Self-Invested Person Pension). However, these are only available to UK residents. I have relocated to Japan, maybe for the short-term, maybe longer-term, I’m not sure yet. But I’ve found a job here so I’ll see how it goes for a while. Unfortunately my Japanese is nowhere near good enough to investigate the Japanese options yet, and if I open a taxable account in the UK now I’m not at all sure what the rules are. I also had a look at some of the various “international banking” options that offer tax-efficiency but they all seem to involve the bank putting its hand in your pockets and are designed for high-income expats, not modest individuals seeking a new lifestyle and trying to learn a language.
Most of the advice I read about people that are not living in their home-country says “talk to a financial advisor”, especially because the tax situation is impenetrable. My reluctance to do that is because a) I’m not sure I have enough to invest to interest a financial advisor and b) I’d be worried I wouldn’t find one that would understand (or be willing to advise on without a heavy fee) the low-cost index fund route.
Do you have any advice, or know of anybody that might be able to give advice, about investing for the little guy that as found himself offshore but still wants to build up some investments without getting bitten by heavy taxation?
In the mean time, I’m thinking some investments are better than no investments, even if they are taxable, so I may open a taxable UK investment account for the time being, just to get the ball rolling. It’ll probably earn more than savings sitting in cash.
Many thanks.
Welcome Adam!
Japan sound like a grand adventure and learning Japanese a formidable challenge. Certainly more so than this financial stuff. 🙂
I’m afraid your questions are a bit above my pay grade as I am unfamiliar with UK investing, let alone Japan. That said, there is an excellent guest post here and you might post your questions there for my international readers: https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
You are right to be cautious about advisors and most are only interested in people who have money for them to manage rather than those starting out. That said, you should be able to find one who can provide some guidance for an hourly fee. Just don’t enter into any long-term commitments. https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
Hope this helps!
Thank you for the response! I guess I have a lot to work out. I read the European article a few months ago but I’ve re-read it again and it’s very useful. I’m currently in the process of deciding between Vanguard funds or ETF’s, or another interesting fund a commenter posted, and bemoaning having to pay an extra 0.25% in platform fees to the broker on top of the TER (but at least they’re honest about it).
Anyway I’m not sure what I’ll be doing this time next year, if I end up over here for decades maybe I can be the jlcollinsnh Japan ambassador. 🙂
Welcome Ambassador!
Maybe once you are settled in you can set up a reader meet-up for me in Japan like the ones coming up in LA.
See the note at the end of this post: https://jlcollinsnh.com/2014/11/21/chautauqua-february-7-14-2015-escape-from-winter/
I’ve always wanted to visit…. 😉
Hello Jim!
I am fairly new to the concept of ‘early retirement’ and I’m so intrigued.
If you would, I would love some advice on just starting out on the road to FI.
I am 29 years old.
I have finally paid off my school debt and changed jobs to be making a comfortable (for me) salary of about 70k a year.
I have almost 10k is cash savings (which I plan on investing just as soon as I hit the 10k mark later this month) in which I would love a suggestion of where to begin.
I have 16k in 401k savings, and will fully fund a ROTH for the first time this year.
After the job switch a few months ago, I am currently saving a little over $2k/month (between retirement ($800) and cash ($1400) and plan on continuing on this savings path for the foreseeable future.
I do have a 12k car loan that I pay about $500 to every month as well. I should probably up this payment, but it is at 1.9%.
I would love to be able to quit work asap. I don’t dislike work, in fact, most of the time I enjoy my job, but the thought of doing it because I want to, not because I HAVE to, is freedom to me.
What are your thoughts on where I should be putting my money, if I am saving enough, and how I can become FI ASAP!!
Thank you for you always thoughtful and articulate comments.
-Meg
Welcome Meg…
Your line “I don’t dislike work, in fact, most of the time I enjoy my job, but the thought of doing it because I want to, not because I HAVE to, is freedom” sums up my feelings as well. 🙂
… and it is why you want F-you money: https://jlcollinsnh.com/2011/06/06/why-you-need-f-you-money/
If you want to “become FI ASAP!!” it is really very simple:
Save and invest more of your income. Your current rate is ~33%. I figure 50% is the minimum, but if you are serious about “ASAP”, you should be looking at ~80%.
At your current savings rate of ~33% you are ~21 years from FI
50% = ~14 years
80% = ~5 years
Check out the chart at the end of this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
Next, stop borrowing money. It is great that you paid off your student loans and a shame that you borrowed to buy a car. But going forward your mantra should be:
“If I can’t pay cash I can’t afford it and that cash must come from money left over after I fully fund my investments.”
That said, pay the minimum on your 1.9% loan now that you have it. Over time your investments should pay more.
Invest in stocks, specifically VTSAX and be prepared to ride out and ignore the wild ride. To understand why, read https://jlcollinsnh.com/stock-series/ from beginning to end.
Good luck and keep us posted!
Jim,
1: The generally accepted SWR is 4%. But I’ve read about that being misleading. One commentator/blogger talks about Sequence of Returns (not just Average Returns) being more important than average returns of the market . He also talks about High valuations giving low returns and vice versa.
Could you please share your thoughts on these as it relates to SWR? I’m not sure how we can foresee and plan for sequence and valuations?
2: You recommend Mutual Funds. I’ve read that Funds are not tax efficient and that the equivalent ETF’s would be the better investment. Can you tell me what I am missing since Vanguard offers both, Boggleheads recommends Funds, and Funds are the more popular investment vehicle.
Thank you
Vic
Hi Vic….
1. Here’s my take on the 4% rule: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
2. Tax efficiency has nothing to due with whether you hold funds or EFTs.
For instance, the ETF version of VTSAX is VTI: https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT Both hold exactly the same total stock market index portfolio and are identical in having very good tax efficiency.
Funds and ETFs both create taxable events when they pay dividends and capital gains distributions. Since these are taxable, the more a fund/ETF throws off, the less tax-efficient it is.
So, for instance, an actively managed fund/ETF that focuses on dividend paying stocks will be tax-inefficient. An index growth fund which tends to hold stocks that don’t pay dividends, would be more tax-efficient.
Index funds tend to be tax-efficient because they don’t trade stocks inside the fund like actively managed funds do. Trading inside a fund creates taxable capital gains distributions.
Hope this helps!
Hi Jim,
I’ve recently been spending all my free time reading your blog, especially the Stock Series. Although, I understand the majority of it and think I am on the right path, I still have a few questions, that I was hoping you may be able to answer for me.
I am 33 yr old, full time firefighter and side job worker, single and own a 3-family home in which I live in.
The other two apartments are rentals and bring in $2100/ month (25,200/yr) and my mortgage is $1950.00.
I still owe $260,000 on a 3.25% loan. $267/ month is PMI and I consider paying down this loan quicker so that I can get out of PMI. I need to get down to $218,000 and have a minimum of 38 months more to pay PMI.
This is my only “debt.”
I make about $90,000 pre-tax a year not including my rental income.
Currently 12% of my income goes directly to a retirement system which will provide me with a pension when I retire. (This is a state run retirement system, my best guess is I will retire with approx. a $70,000/yr pension)
10% goes towards a 457K with a relatively high expense ratio of 1.49% and is in a target date retirement fund. ($50,000 as of today)
I max out my Roth IRA through Vanguard (also a TDR fund) ($18,000 today).
My emergency fund is in Capital One Savings and I put $250/week in it. ($27,000 today).
I have short term goals of getting married and buying a single family house with my girlfriend/ soon to be wife. She also has about $20,000 in savings.
My basic question is the following;
1) Should I continue to put my extra income into savings because I will probably want it in the next 5 years for larger expenses? (Largest being a down payment)
Or should I open a taxable account with Vanguard using your suggested VTSAX? I understand the risk of losing money, but also the risk of leaving it in a savings account and missing larger opportunities.
2) Should I pay extra towards my mortgage so that in 38 months I no longer have to pay PMI? (If I do not, then it will take me an extra 5 yrs of PMI payments before I have the LTV needed to lose PMI).
3) Given my pension, 457K, Roth IRA, and investment property….do I have too many things tied into retirement? Is that even possible? Should I stop putting money into the 457K because of the high expense ratio?
Thanks for your help and guidance!
Craig
Welcome Craig…
I think you are on the right path, too. 😉
Let’s go thru your questions:
1. How sure are you that you’ll buy the house? How big an issue would it be if you had to push buying out a few years? How big a risk taker are you? 🙂
Basically stocks, VTSAX, are for money you want invested for decades. Money you plan to use within the next five years should be in short-term bonds or cash.
Of course, VTSAX has much greater upside potential than cash, the risk being it also has much greater downside in that five year window.
If you absolutely want the house, stick with cash. If you wouldn’t mind a delay if the market moved against you, you might consider VTSAX.
If you want to walk the middle ground, you can use Betterment to customize a portfolio to your risk/reward comfort level: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
2. Sounds like the PMI bugs you. It would me. 😉
Paying it off is a very conservative and sound way to invest your money. Personally, I’m a very aggressive investor so I’d deploy the money into VTSAX. But that’s me. Do whatever makes you feel most comfortable here.
3. This is kinda like asking, am I going to be too rich? Or, am I going to have too much freedom? 🙂
Personally, I never thought of my investments as “retirement” and the rest. They all added up to my net worth and I was always interested in building that.
You start by fully funding all the tax-advantaged accounts you have access to, including that high-fee 457K. Every dollar you don’t pay in tax is a dollar that can continue working and compounding for you.
Overall you seem to be doing great, thinking clearly about this stuff and asking the right questions.
One thing you didn’t ask about and that jumps out at me is your 27K emergency cash reserve. As a firefighter with a side gig, my guess is your earned income streams are very secure. Unless there are other factors you haven’t mentioned, you might consider making those cash $$$ work harder.
Congratulations to you and your girlfriend!
Jim,
Thanks so much for your quick reply! I am glad to hear you think I am on the right path…:)
Here are my answers to your questions:
1) My guess is we will be buying a house in less than 5 years and therefore some of my money would be better off in cash. At the end of your reply you mentioned my 27K emergency fund.
Quite honestly, it is more of a savings account for potential down payment than it is an emergency fund. I do have good job security and our hope is that we can save enough to put 20% down on a home. (Currently our goal is if each of us saves $40,000 we would have $80,000 for a down payment. We won’t buy unless we are in that situation).
Eventually I will have enough equity in my 3 family to get a home equity line in case of emergencies…
2) PMI does bug me, but maybe I shouldn’t care so much about it since my tenants are technically paying it for me anyways…I agree it is a conservative approach and that “extra” money could be better used some place else like Vanguard or Betterment.
3) As far as “retirement” is concerned, I understand that it is all about our net worth, but I can’t start using that money until I am 59 1/2, correct?
Therefore, I am putting 12% into a pension, 10% 457K, about 8% into Roth….which is 30% of my pay that can only help me when I am retired.
Also, are you suggesting that I should be putting even more money in my 457k before I do anything else? 10%=about 9,000/ yr…I believe I am allowed to do almost twice that.
I believe your suggestion in order is as follows:
1st-Max out my 457K= $17,500/ yr I believe
2nd-Max out Roth= $5500/ yr (Change from TRD to VTSAX)
3rd-Keep “savings” in cash for what I might need in next 5 years.
4th- Open Vanguard or Betterment taxable investment account with anything left over. (Hopefully there is something left over!!!)
Finally- Do not pay anything extra on my current mortgage.
Would you agree?
Again, thanks so much for your time and help! It is greatly appreciated.
Craig
Here is my basic hierarchy for deploying investment money:
1. Fund the 401k type plans to the full match.
2. Fully fund a deductible IRA, rather than the Roth. The reason is the money you don’t pay in taxes will compound for you over the decades.
3. Finish funding the 401K to the max.
4. Fund your taxable account with any money left.
So, applying this to your list:
1st-Max out my 457K= $17,500/ yr I believe
2nd-Max out a deductible IRA= $5500/ yr (Change from TRD to VTSAX)
3rd-Keep “savings” in cash for what I might need in next 5 years.
4th- Open Vanguard or Betterment taxable investment account with anything left over. (Hopefully there is something left over!!!)
Finally- Do not pay anything extra on my current mortgage.
The only change being to #2.
Regarding your point #3:
If your savings rate is robust enough to reach early FI, you should be able to fully fund your tax-advantaged account and your taxable account. The latter can provide the money you’ll need until you reach 59.5.
But even if you need to tap into your tax-advantaged accounts before that age, there are ways to avoid the penalties. See: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Thanks again for your help. This is all making a lot more sense now and that Roth conversion ladder is so interesting! I never realized just how much taxes can really affect your net worth.
I have one more question based on the information and suggestions you have made. If I follow your opinion (and I plan on it), what do I do about the $18,000 I have sitting in my Roth IRA. Obviously I have already paid taxes on that money, but have also made about $3k in interest. Should I keep it there? Can I transfer it to a traditional IRA? Or just take the money out of the Roth that I put in it? (In that case I would have to figure out what to do with the interest made.)
Thanks again for all your help!
Craig
Yep. Taxes are a big deal. It’s not just the money you give up paying them, it is all the money that money could have earned over the decades for you.
This is the same reason costs are so important. 1% seems like so little, but that money compounded over the decades is huge.
That said, I love Roths. I just don’t like having to pay tax on the money first. But once you own a Roth it is a wonderful thing. By all means, keep yours. It will grow forever tax free now.
In the distant future, when you are 70.5 and facing RMDs, you’ll love it all the more. 🙂
https://jlcollinsnh.com/2014/07/27/stocks-part-xxiv-rmds-the-ugly-surprise-at-the-end-of-the-tax-deferred-rainbow/
You might want to check out my conversations with Erik and Sylvia below.
Hi Jim
I’m a huge fan of your blog and really appreciate your sharing of information. It’s been so helpful in my understanding of investing.
I was wondering what your take on “value weighted indexing” is (i.e. using the Schiller index to inform a time to purchase stocks) . On the one hand it seems like an attempt to time the market, but then again it also seems to make some sense in terms of seeking out a sale.
If you’ve already commented on this please feel free to point me to it on the blog. Otherwise I’d love to hear your thoughts.
Again thank you for all your contributions. Much appreciated!!
Hi Travis…
Welcome and thanks for your kind words.
Let’s start with two articles:
http://valueweightedindex.com
http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/index-investing/is-it-worth-making-the-shift-to-fundamental-indexes/article11446205/?service=print
These describe the new variations on indexing and both indicate that these are indeed a better way. I’m not so sure.
They drift dangerously close to market timing and/or stock picking for my tastes. They begin to look a lot like active management and seem to sport the higher costs that go along. (If you decide to go this route, I’d be very careful of those costs.)
Their 20-year record seems impressive, but then other active strategies have done well for a time before reverting to the mean.
Meanwhile, classic indexing has stood the test of time and works splendidly. I’d not ready to give that up in “chasing returns.”
Finally, Jack Bogle has called these things “witchcraft” — not exactly a ringing endorsement from the guy who founded Vanguard, invented the modern index fund and has been immersed in the concepts for some 64+ years now.
Thanks so much for your feedback! And keep up the great work you’re doing 🙂
best
Travis
And thanks to you, Travis…
for your follow-up note.
It is always nice to know that the person asking actually read my response. 🙂
Hi Jim,
I need some advice/suggestions. We are a family of 3, I’m 36, my wifey is 32 (stay at home mom) and our son is 4 years old. I’m working as W2 contractor with no 401k option. My annual income ranges between 160-180K in Chicago area.
I’m currently saving 25-30% of after tax and 5%-7% in IRA. I’m planning to work for another 20 years. Till now I have only saved 100K inCD and 25K in IRA.
What approach should I take to reduce my tax burden. Should I start paying my mortgage fast ($300K). I would appreciate your reply.
Welcome Erik…
Being self employed you have some wonderful options.
You can, and should, set up a SEP IRA and for 2014 the contribution limit is a whopping $52,000. Far better than the $5500 for a regular IRA. This will help get you started:
http://www.irs.gov/Retirement-Plans/Plan-Sponsor/Simplified-Employee-Pension-Plan-(SEP)
Your savings rate and income should allow you to fully fund it, or close to it. I would, and I’d open it with Vanguard and put it in VTSAX. To fully understand why I say this, and the risks this entails, if you haven’t already please read my stock series: https://jlcollinsnh.com/stock-series/
If you decide this is what you want to do, the folks at Vanguard can walk you thru the process: https://personal.vanguard.com/us/openaccount?CompLocation=Home&Component=OpenAccntLnk
Note the phone number in the box on the right.
As for paying off your mortgage, that depends on your interest rate and your risk tolerance. You should also consider that, at your income, your mortgage interest is providing a nice deduction.
Here are some rough guidelines:
If your interest rate is less than 4%, keep the mortgage.
Between 4-5%, it depends on your preference.
Over 5%, seriously consider paying it off. Or refinancing.
Finally, that 100k in your CD is dying a slow death due to inflation. Unless you have a need for such a large cash position, you might want to consider making those $$$ work harder. Again, read the Stock Series.
At your age, with your income and with your savings rate, you have the potential to do very, very well for yourself and your family.
Good luck!
Thanks Jim. The only problem is I can not open SEP-IRA because of W2 contract not 1099 contractor. 🙁
My husband is 68. He did some consulting this year and should be able to max out a SEP. We were planning on adding to our ROTHS until I read the comment you made about the 2014 SEP contribution limit. Since my husband will have to start taking distribution from his IRA in a couple of years is the SEP worth doing or should we just both add to our ROTHS? If he does a SEP can I do my ROTH? I do not have any earned income this year. Can we both do a ROTH even if we max out the SEP. We just hadn’t thought about the SEP this year because of our age. Thanks for all the information.
Hi Sylvia…
Erik in the conversation above is only 36. He has decades ahead for his SEP to grow and compound.
At 68 your husband is only three short years from having to take Required Minimum Distributions (RMDs) from his tax-advantaged accounts. Except for his Roth. And at his age, and mine, Roths are where we want to be.
I discuss my own strategy in points 8-11 in this post: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
For more on RMDs: https://jlcollinsnh.com/2014/07/27/stocks-part-xxiv-rmds-the-ugly-surprise-at-the-end-of-the-tax-deferred-rainbow/
Without knowing much more about your tax bracket now and projected for age 70.5 and how much you hold in tax-advantaged accounts, I can’t suggest what you should do.
But you are probably correct to be focused on contributing to your Roths at this stage.
And yes, should you decide it makes sense, you could contribute to your Roth while he contributes to his SEP.
Thanks Jim, that is what I thought, but after you mentioned the SEP tonight I started second guessing myself since $52,000 in a tax deferred account sounds good. We will stick with the ROTHS.
Indeed it does!
One more reason to wish we were still 30-something. 😉
Jim,
My daughter has been reading your articles and blog for quite some time now and of course has gotten me to read too.
She travels the world for her career (Director of International Admissions at a local College, is unmarried and lives with us because it makes sense as she is out of the country more than a third of the year. About 4 weeks ago she was at the kitchen table looking over her savings and contemplating getting her Doctorate in Educational Leadership when she asked her mother and I this question, “ If it were you, would you work toward getting your doctorate or being “FI” in 7 years?” After asking her what “FI” meant we said without hesitation, “FI!”
The current President of her college is mentoring my daughter to help her move forward in her career which is allowing her to make these great decisions. However they couldn’t happen if she did not know how to invest her money. In addition, she has found a way to begin her Doctorate in January while still putting money in three separate places on her way to financial independence by 45, nice!
She is doing exactly as you coach her and feels really good about her future.
On another note, because of her travel she has found ways to help our family amass so many air miles over the past 4 years it has enabled us to do what we call aspirational travel with her and her sister. When she becomes FI my wife and I will be retired and we’ll travel even more, did I say thank you enough? 🙂
I wanted you to know what a difference you are making in people’s lives, especially my daughters and now our families lives. Oh, and I’ve sent your link to quite a few people too!
Thank you again from a proud father,
SW
Hi SCW…
Thanks for taking the time to write and for sharing your daughter’s story with me. Sounds like she’s off to a wonderful start and that’s exactly the kind of job I wish I’d had back in the day!
You and she might find this post from my pal MF of interest: http://www.madfientist.com/free-ivy-league-degree/
Very cool that you, she and your wife will all “retire” at the same time!
My best to you all and give your daughter a high-five from me.
Jim – Have you heard that Tony Robbins has just released a new book on money, specifically focusing on financial security, independence, and freedom? (I put a link to the e-book via Amazon in the website area).
I heard about the book through the podcast interviews that James Altucher and Tim Ferriss recently had with Tony Robbins. I’ve read through the first few chapters so far, and it seems like it follows the simple principles for wealth (i.e. take as much as you can off the top for automatic investments so you don’t miss it, then let compounding take care of the rest). I’m particularly interested in the interviews with John Bogle and Warren Buffett.
If you have a chance to read through it, I’d be interested in your thoughts on Tony’s plan as well what the various investing heavyweights he interviews recommend that the average person do to succeed in the money game. If you like, I’ll follow up with you after I’ve completed reading the book.
PS – Thanks for the Tuft and Needle post. My wife and I will most likely get their mattresses soon. Have a meaningful Thanksgiving.
Hi Tom…
I have heard. With all the publicity it’s been hard not to. 🙂
But I haven’t read it.
I have listened to the Altucher interview: http://www.jamesaltucher.com/2014/11/robbins/
I confess I find Tony tough to take. He can’t answer a question without giving a speech and James (who I enjoy listening to) was a bit overwhelmed and drowned out. Tony’s relentless bragging and name dropping gets under my skin, plus I have the nagging sensation that he really doesn’t quite understand the concepts he’s discussing. Finally, I’m not sure a hedge fund manager who has made billions charging high fees is the best financial person to put on a pedestal.
Thanks, but I’ll take Jack Bogle for that role: https://jlcollinsnh.com/2014/11/03/jack-bogle-and-the-presidential-medal-of-honor/
So, clearly I’m not the most objective commentator. 😉
That said, Kathryn Cicoletti is someone whose irreverent views I’ve grown to respect and she is “kindly calling bs on most of what Tony Robbins says”:
http://kathryncicoletti.tumblr.com/post/103145906441/kindly-calling-bs-on-most-of-what-tony-robbins-says
In that piece she says the hedge fund manager’s secret sauce is
The All Weather Portfolio that looks like this:
Stocks: 30%
Bonds: 55%
Commodities: 15%
Anyone who has read thru my stock series (button at the top of this page) won’t be surprised that this strikes me as terrible advice.
For anyone interested, here’s a link:
By way of full disclosure, if you click on that link and buy the book, or anything else at Amazon while you are there, this blog will earn a small commission. Prices to you will be the same.
That said, while I would be interested in reading it, personally I wouldn’t pay for it. Partially because of what I said above, but mostly because I get my books from the library. Unfortunately, they don’t have it. Want to send me yours when you’re done? 🙂
Anyway, those are my thoughts not having read it.
If you are willing to follow up with a review once your done, please do post it here. Especially, although not only, if you find it has more value than I expect. Much appreciated.
Glad you found the T&N post useful: https://jlcollinsnh.com/2014/10/26/tuff-needle-a-better-path-to-sleep/
We still very much enjoy ours.
Have a wonderful Thanksgiving!
Hi Jim,
When I was 43 I was on track to be a millionaire by 62, but at age 54 I made an unwise decision in regards to my career and went belly up (no bankruptcy just lost house and all but 56K in my IRA in 2007). We/I have come back from that (that’s a story in itself) to now having 100% of my money in essentially 3 stocks, Apple $227k, Comcast $227k and Alibaba 55K and some cash for a total of, round numbers $540k. As you can see I have a high tolerance for risk, not proud of it but it has helped me make a good come back. After reading many of your articles I am thinking about selling ½ my Comcast and investing in the VTSAX with the proceeds (IRA money only). My wife will retire in 6 years with about 200k.
I bring this up because as much as I read about not timing the market it sure seems to me a correction is imminent. Any thoughts on telling me to simply do it now, or what would you tell me other than to do this with 75% of my stock (not trying to put words in your mouth) instead of just half of my one position?
Any input would be welcomed.
SW
Hi SCW…
People have been saying a correction is imminent for the last five years or so. One of these days they’ll be right. I have no idea whether that will be tomorrow or another five years from now. Neither does anybody else.
One of the cornerstones of my approach is that since we can’t predict such things we need to be tough enough to endure them when they come. Because they will.
But if we are investing for the long term, and that’s the only way to invest, it doesn’t matter. It’s like I tell my daughter, she should expect at least one 2007-8 level melt-down during her investing life and many more -20% bear markets.
Unless you have a crystal ball, no one can avoid them. It is the two steps forward one back price we have to pay to harness the market’s wealth building potential.
I will say holding Apple, Comcast and Alibaba is far riskier than VTSAX. If you are nervous about moving into VTSAX just before a correction you should be terrified holding just those. 🙂
The way to deal with risk is with your asset allocation, not market timing. So decide what allocation works for your risk tolerance and invest accordingly.
For more:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
BTW, I applaud you for taking whatever risk it was that derailed you for a bit. I’ve done the same and while the setback was painful I’ve never regretted trying.
Hope this helps!
Jim,
Thanks for taking the time to contemplate and answer me regarding market timing. I guess I’m still a little confused, here’s why. If I read correctly the program you espouse, and I like a lot, is about is 96% fool proof. How do I know I’m not getting in on the next year when it won’t make sense to invest this way if I buy in at a high point? Am I making sense?
SW
What you are referring to is the 4% rule: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
The 96% success rate refers to when you start living off your investments. If you happen to retire just before a major collapse, and you retired with the minimum you needed, you’d have to adjust your spending and/or generate some new income. Not unlike suddenly losing a job.
If, as I think we were, we are talking about investing a lump sum; even if the market plunges right after you should have years for it to recover. Plus, presumably, you’d be investing new money from your earnings.
For more:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
Mr. Collins,
First, thank you so much for this blog. It has completely changed not only the way I think about saving and investing but also the way I act with my money. I only wish that I had discovered you earlier in life as I’m sure you hear a lot.
My main question concerns Roth IRAs and, specifically, how to begin with them once you have established accounts with significant balances. I’ll describe my financial situation and perhaps it will become more clear what I mean.
46 year old single female, 100k + a year. I contribute 20% of this income to my 401k at work that is NOT matched (unfortunately) by my company. The main reason I do this is to help on taxes though I still pay (no kids, only own a house). I max this out every year by around November. Right now, this balance is sitting at ~24k because its at 100% stocks in their index fund options. (I just started this job a year ago)
I also have a traditional IRA with Vanguard that I rolled over my prior 401k into. The VTSAX account you recommend here. This balance is at ~225k.
Other assets: Savings account, 10k. Taxable Vanguard account (again, VTSAX) 20k that I contribute regularly too but in rather small amounts. But, hey, it grows slowly. I recognize you will probably say, why the large savings account. But as a single female, I confess, it’s my “what if I’m laid off” security blanket.
Debt: Mortgage. 240k. I live in Washington DC metro. It’s hard for me to fathom ever paying this off on my own short of selling the house. Car payment. 10k. It’s my intention to never have another car payment once I pay this one off.
I’ve read your entries about the Roth IRAs and how, once retired, you start rolling more and more of your money (the forced withdrawals) over into the Roths. My question is: Do you suggest I open yet another account I contribute to in the form of a small Roth? Because, every time I’ve asked a financial adviser about converting my traditional IRA, the taxes I would have to pay on that account right now are astronomical and I shy away from that.
Hi Tammy…
Sounds like you are moving in the right direction on all fronts.
With your income and tax bracket, I suggest you continue to fund your deductible IRA and your 401k. Every dollar you don’t pay in tax is a dollar that can continue working and compounding for you.
This, of course, means you won’t be able to fund a Roth. And you are right, converting your IRA to a Roth would be a taxable event you want to avoid.
Shifting money to a Roth is something you only want to do when your income drops and you are in a very low tax bracket. At 46, unless you plan to retire early, this is not something you need to worry about now.
Make sense?
For more:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
https://jlcollinsnh.com/2014/07/27/stocks-part-xxiv-rmds-the-ugly-surprise-at-the-end-of-the-tax-deferred-rainbow/
Thanks very much for your response.
It does make sense upon retirement.
I guess I had it in my head that I had to have this Roth set up prior to retirement because converting that [traditional IRA] account after retirement was only going to take a larger chunk of it to taxes than doing so now because it was going to have grown even more.
I wasn’t thinking that I could just open a new Roth after I retire and begin funneling the withdrawals to it then (at least I think that’s what you are saying here).
Thanks again for the comment.
Hi Tammy…
You can open your Roth anytime to transfer assets to it from your regular IRA. To open it with contributions you need earned income but, again, with much earned income you want the tax advantage of a deductible IRA.
Hopefully, your IRA will grow substantially over time (that’s what you want!) and ultimately you will have to pay tax when you begin withdrawals; the thorn on the rose, if you will. 🙂
Hi Jim ~
I’m (really) looking forward to meeting you at the Chataqua in Feb – AND – all the other like-minded folks that I anticipate will be there.
I currently have a self-directed 401K at Schwab: funds on both the 401K and the ROTH401K side of things.
I have an option to switch-over to Vanguard, however VTSAX is very similar to my SWTSX which I currently have some of my 401K holdings invested in.
I haven’t had any problems with Schwab – though I have had this account for only 2 years – but, the more I read your blog, MMM, JD’s, the more I wonder if I would be better off with my money being housed at Vanguard (?).
Next year, we are planning on using the pre-tax (401K) side of things, as our ROTH401K monies will (hopefully) be put to another use (another story, another time).
Whether we stay at Schwab, or go Vanguard, we will be attempting to each contribute $18K + take the profit sharing option at the end of 2015, so as to try to really sock some funds away.
Additional info:
I’m 43 (as is my wife), and we have a (almost) 3 year old. We make good money, but it took awhile with getting a career started, deciding to go to graduate school, a couple of lower paying positions after grad school…..I just feel ‘at sea’ with my financial picture.
We are currently renting (took a job in a new place, and not sure if we will stay ‘forever’) – Excellent credit…one remaining student loan with an ultra-low interest rate (0.625% on $17K) …no personal mortgage…one (cash-flow) rental property in our previous state…no crazy spending habits…utilize business to write-off multiple expenses.
If you would like to offer some insight, I am all ears.
Thank You,
Todd
Hi Todd…
Great to hear you’ll be joining us for the Chautauqua. I look forward to meeting you and hanging out. It really is a great time!
I have no experience with Schwab, but people who use them seem to like it, so if you do it probably won’t hurt to stay with them.
That said, I have a strong preference for Vanguard as it is the only investment company whose interests are aligned with their shareholders. It is where I keep my investments for the reasons I discuss here: https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
Other than that, it sounds like you are moving in the right direction and at 43 you have lots of time to make this investing stuff work.
Wow, what a low rate on the student loan. Pay it off slowly. 🙂
As for renting, I think it is a sound choice. In my view, most often owning a house is an expensive indulgence. Fine if that’s what you want to indulge in.
But if not, it pays to run the numbers to see just what it costs v. renting. Here are some of my posts on this: https://jlcollinsnh.com/category/real-estate-2/
Hope this helps!
See you in February!
Hi Mr. Collins,
Would you mind reading and commenting on this MarketWatch piece today critiquing Vanguard Total Stock Market Index fund? It’s not as hyperbolic as the subject line suggests, thankfully, and it didn’t change my overall thinking on keeping investing simple and easy. Still, there’s something to be gained if one doesn’t mind complicating it a bit by throwing in a value index fund here and small-cap index fund there to suit their own investment profile (such us risk tolerance and investment stage they are in, etc.)?
I’m almost all in VTSAX, except ~10% individual stocks bought in my pre-jlcollins-blog life :), and am relatively stoic during market downturns. So I’m toying with putting say, 10%, into a Vanguard value index, but would like to hear your thoughts first. Thanks!
Here’s the article link:
http://www.marketwatch.com/story/why-vanguard-total-stock-market-isnt-the-best-fund-in-the-fleet-2014-12-03
Sorry Jian…
…reading and commenting on the ideas of others is not something I chose to do.
Please read the post above introducing these comments and answers.
Just curious on your thoughts of vtsax vs vsmax, just curious. With my limited knowledge I am assuming more risk with the small caps=more reward in the long run. No idea if this is actually true, wanted your thoughts.
I haven’t looked in awhile, but as I recall, over time small cap stocks do offer a slight performance advantage over long periods of time.
The problem is, they go in and out of fashion and they can also have long periods of underperformance. So for this approach to outperform VTSAX, you’ll have to be sure you are absolutely committed to it over the decades.
Plus, with VSMAX you lose the international exposure of US large caps as I discuss here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
I prefer the broader-based all-weather approach of VTSAX.
Dear The Almighty Jim,
I haven’t commented in a loooong time but think of you often. You are always in my financial heart.
But, I need you…what can you tell me on how to get out of a variable annuity (Metlife)?
I have learned so much from you and the Amazing Mad Fientist that i’m now able to help some of my family and friends. I must say i’m quite impressed with myself!
I pointed out to my step father his 401K which is through Paychex is raping him and was able to show and explain why. I was also able to look at his statements from his Financial Planner and happy to see she is good and honest and had him in non commission stuff.
But, my dearest of friends who is one of the most genuine people I have met, mentioned one day she invests with Merrill Lynch. My immediate action was YIKES. Initially, I didn’t say anything because she wasn’t asking for my input.
Recently I watched Inside Job and was BLOWN away! I knew those big banks were crooked but didn’t realize just how evil they are. So it came up one day and I asked her Why does she invest with ML?
She replied “because i’m lazy and I don’t want to think about money but i’m thinking of switching over to Chase so all my accounts will be in one place. I don’t have time to look at it or manage it”. (It is true, she is a full time volunteer and does the good work of 10 different people).
I told her Please don’t, Chase is just as evil. (She is also one of those overly social responsible/conscious types. MAJOR left wing. She even spoke at the DNC!)
She gave me her ML papers and said if you want to look at it and tell me what you think I should do that’s fine. Looking at it her TV is $394K with $195K held in Metlife series L VA.
Ugh… Doesn’t everyone know annuities not good, variable annuity very bad!?!?!
She doesn’t know when she purchased it, she thinks around 2007, she is 58 years old. The other stuff she has with ML is mostly individual stocks, some REIT, some MF but not much.
I probably don’t have to state the obvious but they are NOT Vanguard REIT or MF.
She wants me to go to her visit with the Chase people (the appt was already set up). I am curious to see what they will say but I also think she should talk with a fee based FA. I’ve heard from 2 separate sources to look through the Garret Network for one.
Thoughts???
I would refer her to my step fathers but his is in NY and we live in FL. If you can reference anything you may have written about Annuities i’d be grateful. I thought I had read something about them somewhere on your site but I did a search and nothing came up.
I REALLY want to help my friend and give her the best advice I can which right now is sell everything and put it all in VTSAX but I want to know if there are other options to minimize taxes, losses, and penalties.
Hi Krissie,
I’ll throw in my two cents. Garret Network would be a good place to look for her. Another option to search for a financial planner/advisor would be NAPFA.org. It’s an association of fee-only financial advisors and you can do a search by zip code to see if there’s a member close to you/your friend. Another suggestion if you’re interested is to head over the Bogleheads forum and post the situation there and have them weigh in. They give advice on individuals situations often and a lot of smart people hang out over there. Lastly, you could ask your father in laws advisor if they would be willing to do a skype session. And good for you for helping people out! Jim is certainly an inspiration to his readers.
Matt
Thanks Matt, that’s an excellent idea. I love the bogleheads forums. Wish I had more time to read and learn from those wonderful minds…
Hi Krissie…
Always a pleasure to hear from you, although I did take the liberty of breaking your message up into more readable paragraphs. I’m afraid my tired old eyes can no longer handle long, dense paragraphs. 😉
I haven’t written about annuities, other than maybe in response to a question or two.
I’m not a fan for reasons that have to do with fees, giving up your capital and believing there are better, less expensive options. But I know little to nothing about getting out of them.
In addition to Matt’s excellent suggestions, you might give Vanguard a call. Let them know you’d like to move the annuity over there and/or cash out of it. They should be able to help.
Good luck!
Thanks Jim, I did post on bogleheads to hear what they have to say and I was going to call Vanguard as well. If I find out anything i’ll update in a couple of weeks on the situation.
On another note, I was reading one of your above comments on the Tony Robbins book. I did buy it through Kindle and I am happy to lend it to you. Surely, you aren’t such a relic you don’t have a kindle or kindle reader app??? I started it, liked it, want to finish but it will be awhile beofre I get back to it. I also listned to a 3 1/2 hr podcast review on it from Radical Personal Finance which gave me the cliff notes version.
Ha!
That’s exactly the kind of Kindle-less relic I am. 😉
Hi. I’m interested in the lunch in Glendale CA. How do I get into contact with the organizers? Thanks.
Great JK…
I’ll look forward to meeting you!
PM sent.
Hi Jim,
I’ve been a regular reader for a couple years. Thanks for the insights provided. I couldn’t find how to make a comment on the blog so am posting it here.
Regarding the micro financing idea. I have donated to FINCA in the past for several years. Then my daughter suggested Kiva and I in particular wanted to make loans in Ecuador for personal reasons. (our son-in-law is from there and our daughter devoted 3 years to the Peace Corps in that country). However when I investigated Kiva’s loans I found they charge 30-50% interest (my recollection, but I know it seemed exorbitant). When I questioned them they replied that was the going rate and may have implied that it cost them that much to operate the program. It was 2-3 years ago so don’t remember all details clearly. I still found it too much and didn’t contribute.
I further researched the general micro-finance issue and found conflicting opinions. While it just seems like a “no brainer” to give a hand up rather than a hand out the case was made that far more good could be done with donations. Mosquito nets save more lives than loaning money for buying cows or sewing machines or small retail stocks. Subsequently I have donated regularly to MSF (Doctors without borders) because they will go almost anywhere to help people medically. What are your thoughts?
Regards, ael
Welcome ael…
This really does belong on the Kiva post: https://jlcollinsnh.com/2014/12/09/micro-lending-with-kiva/
If you go to it and scroll to the very bottom, past all the comments, you’ll find a box to post your comment, just like you did for here.
In those comments you’ll also find a very lively conversation regarding the very issues you raise, including my own thoughts on the matter. Putting your comment above there will allow others interested in this to see it.
Thanks!
Hi Jim,
May I call you Jim? I’ve I came across your site from Mr. Money Mustache and love your site! I’ve been noodling what to do with my far-too-expensive financial adviser and his pretty well-performing … (but still, those fees!) .. fund selections.
Long story short, I’m going your (and MMM’s) route. I’m about to massively simplify and move the whole thing over to Vanguard. (In fact, I’ve already done that part. Now we’re ready to start shifting assets.)
Here’s the thing, though. I have substantial holdings in a taxable account. And I think I am going to want to treat my tax-advantaged and taxable accounts separately for purposes of asset allocation calculations. That’s because I’m using them for different purposes. The IRA is meant to work with my 401(k) to fund my (drumroll…) retirement. The taxable account is my screw-you money (although I enjoy my job) and is also meant to fund my dream of learning to fly.
That means that I’m going to need to hold at least some bonds in my taxable portfolio.
I don’t like bonds. But I’ve come to terms with the need to have some, Here’s my question: VBLTX would be where I would want to go, but I gather that it’s not all that tax-efficient for a holding in a taxable account (Or maybe I gather wrong. Is that actually true?). I’m thinking of putting all of the bond portion for my taxable-account holdings into VBILX instead. Is that where you would go? I’d really like to hear your take on this.
Thanks!
Hi Matt,
Bonds are considered tax inefficient because they pay taxable interest. Using VBILX rather than VBTLX doesn’t help in this regard.
However, it is an interesting choice for other reasons.
There is an argument to be made that a total bond market fund, like VBTLX, really averages out to being an intermediate bond fund like VBILX. While VBILX has a slightly higher ER of .10% v. .08%, it also pays more interest: 2.46% v. 2.07%.
This is why I personally use VFIDX, which has an ER of .10% and pays out 2.71%. But it has a 50K minimum to open. https://jlcollinsnh.com/2012/10/01/stocks-part-xii-bonds-and-a-bit-on-reits/
You might consider a tax-exempt municipal bond fund for your taxable account. But these pay less interest, so you need to be in a fairly high tax bracket and/or high tax state to make them worth it.
Personally, even though you have different goals for your tax-advantaged and taxable accounts, for asset allocation purposes I would consider them together and keep the bonds on the tax-advantaged side.
Hope this helps!
Hi Jim,
Oh, bugger. First time I ever ask a question on this blog, and I get the question wrong!
What I meant to ask about was you thoughts on VWITX for that purpose.
But I take your larger point that the right thing to do is to it keep bonds in the tax-advantaged bucket.
Thanks!
No worries, Matt…
and if you are going to hold bonds in your taxable account VWITX is a fine choice.
My only suggestion would be that, if you live in a high tax state, you look for a muni fund exempt from your state taxes as well.
Best wishes for a healthy and happy 2015. God bless you and yours.
Thank you, Matt!
And a healthy, happy and prosperous New Year to you and yours!
Hi Mr. Collins,
My name is Frank and I will be turning 18 years old in January. I already have approximately $500 invested in a mutual fund through E-Trade that my Dad set up for me but as soon as I turn 18, I want to increase my initial investment to $1000 and invest in index funds like you recommend. However, most investment firms are not so friendly to investors with so little money like me. Vanguard, for example has initial minimum investments for their funds at $3000 and at $1000 for their target date funds only. I have a few options but I don’t know which one to choose.
1. Invest in Vanguard Target Retirement 2060 Fund. This fund has a $1000 initial minimum investment and a $100 minimum additional investment.
2. Invest in Vanguard ETFs most likely just VTI to keep it simple. This ETF sits just above $100 per share.
3. Open a Betterment Account but get charged $3/month because I will not have $10,000 invested or be able to commit to a $100/month auto-deposit.
I have a summer job caddying at a local country club and get paid weekly during the summer. The only reason I am considering Betterment is because I would be able to have all of my money working for me instead of it sitting in my savings account until I accumulate $100 or so to buy another share of an ETF or invest more into the Target Retirement Fund. However, the $3/month fee seems steep.
I want all of my money to be working for me, not sitting in a bank account.
What do you recommend?
Merry Christmas
Thank you,
Frank
Hi Frank…
For a guy not yet 18 you have an impressive handle on this stuff. I say that not just to compliment you, although I mean it as such, but because it influences my thoughts for you.
First, if you haven’t already, I urge you to read the full stock series here. It is important to understand the playing field.
Second, with that in mind, I’d suggest that your ultimate goal is to get set up in VTSAX (total stock market index fund – Admiral Shares). From there you’ll just keep adding as much as you can whenever you can, ignoring the market ups and downs.
Starting at your age and with the decades ahead, your results should be formidable.
So, how to get from where you are to the 10k needed for VTSAX?
In truth, any of the three options you propose will work just fine and your assessment of them is spot on. Since I’m going to suggest #1 or #2, let’s look at each in reverse order.
#3. Betterment. While I like Betterment and see it as useful in some cases – https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/ – the costs are higher. For someone like you, who clearly has an interest and understanding of investing, Vanguard offers lower costs. Plus, ultimately moving into VTSAX will be a bit easier.
#2. VTI is Vanguard’s ETF version of VTSAX and it even has the same rock-bottom .05% ER. Further, you can open a Vanguard brokerage account and buy/sell shares anytime, commission free. Once you hit 10k you could roll into VTSAX or you could just keep building your VTI.
#1. Vanguard Target Retirement 2060 (VTTSX) is a “fund of funds” and it holds four Vanguard funds: Total and international in bonds and stocks. It’s ER of .18% is low, but much higher than that of VTSAX or VTI. If you go this route, I’d use it to get started. Once you hit 3k you can move to VTSMX, the “investor shares” version of VTSAX, with a .17% ER. Once you reach 10k there, move into VTSAX, which Vanguard should do automatically.
Let’s talk a little about taxes.
Capital gains taxes only kick in once you reach the 25% tax bracket on earned income. Below that, the cap gain rate is zero. My guess is that you’ll reach the 10k invested level before you are in the 25% bracket, so all the changes on the way will be tax free.
But let’s look quickly at how it works just in case:
VTI to VTSAX will be a taxable event.
VTTSX to VTSMX will be a taxable event. VTSMX to VTSAX is not.
Since the step from VTI @ $1000 to VTSAX @ $10,000 is larger, the potential for taxes is higher.
The step from VTTSX @ $1000 to VTSMX @ $3,000 is smaller, the potiential for taxes is less.
But these are really small considerations and either path will work just fine. The fact that you are starting so early is far more important and powerful.
Finally, I wouldn’t worry about your money sitting in the bank until it reaches the $100 level to transfer. Think of it as motivation to save more and get there sooner each time. 😉
Hope this helps!
Have a very Merry Christmas and here’s to many, many more prosperous New Years ahead!
Hi Jim,
I currently have a Vanguard Roth IRA with 4 funds: Wellington, Windsor II, International Growth and International Value. These are all actively managed funds and the costs of the latter two funds are a little high, at least compared to index funds. They seem to be solid funds though. I’m wondering what Vanguard funds you may recommend as ideal for a Roth IRA.
Thanks! And thanks for all of the valuable information that you provide on your website.
Hi Ricki…
My daughter, wife & I all have our Roth IRAs in VTSAX.
Jim,
Thanks so much for your incredible website. I basically spent the whole weekend reading your incredible Stock Series. I am 30 years old I’m going to be starting my first real job as a physician (about 250k earnings pretax) and plan on beginning investing my way towards FI. I am also a practicing muslim so I have an obligation to avoid bonds as they use direct interest. Stocks however are fine. This presents me with a dilemma.
I plan on putting 1/3rd of my incoming into tax advantaged/taxable accounts and was planning on just going 100% VTSAX just as you recommended. But towards the end of my career (around 30 years from now), I plan on slowing down tremendously and go towards the “wealth preservation” stage of my career. Unfortunately, I cannot do bonds as described above.
I was considering what options you might have for me to put in a 70/30 VTSAX/??? to reduce volatility. I was considering Vanguard global minimum volatility funds. I’m still not sure how to go about this, but if you have any recommendations or thoughts on this I would greatly appreciate it.
One other thing. As a muslim, we are required to give 2.5% of our saved income to charity every year. I was considering making a charitable fund as you had and shifting money from our wealth to the fund to the charity to avoid taxes. Do you think this is a good idea? Thanks so much for the awesome site. Look forward to future posts.
Welcome Shah…
Glad you found your way here and thanks for the kind words.
In needing to do without bonds, you pose an interesting question as to how to smooth the ride once you retire 30 years from now. My, but you are planning ahead! 🙂
Here are a few options for replacing the bonds that occur to me:
1. You could simply hold cash, perhaps in your checking account to avoid interest. Perhaps 2-3 years of living expenses you could tap during those times the market is plunging. During the good times you draw from VTSAX. I describe this at the end of this post: https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
2. REITS provide a bond-like payment but as dividends rather than interest. VGSLX: https://personal.vanguard.com/us/funds/snapshot?FundId=5123&FundIntExt=INT
3. Dividend paying stocks. These tend to be large, blue chip companies. While they’ll offer less growth, the dividends serve to make them a bit less volatile than VTSAX.
VDADX: https://personal.vanguard.com/us/funds/snapshot?FundId=5702&FundIntExt=INT
VHDYX: https://personal.vanguard.com/us/funds/snapshot?FundId=0623&FundIntExt=INT
4. You could just continue to hold VTSAX, especially if you are willing to draw less than 4% when the market turns down. In fact, come the next market plunge, I just might sell my bond fund and go back into all VTSAX myself. With interest rates this low, I see risk in bonds. Plus stocks have far greater potential and I don’t mind the volatility.
Of course, options 2 & 3 very very close to holding all stocks. You might think of these as middle options, #1 as the most conservative and #4 as the most aggressive.
As for your charitable giving, I think the Vanguard Charitable Endowment Program is a great option, for the reasons I describe here: https://jlcollinsnh.com/2012/02/08/how-to-give-like-a-billionaire/
Of course, part of the benefit is that you can make a contribution in one year, take the tax deduction, and then dole it out to your charities over the next few years. If Islam requires you to give 2.5% of your net worth each year, I’m not sure this would be acceptable. But you’re the better judge of that.
Hope this helps!
Now, about this mole I have…. 😉
Hey Jim,
After having a firm grasp on the lifestyle and investing principles, I think my situation may still be unique enough to warrant your personal touch. A little background.
I have always had early retirement as a pipe dream, and not knowing just how possible it was, opted instead to find a line of work that would allow me to live the lifestyle I wanted and work as little as possible to maintain it.
I’m truly surprised, in all of the blogs of this type, I don’t read more (or anything, really) about the benefits of the service industry for this kind of lifestyle design. Wages are great (I currently average $20-$25 an hour, and at least in my city, this is in the middle tier), but more importantly, I can pretty much work as much or as little as possible and still have a job.
I’ve saved money and taken a month off at a time, several times, to visit friends in other cities, and do whatever hell else I wanted, essentially living in semi-retirement. But this is not about extolling the virtues of waiting/bar tending, so I’ll continue forward. The main reason I bring it up is say I do not and probably will never have a 401k or any type of employer retirement plan.
I’m fortunate enough to have a fiscally savvy dad, and you remind me a lot of him. He insisted my brothers and I all open Roth’s when we turned 18. I can’t say $5k has gone in every year, but I sure am glad to be 10 years in to retirement planning. It’s currently sitting at $30k. He’s been in charge of the investments up to this point, and I intend to roll it over into a VTSAX ASAP.
My current stats: turning 28 next month, student and credit card debt (a little too much lifestyle funding right out of school) completely GONE. $4,000 in cash, plus my Roth assets.
I plan on starting my taxable account in VTSMX on my 28th birthday, pumping as much in as I can each month (and really try and front load to reach the $10k min for Admiral benefits). My earned income for 2014 was $24.5k (restaurant work is seasonally dependent, so my monthly income tends to be more inconsistent than $2k a month).
I think it is well within reason that with no work increase and little lifestyle change, I could be investing at least $10k a year. The great thing about my line of work is 1) I can always work more (I made that income working 20-25 hours a week) and 2) With the experience I now have, the top tier restaurant gigs are now within my reach.
But for the sake of my question, let’s play with $10k a year in investment potential.
I’m hoping to be financially independent in 10-15 years. Based on my current savings rate, this is totally reasonable. But if I continue to put $5k in my Roth every year and $5k in a taxable account, my intuition is that it delays my early retirement goal considerably.
Assuming potential for any increase in income won’t ever push me out of my current %15 tax bracket, are the tax advantages of a Roth worth keeping that money out of my hands for 15-20 more years after my FI goal?
Would it be foolish to completely stop funding my Roth from this point forward, and instead pump all I can into my taxable account, and let the Roth grow for 30 more years as is and have a nice gift waiting for me when I come of age?
I’ve read both your and MF’s discussions on IRAs, but I still don’t feel confident in making the right call based on my specific parameters.
Keep fighting the good fight, and thank you. I finally have the validation that my dreams of early retirement are totally reasonable and achievable.
Welcome Mark…
As it happens, I’ve been thinking exactly about lifestyle design of late.
You are right. Most early retirement blogs focus on savings rates, investing, reaching FI and retiring to work you love. (For the record, I consider this an investing blog with a bit of travel spice thrown in once in awhile.)
But it occurs to me, and I’ve met many people who have done this, if you can master frugal living you really don’t need much. Maybe the whole investing step can be skipped altogether.
In the movie Office Space (one of my favorites) there is a bit of humorous dialog that goes something like this:
“If I had a million dollars I’d just sit around and do nothing all day.”
“You don’t need a million dollars to do that. Take a look at my cousin…”
Second 1/2 of this clip: http://www.liveleak.com/view?i=135_1346020977
I don’t know if you read my current post, but Stan is pretty much like that: https://jlcollinsnh.com/2015/01/21/trish-and-stan-take-an-intrepid-sailing-voyage/
He is a guitar player and a very good one at that. He never made the big time, but he was good enough to make a modest living. He is indifferent to all the consumer propaganda and found meeting his basic needs was cheap enough that he could live on only the money his gigs provided. No “work” or FI required.
Having no F-you money would drive me nuts, but that’s me.
Anyway, sounds like your waiting/bartending gig provides you a life with lots of freedom and flexibility. So, well done!
Still, continuing to build your F-you fund – https://jlcollinsnh.com/2011/06/06/why-you-need-f-you-money/ – can only help, so let’s look at that.
Let’s look first at your Roth.
— As you are planning, VTSAX is a great place for it.
— You can withdraw your contributions to your Roth anytime, tax a penalty free. This is because you fund a Roth with after tax dollars. Only what it earns is subject to tax and penalty on early withdrawal.
— So you should definitely fully fund your Roth – $5500 – before a taxable account.
But, should you have a Roth or a deductible IRA?
Earning 24.5k per year as a single man, you are currently in the 10% tax bracket which goes up to $18,150 in income. Remember, for 2014 you have a personal exemption of $3950 and a standard deduction of $6200. Those reduce your taxable income by $10,150 to only $14,350.
(Your income and early retirement plans put you in a great tax situation. For more, here’s a good read: http://www.gocurrycracker.com/never-pay-taxes-again/)
This means that if you use a deductible IRA, rather than the Roth, you’ll save $550. That money can then be invested in addition to the $4500 from your 10k total into your taxable account. So invested, you have not only the $550 but everything it will earn for you over the years.
Once you early retire, you can begin rolling it into a Roth using the laddering strategy described here: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
So, with this change, you are now investing $10,550 rather than $10,000 and your $14,500 to live on remains the same.
Next, let’s look at what you need to have invested to be FI.
Assuming $14,500 is what you need and you’ll use the 4% rule (https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/), you need 25x that amount: $362,500.
Using this calculator – http://www.globalrph.com/invcomp.cgi – and assuming an 8% annual return, we see that:
—$10,000 a year for 10 years = $192,842
—$10,000 a year for 15 years = $342,014
—$10,000 a year for 15 years + one year without the contribution = $379,375
Investing $10,550:
—$10,550 a year for 10 years = $199,710
—$10,000 a year for 15 years = $355,332
And just for kicks, if you were to use a 50% savings rate and invest $12,000 per year:
—$12,000 a year for 10 years = $217,817
—$12,000 a year for 15 years = $390,444
—$12,000 a year for 14 years = $350,411 (Almost there a year earlier.
And, of course, if in saving 50% you were to be able to live on $12,500 per year you’d only need $312,500 to be FI:
—$12,000 a year for 13 years = $313,343
Ain’t playing with numbers fun?!
Bottom line:
—Fully fund a deductible IRA each year.
—Keep the Roth. No need to change anything, plus you can access the money you contributed tax and penalty free once you retire if needed.
—Fund your taxable account with the money left over. This should give you plenty of readily accessible money once you retire and before age 59.5.
—Fully enjoy the freedom your work allows knowing that, as good as it is, every day you grow less dependent upon it.
Indeed, your “dreams of early retirement are totally reasonable and achievable.”
BTW, I just might make this a Case Study post. 🙂
Thanks for the reply, Jim! That makes total sense. Playing with the numbers is indeed a lot of fun, especially knowing that those numbers reflect what I consider to be my current minimum. Any increases in income (without associated lifestyle inflation!) get me there faster.
I’d be honored if this became a case study post. I’d be happy to provide more details about my situation if need be.
Thanks again!
One quick follow-up question: the only area I’m still trying to figure out for myself is cash on hand/emergency fund. As far as monthly cash flow for rent, bills, and expenses, I’m thinking I don’t need more than a grand or so in my checking. I’d like my emergency fund to be $5k (4-5 month of living expenses in case of unemployment, and my catastrophic health insurance deductible is $5k), but I don’t want it sitting idly in a savings account. Considering I can pull out contributions from my Roth penalty and tax free, is it safe to think of $5k of my Roth as an emergency fund?
Hi Mark…
Like you, I hate the idea of holding unproductive cash. Some day, when interest rates on cash aren’t running less than 1%, I won’t mind so much. But now…
You are right, of course, that you can withdraw your past Roth contributions tax and penalty free anytime. However, the risk of letting this be your emergency fund is, come that emergency, the market might be plummeting and you’d be forced to sell shares cheap.
And, as we all learned in 2007-9, a major market crash might also be when your job goes away and you need the cash. Bad things tend to come together.
On the other hand, if you were unemployed for 5 months, you wouldn’t be drawing down all $5000 at once. Rather, you be taking it $1000 per month. If the market dive were a short-term correction the blow would be softened.
The point is that with your Roth you do have ready access to liquid assets; that is, assets you can turn to cash almost instantly. But the emergency might coincide with horrible timing for that liquidation.
So, no it is not “safe” to think of your Roth as your emergency fund. But that said, depending on your risk tolerance, you might hold less in an emergency fund and consider it a backup of liquid assets. As Clint Eastwood once said, “Do you feel lucky? Well, do ya!?”
Finally, in figuring how much of an emergency fund you need and where to hold it, you also have to consider how much risk you actually have. Things like:
–How secure is your job?
–Do you own a house? (Houses are prone to needing unexpected and expensive repairs.)
–Do you drive an older car? (Also prone to needing unexpected and expensive repairs.)
–How is your health?
–Do you have risky hobbies?
Make sense?
Hi Jim,
I really enjoy your blog, thank you for the great info
Mark
Jim,
I’ve really enjoyed reading your website, blogs, etc., your outlook on investments, business, life, etc., make a lot of sense to me. If you could give me your input I would be so grateful.
Background
I know that all decisions are mine and I am responsible solely for their outcomes. I am in midlife change. I am 56, single, no children, owned a small business for many years so I wanted to stay as liquid as possible. I rent a 1 bedroom apt. in the Northeastern U.S. and live a simple, frugal, life, and love being outdoors cycling, hiking, and walking. I left a job in 2014, and am looking at options currently ranging from possibly not working, to working part time in the business world. My living expenses are about $1,600 monthly or $20,000 annually, and I don’t have any debt. I am not sure at what age I will stop working; anywhere from now until 70 years old, I don’t plan on taking social security until 70 years old.
Investments
1. Retirement $190,000 in Vanguard, (includes $6,000 in individual stocks, a small amount in the Vanguard target date 2025 fund, but in total 9% in stocks, 3% in bonds, 88% in money market)
2. non-retirement Cash $410,000 in bank account receiving 1.05 % interest
3. Emergency Fund $5500
4. Small Business investments $275,000
This is a total of roughly 880k
Questions
1. Retirement. Obviously I need to put the Vanguard retirement money into action. I’m thinking about putting it into the Vanguard total stock market index fund, and the vanguard total bond market index fund, the allocation maybe at 70/30 between stocks and bonds, using admiral shares. I’ve read that you like putting it in as a lump sum rather than DCA (dollar cost averaging), but I’ve felt that we’re due for a correction, and, yes, I know that you don’t believe that one can successfully time the market. What would you do with the $190K? Where do you think the market is headed?
2. Can I afford to stop working now? Would you advise that? What should I do with the $410,000 in cash if I stop working? It seems that whether I stop working or start to work on my own now, I need revenue to pay my current monthly expenses, or I start drawing down on my savings.
3. What would you do with the $410,000 in cash if I go back to work and start earning money? Buy a home? Do nothing and stay liquid? Put it in the same Vanguard funds but in a taxable account (?)-seems like duplication. Make loans in lending club, betterment, etc.? Invest in T-bills, tax-free bonds, or a vanguard dividend paying stock fund? This probably would be short-term money, 0-5 years.
4. The $275,000 is investments in businesses with a close relative, I am nervous about being paid back, and this has caused me worry and stress. Any thoughts?
5. The property that I live in was sold recently, it is a 3 family built in the mid-1800’s, including an apt that I live in, and a large garage that can be rented out. I could have paid cash for it. I decided not to because of its age, I would not do the bigger repairs myself, and I was nervous about buying this before getting paid back on my business investments. If they went south I could be stressed financially, and I also wasn’t sure if I wanted to be a landlord. It is likely that it would have thrown off positive cash flow immediately. The fact that I passed on the acquisition has been bothering me, wondering about your opinion on this?
6. I live in what I call a “stupidly expensive” part of the country (the Northeast), due to the housing prices and cost of living. It doesn’t seem worth it, but maybe I’m just mad that I didn’t make a ton of money in the housing market!! I have some family here but other than that there really is nothing keeping me here. I’m considering looking at other parts of the country, where I can enjoy the outdoors more, either the mountains or the ocean. I’m tired of the “grey” winters and early darkness here, maybe I should go somewhere else for the winters, at least initially. I am considering Tucson, Albuquerque, Sedona, Santa Fe, Pueblo, Co., I have enjoyed not working, and spending days hiking and cycling in the desert southwest sounds appealing.
Any thoughts?
7. I like a simple life, and feel that there is value in that. I’ve read your opinion on renting vs. buying, but long term do you think I should look to purchase a home?
Finally, I know that these are questions that are personal choices, and it isn’t even fair to ask for your input, but any opinions that you have would be greatly appreciated.
John
Hi John…
Thanks for writing.
I’ve made your comment and questions into a Case Study and you can find it here: https://jlcollinsnh.com/2015/01/30/case-study-11-john-a-small-business-owner-in-transition/
Hello Mr. Collins,
First of all, I’ve been reading your blog, MMM, and Mad Fientist over the last couple of months and I feel like they’ve given me so much direction and hope – THANK YOU SO MUCH!!! I’ve always led a pretty frugal and minimalist lifestyle, a Mustachian by birth if you will. So I feel like I have the fundamentals of FI (i.e., mentality and savings), but lack the technical knowledge and experience to make it come to fruition. I’m just breaking the ice on investments, taxes, and a real roadmap to FI (minus just saving money), so I apologize if I’m severely butchering some of your explanations.
I’m very interested in implementing the 4% rule and taking some time off of work to do more of things I’d like to do without thinking about how much money I need to earn from them. At the moment though, my portfolio is spread out with a majority being in my 401k, which makes pulling that 4% seem a little more difficult, at least to a beginner like me. Does that 25x your annual spending needs to be in liquid funds and not pre-tax accounts? My current assets are:
– 401K: 146k
– HSA: 0k (just started this year, but contributing maximum amount this year)
– Roth IRA: 19k
– Stocks: 21k (invested in a couple random companies more geared toward the long-term)
– Savings: 32k (making nothing of course, but I consider it my f you money)
I’m 32 and currently make 90k/year (before tax). No debt, no house, and a paid off car. I contribute 10% to my 401K (which I’m thinking about starting to max out this year), and save about 50-60% of my post-tax salary (which might change if I max out my 401k).
My question now is how do I calculate/know when I can start to implement that 4% rule? I estimated that I can survive off 15k/yr, so my target is 375k. However, because so much of my investments are and will be tied up in the 401k, I will need to be able to support at least 5 years of living (75k) using taxable investments to allow for the 401k to tIRA to Roth IRA conversion to happen, and let me start pulling from the Roth IRA. If I can cover that 5-year period and have the 375k untouched, then I can theoretically start pulling the 4% from the Roth IRA conversion ladder and reach FI? Am I interpreting everything correctly? Any thoughts would be greatly appreciated. Thank you very much.
Welcome George…
Thanks for your kind words and congratulations on being debt free and over half way to your goal of 375k and FI. Well played.
In figuring that 375k you add up all of your assets, in your case currently 218k by my count.
You should certainly max out your 401k and your 50-60% savings rate is very powerful. Of course, more would be even more powerful and you might want to check out the chart at the end of this post: https://jlcollinsnh.com/2015/01/30/case-study-11-john-a-small-business-owner-in-transition/
There is no need to worry about having your money tied up in tax-advantaged accounts like IRAs and 401Ks. There are ways around this, some of the best of which are discussed here: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
That said, you already have a head start with your Roth. Any contributions you’ve made to your Roth you can access tax and penalty free at anytime.
You also have the 21k ins stocks and the 32k in savings, giving you ~62k in readily accessible assets.
But while having the Roth is a good thing and you should let it ride, going forward you really should be using a 401K/deductible IRAs to “turbo charge” your savings with tax advantages as described here: http://www.gocurrycracker.com/turbocharge-savings/
When it comes time to start pulling the 4%, here are some strategies I’ve used: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Hope this helps!
Thank you Mr. Collins!! Hopefully I’ll be checking back in with a success story pretty soon. All this knowledge and having a plan makes work seem a whole lot different!
Hello Mr. Collins,
One more question at the moment about VTSAX and mutual funds. What would you suggest in terms of dealing with the dividends and capital gains? Because I’m still working right now and am in the 25% tax bracket, should I just continue to reinvest them into VTSAX? I’ve heard about complications of purchase price and how dividends and capital gains should be moved to a separate money market account. Then when a large enough sum is there, buy another chunk. Thank you again for your time!
George
I’ve always just reinvested mine.
The tax treatment of the capital gains distributions and dividends is exactly the same whether you take them or reinvest them. You will owe tax on them in the year they are paid, either way.
Having them paid only to reinvest them later only wastes time.
Once you start withdrawals, it makes sense to have them paid out instead of reinvested. Doing so will help avoid any possible short-term sales.
But while you are building your wealth, reinvesting is the easier and simpler path.
Perfect, definitely still in building wealth stage. Thank you again!!
Just finished reading the entire series you posted on the Stock Market and I am excited to finally invest some of my $ with Vanguard.
Here is my question: I have two children, ages 7 and 9. They have been given over 10K each as a tax free gift from family. I really do not want to do the 529 thing. Should I invest their $ in an Index Fund? Whose name should I put the accounts in? If mine, will there be any tax consequences from switching a tax free gift from their name to mine? The money, as of right now, is just sitting in a savings account.
eric
Hi Eric…
Congratulations on wading thru the Stock Series!
Seems to me you have a couple of options:
1. Hold the money in your name and mentally earmark it for each child. This allows you absolute control and you can use the money freely for any child care expenses, education or medical needs. When it comes time to pass it into their control, you will have to be aware of gift taxes. But these are subject to exclusions that increase each year. For 2014 the exclusion is $14,000. So you and your wife could give each child a total of $28,000 each year: $54,000. Even with a large accumulated amount, by spreading it out over several years you’d be able to transfer very large sums. See: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes
2. Open a UGTM account for each child. This puts the money in a trust and in the child’s name, which might be important to those family members who gave it. It also removes any earnings from your taxes and to your child who presumably will be in a lower bracket.
The two big downsides are:
–once the child reaches the age of majority, the money is theirs to do with as they please.
–the money in the account will impact any considerations for federal financial aid.
For more: https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma
We used #2 and it worked out fine. She is a responsible custodian of her money and, as it turns out, we/she wouldn’t have qualified for federal aid anyway. But if I had it to do over, not knowing how it was going to work out, I might well use #1.
One thing you should consider, once they start working, is funding Roth IRAs for them. While they have jobs in high school and college they might well make close to or more than the maximum $5500 contribution. Starting them that early will give the power of compounding decades to work its magic. Plus, if need be, they can withdraw the contributions tax and penalty free anytime.
Once, however, they are earning enough to pay taxes, have them switch to funding their 401k or deductible IRAs for the tax deferral.
Hope this helps!
Hello Mr. Collins,
I am a follower of your site, and point anyone who seems interested her as well. I would find it very helpful to hear your advice for our situation, when you have a chance.
Personal Situation –
My wife and I are 35 and 37 years old, expecting our first baby this year.
I have a regular job, with Fidelity 401k and ROTH 401k plans available.
I currently contribute 15% to the 401k. Plus the 3% company match.
My wife works from home, has no company retirement plans available.
Together our annual income is ~$115k
I also have additional income of $1,500+ per month before tax, from side hustles, and intend to grow this further.
Assets –
401k (me): $20k (VTSAX)
Rollover IRA (me): $88k (VTSAX)
Non-Vanguard Rollover IRA (wife): $75k (Target Date Fund)
Cash Savings: $30k
Total: $213k
Liabilities –
Townhouse (Rental): $165k Mortgage (This property is essentially break even, until we need new tenants, or a repair comes up).
Current House: $178k Mortgage
Boat: $14k on the Loan (Fishing is my one indulgence…important to my mental health 🙂 )
Future Car to Replace Wife’s Vehicle: $TBD
I simply do not want to work a “regular” job until 59-½, the thought of that is soul crushing…yet we couldn’t access any of our investments thus far until 59-½ anyways.
How do we get out of that ‘box’? In what order would you recommend investing in the various retirement account options in our situation?
There is a lot of information out there to clutter one’s mind. I feel stuck and unsure how to go forward, or what changes I need to make. I suspect just dumping everything into the 401k is not the best plan. Your thoughts are always appreciated.
-Tom
Tom, until JLC has a chance to get back to you, I thought it might be worth linking to his post about accessing Early Retirement money in answer to your question. The article was an eye-openner for me!
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Good thinking there, HM!
Indeed, a link to that same post is part of my Case Study reply.
Glad you liked it!
Hi Tom…
As we discussed by email, your situation has become a case study:
https://jlcollinsnh.com/2015/02/11/case-study-12-tom-at-the-crossroads/
Hope it helps!
Hello Mr. Collins,
Your blog is outstanding! I’ve read the entire Stock Series and related posts as well as the comments. Your writing is very clear and accessible! I also read all the comments in “Ask jlcollinsnh”. I believe I understand the concepts that you explain in your posts, but there are a few finer points that I am not entirely clear on and I hope you would be willing to comment and let me know if I am thinking about this correctly.
Background:
My wife and I have been saving aggressively for a long time and believe we are FI. We plan to retire early in 1-2 years, which is long before age 60 for both of us. We are completely debt free, have $1.3 million across tax-deferred and taxable accounts, and expect to spend $37K per year in retirement. Our asset allocation across all accounts is 60% stocks, 31% bonds, and 9% cash. We only use broad market low-cost index funds in Vanguard and TSP, as you recommend. The taxable account is 100% stocks and the tax-deferred accounts have stocks and bonds. The asset allocation is based on our comfort level and ability to commit to our plan. We max out our TSP and backdoor Roth IRAs (based on income) before investing in our taxable account.
Questions:
1) We have about $120K in cash (9% of assets). The large amount of cash (goal was $200K) was intended to cover 5 years of expenses in early retirement, before Roth conversions are available (we will use the Roth conversion ladder strategy for early access to tax-deferred assets). Our strategy now is to invest the cash the taxable account (stocks) for growth until we need it. In early retirement we will be essentially using bonds in the tax-deferred accounts for expenses, since we will be selling stocks in the taxable account, and then simultaneously buying them back in the tax-deferred accounts by rebalancing bonds to stocks. We may also be able to take advantage of tax loss harvesting in the process (avoiding wash sales). Do you agree with this thinking?
2) Because we will have eliminated our cash reserves in #1, the total assets available outside the tax-deferred accounts (stocks in the taxable account) should be at least twice what is needed to fund 5 years of expenses, because those assets are in stocks, and if the market were to drop 50% for an extended period, we would still have enough to follow our strategy until Roth IRA conversion assets are available. Do you agree with this thinking?
3) The total assets available in bonds in the tax-deferred accounts should be at least equal to 5 years of expenses, to allow for the rebalancing of bonds to stocks per the strategy in #1. Do you agree with this thinking?
4) Regarding bonds, we currently have the advantage of the TSP G fund for our bond allocation, a unique bond index fund (regarding risk and return) available to federal employees. In order to execute our plan we will need to roll our TSP over to a traditional IRA and will need to choose a Vanguard bond fund, which makes us nervous given the potential changes coming in the bond market. I think that VFIDX would be appropriate for us based on your reasoning for holding VFIDX rather than VBTLX at this time. Would you be willing to share your thinking on the conditions under which it might be wise to move the bond allocation from VFIDX to VBTLX?
We understand that we are responsible for our own choices, and are fairly confident in our thinking, but would place a very high value on your comments and advice.
Welcome VVC…
…and thank you for the kind words.
Let me start by complimenting you on one of the most impressive comments ever on this blog. Clear, concise and obviously coming from a solid knowledge base.
When you say you’ve read the entire SS and related posts along with everything here, is shows.
That said, it is not surprising that my overall answer is “Yes. I agree with your thinking!” 🙂
Let’s walk thru it together.
First, you are very comfortably FI.
1.3M @ 4% = 52k annually, 15k over your projected 37k spend. Or, looking at it another way, 37k is a very conservative 2.8% withdrawal rate.
Second, your 60/31/9 allocation is a solid one, and fairly conservative.
1. What you are proposing to do here basically what we do using our aggressive 75/25 allocation. Of course, your new allocation will be a much more aggressive 69/31 than what you are currently using. That should produce more growth and it will definitely produce more volatility. As long as you fully understand this, it’s fine.
Just yesterday I came across an alternative to holding cash. Candidly I haven’t thought this thru just yet, but I am intrigued. That being the case, ordinarily I wouldn’t mention it. But given your understanding of this stuff, I’ll leave it to you to judge: http://www.1500days.com/guest-post-using-p2p-lending-as-a/
2. While this is very sound thinking, it is also a very conservative approach. My only reservation to it would be if it caused you to delay retiring (or some other goal), assuming retiring is a major priority. If that’s the case, it becomes a matter of balancing risk and reward; and with this approach you are very much on the low risk side of the ledger.
3. I agree with the thinking, but again I wouldn’t delay anything to reach this goal. Holding some bonds in a taxable account, while not ideal, isn’t the end of the world if it helps get you to your major goals sooner. Nor is altering your allocation a bit.
4. TPS accounts are indeed something special and I’d hold on to yours as long as possible. Maybe you only need to move some of it?
If you know I hold VFIDX you really have read deep into this blog. 🙂
VFIDX is an intermediate corporate bond fund.
VBTLX is a total market bond fund, so it holds government bonds like treasuries which are considered less risky, in addition to corporate bonds. It also holds bonds of all maturities.
So, VFIDX is the more focused of the two and potentially more risky.
If you take all the maturities owned with VBTLX and average them out, you essentially have a intermediate fund in character. So, much like VFIDX.
The real difference is that corporate bonds, being considered less save than treasuries, pay a bit higher interest. Currently 3.14% v. 2.48%.
With that background, I’m afraid I still can’t answer your question. I’m not sure what conditions, other than a major collapse, would prompt a move. And that’s the problem. By the time that happened it would be likely too late.
Since I only suggest bonds to reduce risk and smooth out the ride, for the vast majority of my readers, I think the safer and broader scope of VBTLX is worth the lower rate. The extra risk of VFIDX is I think small, but then so is the rate difference.
But, for those like you who take enough time in reading and understanding the information here to come across VFIDX, it is perhaps a more profitable option.
Hope this helps and thanks for reading!
Thank you very much for your kind words of encouragement and helpful advice. As you probably gathered, I have read other books and blogs on these topics, and I’ve been piecing the simplest and most efficient bits of information together to round out my current knowledge. What your blog has done for me (and your readers) is to distill the best information into an easily understood series of posts. I look forward to your book, which will take your contributions to a new level.
One clarification I need to make in my original post is that in moving the 9% cash to stocks, I plan to immediately rebalance stocks to bonds in the tax-deferred accounts to maintain our overall allocation of 60% stocks and 40% bonds. Your comments and advice are still very helpful despite the omission in my explanation.
Thanks for the link to the post on P2P Lending for cash needs. I will check it out.
Regarding the TSP, there are limited withdrawal options at separation. I can roll over a one-time partial withdrawal when I separate, then rollover the remaining full amount at a later date, but at age 60 I will start drawing a pension that will significantly reduce my ability to continue the Roth conversion ladder while staying within the 15% tax bracket. In order to get all of the TSP assets into a Roth by age 60 (a 13 year process), while never going over the 15% tax bracket, the simplest option is to roll over the full amount at separation. I like the idea of minimizing taxes in this way, but it does involve giving up the advantages of the TSP G fund for our bond allocation. The other alternative is to roll over half at separation and half 6 years later, but I’m not sure that is worth the hassle.
Thanks again and keep up the great work!
Hi Jim,
I’ve been a reader of your blog for a while now and I’m a big fan. I’m wondering if you can offer some advice on an allocation question. My company’s retirement plan is basically to give me company stock in an ESOP. I’ve been with the company for many years now, and so I have a significant amount of company stock in my retirement plan. It’s so much that it’s nearly a third of our savings. This company is a very large multi-national blue chip dividend paying company. I don’t like having so much money tied to a single stock. But they have specific rules on what I can do with that money. I can only diversify into low risk funds, limited to one of the following: money market fund, short term bond fund, intermediate term bond fund, or a “real return fund” (which is split between treasuries and REITs). Should I move from the company stock into one of these?
We are definitely in the wealth accumulation phase. Combined, my wife and I have about $800k in savings, and we’re saving about $160k/year. Virtually all of our savings are in stocks – all in index funds, except for this large chunk ($250k) in a single company stock.
What would you recommend? Keep the stock? Or move it into the lower risk but seemingly lower growth funds? Or maybe somewhere in between?
Thanks for any help,
Mike
Hi Mike…
You right right to be concerned. Holding 31% of your net worth (250k/800k) in one company is very risky, even if it’s a great company.
Part of that risk is mitigated by the 160k you are saving each year, assuming this all going into your index fund and isn’t adding to your company stock holding.
If this is the case and if you feel very positive about your company and if you have a high risk tolerance, you could let this slowly lower your percentage exposure. After ~5 years you’d be at about 1.6M/250K or ~16%.
Of course, this assumes no growth in the stock or in the index fund. How they each actually perform might dramatically alter this picture.
Given the limits your company has placed on moving out of their stock, your only other option is to add some bonds to your portfolio. That’s not all bad, even in the wealth accumulation phase.
Assuming you like your company’s stock, you might get it down to ~80k/10% and move the other 170k into the bonds. That will give you ~79/21 – stock/bond allocation.
I’d likely use the intermediate term bond fund, but the “real return fund” is worth a look. It depends on how the treasuries and REITs are split. REITs are, of course, a type of stock, so this potentially would be the more aggressive wealth accumulation choice.
Make sense?
Thanks, Jim! This makes sense. I really appreciate the advice!
Hey,
I just found your blog and it’s really good, thanks for creating all this content!
To my question…
I am 19 years old and I live in Sweden. I have about 120k SEK (15k USD) that I’d like to place in an index fund to start my path to financial freedom. The problem is that currently, the market is at an 10-year high (very high in fact). Would it be a bad move to place my money now? If your opinion is that I wait, how do I know when it’s time?
Thanks,
John
Hi John…
Glad you like it. Always nice to hear from our Swedish readers!
You won’t read far in this blog to learn that trying to time the market is a loser’s game.
Your last question puts the finger on the problem: Nobody knows.
I have no idea what the market will do tomorrow, next month or next year. Nobody does, especially not those who claim they do. 😉
What I do know is that it goes up far more often than it goes down and that it routinely sets new highs.
I have always invested my money the moment I could and never concerned myself about what the market might do short term. It’s unknowable.
For more: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Good luck!
Mr Collins,
I am new to investing and I am glad I found your blog, over this past weekend I have been reading about early retirement, investing and saving etc. It has been very overwhelming and I have in addition to subscribing to you blog, bought the bogleheads guide to investing book, opened an Roth IRA account for my wife.
Now, I have a lot of questions and I one thing that i have come to take from all the reading is that it does not have to be complicated, keep it simple. I like this because, I think I am a passive investor or would like to become one.
First – I have a 403b through my employer so I contribute 6% and they match 4%. Everywhere I read, people say to max out the 401k/403b, but doing so will result in lower take home paycheck, which mean living frugally. Is this a correct assumption.
If someone who is just started to save like me, how am I supposed to max out my 403b and still be able to live comfortably with monthly expenses etc.
Would you suggest starting with employer match then over the years gradually increasing the contribution?
I have also read good arguments for and against Traditional IRA vs. Roth IRA, if I don’t have my 403b, or my wife’s 401k through vanguard who can we take advantage of the Vanguard index funds that you have mentioned and recommend?
Second – Should I have both Traditional IRS through my employer and Personal Roth through Vanguard?
What about saving just cash into a savings account?
I guess I am trying to find the order and how much goes where, so far the simplest thing we have done is save $500 – $1000 in our savings account.
Also, do we need to have a cash reserve for emergency and then think of investing?
meaning save for emergency fund first, and then start investing?
If I do have Vanguard Roth accounts for my wife and myself should I just buy the one VTSAX (Vanguard Total Stock Market Index Fund) and call it a day.
I am sure you have covered all this but if you could respond to my email and give me some direction, it would be really great.
~Sid
Hi Sid…
You’re right, investing really is simple. At least in my view. VTSAX to grow your wealth and VBTLX to smooth the ride if/when you feel/have the need.
Navigating the various tax-advantaged accounts like 403b makes it a bit more complex, but I’ve written about all this in the Stock Series and as you go thru it things will become steadily more clear.
If your goal is to become financially independent then, yes, you are going to have to prioritize saving and investing over spending. It sounds like you haven’t fully reconciled this just yet, but maybe this post will help: https://jlcollinsnh.com/2015/02/11/case-study-12-tom-at-the-crossroads/
If you decide that financial freedom is worth buying then, yes, you’ll want to max out your 403b, at the very least. Additionally, fund any IRAs you are eligible for and a taxable account as well. As the chart in that post shows, you’ll be aiming for a 50%+ savings rate, so you should have plenty of money to invest in all these.
Set that savings rate now, not gradually. Nothing is more critical to your success in reaching FI.
Hold only as much cash as you need for your emergency fund. Every year your cash loses spending power to inflation.
Your investments and your emergency fund is not either or. Fund both together, again using that savings rate. Once your EF is full, focus everything into the investments.
If this all sounds a little confusing, and I’m guessing it does, read thru the Stock Series: https://jlcollinsnh.com/stock-series/
Once you do you’ll have a better idea of what to do and, importantly, why.
Thank you, every day that I read one of your stock series, I feel I am getting educated in what I though was a very complex and hard to understand field.
I think the way you have structured and approached this subject makes sense for all types of investors, from beginners like myself to pros.
I have a couple of more follow up questions, but wanted to make sure first that if its ok for me to ask recommendation from you about my portfolio or not, or should that be a private email exchange if you are willing to give some advise.
I was talking to my company HR today and there is a bit of confusion for me. They said, that the toal limit is $18,000 max for both 403b and Roth, I had the understanding that $18,000 limit was for 403b and in addition $55,00 for Roth.
If I don’t have access to VTSAX through my employer, should I buy the VTSAX by opening an account with vanguard.
For my wife I already opened her Roth account with vanguard and bought the VASGX, should I exchange that for the VTSAX?
My pleasure, Sid…
and by all means feel free to ask more questions. I prefer you ask them on the blog rather than in private emails so others can benefit from our conversations.
I also appreciate your reading thru the Stock Series first. This will very likely answer most of your questions as you go along.
Your HR depatment is correct: For 2015 the total limit is $18,000 for all employer sponsored plans combined.
From the IRS –
http://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You’re-Eligible-for-More-than-One-Retirement-Plan%3F
“Elective deferral limit
“The amount you can defer (including pre-tax and Roth contributions) to all your plans (not including 457(b) plans) is $17,500 in 2014 and $18,000 in 2015. Although a plan’s terms may place lower limits on contributions, the total amount allowed under the tax law doesn’t depend on how many plans you belong to or who sponsors those plans.”
But you can also contribute an additional $5500 a year to your personal IRA or Roth, subject to some income limits.
If you don’t have access to VTSAX through thru employer, then yes, you’ll need to open an account with Vanguard. You can then own it in your taxable accounts or in your IRAs or both as I do.
As for switching from VASGX to VTSAX, it depends on your needs an goals. This post might help: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
Hi Jim,
Below are the funds that are available through my employer 403b.
This is what I am currently invested in
Lazard Emerging Markets Equity Instl 10% 1.09
AllianzGI NFJ Small-Cap Value Instl 10% 0.86
Columbia Acorn Fund – Z 20% 0.79
American Beacon Lg Cap Value Inst 20% 0.59
PIMCO High Yield Instl 10% 0.55
PIMCO Real Return Instl 10% 0.47
PIMCO Total Return Instl 10% 0.46
T. Rowe Price Real Estate 10% 0.79
These are all the funds available to us.
T. Rowe Price Retirement Balanced Fund 0 57%
T. Rowe Price Retirement 2010 Fund 0.59%
T. Rowe Price Retirement 2020 Fund 0.67%
T. Rowe Price Retirement 2030 Fund 0.73%
T. Rowe Price Retirement 2040 Fund 0.76%
T. Rowe Price Retirement 2050 Fund 0.76%
American Funds EuroPacific Gr R5 0.54%
Lazard Emerging Markets Equity Instl (1.09%)
Vanguard Total Intl Stock Index Admiral (0.14%)
T. Rowe Price Real Estate (0.79%)
AllianzGI NFJ Small-Cap Value Instl (0.86%)
T. Rowe Price Small-Cap Stock 0.91%
Columbia Acorn Fund – Z (0.79%)
JPMorgan Mid Cap Value Instl 0.93%
Fidelity Spartan 500 Index Inv (0.10%)
American Beacon Lg Cap Value Inst (0.59%)
Harbor Capital Appreciation Instl 0.68%
PIMCO High Yield Instl (0.55%)
PIMCO Real Return Instl (0.47%)
PIMCO Total Return Instl (0.46%)
Based on the funds available and the funds that I currently have, what would you recommend.
I also want to open a Vanguard Roth IRA and get the VTSAX
that you recommend. Should both my wife and I have the VTSAX or should we diversify one holding the VTSAX and the other some other fund.
Hi Sid…
This gives me a great chance to illustrate how to find the index fund (s) in a plan and, of course, index funds are all I’d be interested in.
Just scan down those ER numbers on the end of each fund, looking for the lowest. The index funds will not only be the lowest cost funds, the margin will be large and easy to spot.
In your list we quickly find two:
–Vanguard Total Intl Stock Index Admiral (0.14%)
–Fidelity Spartan 500 Index Inv (0.10%)
Note that the next closest funds sport ERs of .47%. That’s 3.3x higher than the first and 4.7x higher than the second.
The Fidelity fund has the lowest ER and it tracks the S&P 500 Index. That would be my choice.
The Vanguard fund is an international stock fund, which is why its ER is higher. I don’t feel the need to hold international for reasons I describe here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
But if you do, that fund is a fine choice.
Since you are currently holding the Pimco funds, I assume you are looking for some bonds in your allocation.
PIMCO Total Return Instl (PTTRX) is categorized as an intermediate term bond fund. You can read the summary in this link: http://finance.yahoo.com/q/pr?s=PTTRX+Profile
PIMCO Real Return Instl (PRRIX) focuses on inflation-indexed bonds: http://finance.yahoo.com/q?s=prrix&ql=1
PIMCO High Yield Instl (PHIYX) focuses on high-yield securities commonly known as “junk bonds”: http://finance.yahoo.com/q?s=phiyx&ql=1
Those are the only three I see on your list, and they are all pretty specialized. Were I to hold only one, it would be PTTRX as it is a bit broader and the ER is lowest. But for the broadest coverage, you can hold all three as you currently are.
Right now your stock/bond allocation across all the funds you hold is 70/30. If you wanted to duplicate that you’d keep 10% in each of the PIMCO funds as you currently do and 70% in Fidelity Spartan 500 Index Inv
As for VTSAX, it is the only stock fund we hold across our accounts as I describe here:
https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Thanks for the tip of how to find an index fund, I don’t necessarily want to duplicate what I currently have, there was a mettle advisor who comes at our work site and he helped me with choosing the funds.
I want to be able to maximize returns, if the The Fidelity fund is close to what the VTSAX is then I would want to probably invest 90% in it and the rest 10% in the PTTRX.
Is this a good strategy, also if I have the the fidelity index fund for my 403b and the VTSAX for my Roth, would that be redundant?
I am also interested to know when to keep emergency fund, currently its in our savings account, is that the right place to hold the money.
It is hard for me to tell you whether 90/10 is a good allocation for you. It depends on your needs, goals, risk tolerance, etc.
This post will walk you thru the thought process: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
VTSAX is a total stock market fund. As such the S&P 500 index, that the Fidelity fund tracks, makes up ~80% of it. So yes, it is redundant. But it doesn’t matter. If you read the last post I linked to in my reply above it explains why.
A savings account is a good place to hold cash you might need in the near future, like your emergency fund.
I have a thread on boglehead forum going on and based on the 401k for my wife and 403b for me and the funds available to us this is what was suggested.
I wanted to run it by you and get your thoughts on it.
His 403b at MetLife — $17K — 61%
34% Fidelity Spartan 500 Index (0.10%)
15% Vanguard Total International Stock (0.14%)
12% PIMCO Total Return (0.46%)
Her 401k — $0 — 0%
0% target-date fund that has around 20% bonds
Her Roth IRA at Vanguard — $11K — 39%
39% Vanguard LifeStrategy Growth Fund (0.17%)
For His 403b set it up so that in each paycheck deferral 56% goes to the 500 Index, 24% goes to Total International, and 20% goes to Total Return. For Her 401k have 100% go to the target-date fund.
I recently opened wifes Roth IRA and bought the Vanguard LifeStrategy Growth Fund ($5500) before I knew about your blog but now I am considering putting all her Roth ($11,000 for 2014 and 2015 ) and buying the VTSAX.
I also plan want to buy the VTSAX for my Roth IRA.
How should I set up all my accounts to maximize returns.
I have already shared with you my thoughts. Now you are asking me to debate the suggestions of others.
Please take a moment to read the post introducing this comment section, specifically “The investment ideas of others”
If you want to know why (and you should want to) I’ve made the suggestions I have and my case for them, I have written about it in detail in the Stock Series here. After you read it, you will be able to decide for yourself which of the options that have been offered to you work best.
Jim,
I think I may have offended you with my last post, that was truly not my intention. As a new investor knowing nothing about it, I was just merely trying to get a second opinion from you. But you are correct that you have already given me your opinion. I guess I just wanted to double/triple check that my asset allocations are right.
Anyways, I have other questions, which I will ask once I get my Roth and 403b setup properly. Hope to get your continued advice, me and my wife are very grateful to have come across your blog and are big fans.
Not so much offended, but impatient and concerned.
You are seeking, and receiving, ideas from multiple sources. That’s a good thing. But, as you say, you are a new investor and know little about this stuff. So now you are confused. You need more information.
I’m impatient because the information supporting the ideas I gave you are all spelled out right here in my blog. But instead of taking the time to read it, you ask me to engage in a debate with the ideas of others. Had you read even this Ask jlc post you would know I don’t do that.
I’m concerned because if you don’t take the time to understand the advice you have been given, mine or anyone else’s, you will be far less likely to stick to it once the going gets rough. And the key to success is in finding a plan that works, implementing and staying the course.
I think you are right and it maybe one of the rookie mistakes that I am trying to get information from everywhere and in turn being overwhelmed and having information overload. I think it would be a good ideas for you to give an example of someone like me in one of your posts.
“Rookie mistakes not to make”…haha
You are absolutely right, that I missed reading the beginning of this post and I should have read it, along with other articles in your stock series, I have been eyeballing most of you post and may have missed a few, but I will go back and re-read them.
Based on your suggestion, I think I am in the wealth building period, although a little late at age 34.
I have my work 403b at
Fidelity Spartan 500 Index (0.10%) 100%
my wife 401k
at a target date growth fund as all her other option the fees is too high.
Wife’s ROTH IRA with Vanguard
Vanguard LifeStrategy Growth Fund (VASGX)
Will change it to VSTAX once over $10,000
My ROTH IRA with Vanguard
VTSMX will change to VTSAX once over $10,000
Thanks for all your help.
Jim — I know most of your work here focuses on the numbers, but I’d like to ask a question about the mental side of early retirement. You may have covered this in an earlier post, and based on some of our conversations I know you have ideas, but I thought I’d ask specifically on the blog — How do you really know when it’s time to pull the plug and jump into early retirement?
I have several years of spending tracked at Mint.com. Based on that I think I probably *could* retire now, but it would be a no-frills sort of retirement. Travel would have to be done on the cheap and there would be very few luxuries. Bailing on the work world would lock me in to that lifestyle, which makes me nervous.
However, I also struggle with the “one more year” challenge. Every year I think that just putting in another 12 months will makes things more secure. I’m 53 now, so “early” retirement in pretty relative. If I keep doing this for another 5 years I’ll no-doubt be in a more secure financial situati0n, but I might also be dead.
So I guess my question is this: How did you know that the time was right? Or does anyone ever really know?
Thanks for all you do Jim. You’ve improved a lot of lives.
Tom
Hi Tom…
First, thanks for posting this on the blog so others can benefit from our conversation.
As we know each-other personally, you could have just as easily done it by email, limiting the benefit.
What you are asking, of course, will have a different answer for everyone with the question. To me, it is a balance of how eager one is to be retired v. their need for security.
Personally, I’ve continued to work well after being FI. Of course, I also stepped away from various jobs over my career many times for months and sometimes years.
My last job, for instance, was with a truly wretched company run by cynical and short-sighted people. But, my immediate boss was a friend (I had taken the job at his request), I liked the team he had put together and I enjoyed my customers. Even then, after a few years, I just had to step away.
So, a mixed and sometimes very unpleasant bag, but it made my financial situation even more secure.
While I was very comfortably FI when I left (and before I started, for that matter) I still would have left even if my finances allowed for only a bare-bones retirement. In fact, I would have left even if I wasn’t quite at FI, trusting either a rising market and/or another (maybe part-time) job to fill the gap.
Certainly with every working year that passes your finances will improve but, as you observe, at the same time the clock is ticking down. It is an art rather than a science as to where those lines intersect for an individual.
My sense, and it is only that, is that you’d be more comfortable if you worked an bit longer and had a bit more for those extras.
Consider, too, that if you found a side gig or part-time job that brought in 20k, it is the equivalent of having an extra half-mil.
In the end, we probably never really know until the race is run. But my guess is, that far more people look back wishing they’d retired sooner rather than that they added a few more dollars to the pile. Especially amongst those, like you, who ask the question. 🙂
Finally, let me leave with with the story of my other friend Tom: https://jlcollinsnh.com/2014/01/14/case-study-7-what-it-looks-like-when-everything-financial-goes-wrong/
Hope this helps, and thanks for your kind words!
Then, of course, there is this: http://www.theonion.com/articles/health-experts-recommend-standing-up-at-desk-leavi,37957/
Thanks Jim, cogent advice as always! You’ve read my mind pretty well. I have a pretty sweet gig right now, working 3 1/2 days a week and only driving to the office for 2 or 3 of those days. For now I think I’ll keep riding this bus, but with the knowledge that my FU stash gives me the opportunity to walk away any time I’d like.
Oh, and I’ve decided that any career advice taken from The Onion or from Office Space is inherently correct!
Thought you might have some comments on this article
http://www.usatoday.com/story/money/2015/02/11/ozy-timing-stock-market/23226647/
Hi Bonnie…
Please read the post above introducing this comment section, specifically:
“The investment ideas of others:”
That said, you don’t have to read far into this blog to guess my reaction to the concept in that article is:
Hooey! 😉
jlcollins,
First and foremost, thank you for all that you do with taking with structuring and posting such wealth of information on your blog, it is phenomenal!
I wanted to run something by you and see what you would think. I follow your blog, as well as whitecoatinvestor, Financial Samurai, Budgets Are Sexy, among others very closely. I will be sending you an email soon with another set of questions that you might be able to add to your “Case studies” series, but I wanted to see what your thoughts were regarding the following.
I recently opened an account with Betterment; I’ve set everything up under the portfolio asset allocation called “Build Wealth.” Now, from their recommended asset allocation breakdown, I was originally at 90% stocks and 10% bonds.
After reading your blog and the aforementioned blogs, I decided to be a bit more aggressive and adjust my allocation with my Betterment account to 100% stocks (I’m a 28 year physician).
I have a goal to reach of $100K with a timeframe of 5 years, which I would like to use as a down payment for a house, which my wife and I will budget between 250-300K (current salary of $250K without quarterly quality and productivity bonuses, which can add an additional $15-$20 each).
I’m currently maximaxing my 401K and Roth IRA with a yearly backdoor Roth IRA contribution, and set aside $24K yearly of which $15K goes directly into my High-Yield Savings account, and the difference into the VTSAX.
I contribute $50K/yr towards student loans, which will be paid off in 2.3 years total, and live off of $77K a year with my wife and daughter.
Occasional moonlighthing shifts provide for an additional $30-$100K depending on how often I do them and where.
So back to the original questions, would you recommend an asset allocation of 100% stocks for a goal of $100K in 3 years contributing $2,800/mo reasonable, or should I go about this differently?
Thanks again in advance!
Welcome Dex…
High praise indeed – Thanks!
First let me applaud your plans to buy such a modest house, your modest annual spending (both compared to your income) and your savings rate.
This gives your some flexibility others might not enjoy, as does your plan to put 100k down on the 250-300K house. You could probably get a mortgage putting only 5%/~15k down.
This means you can take a lot more risk in reaching for the 100k. Five years from now, if you should fall short, just put less down.
That said, the classic (and sound) advice is that money you plan to use in five years or less should be held in cash. Stocks are for the long-term: Think decades.
I have written about Betterment here: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
In that post I suggest that using a conservative stock/bond portfolio with them for short-term savings goals is an option worth considering over cash. Not as risky as all stocks, but hopefully better results than cash paying almost nothing.
However, your 90/10 allocation is too aggressive for this purpose. Think more 50/50.
Moreover, if you go to an allocation of 100% stocks there is really no reason to use Betterment and pay the extra fees. Just head over to Vanguard and buy VTSAX.
So, in saving the 100K downpayment you have three options:
1. All cash in a savings account. The classic advice with little or no risk to principle.
2. Betterment and a 50/50 stock/bond allocation. More risk, but the chance of growing the money faster.
3. VTSAX. Much more risk, but the chance to grow faster still. Use only if you are comfortable knowing the money might not all be there when you need it.
Make sense?
In addition to Mr. Collins’ advice, I’d also point you to this post:
http://www.1500days.com/guest-post-using-p2p-lending-as-a/
I haven’t tried p2p lending myself, yet, but am planning to very soon. Have just been lazy, as it sounds like a very hands-on thing, unlike buying VTSAX :). MMM has a post about it telling his own experience at the Lending Club. I’m more of a buy-and-forget kind of person, which is why this blog is my favorite – Mr. Collins makes investing simple and easy! Hope this helps.
Thanks Jian…
I had actually planned to link to that post as part of my response, but forgot about it in the writing process. It describes using p2p lending as a cash substitute.
While I still need to process the idea a bit more, I’m certainly intrigued by the concept.
Hi Jim,
I’ve read your total Stock series and few case studies. In general I like your advice. I think it’s great and helpful.
I don’t really have a specific question, though i might decide later to share my story to get some validations, criticism, suggestions and general kuddos (i think i deserve some).
Actually I’ll take that back. I have very specific question. “Ordinary bucket” – what is it? At this point of my life (early 30s) I have very little sitting in 401k and IRA and I don’t plan to improve any time soon. Yes, that’s where the criticism will come when I share more details . Anyway, taking this for given, I still want to invest and idea of total market funds makes sense to me with my specific needs. So what does it mean an “ordinary bucket” – what kind of account is it?
Anyway, this was my only one specific question. that wasn’t the main idea behind my comment here.
Though it’s not a question…. It’s more like a conversation opener…. You see I am very very very conservative. I come from another less stable country that’s been through alot even in my short life. I believe I have a broader view of everything that can go wrong for this reason….
I deeply respect what you and Mr MMM and others alike are preaching. But at the same time I feel like there are waaaaaay too many assumptions and I am hesitant to dive in. In one of your posts you talk about magic beans. And I read it I thought to myself. “Well, he is right”, but I keep asking myself this one question – how do you know that this new notion of index investing is actually not another magic bean? I mean symptoms are the same as with all other magic beans.
And Vanguard. The more praise about them I read the more I want to stay away for the same reason you mentioned in your posts too – if everyone is doing it, I probably don’t want to be there….
And back to the assumptions….
You see, everywhere I read it seems like Great Depression and Great Deflation are what bloggers like you think is the worst possible thing to happen.
To me (with my history) it’s not. I know a number of things that are worse. And no, it’s not about nuclear was and zombies, it’s about other very real events that can, yes, they can, happen….
I feel like Americans loose the sight because they base their assumption on historical data. But you know (just like any fund booklet will tell you) that no future predictions should be made on historical data
What historical data I refer to?
When was the last war that was on American territory( less Pearl Harbor)? War with Mexico in 1847? 150+ years ago and it’s a question whatever that can be counted for “on American territory” anyway.
When was the last civil war? 1862? 150+ years ago too.
Any major overwhelming scams or total fraud epidemics where companies pretend to do what they say they do but then just run away with the money? What are the controls in Vanguard to prevent that?
Revolution? Total currency deflation and crazy inflation? I mean like something costing x in the morning and 10x in the evening?
you wrote about “in full faith and blah blah blah of the US gov-t”… You know what I am talking about. And I hope you won’t argue the events mentioned can never happen? It’s all in faith….. or in other words… in hope that all will go on as it used to….
I am a historian (kind of). Empires rise and fall. Even the mightiest of them. Just look at the Roman Empire and see 100 similarities.
“Market always goes up”. Really? Always? Sounds like a statement based on historical data specific to a particular location. You mean “always” as in last 150 years without wars and other catastrophic events in the US, right? Where the hopes and trust and faith is still there. I mean what about “market” of Greece? and “market” of Spain that are in financial ruins? These “markets” never fell?
ok, ok, “but we are in the US”, so nothing bad can happen here?
And I am not arguing, I am just concerned about all of the assumption made behind this strategy that you and alot of people are preaching. I like it. Don’t get me wrong. I just feel like relying on it is STILL pretty much just flying blind…
My moto is “hope for the best, but prepare for the worst”, and that’s exactly what I am trying to understand what is it look like “the worst” without being overly paranoid and preparing for zombie attack, but thinking about realistic events….. I am just not convinced that this strategy is really the best when you take such “worst” possibilities into the account.
isn’t this still very faithful and trustful way of putting all eggs into the same basket really?
You know what I mean?
What do you think?
Welcome GW…
First let me say I hope you do chose to share your story and your investments. Given the concerns you’ve express I’m very interested to hear how you approach investing.
Back in the early 1980s my wife and I traveled to Caracas. Her best friend from childhood and her husband were living there at the time. The three of them grew up in the same African country and in their early 20s all three fled a revolution with the clothes on their backs.
I noticed that Evo wore a Rolex. This surprised me as he was not an ostentatious guy. One evening I asked him about it.
He said, “Once you’ve had solders show up at your hotel (he and his family owned a hotel), declare it is now their hotel and force you from it and the country at gunpoint, you learn to appreciate stores of wealth that are portable.”
We must all take into account the risks of where we live in planning our investments. I might someday live in South America, but I will continue to hold my assets in the US.
This is because, in my judgement, the US remains one of the most secure and stable places in the world and I suspect it will for the next 100 years or more. I base this not on some kind of patriotism, but rather my sense of what the foreseeable future is likely to hold.
No country or political system lasts forever. History teaches that well. But they all don’t end in a burst of flame either. My guess is that the US will most likely follow the path of England — a slow decline from world dominance rather than sudden and utter collapse. This will happen less because of our failures, and more because of the increasing success of other places in the world.
Of course, not everyone agrees with this, and for those that don’t, this blog has little value to offer.
For the ideas and strategies I discuss to work assumes and requires a continued rule of law. The day that disappears, then yes, the markets will no longer always go up.
But short of that, they have been remarkably resilient.
While some doomsday event could end it all, it is important to realize that the last ~150 years have been no walk in the park: Civil War, two World Wars, countless long and expensive other wars, depression, deflation, inflation, crashes and panics. And the market goes up.
This is because people continue to work, invent and strive for a better life. It is this enterprise that powers the companies that make up the market.
It makes far more sense to me to invest according to what is most likely to happen rather than the worst that could.
The problem with investing for the worst, is that you never know what that worst is going to look like.
Massive civil unrest or rampant disease?
Fortify your bunker and stock it with canned goods, guns and ammo.
An invasion by conquering armies or a revolution?
That bunker becomes a death trap. Better to be ready to move fast and light and hope your Rolex and the gold coins sewn into your clothes aren’t confiscated at the border.
Were I to see those things starting to develop, I’d be looking for the exits. But I don’t. If you do, your strategy will be something very different than what I present here. And I hope you’ll forgive me if I say I hope you’re wrong. 😉
As for your concerns about indexing, at ~40 years old it is no longer a new notion and throughout the Stock Series I’ve made the case for it as best I can.
As for Vanguard, the case for it also runs thru the posts here, most specifically this one: https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
If you remain unconvinced, there’s really not much more I can offer.
Lastly, “Ordinary Bucket” is a term I coined to describe where investments are held that are not tax-advantaged. This is covered in more detail here: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
As I’ve said here many times here, I have no interest in trying to persuade anyone of anything. I write about what has worked for me and what has kicked me in the ass. It is the same advice I give my daughter.
For those who share my basic world view, it may have some value. For those who don’t, it will have none at all.
Hope this helps!
My dear sir,
If you are half-serious about living in Africa (or any developing country) some day, have you looked into the local banking system and interest rates? They tend to be higher, much higher than in US.
I was in East Africa (mostly Rwanda) last December and was shocked to learn typical mortgage rate starts from 18% (!), and that’s for middle-class people with stable incomes. There’s some valid reason for high lending rates in a region that’s seen lots of turmoil, but things have been improving there and I rather suspect Africa will be the new China in a decade. All this is to say, it might be profitable to put some savings there to either invest or just earn interests from bank accounts.
For example, I happen to have a little bit of cash (7% of net worth) in Chinese Yuan, and am currently getting 5% return on 6-month CDs. Since it’s my home country and I go there almost every year to see family, it’s nice to be able to use that return as ‘pocket money’ when I’m there, instead of having to carry lots of US dollars and deal with Forex rates. The RMB is also consistently appreciating against the dollar, so that’s a tiny hedge on my part too. Would like to hear what you think. Thanks.
No plans to move to Africa, although we’ve been back to visit. At the time the Tanzanian shilling was officially trading at 13/1 against the dollar and 170/1 on the black market.
It was great for us as we had friends and relatives eager to give us shillings to be repaid into their London based account. This was the only way they could move money safely out of the country and into a hard currency.
So, in that case, there is no way I’d want to hold a local bank account no matter what the interest rate.
I did, however, almost enter into a joint venture in trucking there. In the end, my potential partner found other capital than that I was raising. Last I heard, they were doing rather well.
But this was all some time ago.
From what I read, China is making major inroads into the African markets. Great potential there, I think.
We have considered moving to Ecuador and some expats there hold local accounts paying handsome interest rates. It helps that Ecuador uses the US dollar as their currency. Still, this calls for caution as regulations are lax and there is no protection like FIDC for deposits.
I think what you are doing with the Yaun makes sense. You have a connection with China and likely a deeper understanding than most outsiders. Plus, as you say, it’s nice to have cash there for your visits.
But holding a foreign savings account is basically trading in currencies and interest rates everywhere are subject to local inflation and market rates. Lots of moving parts to keep track of.
Interestingly, high interest rates were quite the topic of conversation in the comments on this post: https://jlcollinsnh.com/2014/12/09/micro-lending-with-kiva/
So, when are you going to organize a reader meet-up in China for me? 🙂
A reader meet-up in China? Hmm, that’s an idea! I’ll have to check if your blog is even accessible behind the infamous “Great Firewall”:).
But if you ever decide to spend some time in the Bay Area, I’d love to organize a meet-up here! I’m sure there are many readers of your blog here.
MMM did a poll on professions of his readership a while ago that yielded predictable but still interesting results. Would be fun if you do a similar poll on both profession and geography of this blog’s audience.
As for investment in Africa, I’d be interested in that too. You are right though the hard part is finding the right partner. After I ease out of the day job, I might just go live in East African for a while, teach yoga and look for investment opportunities then. That should be better than the helicopter approach.:). I might also go back to Kenya this summer to see the wildebeests migration, if I can get away from work that is (sigh).
BTW, just finished reading a poignant memoir about growing up in Africa (Rhodesia and Zambia) by Alexandra Fuller. A great read, very unconventional family and childhood, lots of heartbreaks, yet unsentimental.
Thanks Jim, I’ll probably share my story but the more i think about it the more i feel like there is nothing to be proud of and I would end up whining about my fears rather than being constrictive. And I would hate to sound like an emotional lifophobic..
After all I posted my comment in hopes of a conversation rather then question-here-is-0your-answer gig.
I wonder about that friend of yours in Africa. Nothing like That happened to me. What is his outlook on life and money and investing?
And if you suspected that the time has come for an exist strategy, what would it be? What would you recommend to your daughter?
Timing “bad times” is the same as timing market… When you know that it’s time to go, it’s usually too late. I bet you that friend who was forced from his hotel probably didn’t see this coming. It’s like being a frog in a pot with water that’s about to boil. Though decline is a gradual process, it’s “unnoticeable” from within till the moment the water is actually boils.
And yes, I want to be wrong too. I don’t want to only get ready for the worst, I want to hope for the best as well. I know i need to invest, i know path you describe is good, it’s just that I get paralyzed with fear and can’t move forward. I need to explore all “what-ifs” before I make that final move. And I have no one to discuss this with. I am the financial “guru” of my family and circle of friends and the guru I am really not. I know how to be a saver, I know how to be smart about not wasting money, i know to ask alot of questions when it comes to money, but even that doesn’t take me to 50% saving rate.
In fact “saving” is not even term that circulates in my family (and surely investing doesn’t come close either) . In that when I say “family” I mean my extended family – my parents, my cousins, my husband and his family, etc… I am feeling pulled between the notion of saving money which deep inside I know is a right thing to do, and a proved experience in my family for the last 100 years that yells loudly that saving is worthless and pointless and might get one no where so why bother. No, it’s not about upgrading lifestyle, it’s about having just enough to survive….. in those 100 years no one in my family ever had anything to save, nor had an option to be legally financially independent even if they had the money for it… I know this doesn’t make sense to you but it makes sense to me.
So what’s left? I believe in investing in people and relationships. Farm will be nice too but it’s just not my thing….
Which brings me back to your friend in Africa. So what does he think? What are his priorities? What’s his approach to saving, investing, money, security and life in general. I wonder.
And what would be your exit strategy if you had to recommend one to your daughter?
Mark Twain once said:
“I am an old man and have known a great many troubles, but most of them never happened.”
That one of the quotes from this post on some of my favorites: https://jlcollinsnh.com/2012/06/12/i-could-not-have-said-it-better-myself/
It resonates with me because I watched my mother ruin her life worrying about things that never happened.
Certainly the world and its rule of law could collapse around us and all this financial effort will be for naught. Worth keeping our eyes open. But the odds against it are long.
But if we succumb to relentless fear and worry about the possibility, it will most certainly ruin our life. Even if it never happens.
Whenever we strive to achieve a goal, be it reaching FI or mastering a craft, there is always the chance cruel fate will intervene. But that’s no reason not to try. A large measure of the satisfaction is in the effort anyway.
You say for “100 years no one in my family ever had anything to save, nor had an option to be legally financially independent…”
But maybe now is the time to break that cycle. Consider this from Bucking the Trend:
* Let’s face it, you are already “wealthy” by almost any worldly definition so let’s keep this in perspective. Just by reading this post we know you are:
–In a sheltered, warm place with connectivity to the Internet.
–Clothed (although maybe I shouldn’t assume too much).
–Literate and proficient in one of the most influential languages in the world.
–Probably not too concerned about from where your next meal is going to come.
*From: http://bucking-the-trend.com/my-wealth-manifesto/#more-75
Here’s another perspective from my friend Tom that I like:
https://jlcollinsnh.com/2014/01/14/case-study-7-what-it-looks-like-when-everything-financial-goes-wrong/
As for my friend Ivo, he passed away many years ago. His widow lives in Italy where they settled after Africa. He was of Italian descent and held dual citizenship. My guess is that would be his advice.
My wife didn’t have that advantage. As she shared with me, she grew up in a paradise and enjoyed a golden childhood. She had begun a career in banking. The revolution shattered that and scattered her siblings, mother and other relatives across the globe. He father died.
She made her way from Africa thru London and to Chicago where her sister lived. She got a menial job in a factory and went to community college. After 5-6 years she became a citizen. By the time we met, she was established in a new career and had managed to bring her mother here to live with her.
Despite all that, in the 33 years we’ve been married, I’ve never once heard her express concern about the future.
My guess is, after what she’s been thru, she knows she can handle whatever comes her way. The only real security is in yourself and having the flexibility to adapt.
This is what we tell our daughter. We have also encouraged her to get out and explore the world. It’s a big place with many options should things turn dark wherever you happen to be.
I have no idea whether the next 100 years will be a century of wine and roses or see the collapse of civilization. But I do know that paralyzing fear will be completely useless in either case.
I like this one the most: “Whatever course you decide upon, there is always someone to tell you that you are wrong.” – Emerson
My problem is that my parents who were always supportive are telling me that I am wrong, and they for the most part were always right….
2 comments on assumptions –
“This is because people continue to work, invent and strive for a better life. It is this enterprise that powers the companies that make up the market.” – so how can totally ruined financially Spain and Greece can be explained? Are you sure that this assumption is valid?
And another one on from one of your posts that “inflation is good” that it is good for growth… but don’t you think that growth due to inflation is only an illusion of growth? Isn’t it to make people feel happy like there savings (or worth of a cmpany) grows when in reality that increased worth is only capable to buy the same amount of whatever. There is no growth in that, it’s only an illusion.
“Despite all that, in the 33 years we’ve been married, I’ve never once heard her express concern about the future.”
I think people who’ve been though something like that are not concerned about future because they know it’s totally out of their control. But for that specific reason my parents urge me from saving anything.
I am not sure but i think instead of savings they believe purely in luck. And the more i think about it, the more i come to conclusion that almost everything good that happened is based on luck too. Surely, to win a lottery one must buy a ticket, but still, buying a ticket doesn’t mean winning. So where is the balance and how to buy a correct kind of “lottery”?
My story is. I was born in relatively poor situation. Nothing major. We had our basics covered – shelter (i was sharing living room with my brother till i was practically 18), food, and clothing (hand-me-downs from siblings, cousins, neighbors etc. I got my first brand new piece of clothing with my 2nd paycheck at 17, first one went to buy toys….brand new my own clean toys)….. With some luck my father had a car and we had a small studio-like cabin in the country in the middle of nowhere. I never felt poor. My parents retired when I was small and I had the luxury of spending summers with my family. Oh and my father could fix and make anything… and i mean a-n-y-t-h-i-n-g…. My mother – just a wonderful, smart, wise, clam, calculating woman who always made any situation look ok. No money? No problem, we didn’t need that stuff (any stuff) anyway. She taught me to be smart about money and both of y parents being pretty adventurous how to take moderate calculated risk. Having 3 kids after 50 (my dad and 40 my mom) back in their days were unheard of. Their moto was always not to worry about future but do what feels right, right now. Irresponsible? I don’t think so. Optimistic? Probably.
I think I am wondering off too far now, but I love my parents and our life back then.
Anyway, I grew up with a mind set of minimalistic needs and I am ok with it. But still my mother also taught me that money ws just money and not worth dedicating my life to it. Money is the tool to get ahead and achieve goals. Saving for the heck of saving was frown upon. Spending money smart was not only about saving it everywhere one could, but to spend it too, but spending it for things that were worth it.
When we moved to the US, there was 1 expense there was no cap on for anyone – international calls – no matter how expensive. She believed our ability to contact friends and relatives was more important then money. She said that it was an indulgence worth paying for.
Anyway at 19 we all moved to CA. No we didn’t have to, no we didn’t run away from something horrible. The opportunity was there and it was an adventure. The safety net though was always there: “If we don’t like it, we can always come back.” My father said it was a 3-month adventure. My mom hoped to change his mind.
I got lucky and found a very good language school. With good enough language a year later I was able to attend college and find a decent job. At minimum wage though I wanted to save for a nice car. My full-time college experience was during full-time work and I lived with parents.
When I saved enough for a nice shiny car,I found myself not being able to part with the money. The cause didn’t seem important enough to say goodbye to the money I saved. Then a plan was developed because I had this idea of moving to upstate NY and figured I could save enough to buy a cheap house there.
The idea of moving died but I had the money I planned for down payment.
At this point I decided to find a middle ground – to get myself a safety net. Apartment in my home town sounded like a good compromise. It was real estate – a worthy cause – but not in NY, but my hometown instead where “if something went wrong” I could run away to. I never though of real estate as an investment and I still don’t. With a major case of luck the apartment got paid off and in another 3 years I found myself sitting on another nice sum of money I felt an urge to do something with. Again, parents always warned me from keeping cash or another paper representation of wealth. At least apartment was something real, somewhere I could live.
Did I say that the apartment appreciated double 4 months after I got it? Pure luck! And now it’s about 3times more than the purchase price.
Anyway I think I just wanted to avoid the question of investing because I went back to the same strategy as before and the 2nd apartment was purchased in my home town.
My parents went back few years later. Few years after 2nd apartment was purchased went into paying off the mortgage.
2nd apartment was purchased a year after I graduated from college. Now both apartments are are paid off and produce a stream of rental income. As much as I want to take credit for the “net worth” I accumulated by now I feel like it was just luck.
So that’s the history.
Now my dilemmas are – I am making money and I am saving money but more real estate is an overkill. It’s not an investment in my mind. It’s a safety net and I have it set now.
With those 2 apartments and a share in my parents I am close enough to 500k in net worth. Though I don’t see it that way. It’s something I want to keep, no that I want to sell. This is something that makes me feel warm and fuzzy at night and I can sleep.
I now feel, it’s time to invest. I feel like I am starting from the square 1 though as all of my “net worth” is untouchable.
I look into my situation and I feel like to complete FI I have to sacrifice too much. Retirement is far. As well as college for my son. Did I say that my parents are in complete opposition to 529, IRA and 401k because they don’t think that by the time I’ll be able to use any of that it will be worthless? Yeah. That’s what makes it so hard. I always listened to their advice and i think they are a major part of my luck. Not being able to rely on them for moral support is hard. But I fell like I can’t follow their course anymore. I am not a pessimist really.
I hope for the best, but all lessons creep in and stop me cause i have no support from ppl I trust. My husband is even worse. At least I am concerned but I make steps forward. He is only concerned. That’s where it ends. That’s why I am in charge of finances. So when I decide to do something, I must be sure so my own concerns, his concerns, and my parents concerns don’t ruin my confidence in the direction taken. I must be ready to answer all questions. That’s why I looking wisdom of people like you.
Arg, anyway, this is alot of lyricism about nothing.
I am not sure how I feel about retirement accounts. I hate the idea of not being able to touch my money for a long long period of time.
My immediate financial goal is following. My parents (90 and 75) have an apartment in our home town. I owe 3rd of it. My siblings will inherit other 2 3rds upon my parents death. I have sentimental feelings for that apartment so I don’t want to be sold. I plan to pay my siblings out from their shares when the time comes. We have good honest relationships so this won’t be a battle, it’s just a matter of me having the money. And they will wait if I don’t have enough or the market is down or whatever.
I want to get 100% ownership of that apartment and so that’s what I am saving for right now. I want my money to grow though. Because no matter how long my parents will live, I won’t have enough but the day X. And for the obvious reasons my timeline is not set in stone. But I for sure can’t have my money locked in in IRA.
I just wander to know how wrong do you think I am in my approach? It’s hard for me to think very long term. And I need to make sure I thought out all the aspects of what I am about to do.
Alot of words. I hope you are not too irritated.
Not irritated at all, GW…
…but we have come to the point where there is little more I can offer.
You have my thoughts in fairly great detail both in the posts on this blog and in my responses to the many questions that follow them.
Only you can decide if the ideas here resonate with you and the extent to which you can or should incorporate them with the others you have embraced in your life.
This is one of the reasons I, too, like that Emerson quote and included it in that post. 😉
To your specific questions:
Spain and Greece are both very small economies and, kind of like small companies, as such they carry more risk and volatility.
But, yes, I think both will come back precisely because of the nature of human creativity I described above. The wheel is always turning.
Inflation, especially in large sudden doses, can be very damaging and it certainly erodes the value of paper currencies. So, as you suggest, some of the increased value of an asset is an illusion.
But at the same time, in smaller less sudden doses, it serves as a very useful lubricant for business growth.
Thanks for sharing your story.
Hi Mr. Collins,
I’m so grateful to your blog, esp. the Stocks series, for offering a simple way to investing! After reading your blog (and MMM), I moved all my savings (IRAs, Roth, non tax advantaged investments) to Vanguard (they really should give you an award or something!). Gradually sold almost all individual stocks in Roth in exchange for VTSAX, which is now also the default fund for any “new” money coming my way.
However, I do have some Apple shares bought in 2004 (lucky me! :)) left, and I’ve been debating if I should trade them for VTSAX or leave them alone. My only reason for wanting to hold on to Apple shares is they are probably going to do well for another few years according to my crystal ball of course, better than the broad economy because they are in high-tech and they have loads and loads of cash. The shares are in ROTH due to my genius:), and valued at about 13% of all my equity holdings and about 9% of my net worth as of today’s market close.
BTW, I’m probably FI by now per the 4% rule, but still working because I don’t mind my job or my colleagues; and I want to build extra cushion just in case the market crashes the minute I quit.
This is probably a personal risk tolerance question, but would still like to hear your opinion. My risk tolerance is high I think; for example, I didn’t do anything to the 401k holdings during the 2007-2008 crash; and generally ignore market ups and downs although I read the news. Do you think, IF Apple stock loses, say, 50% of its market value (assuming the broad economy is fine), I’d be in a much weakened position for overall FI? My gut feeling is probably not; but the feeling is biased because I’ve grown fond of Apple and their products.
Hi Jian…
Always nice to see you here!
Apple? Bought in 2004? In a Roth?
I think you might be confused as to who should be giving who advice. 😉
Congratulations on being FI!
The Apple question is one of personal risk tolerance, but even if it dropped 50% (while the rest of the market was stable) it wouldn’t destroy your being FI. At 9% of your net worth, overall you’d drop 4.5%.
For example, if your net worth was $1,000,000, it would fall to $955,000. At a 4% withdrawal rate your annual income would go from $40,000 to $38,200 — a drop of just $1800. Perfectly survivable.
Apple has certainly been a star. Its market cap is now ~700m and word is it could well be the first billion market cap company ever. Tim Cook has certainly shown it can prosper under his leadership.
But history is filled with once great companies that fell from grace: GM, US Steel, Kodak, Xerox, Enron. Of the original Dow stocks, only one survives: GE.
The world is filled with companies planning, striving, hoping, plotting to take bites out of that tasty Apple. New technologies are brewing that might one day sweep away tablets and phones. (No I don’t know what they are) 🙂
Nor do I know if this will be tomorrow’s news or not for 50 years.
If it were me, I’d count my blessings, take my profits and move on to VTSAX. Especially as I could do it in a Roth tax free. Holding it would be too risky for me.
When the market drops 50% you can reasonably and reliably expect it to recover. This is not the case with individual companies and their stocks.
That said, since it’s only 9% of your net worth, it’s not a horrible risk to hold it and it does have momentum on its side.
Perhaps the most reasonable path would be to trim it back to 5% of your holdings. At that level the risk is low and it still has the potential to boost your overall performance if it continues on course.
An old Wall Street saying: Never fall in love with a stock. It will never love you back.
As for your job, nothing wrong with continuing to work as long as you like. But isn’t nice to know it’s optional? 🙂
Hi Mr. Collins,
Thanks so much for sharing your thoughts. I knew I could count on thoughtful and nuanced perspective from you! This is exactly what I needed. I was torn between wanting to be a true “indexer” and to holding on to my favorite stock:), but the intellectual discrepancy was bugging me. Now you’ve offered me an escape path where I get to eat the cake and have it too! I’ll probably take the compromise approach and sell half of my holdings, so Apple will only take up ~5% of my total worth.
BTW, S&P 500 already has decent exposure to Apple. But remember I’m also emotionally attached to it, despite knowing it’ll never love me back :)! Besides, it gives me bragging rights, which is not insignificant a factor in my decision. The story is, I went to NYC to visit a school friend in 2004, and saw everyone jogging, rollerskating, walking in Central Park and along the (East?) River with those now iconic white earbuds. Came back to the Bay Area and looked up Apple shares, didn’t see anything troublesome, esp. no short-selling, which to me was re-assuring. So I bought 100 share using all the cash I had in Roth at the time, kinda on a whim. Now it has become my go-to example of “See how smart I am”, whenever I want to annoy my friends or impress a new acquaintance.
Truth is, I’ve had even better returns on other single stock picks, as well as very bad ones. I bought into companies because a friend got hired by them, or a boy-friend or co-worker’s spouse worked there, or Warren Buffett bought into them (GE stocks, at $9/sh after the crash in 2008). But I’m not Buffett and got scared a week later and sold them! My shares of a Chinese solar-panel company is now worth exactly $0. All this is to say, I concede that I’m not a good stock-picker and will stick to indexing.
However, it’s a lot of fun trying to pick winners. A LOT! I suspect it’s what race horse gamblers feel. I’ll put aside some “fun money” for this very purpose – to satisfy the gambler in me. But it’ll be what I can afford to lose, without affecting my overall financial health.
As for the JOB, I’m working up the nerve to set a deadline to quit, which is end of 2015 for now. It’s so easy to keep doing what we do already, very hard to break the habit. I need to start something on the side, so I can ease into not having a day job while still having something to do. So much for “retiring” :). But you are absolutely right, it sure is great to know that I don’t have to hang on to my job no matter what! It changes how I feel completely – it’s incredibly empowering knowing I can tell the higher-ups to take this job and s#$e it!:) But weirdly enough, it also enabled me to enjoy the work much more than if I depended on it. Human psychology is certainly complicated. It’s like dating!! 🙂
Hi Mr. Collins,
Just recently found your blog (via MMM, like most it seems). I’ve read the entire Stock Series and many others.
I’ve seen mentioned several times that you were working on a book, based on the Stock Series. These mentions were at least a couple of years back. I don’t see the book advertised on here.
Did you ever get it finished? If yes, where do I get it?
I’m thinking it will make a great wedding gift for a favorite niece getting married in May.
It would also make me look much less tightwadish than a card with a link to the Stock Series lovingly hand written inside.
Great work here by the way. Wish I’d found it at its birth.
Welcome Joe…
Good to see you here. Mr. MM has been very supportive of what I do and no question a lot of folks found their way from there.
The book is still a work in progress, having turned out to be a far more time consuming project than I would have guessed or bargained for.
The good news is the first major rewrite is now with my editor. From here it could be still more rewriting or just final polishing or, most likely, somewhere in between.
We figure it should be out this Spring. But then, last summer we figured it would be out last Fall. Go figure! 😉
When it’s ready I’ll be announcing it with a post, so please stay tuned.
Thanks for you patience and your kind words.
Mr. Collins,
You are a true miracle in this world. You have impacted my life in an incredibly positive way.
I am 25 years old, a beginning investor, and it is so incredibly easy to be get utterly overwhelmed by all of the “advice”. People try to sell me financial products, or give an all weather portfolio, or yell at me on tv to buy this stock and that stock.
I am an immigrant, came to US at 12 alone, my parents still live in my home country. I have no adult grown up i can trust. Therefore, the advice that you posted online for your daughter warmed my heart. I feel like I can trust you Sir.
Mr. Collins, I guess i can say that with a lot of hard work, I achieved an american dream. I am graduating NYU grad school with 4.0 GPA and secured a job with a six figure salary. Meanwhile, I managed to save about $30,000 dollars in my savings and i am debt free.
May I please ask you for an advice? I am trying to be as judicious as I can about my investments and want to ensure that I am on the right path.
1) I opened up a ROTH IRA with Vanguard Target Retirement 2055 Fund. I contributed maximum of $5,500 in 2014 and will use dollar cost averaging to put about $450 each month for 2015.
2) I will utilize my 401k and contribute up to $17,500 (i’m starting in june 2015). my company offers 6% match.
3) This is my question: I have about $30,000 in an emergency fund, and I want to invest in addition to my roth and 401k into Vanguards VTSAX (per your recommendation).
-Does this entail opening a separate brokerage (non-taxable) account?
-Should I implement dollar cost averaging and automate my paycheck to put some money in there too?
-Are there tax implications for having a non-ira account? Will I be paying lots of taxes at the end of the year? Or will I only pay taxes if i receive capital gains?
Thank you one million times.
Well, I’ve been called a lot of things over the years, mostly unprintable, but a “….miracle…” is a first.
In any event thank you!
Truth is, given all you’ve accomplished since arriving here at age 12, you’re the miracle! I’m particularly impressed that you’ve come out of NYU with no debt and $30,000. Well played!
The answers to all your questions are in the Stock Series https://jlcollinsnh.com/stock-series/, so my first piece of advice it to give that a close read. Or two.
That said, let’s look at your questions:
1. Your Roth is fine and opening it has served you well as you likely had little taxable income as a student. But now, earning over 100k you’re going to want to focus on tax-advantaged accounts like your 401k. Your 100k+ income is too high for a deductible IRA and depending on how high it is, maybe the Roth too.
Holding your Roth in a TRF is fine, but at your age I’d suggest the more aggressive all stock VTSAX. See: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
As for DCA, I am not a fan. See: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
If that makes sense, here’s a strategy from The Mad Fientist to consider: http://www.madfientist.com/front-loading/
2. For 2015 you can contribute up to 18k to your 401K. The 6% match is awesome. Must be a good company. 🙂
3. –You would open a taxable account directly with Vanguard. No other broker needed.
–Again, I don’t like DCA if you can do a lump sum. But for investing money as you earn it, arranging automatic transfers to your investment account is a great idea.
–Yes, investments held outside IRAs and 401Ks are subject to tax. That’s why they are called taxable accounts. 🙂
Specifically, each year you will owe tax on any dividends or capital gains distributions paid. This is true even if you, and you should, have them automatically reinvested. Capital gains distributions are earned when a fund trades stocks in its portfolio. This rarely happens in an index fund like VTSAX and this is one reason why VTSAX is considered “tax-efficient.”
Each year Vanguard will provide you with 1099 forms reporting your taxable earnings.
This is different from the capital gains owed if you sell shares of your fund at a profit. No matter how much your fund increases in value, there is no tax due until you sell.
You are welcome one million and one. 😉
Hello again Mr. Collins,
I was doing my due diligence and reading and re-reading your stock series along with all the links you forwarded to your readers of MadFientist, Streetfinance, MMM, and your hero Jack Bogle.
Mr. Collins, I apologize for coming back for the second sets of questions. I would be incredibly grateful for your guidance.
1) Emergency Fund: I have read through the Ask Jlcollinsh section and you seem to recommend about $5,000 in the emergency fund. Is that correct? After investing in Roth $5,500 last year, i have about $28,000 left in my emergency fund. At one point you said to someone, “what kind of an emergency are you preparing for?!” That struck a chord with me, I really should open a taxable account with Vanguard. With this said, would you recommend putting a lump sum of $23,000 into VTSAX?
2) I will be moving to Washington State after graduation ( i live in nyc now). My starting salary will be $104,000 payable semi-monthly. Can you kindly help me with calculations? If, I will contribute 18% to 401K + 6% match from my company, in addition I will be maxing my Roth, how much should I be saving additionally if I want to retire in 10 years? I am 25 and single now.
3) Lastly, I want to ask a question regarding your “How i failed my daughter” post. You mentioned that once your daughter gets a full time job, she should still for the next 10 or so years live as frugally as she did in college. This is a common question that would be useful for a millennial like me. I am interested in finding your opinion. Do you think getting a roommate would help in decreasing my monthly fixed cost? I know that the question is yes, but part of me thinks that I kinda deserve my own apartment now. In Seattle, a 1 bedroom is around $1200, however i’ll be able to lower it by $300-$500 living with a roommate.
Thank you so much again and again.
Welcome back NYU…
1. The amount of an emergency fund is very much tied to the question of “what kind of an emergency are you preparing for?”
If you have a family, single income, house (prone to expensive and unpredictable repairs), a few kids and car payments; you’re going to need a big one.
If you are single, making good money and living like a student, not so much.
If you are comfortably FI as I am, none at all.
As for investing a lump sum: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
2. Check out the chart in this post: https://jlcollinsnh.com/2015/02/11/case-study-12-tom-at-the-crossroads/
As you’ll see, your savings rate needs to be ~65% to retire in 10 years. To achieve that you’ll be maxing out your 401k (18k), Roth (5.5k) and investing in a taxable account. That last will be what you draw on first in early retirement.
It might look something like this:
104
-16 taxes, very rough estimate of ~15% effective rate
=88
=31 for living
=57 @ 65% savings rate
-18 401k
-5.5 Roth
=33.5 in taxable
If you go to this post, https://jlcollinsnh.com/calculators/
and select this calculator, http://www.globalrph.com/invcomp.cgi
You can see:
$57,000 per year earning 8% over 10 years = $825,734 @ 4% = $33,029 annual income.
3. Depends on which you want most: Financial Freedom or your own apartment.
Using the same calculator above, you can see:
$500 a month = $6000 per year earning 8% over 10 years = $86,919
$300 a month = $3600 per year earning 8% over 10 years = $52,152
Mr. Collins,
I am pleased to say that I opened up a VSTAX brokerage account with Vanguard. Thank you for your support and patience.
You are really making a positive difference in the world by educating young minds like me. Thank you and God bless you and your family.
My pleasure NYU…
Your warm comments are a great reward.
Hello Mr. Collins, I hope everything is well with you and your family. I am back with a question.
I received $50,000 gift from my father.It was a huge surprise, and I am not sure what to do with it! My roth is maxed out for this year. According to your stock series, you teach us to invest the surplus in VTSAX. Mr. Collins, Simply put, I realized that I am a big chicken and I am afraid to lose this money. Because I am still relatively inexperienced (25 year old), i really do not know how i will react when the economy sinks. After all being 100% in equities will get pretty rocky! Your philosophy is not to be afraid and during the storms to invest more.
I currently have $10,000 in my taxable account. You tell us that we have to be ready to stay the course, but can you give an advice to the young readers of your blogs. HOW do we stay the course? How do we prepare ourselves emotionally? And lastly, what would you have recommended your daughter if she received such a significant gift.
Thank you from the bottom of my heart.
Welcome back!
Let’s start with your last question first: I’d tell her to put it in VTSAX and forget about it for 20+ years.
Here’s my take for dealing with fear and investing in a raging bull market: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Good luck!
Hi Jim, I would love your opinion on whether on how I should contribute to my 401k and IRA.
I am 23, I have a steady income of 120k pretax, which I expect will grow yearly, and I spend about 26k a year on all my expenses (rent, food, car, spending money). I invest the rest of my money. I wish to retire early at 45 and I am currently looking into alternate sources of passive income.
I do not like the Traditional 401k because I do not like the idea of not being able to touch any of my money. However, I highly doubt my retirement income will be greater than my current income. I tried various online calculators but they give different results. I am leaning towards contributing 9k each to a Traditional and Roth 401k, and fully to a Roth IRA. What do you think or advise?
Hi Raymond…
Congratulations on an outstanding savings rate. If you maintain it and avoid lifestyle inflation you should be FI long before age 45.
You should be taking advantage off all tax-advantaged accounts you can, especially at your income level. This means fully fund your T-401k and, to the extent your income allows, your T-IRA.
Every dollar you don’t pay in taxes can compound for you over the years. My pal, The Mad Fientist, has a great series in place illustrating this: http://www.madfientist.com/guinea-pig-year-1/
Don’t worry about not being able to touch the money. There are strategies to handle that: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Plus, with your saving rate, you’ll also be investing in regular taxable accounts you can access anytime.
In short, tax-deductable 401k/IRA accounts now, convert to Roths in your retirement.
Hi Jim,
Hope you’re doing well! I really enjoyed your latest post about the guy with the boat and the townhouse.
I’d be very interested in hearing your opinion about MBAs. I know you must consider the opportunity cost of any degree, and I know that it’s possible for some people with certain companies to have their degree paid for. But if you can’t get your degree paid for, is there anything that makes getting an MBA worth the opportunity cost?
For instance, what would you say to a person with the following profile? Twenty-six years old, no debt, works as a technical writer making about 30k, saves about 16%, has a BA in humanities. This person wants to move up the corporate ladder and get management/leadership experience but finds it hard to do so without formal business education, and without much luck of getting a job at a company with a good training program (this is becoming less and less common). He’s also interested in starting his own business some day. He wants to get an MBA from the local public university which offers reasonable tuition but ultimately would be about an $80k opportunity cost. He’s interested in tech marketing and product management and would study those things at business school. All this being said, his goal is financial independence and he’s dedicated to this goal, just not sure how quickly he’ll get there without moving up in the world.
Do you think that getting an MBA would be worth it for some hypothetical person who conforms to that profile?
Thanks, Jim.
Hi Alanonymous…
It has been a long time since I was at the beginning to middle of my career, so things could well be different now.
At various times I thought about going back for my MBA, but could never justify the time and expensive. Would it have helped? Hard to tell.
What I did notice is lots and lots of bitter people who got MBAs and still found themselves stuck in the same jobs as before. So it was certainly not a magic bullet they were hoping for.
My observation is, once you are working for a company, they care only about what you can and are doing for them.
The exception is, I think, an MBA from one of the truly elite schools. If you want to climb the corporate ladder in the top companies and firms, this gets you in the door and on the fast track. The rest, of course, depends on how you deliver.
If you want the knowledge you’ll gain going thru the program, by all means consider it. But be wary of assuming it will open career doors.
Here’s what I’d do.
Go to the school and ask for information on the job placement success of their MBA graduates. Ask for a list of some of those graduates who have used it to make progress in their careers.
Call these people up and ask them to coffee or lunch. Tell them you want to ask about the program and how valuable they found it. You’ll learn a lot and make some great business contacts in the process.
Not on MBAs, but a couple of years ago I wrote a post on college:
https://jlcollinsnh.com/2012/05/23/the-college-conundrum/
Thanks for the response, Jim.
I will do what you suggested, and maybe I’ll focus on talking to people who were about my age when they went into the program.
Thanks again!
Hi Mr. Collins,
Thank you so much for all your advice. I have really learned a lot from your stock series, which I have read twice, and will be reading again soon. Can you please take a look at my ‘stats’ and possibly give me some advice on the questions below? Overall, I think/hope we are doing ok for a young couple in our early 30s. We have no kids and no plans for them at this time. We do need to work on our expenses, and consider the possibility of getting out of our high cost of living area when we can. We are currently caring for an elderly relative (not as a dependent), and are stuck in our location until she passes.
ASSETS – we have no debts at all, and do not own a home
-Husband 401K is @ $11,640 with 25% of salary with Fidelity invested in VINIX Vanguard Institutional Index. His salary is quite low, so we don’t max it, contributing about $10K per year.
-My 401K is @ $61,130 with 20% of salary with John Hancock invested in a JETSX Total Stock Market Index Fund with an expense ratio of .66. (Really a lousy list of funds to choose from here, I should probably be contributing less to this and more to the IRAs, but it’s just so easy to have it come out before it ever hits my bank account). This one is falling short of being maxed also, contributing about $13K per year, plus 3% employee match.
-Husband Roth IRA $11,182 in VFFVX Target Retirement Fund and $14,605 in VTSAX, with monthly automatic contributions, we have not yet fully funded this in a year, but we are getting close.
-My Roth IRA $9,080 in VFFVX Target Retirement Fund with monthly automatic contributions, we have not yet fully funded this in a year, but we are getting close.
-My leftover TSP from time in the service $2,045 (need to get this rolled over to Vanguard, but not quite sure if it is Roth or not).
Total investments: $109,680
We also have $13,000 in the emergency fund, and $8,000 in other savings (car, as both of ours are pretty old, and travel).
My big question is about the Vanguard IRAs. It seems that you are very gung ho for the traditional IRA over the Roth. I need to reread the stock series to remember why. In order to open a traditional IRA with Vanguard (and I have the same question about a taxable account), would I need to save up the $3,000 minimum again to open the new account? Do you recommend stopping the automatic contributions to the Roths, waiting until we have the minimum saved up for the traditional, and then contributing to those going forward, leaving the Roths alone from here on out? I do have a reasonable high risk tolerance, but I also want to “set it and forget it”, so then would you recommend opening a VTSMX fund in the IRAs, or going with the Target Funds, or maybe one of each?
Do you have any other suggestions for us, given our situation?
Thank you so much for taking the time to read and answer my questions!
Selah
HI Selah,
Let look first at you’re specific questions:
—You are correct, I’ve come to favor T-IRAs over Roths for people working and paying income taxes. The Mad Fientist is the one who opened my eyes regarding this. Rather than rereading the Stock Series (although that’s a fine idea!) for the reasons why, check out this post of his: http://www.madfientist.com/guinea-pig-year-1/
—Yes, to open a traditional IRA or taxable with Vanguard you typically need a $3,000 minimum. However, you can open one of their Target Retirement funds with $1000, so you could start there and move the money when you reach $3000.
—If you decide that going with a T-IRA makes more sense than a Roth, then yes stop the automatic contributions to the Roth. But keep the Roths you have.
—Automatic contributions are a great idea, so set them up again with your new IRA once you can.
—At your age, and if you really do have a high risk tolerance and will really “set it and forget it”, VTSMX is lower cost and very likely to provide greater results over the decades than the Target Funds. Once you reach $10,000 it will convert to VTSAX with still lower costs.
I’d swap out the Target funds for VTSMX/VTSAX across the board.
As for other suggestions:
—Perhaps you can move to a less expensive area with your elderly relative? Unless you think she’ll pass in the very near future, this is a option you should consider. The cost of where you live can, as you know, dramatically reduce the amount you can save and invest.
My guess is she has ties to the area and wants to stay? If so, it’s nice of you to want to accommodate her, but you have to balance that with your own very legitimate needs. In the same way parents should fund their retirement before their kids education.
—I’d leave the TPS in place. These are great accounts to have and are an exception to my rule of rolling out of employer based plans into personal IRAs. But be sure it is invested in the stock option for long-term growth.
—Likewise, VINIX is an excellent fund and very low cost. Also worth leaving alone once your husband moves on from that job.
— JETSX, on the other hand, is an example of a fund you should roll out of the moment you can. An expense ratio of .66% for an index fund is outrageous.
—$13,000 in an emergency fund (plus $8000 in other savings) seems very high to me. I don’t get the sense that you have an expensive lifestyle or that you are concerned about losing your jobs. Plus, you don’t own a house, and houses are a big reason people need larger emergency funds: Expensive things like furnaces and roofs tend to crop up.
I’d think about cutting this back, maybe making the $8000 travel/car budget do double duty. If you have an emergency, cut back on travel and nurse the old cars along till you get thru it. In an emergency, you’d do that anyway.
Overall, I think you are doing just fine. No debt and you understand the importance of reducing expenses and investing for the long-term. Well done!
Wow, thanks for getting back to me so quickly!
I didn’t realize that it was a good move to move money from one fund into another (Target Fund to VTSMX once the minimum is met) . It seems kind of dumb to say it out loud now, but I guess I thought of it sort of like ‘buying low/selling high,’ where I would be better off just holding the funds I had. I will definitely be moving the Roths (and starting the T-IRAs) in VTSMX.
Yes, the elderly relative has ties to the area and also owns the home we live in. As a result, we do pay less in rent than we should in the area (which I should have stated), but the cost of everything else is still pretty high. Although this is a dear dear relative that I in no way want to lose, I honestly can say that I do not think it will be for very much longer. That is a big part of holding such a large amount of cash reserves right now. I don’t know exactly when we will be leaving the area, or what our job situations will be when we do, but I do know that once we no longer have this responsibility, we will be moving (a new state, a new country? We don’t know yet but will be exploring our options at that time). I think I feel that if I have the cash on hand, we could be ready to go anywhere at a moment’s notice. Having said that, you are right, it is still high. I will possibly use some of that to start the T-IRAs this year.
Thank you again for your help, and for everything you’ve written along the way. I am a huge fan!
Hi Jim,
What do you think about Long Term Care Insurance?
Specifically, is there an optimal time to purchase?
I am 53 and my wife is 50 years old. We are not FI but we hope to be there within 10 years. We own a house worth 500K and have 11 years left on a 15 year fixed with a 140K balance. Out net worth is about 700K. Our monthly expenses are about $ 6,300 and we are both self-employed and currently taking home about 14K per month on average.
LTC Insurance will add about $ 400 per month to our expenses. Is this something you would do at any point? We can probably wait a few years but the premiums will definitely go up the longer we wait. What do you think?
Thanks,
Ron
Hi Ron…
I hate insurance questions.
1. I don’t like insurance.
2. Because I don’t like insurance, I’m no expert in it.
Wherever possible, I’ve always self insured. I’ve never had life insurance, other than what employers provided free, or LTC. Instead I’ve poured what would have been the premiums into my investments.
Of course, if I had died or been seriously disabled this wouldn’t have worked out as well. But my feeling was the odds were on our side (otherwise they wouldn’t want to sell me the insurance) and if we had to we’d just tough it out.
It helped that I was FI before our daughter was born and that we lived far below our means. I see the need for insurance more for those skating closer to the edge.
Ironic. The less financial resources you’ve managed to build, the more you need to spend on protection.
$400 a month is a huge bill: $4800 dollars a year. Invested that would build into a very nice stash. I’d find it very tough to spend it on something I very likely will never need. Knock wood. At my age it would be even more.
But this is me. I’m not about to tell you not to buy it. I’ve got enough on my conscience. 😉
If you do feel the need, you should probably buy it sooner rather than later. After all, needing it at 50 is a bigger deal than at 70 when you’ve less time left.
My pal Joshua – http://radicalpersonalfinance.com/rpf-0009-why-your-house-is-a-terrible-investment/ – talked about LTC in a podcast last fall. He’s an insurance expert and he was making the case that LTC is more important than life insurance.
As I recall, one of his points was if you die, your family loses your income. If you are disabled, they lose your income and have to support you. There were others.
I’ll reach out to him and ask for a link to that podcast. Well worth a listen. Assuming he responds, I’ll post it here.
Hi Ron…
As promised:
starting at 1:03: http://radicalpersonalfinance.com/friday-q-and-a-cash-houses-vs-mortgages-speculative-biotech-stocks-in-an-esa-physician-private-practice-vs-hospital-job-accounting-for-business-deductions-multi-family-living-529-plan-qualified/
And this one on Long-term care insurance.
http://radicalpersonalfinance.com/23/
Joshua really knows his stuff, so these are well worth a listen.
Hope this helps!
Jim,
Thanks for including my show links!
I haven’t yet released a comprehensive series on Long-Term Care insurance, but it’s coming in the future.
Ron, the only way to answer your question is to run a scenario comparison. You will need financial planning software for this or you will need to be very good with a calculator.
Take your existing financial plan and run the scenario that shows your ideal retirement lifestyle and see how the numbers work out under various assumptions. (Put in the age you plan to retire, your estimated net worth at retirement, assumed rates of return, assumed age of death, etc.) See what the margin of safety of your plan is under various scenarios.
Next, figure out what you would do if you and your spouse need long-term care. Find out how much it would cost in your area and what arrangements you would make. Figure out how you would expect your retirement lifestyle to change if one of you needs care and if both of you need care.
Then, run those scenarios with the added costs of Long-Term Care expenses and see how you plan holds up without insurance.
Finally, run the original scenario but add the necessary costs of LTC insurance premiums and see if you can afford the premiums and still maintain your ideal retirement scenario.
I know that’s a lot of math, but that’s the only actual way I’ve ever found to answer the question accurately. None of the “rules of thumb” ever hold up for very long.
The math is easy if you have good financial planning software. A good financial planner can easily run the scenario without insurance and can easily show how much your lifestyle/net worth will be impacted if you buy insurance and never need it.
Then, you just have to make a decision on what’s best for you.
Note this: the primary problem that LTC insurance covers is if you and your spouse are happily retired and then one of you needs care. Most people who are affluent prefer to remain in their own homes and hire the caregivers to come in and care for them. Most people prefer not to disrupt their lifestyle by moving to a cheaper place, etc.
This means that you generally have all of your original expenses of living PLUS the cost of LTC caregivers. If you account for $5k per month as your normal lifestyle but then have to add on an additional $4k of monthly LTC costs, that can disrupt a retirement plan very quickly. That’s the problem insurance solves.
Note, however, that there are many ways to solve the problem without insurance. Some people plan for family members to provide care. Some buy into a Continuing Care Retirement Community (CCRC). There are plenty of options.
LTC insurance is a useful one and often it’s the best one (for people who are affluent).
I don’t like rules of thumb but they are sometimes helpful. Here’s my rule of thumb with my experience.
$0 Net Worth to ~$500,000ish Net Worth at retirement = Can’t afford to have LTC insurance because can barely afford to retire. If LTC is needed the best plan will simply be to spend down assets and go on Medicaid. Hope not to need LTC and try to stay healthy.
~$500,000 to ~2M or $3M Net Worth at retirement = Most probably should buy LTC insurance if it’s available depending on planned expenses at net worth. Having and paying for LTC insurance premiums is doable and is probably preferable to spending down assets. Shop carefully and design a plan that fits the scenario. A minimum, “partnership” plan (partners with Medicaid and avoids some spend-down) might be appropriate at $500k NW…a nicer very robust policy might be doable at $2M or $3M NW.
~$2M or $3M Net Worth and up at retirment = probably don’t need LTC insurance depending on planned spending levels at retirement. But might be a cheap way to assure a higher nest egg left behind as an inheritance. Might be a cheap way to protect a million bucks from being spent unnecessarily.
If you do buy LTC insurance, make sure to work hard to do it in a tax-efficient manner.
-Run it through a business (especially a C-Corp if you have one) so you can deduct some or all of the premiums
-Pay for it with non-taxed dollars from a cash value life insurance policy or annuity if you have one.
These can be great ways to get great discounts on the policies.
Hope that helps!
Joshua
Thanks for the detailed response, Joshua.
It certainly helped me!
Thank you both so much for the prompt replies!
I will listen to the podcasts and run the numbers.
We are probably going to end up between 500K and $2M or 3M so we fit right there in the middle. Life, Health, Auto and Homeowners insurance is probably close to 20% of our expenses. This is the price we are paying for starting to save for retirement too late. Fortunately, we are both self employed and love our work.
Thanks Again and All the Best,
Ron
Hello Jim,
I found your blog from MMM website and I am so glad I did.
Your blog and MMM’s blog changed my whole perspective on life and money and investing.
I have lost hundreds of thousands of dollars in the stock market in the last few years which is impossible in this bull market but I did.
After reading your stock series I started investing in vanguard index funds.
Here is my situation:
House 1 worth 300k mortgage left 50k rental home
House 2 worth 380 mortgage left 200k
Physical gold 80k
529 plan for my kid 70k
401k of me and my husband 700k which is all in cash waiting for market to fall
Other stock accounts including vanguard 60k
Roth 20k
Loans on cars 40k
Household income 350k annual
I am >35 and am hoping to become FI soon. Our yearly expenses including mortgages and daycare payments is 72k
I need some advice from you. With our savings each month should we pay down our mortgage or fund our vanguard stock account or fund our kids 529 plans. I feel like gold will see its day in the next few years and I can regain some of my lost money in the stock market from that. What is your advice for me. Really appreciate it as I am at cross roads now and trying to make up for our past investment and lifestyle blunders.
Thanks For your time and insights.
Hi Fool (you’re being too hard on yourself),
Glad you found your way over here. Welcome.
Don’t feel too bad. It is perfectly possible to lose money in any market for reasons I describe here: https://jlcollinsnh.com/2012/04/25/stocks-part-iii-most-people-lose-money-in-the-market/
So you’re not alone. I’ve done it myself.
My first piece of advice is, don’t think you can make up for past losses. They are history and there is no investment accelerant to be applied to recover them.
Instead, think in terms of making a new beginning. The good news is you have a great base from which to start.
Let’s first look at the good news:
—With 350K in income and a 72K spend rate, you have an outstanding savings rate. This is a huge advantage.
Getting to FI:
—To have your investments support a 72 spend rate @ 4% withdrawal, you’ll need ~1.8m. https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
—You are at ~1.32m — 430k house equity & 860k investments, 70k 529plan, -40k car loans.
—So you are ~480k away. Not bad given your savings rate.
Questions:
—I’m not a fan of 529 plans. Too many restrictions. I’d keep it but stop funding it.
—Hard to say about your mortgage as you didn’t mention your interest rate. But basically I think under 4% keep it, over 6% pay it off and between it’s a toss.
—Your 40k car loans are likely at higher rates than your mortgage? If so, pay them off first.
—With your mortgages and car loans you have accepted the standard marketing line that debt is OK. It’s not. If you’re serious about reaching FI, learn to loath debt.
—Aggressively fund your Vanguard accounts. VTSAX is my favorite for wealth building.
—I am not a fan of gold, but if you want to own it you should have a clear understanding of what role you expect it to fill in your portfolio. Currency hedge? Inflation hedge?
But saying “I feel like gold will see its day in the next few years,” is a terrible reason. This is the “greater fool theory.” You are buying something that has no intrinsic value and no earning potential and you are hoping someone else (the greater fool) will come along and pay you more for it.
—“…in cash waiting for market to fall.” Really? How far? 10%? 20%? 50%? If it starts to fall, how will you know when it has fallen far enough? For that matter, how do you know it’s going to fall?
What you are planning to do is to time the market. Nobody can.
Jack Bogle once said in his 50+ years in the business not only as he never met anyone who could time the market, he’s never met anyone who has met anyone who could time the market.
Here’s my take: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Reading between the lines, my guess is that your investing approach has been trying to time the market and swinging for the fence with hot stocks. As you’ve learned, that’s a road to disaster. Don’t worry, I made the same mistake back in the day.
Take a deep breath. The road ahead is pretty simple.
Read thru the stock series here. Then decide on your allocation based on your needs and risk profile. Implement it with a just couple of Vanguard index funds and add to them as aggressively as your savings rate allows.
You’ll get there, and probably sooner than you think.
Good luck!
Thank you for the quick and wonderful advice.
Mortgage rates are around ~3%. Car loans are 0% and 1.99%. I will unload the physical gold gradually and just load up on the Vanguard funds.
To sell the rental home or to keep it is another big dilemma we have after facing all the problems with the rental management.
I wish I found this blog from inception and if I did I would be FI by now.
Your blog is phenomenal and truly inspirational. Glad how you and MMM work together in this blogosphere.
Hi Jim,
Your blog is wonderful! I am amazed at your continuous drive to do this free service to folks without expecting anything in return.
I have 2 kids aged 9 and 3. I have fidelity 529 plans for them totaling ~70K.
I understand you are not a fan of 529 plans. There are several theories out there regarding 529 plans (both for and against). I have a request for you. Sometime in the future, can you please blog about 529 plans in general and the case against it. A full article will enlighten the ignorant like me and some others.
Much appreciated.
Thank you, NB…
I appreciate your comment!
That’s a good idea, but with everything else in the queue it might be a while.
Meanwhile, Vanguard has some good info: https://investor.vanguard.com/what-we-offer/college/overview?Link=facet
On that page note this:
“Other ways to save for education goals”
and click on:
“Compare all college savings options”
529 plans are not bad things by any means.
Hello Jim
I have been reading your blog for quite a bit and in fact I loved it so much I immediately subscribed to your rss feeds so I never miss new posts. I have currently finished reading your stock series and I am beginning to re-read the series just find anything I have missed.
I am 26 years old and am a recent graduate as well. I have worked a few part time jobs here and there until I finally acquired a full time position at a company I am enjoying very much. While working a few of those part time jobs, I had managed to save quite a bit of money, however, one of the past jobs I had was a contract position which unfortunately ended abruptly and left me without a job for several months which sapped some of my savings.
I am coming to you now for help with trying to get myself on a stable path to wealth with my new position. I have been in this position for a little over a month so the benefits and such won’t start until March 1st, but here are some details I have as of now:
– I am currently making $40,000 gross salary
– I have about $5,000 currently saved in my local credit union’s savings account
– $2,000 in my Capital One 360 savings account
– I have about $20,000 in student loan debt that I have been paying for the past three
months.
– I don’t have any hard numbers on my savings rate, but I tend to be very frugal and
would like to achieve 50% or more.
– My employer has a 401k plan that I am definitely going to enroll in, however, I don’t
have the slightest clue as to which funds to choose out of their portfolio. I could email
that information if you would like.
– I don’t have a personal IRA account setup and I am curious as to which options I should
choose.
Please let me know if there are any details that are needed. I am sure I am forgetting something as I read several finance and early retirement blogs. There are so many options I have read and wish to try it sometimes makes my head swim, but in a good way.
I want to say thank you for providing such a wonderful blog and resource for people who wish to learn more about personal finance and investing. Your insight is greatly appreciated.
Welcome CCM…
Thanks for the kind words and for subscribing.
I’m glad you are reading thru the Stock Series. I’ve written about the issues that concern you there.
Info on 401K and IRAs: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
For ideas on how to sort thru the funds your 401k offers, check out my conversation with Sid in these comments above.
Ideas on what funds to choose:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
It can all seem a bit overwhelming at first, but as you read thru the posts it should begin to click together.
You mention you are reading several blogs at once on this stuff and that adds to your confusion. I’d suggest you focus on one at a time and move on only once you have a firm grasp of the concepts there.
Finally, once those student loans are paid just shift that money to your investments. You already have the discipline in place.
Your biggest risk to building wealth at this point is lifestyle inflation. You’ve made a good start and if you avoid that you’ll do great!
Hi Jim
Thank you so much for the prompt reply! I really do appreciate it.
Alright then, I will re-read and focus on the links that you provided as well as read the comments from earlier. I think this will help cement things further.
I think that is my biggest problem is following too many blogs at once and having many concepts and ideas at my disposal. I am getting better at consolidating ideas and choosing which one I like best.
Thank you for all your help Jim I really appreciate it!
Hi Mr. Collins!
My name is Kara Perez and I have a hard truth to tell you: I am 26 years old with no retirement savings. I’m sorry to appall you!
I graduated college in 2011 with $25,302 in loans and I am working very hard to pay them off this year. I have $10,200 left as of today and you can follow my progress at my website, karaelizabethperez.wordpress.com
I’m emailing you today with a question born out of concern though- I don’t have any investments or retirement funds and I’m beginning to worry about that. I’ve been reading your Stock Series and doing my own research. I believe I want to open a Roth IRA and start a Vanguard STAR Fund. Does that seem like the right way to go? Would you recommend that to your daughter? I have dreams of retiring in my 40’s and I know that starting to invest NOW is critical to that.
Obviously, as I am still in debt, paying that off is my number one priority. So I don’t have a ton of money to put towards investing right now. I have $1000 that I could put into investments right now and hopefully by the end of the year I’ll have another $500 to put away. Once I’m debt-free (happening by this December!) I plan to sock away 10K next year.
I am asking for your advice. I realize that you are not a financial planner and that you owe me nothing, but I have no one in my family I can ask these questions of and I am scared to take this leap before talking it out with someone.
Hi Kara…
I’m afraid I’m not so easily appalled. 😉
The fact that at 26 you are just being to invest is not a concern, but something to celebrate. So congratulations!
This, along with the fact you are aggressively paying down your debt, is a fine start that will serve you well.
Once the debt is gone, use that same discipline to simply shift that money into your investments.
Having only $1000 to start limits your options with Vanguard.
Star is a good choice. It is a “fund of funds” and so has a slightly higher ER.
You might also look at VGSTX https://personal.vanguard.com/us/funds/snapshot?FundId=1691&FundIntExt=INT
It will give you a 90/10 stock/bond allocation and an ER that is about half that of Star.
Once you reach $3000 you can consider moving to VTSMX. Once that hits $10,000 it will roll to VTSAX.
Unless your income is very low, you might consider a deductible IRA rather than a Roth. Each dollar you don’t spend on taxes you can invest so it will grow and compound for you over the decades.
To see how this works and how powerful it can be, check out http://www.madfientist.com/guinea-pig-year-1/
Hope this helps!
Thank you so much! I’m so excited by all the possibilities of the future. You are doing a great service to us all who are a little confused or unsure.
Mr. Collins,
how do you feel about using tax tricks of the super rich, like offshore corporations, etc., to get your income level to zero, while allowing assets to keep growing? A friend of mine is telling me this is the way to go. I wonder if it’s a quick way to an audit/jail sentence.
Thanks,
Chris.
Hi Chris…
Well, not being super rich I might not know all the tricks available, but my sense is they are overstated.
The IRS requires that all US citizen report all income earned no matter where in the world you earn it. Although there is a generous break on the first ~90k or so.
Further, any exotic tools and strategies will inevitably have very high costs and legal fees associated with them. I’d also be very careful in vetting any proposals. Trying to avoid the tax man has driven many into the arms of the con men.
I suspect that you are correct in that they could be audit flags.
As for jail, that’s only a concern in cases of fraud. So as long as these things are legal and reported, that should be no problem. But for some of these things, that might well be a very fine line.
In any event, I would tread very cautiously watching for cesspools of fees, fraud and legality.
Mr. Collins,
I am new to investing and wanted to ask you a 401K question. After reading through your stock series I decided to check on my own 401K allocation. I just turned 30 so I am still of the age to have an aggressive stance on investing. My problem is after looking through the options in my 401K, I dont believe I have an option for investing in a total stock market index fund (no vanguard funds available). After looking through all the options, there is only one fund with an expense ratio of below 1%. It is a mid-cap fund with an expense ratio of .66%. So, there really are no outliers with a much lower expense ratio. Any advice on sorting this out?
Thanks,
BW
Hi BW…
The sad truth is that many 401k plans still have wretched options.
Most offer at least an S&P500 index fund, usually the lowest cost fund on the list. While I prefer Vanguard, it can be from any company.
Here’s my guide line for finding it: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4212134
But if you plan doesn’t offer anything along these lines, the best you can do is sort thru what options there are and chose what comes closest.
You might also talk to your HR department about improving the plan.
Good luck!
Jim,
I just had to share this link with you. Any thoughts? Are some good points presented?… sure, but I can’t say I agree with a 50% dip like they opinionate.
http://www.marketwatch.com/story/stock-market-crash-of-2016-the-countdown-begins-2015-02-25
Sorry Dex but I’d be shocked if he reads that. From the top of this page:
“The investment ideas of others:
Occasionally in the comments I am asked to read some book, article and/or blog and dispute the ideas in them. I simply don’t have the time or inclination to do this.”
In addition to Matt’s response, I would add: ups and downs in the market are inevitable. If you are in it for the long haul, the ups and downs shouldn’t change your plan.
If the article is correct….or incorrect….or partially correct….who cares? Just keep investing!
Sidenote….I hope there is a crash….I’m looking to buy some stocks on sale!!
Hi Dex…
Matt is absolutely right, I prefer to avoid these “homework” assignments thrown my way.
But, for whatever reason, I did open and scan this one. Seems the author is following my advice in this post: https://jlcollinsnh.com/2014/01/01/1st-annual-louis-rukeyser-memorial-market-prediction-contest-2013-results-and-your-chance-to-enter-for-2014/ 🙂
Whenever someone is trying to predict the future and says something like “But a crash is a sure bet, it’s guaranteed certain,” I roll my eyes and hope my boots are tall enough, ’cause it sure is getting deep.
I tell my daughter, and have said on this blog, that sometime over the next ~50+ years or so she’ll be an investor she should expect a drop like what we had in 2007-8. Maybe even two.
Will that be in 2016? Possibly. Could be one of those other 50 years instead? Odds are 49 to 1 it will be.
If it is in ’16 and makes this guy right, it will be no more than sheer luck.
Here’s my forecast: https://jlcollinsnh.com/2015/01/08/2014-annual-louis-rukeyser-memorial-market-prediction-contest-results-and-my-forecast-for-2015/
If it turns out to be right, that too will be sheer luck.
Jim,
I’m sure the specifics are outside of your expertise, but I’m hoping the principles apply. I’ll keep it as simple as possible, but let me know if more detail is required.
My family has owned a small farm for decades. It has been rented out for the majority of this time, and responsibility is now passing to me to assess current value, update rent, etc. Mostly it is an incredibly passive investment. The tenants send a rent check for the full year January 1st and that’s the end of it. I’ve never even met them but this relationship has been maintained for years. After becoming a Jim Collins super-fan, I encouraged the family to funnel these small rent profits into an index fund and let it keep working for us, but then I got to thinking.
The current average cash rent rate for the part of the country is only about 2.8%. Not great as far as investments go. This fluctuates greatly over the years, as it is typically assessed by crop yields. The land value itself has increased by about 6% per year for at least the past 5 or so. Average land value annual percent increase for the state over the past 100 years is 4%.
I said I would keep it simple and I’m starting to complicate it, so I’ll try again. Assume for argument that the rent of the land is 4% per year, and that the value of the land increases by 4% per year as well. This requires reassessing the rent with the tenant every few years or so as the land value increases. I know everyone says never sell land, but I’m not much one for conventional wisdom and I know you aren’t either. My thought is if we sold the land, put the lump sum in an index fund, reinvest the gains and not touch it for 20-30 years, our investment becomes more valuable in the same period than if we kept renting it. Does the 4% rent + 4% land increase equal to the magic 8% average we hope for in an index fund, or is this coincidence? Seeing as we don’t tend the land or have the option (or desire) to buy more, there’s no way to reinvest the 4% gains into the initial investment (other than funneling the rent profit into an index fund).
I’m in numbers up to my eyeballs so I’m losing perspective, and I hope for both of our sakes that I didn’t oversimplify the math. If this interests you even slightly, I have links to the actual historical numbers for the state and specific county.
Hi Mark…
Always nice to hear from a “super-fan!”
Well, you are certainly right, evaluating farm land as an investment is out of my wheelhouse.
That said, let me offer a couple of thoughts.
First, I’m assuming you are only renting the land and there is not a house also being rented that requires maintenance?
If this is the case, and if you have reliable renters as it appears you do, I love the passive nature of it all.
Further, from the (very) little I have read, with populations increasing farm land should become steadily more valuable.
My guess is that the 4% rent + 4% land increase equaling the ~8% (~2% dividend & ~6% cap gain) average from an index fund is mostly coincidence. My guess is also that the land will be less volatile in price swings and it will certainly be less liquid.
I think I’d be inclined to keep it and, as you are, I’d funnel the rents into the index fund. If…
—this land doesn’t represent the vast majority of your wealth.
—it is in a part of the country likely to stay productive. I’m thinking about potential water shortages here.
—the 4% rent is a reasonably reliable expectation. You mentioned that average rents in the area run ~2.8% and that they fluctuate quite a bit.
—an 8% total annual return is a realistic expectation.
Hope this helps!
Hey there, Jim,
I’ve been perusing your site for a while now, and am so fortunate that you share your knowledge with us in such accessible (and free) ways. Thank you. You’re a deity.
I’ve been “struggling” with a decision for a little while now, and was wondering if I might get your input.
I am a new university professor; I invest in 3 retirement vehicles with each (monthly) paycheck. My monthly contributions look like this:
1) Our state pension fund (6.5% required employee contribution, with a 6.5% university match)
2) $540 into a 403b (pre-tax, no match)
3) Anywhere between $500 – $1000 into a Roth IRA (the monthly contribution tends to vary – I’m making sure I max it out for the 2014 year). My Roth IRA consists of index funds, advice I implemented given my age (34).
I am unable to max out my 403b any given year (I do not make enough). Attempting to max it out will mean that I am unable to fund my Roth IRA. So, I’ve decided that $540 into the 403b (monthly) will have to do for now.
However, I’ve been wondering. There is not a university match for the 403b, and I”ve been toying with stopping contributions to that account in the interest of investing that money ($540 monthly).
For example, I have an Admiral Shares fund through Vanguard that I invest in, monthly, but only about $100 per month.
Or, I can put that $540 toward student loans (I am 27k in student debt).
Basically, are the 3 retirement vehicles I invest in on a monthly basis necessary, or can I get away with 2 vehicles? It would look like this:
1) State pension fund (required pre-tax contribution, usually means around $450 per month out of my check; the university match means that over $900 goes into this fund monthly; I assume it will continue this way, unless a policy changes somewhere. I can tell you that required contributions are decreasing over the next couple of years, so my current 6.5% could easily look like 4% or 5% in a few years’ time.)
2) Roth IRA maxed out annually
Investing in only two vehicles would mean that I stop investing in the 403b and use that money ($540) toward other things (e.g., a more hefty contribution toward my Vanguard index funds, paying off student loans sooner, etc).
Love what you do, and am so appreciative of your support as we all attempt to learn this game and not kick ourselves in old age.
I will be 35 this year, by the way, and only started investing less than one year ago (front-loaded my education, which means I was broke for a long damned time. Now I make 57k across a 9 month teaching contract.)
Thank you for everything, Jim-
–BC
A deity, eh? Boy howdy is my wife going to be surprised to hear that! 🙂
But thank you, BC!
You have a few different issues woven together in your questions:
–Tax-deductable account v. Roth
–403b v. Roth
–Roth v. higher loan payments
–Tax-advantaged accounts v. taxable accounts
The first of these is the most important.
While you were broke and in a very low or even 0% tax bracket, funding a Roth made great sense. But now the tax deduction afforded by a deductible IRA and/or 401b becomes important.
Every dollar you save in taxes can continue to compound for you long-term. So you should very likely focus on a deductible IRA or the 403b, rather than the Roth.
Here’s a great post illustrating why: http://www.madfientist.com/guinea-pig-year-1/
But this is a surprisingly complex topic with many moving parts. This will help you sort thru it: http://momanddadmoney.com/documents/Traditional%20vs%20Roth%20IRA.pdf
The second question then becomes one of 403b v IRA, Roth or otherwise. These each have various limits and restrictions which I cover here: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
But a key factor is the fund options are available in your 403b. Some have excellent choices, others not so much. With an IRA, you can choose with fewer limits.
The third question becomes loan payoff v investment funds. This is largely a function of the interest rate on your loan. My rough guideline:
<4%, keep the loan
4-5%, depends on your personal preference
<6%, pay it off
Finally with tax-advantaged accounts v taxable, it is almost always better to go with the tax-advantaged. People are sometimes concerned about accessing the money before 59.5, but this is really no problem.
You can withdraw your contributions (but not the earnings) from your Roth tax and penalty free anytime.
For your deductible IRA, you can use the strategies described here: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Hope this helps!
Oh, and one last thing…
Congratulations on your new gig, Professor!
I’m sure it’s nice having some $$$ rolling in after years as a poor student. But, beware of the lifestyle inflation monster! 🙂
Keep living “poor” a while longer and focus on building yourself some wealth.
Hi Jim,
Let me just say thank you for your wonderful blog and all of the advice you’ve shared
here – I’ve been reading everything here for the past few months since I came across your
post on MMM and it is rapidly changing the way I view not only money, but life in general.
All for the better, of course!
First, here are my facts:
Partnered, no children, I’m 46, she is 51.
My income: 310k
Partner income: 55-90k (shifting responsibilities in past 2 yrs = income flux)
Home equity: 300k (interest on mortgage 3.5%)
My student loan debt: 75k at 3.0%
My 401k: 400k (100% match + roughly 100% profit sharing = 54k/yr invested per yr)
Partner 401k: 190K
HSA: 3k
In the midst of doing costly renovations to our current home, I found MMM and realized
we were in an uncomfortable spending frenzy and that we had to look at our financial
picture in a radically different light. We both like our careers (we’re in healthcare), but I especially, have no desire to HAVE to work and am determined to get to FI asap.
I recently had the opportunity to relocate for a new position that paid an eye-popping 600k/yr, but for logistical and professional reasons, I turned it down. It was very difficult to walk away from that kind of income, but it actually made me feel a lot less “stuck” in my current situation – nice to realize that there are such opportunities.
I am well aware that with our income, we should have a higher net worth, however, aside from the renovations and home purchase, we were paying off student loans and I started my career a bit later than most of my peers. This year, we are in a position to save about 60% of our after-tax income.
My question is with regard to asset allocation and paying down debt vs investing.
With the relatively low interest on the mortgage and my student loan, I’m inclined to keep them and invest instead. Would you agree?
And since we are in the wealth-building phase, would you recommend even the 20-30% bond holdings or stay with 100% stocks while we are both working (except for some emergency cash)?
I am reading John Bogle’s book of Common Sense Investing and he seems to be admittedly conservative on his recommended allocation. I’m aware of the risks in all stocks, but I think I have a bit more of an aggressive investment personality at this stage of my life.
Any thoughts you might share will be very appreciated, but mostly I wanted to thank you for
the great service you do in writing here – it is an amazing contribution to those of us who shun the confusion and expense of the financial advising industry.
You are fun to read and do a great job of distilling information in a very useful way.
Thanks,
TMT
Hi TMT…
Thanks for the kind words and welcome.
Seeing as you read MMM, I’ll resist the temptation to beat you up on the house and the expensive renovations. Other than to say, as I’m sure you’ve realized by now, those are obstacles to achieving FI.
Your 60% savings rate sounds impressive, until you match it to your 365-400k income. Even using the smaller 356k income, this means you are spending a whopping 146k a year. If you are serious about achieving FI, you’ll want to look at this too.
Ok, on to your questions:
1. Yes, given the 3.5% and 3% rates on your loans, I pay them off slowly and focus on investing.
2. Were I in your wealth-building position my allocation would be 100% stocks. Very aggressive, but in my mind the loan payments represent a conservative balance similar to the role bonds would play. But I am a very aggressive investor.
You are correct, Jack Bogle would definitely recommend you hold bonds, maybe even more than the 20-30% you mention. Mr. Bogle is a very conservative investor (in addition to being my personal hero).
But we are not talking about my allocation, or Mr. Bogle’s. We are talking about yours, and only you can decide what serves you best. But perhaps this can help you sort thru it: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Good luck!
Hi again Jim –
Thanks so much for the reply!
Believe me that if I had found you and/or MMM prior to the purchase of my current house, I’d still be in a rental with a much bigger amount of savings – however, very glad I found you both when I did.
I appreciate your input re: allocation and am inclined to be aggressive at this point since I feel I have some ground to make up. It’s good to hear a second opinion!
As far as spending vs saving, you noted my spending at 146k. Perhaps I am calculating incorrectly, but the 146k includes my income taxes of about 80k/yr. Our spending is hovering around 70k which I am determined to get down even lower.
In any case, I really appreciate your blog and that you take time to answer individual questions, it’s really such a fantastic contribution!
Thanks again,
Michelle
My pleasure, Michelle…
and thanks for the follow-up and kind words.
All the best in your journey!
Hi Jim,
I’ve been devouring your blog over the last several weeks. It is such an excellent resource and I thank you so much for creating it.
My question involves migrating from Betterment to Vanguard. On 1/1/15, I opened a taxable account with Betterment worth about $160k today. I was anxious to begin investing beyond my 401k and Roth, and Betterment provided a simple, effective way to do that. Fast-forward two months, after I’ve re-read your Stock Series, site comments, and MMM’s blog, and I think I’m ready to manage my own investments!
How would you recommend orchestrating this transition from Betterment to Vanguard? Cashing out Betterment now will result in significant short-term capital gains. So should I keep Betterment’s investments in place until early next year and simply redirect future deposits to a new, taxable Vanguard account? Or is there some better way?
Other info you may need:
– I’m 31 and plan to follow your advice of going very heavy in VTSAX, but maybe keeping 5-10% in VBTLX or VFIDX.
– My 401k balance of $3k is in a low E.R. S&P 500 fund (my bond fund choices are terrible). I’ll contribute the 18k max this year.
– My Roth IRA balance of $26k is at Vanguard, currently in their TR 2045 fund.
I tried to keep this brief so please let me know if you need more details. And thank you again for all you’ve written. I can’t wait to buy and recommend your book!
Welcome Brian…
Thanks for the kind words. I wish I had a book for you to buy. Someday… 😉
Since you’ve only had your Betterment account since January 1st and the market is only up ~1% so far this year, I can’t imagine you have “significant short-term capital gains.” 1% of 160k is only $1600, so unless you are in a very high tax bracket, I’d be inclined to just make the change and be done with it.
That said, if you want to hold Betterment until next year, that’s fine too. Just remember, assuming you are reinvesting the interest and dividends, you’ll have those short-term gains to consider as well.
Also, if come December the market has dropped and you are showing a loss, take it then both for the 2015 deduction and to capture the short-term loss for future use.
One other thought. Since you are now comfortable with handling your own assets allocation, you probably don’t need the TR 2045 fund that is doing this for you. I’d (and do) use VTSAX in my Roth.
Jim, thanks for your fast reply and advice. To better clarify, I’ve invested around 160k with Betterment and earned ~6k YTD (for a time-weighted return of 4%). Since I am in a very high tax bracket, I’ll take your latter advice and withdraw from Betterment early next year (maybe keeping a small amount with them for short-term goals, as you seem to do) and direct future deposits to a new Vanguard account. I’ll also look into swapping my Roth’s TR 2045 fund for VTSAX. Thank you again.
Hi Jim. Tax season is here. That means it’s confusion season for some of us. I can’t seem to figure out if I can contribute to a Traditional IRA this year. My situation? I’m retiring at 52 in 2015. In 2014, I worked as a freelancer/consultant and was able to contribute to a SEP IRA in the amount of $12,100. After working through the numbers on Turbo Tax, it looks like my AGI will be around $52,000. If I can contribute to a Traditional IRA it will increase my refund by $1,700. Can I contribute to both a SEP and traditional IRA ($6,500) for 2014? Thanks. Because of your sage advice, I plan to start Roth conversions this year.
Hi Eradicator…
It means confusion for all of us! 🙂
This is my understanding…
Your SEP is an “employer sponsored” retirement plan, even if your employer is a sole proprietorship: You.
Because you are covered under an employer sponsored retirement plan, there are income limits that restrict the deductibility of your traditional IRA: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work
As you can see in that chart, the upper limit for a single filer is $60,000. At $52,000 you are comfortably under this limit and should be good to go with your full $6500 contribution.
Congratulations on your pending retirement!
You’ve earned your retirement angel wings again. Thanks for the quick response. 2014 taxes done. On to the wife’s.
Best wishes
Jim,
Your site is a great resource – thanks for providing it – and I’m completely on board with the strategy. My situation is complicated as I’m moving to the US temporarily (I wrote to you a while back on October 21, 2014, but my move is now a month away and new considerations come to mind). I was wondering if you’d be so kind as to point on any errors or flaws in my plan? Two themes: 1) my existing UK accounts and 2) employer retirement plan (403b)
My UK-domiciled index funds are counted as PFICs, i.e. scary un-American things which get taxed to oblivion. As I don’t want to lose my UK tax wrapper, but still keep things as simple and diversified as possible, before leaving I’ll combine everything into a single Vanguard LifeStrategy (the UK-domiciled version). I’ll have to pay an accountant $150 each year to file the PFIC form with my tax return, but if I leave without selling it’ll avoid any taxes as I understand it. But if I eventually sell while in the US, gains will get taxed at 39.6% + backdated interest! Quite the gamble. There is a halfway house option of doing mark-to-market each year and paying tax on unrealised gains at my marginal rate (15%/25% borderline) regardless if I later leave. Since I’m likely to leave, I’m favouring the first option, but I’d appreciate your input (I know it’s a tough call, so no worries if you’d rather avoid!)
On retirement plans, I’ll be working at a university which offers a 403b plan. I’ll be on the 15%/25% tax bracket borderline as above – is it worth contributing beyond the employer match? Looks like they have Vanguard funds available, but I would be tempted to use a taxable account given the favourable 0% long term tax treatment and added flexibility. I could move the funds to the 403b later, when I’m more sure of future plans and probably further into the 25% bracket.
I love your keep it simple philosophy but unfortunately moving between countries is anything but simple – I haven’t even mentioned my UK pensions or my UK 1 man company (yet more IRS paperwork, even if actual tax owed is zero). Pretty sure I will need an accountant when tax season comes, but I’d really appreciate your thoughts on the big two decisions above to give me a head start. Thanks a million!
Hi Alex…
Welcome back.
As for your first issue, I’m afraid I don’t know nearly enough (or anything at all) about the UK investment/tax landscape. Any thoughts I might offer would be worse than useless.
As for your US based 403b plan, again I have no idea how or if this might be impacted by your UK situation.
You might post these questions here: https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/ Perhaps some of my European readers will have some ideas for you.
But, looking at it purely from a US perspective, you are likely better off fully funding it. Every dollar you don’t pay in tax is not only a dollar you get to keep, but it is a dollar that can continue to work and compound for you over the decades.
Sorry I can’t be of more help! 🙁
Hi Jim,
I have another question relating to opening an account for a child. We got some money as gift for our child and right now its sitting in our savings account. I was wondering if you could suggest where it would be best to invest this $2500, I also think this will be the account where I can periodically put in more money and any other gifts that may come from family in the future for the child.
Hi Sid…
It has been awhile since I’ve dealt with these, but as I recall you have three options:
1. Hold the money in your name, mentally earmarking it for your kid. This gives you maximum control.
2. UGTM accounts as described here: https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma
3. 529 Plans as described here: https://investor.vanguard.com/529-plan/
As you’ll see, 2 & 3 each have pros and cons so it is a matter of sorting thru and choosing what seems to best fit your personal needs.
Once your child starts working you can also consider funding a Roth for them. You can contribute $5500 or up to their maximum earnings each year, which ever is less.
Thanks you for your response, so going with the first option that you gave, can I open a taxable account through vanguard with my details and giving it a nickname for the child so I know I don’t mix up the money and then invest in a VTSAX fund.
Can I also have my own taxable account with vanguard separate from the one for the child.
As I recall, you can. But check with Vanguard.
Hello Jim (Assuming Mr. Collins is your father’s name),
First of all thank you so much for all the shared knowledge and experience.
I am actually an Israeli, but with american born parents and therefore have american citizenship. This brings some difficulty tax-wise, as Israel and the US have a double-tax treaty but not on dividends, capital gains and interest. Luckily, my gains so far have been under the personal exemption. In Israel however capital gains tax is 25% regardless of bracket. So this will definitely have a drag on my future performance once I start earning big returns. Nonetheless I am optimistic that me and my wife will be FI way before retirement.
Lets see how you fare with shekels 😉
A little bit about us: I am 30, and my wife 27, a kid on the way.
Earnings: 282000-307000 ILS (71000-77500 USD) pre tax depending on bonuses (roughly same tax brackets as in the states) – 7% to retirement account with 12.5% company match for (this is ridiculously amazing, I know) and 2.5% to IRA with 7.5% employer match.
Expenses: 141000 ILS (35500 USD) – cost of living in Israel is generally higher than in the states
Mortgage: 125K@3.5%, Equity: 69K (USD)
Retirement accounts: 25K (USD), IRAs: 5K (USD)
Just bought an apartment so starting saving again from scratch.
I think an 90/10 allocation will suit us, my thoughts were:
45% VTI ETF (no vanguard index funds in Israel)
45% TA-100 index fund (the equivalent of S&P500 here) – averaged 12% before inflation since inception in 2000 (yes we are relatively new to stocks here – there is a TA25 which has been around since 92, but less companies I assume means more volatility)
10% Israel total bond fund
My reasoning is that I want to get the potential earnings of the US total stock market, but the TA-100 will be a hedge against currency changes (over long times these cancel out), so after retirement when the exchange rate is low I will cash from TA-100, and when high will cash from VTI.
The reasoning for the Israel bond fund is that bonds work more or less the same wherever you are so I might as well invest in my own currency.
What do you think about my reasoning/plan? 50% savings rate has me home free at 46, right? I get chided by my coworkers that what I’m doing is unreasonable, and that it won’t work. Have every intention of proving them wrong by living MMM style and investing jlcollinsnh style 🙂
one more question, since capital gains here is 25%, does that mean i need my spending to be 3%, since 25% of the 4% will be taxed?
Thank you in advance for your reply
Yaacov (or Jack if you prefer)
Welcome Yaacov…
I’m not sure how I’d fare in shekels, so I appreciate you doing the conversion for me. 😉
My only concern with your investment strategy is that it ties 55% of your wealth to the Israeli economy. The issue is that this is a very small economy on the world stage and hence represents a larger risk.
Of course, that risk can go either way. Over the decades the Israeli market could under or out perform. Essentially you are betting on the latter, and you are a better judge of that than I.
That said, it occurs to me Israel is in a very dangerous neighborhood. You have chosen to tie your career and family life to its fate. You might consider balancing that risk with more investments outside the country.
As for reaching FI, if you check out the chart at the end of this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
You’ll see that a 50% savings rate gets you there in ~14 years. Since you already have ~100k in net worth, you are already on your way. Age 46 seems a very reasonable goal.
At a 4% withdrawal rate $887,500 supports $35,500 per year.
At a 3% rate, ~$1,175,000
Here in the US post-retirement frequently brings lower capital gains rates But if you’ll be stuck with a flat 25% regardless of income, yes you’ll want to take this into consideration. As always it will be a matter of your desire to retire balanced against your flexibility and risk tolerance.
It is very interesting to hear you are chided by your co-workers on this. Seems it is the same there as here in the US. Get used to being the odd one out! 🙂
On a side note, I’ve never been to Israel but almost made it last year. I was invited to participate in an archeological dig opening a cave that has been sealed for some 40,000 years. The hope was to find both human and Neanderthal fossils together.
The dig would have been followed by the chance to explore some of the country guided by a retired Israeli general (whose name I can’t recall), the man who was facilitating the partnership with the Cleveland Museum of Natural History.
Would have been a great time and my first visit there. Sigh.
Wow! What a speedy reply!!! Thank you so much for your insight.
I agree that Israel is a small economy on a global scale, but we have lots of innovation on our side, as we are heavy in export of technologies (I myself am an engineer). Nonetheless, I think I will increase my exposure to VTI to get the full power of the total stock market (3600 companies vs. 100). Then the israeli stocks and bonds can be my currency hedge as described in my previous post.
If ever you make it to Israel, you sir are in luck. My wife isn’t a general;) but is an archaeological conservator and would love to show you around archaeological sites and digs.
I have been preaching your stock series at work and some of it is starting to sink in for some people. Thank you again for it and the blog as a whole makes en enjoyable reading.
Thanks Yaacov…
That’s a very kind offer. I trust you cleared it with your wife? 🙂
Thanks, too, for passing the blog along to your colleagues!
My wife is on board for showing you around archeological digs. Might have to wait untill after her maternity leave, though. But if you came and were interested I would try to arrange for a reader meetup, provided people start reading your blog links that I send them.
I would like your 2 cents about mortgages. The fixed rate is 3.25%, but I also have the oppurtunity for a variable rate of up to 33% of the mortgage. It is Israel bank interest + 0.7% = 0.85%. The variable part can be paid off at any time and the fixed part incurs fees for paying off early. Given these rates, should I take the fixed mortgage for the maximum years so that I have low returns, and thus more money for investing? Or should I try to pay off debt ASAP. I have a feeling that since it is under 4% I know your answer 😉 but still taking the mortgage for longer periods means paying more interest overall.
Thank you again so much for this blog and all your insight.
Thanks!
It is always a great opportunity when you have a local offering to show you around. Even if she’s not a general. 😉
Candidly, it’s not likely to happen in the very near future but it would be a great trip. And I love the idea of a reader meet-up there. I know from the stats I have a small Israeli readership base. Who knows, maybe even a Chautauqua?
BTW and by sheer coincidence, I happen to be in the middle of reading Thieves in the Night by Arthur Koestler.
Written in 1945, it is a novel about one of the original Hebrew Communes of Galilee.
It was a book in my mother’s library, which I inherited, and I am only now reading it after all these years. I had no idea what it was about when I picked it up.
It is a well written and engaging story, and it appears Koestler has at least seven other books to his credit.
OK, mortgages!
Yep, at 3.25% I’d just keep the mortgage, especially if there is a fee for paying it off early.
Shifting 33% of it to a variable at only .85% is very appealing as well.
I don’t know how it works in Israel, but here in the US the danger with variable rate mortgages is that they can adjust upwards. For the unwary, this can be a dangerous trap.
I would only take one if I had an escape hatch. Like limits on how far and fast it can rise and/or something like assets I could use to pay it off if the rate jacked up too far.
But a .85% rate is very, very sweet!
Oh, man!
For what it’s worth, I’d attend a reader meet-up in Israel in a heartbeat!
-matt
Are you already there or would it be a travel destination for you, Matt?
It’d be a travel destination for me. I’ve always wanted to visit Israel anyway, and this would be a fantastic excuse to do so.
I have a question on my 401k options administered by Vanguard. I am currently invested in a target retirement fund which is 90% stocks (70% Domestic, 30% Intl) and 10% bonds (80% domestic 20% Intl). The fee is 0.07%. My 3% company match goes to our companies common stock fund. My company pays decent dividends but I don’t want that much of my 401k invested in my own company (see Enron). I re-balance quarterly to keep no more than 15% of my holdings in company stock. The thought being, if we ever get bought out, I hope I get paid a premium on that stock to compensate for potential layoff.
I’m rethinking my plan. I think for one, I need to ditch my company stock monthly and hold zero. Historically, my company lags market growth as it provides dividends.
I have access to the total bond market via VBMPX, which is just the institutional “plus” version of your bond fund. The expense ration is 0.05%.
I don’t have access to a total stock market index fund. I do have access to a small and mid-cap index fund, VEMPX, at 0.06%. I also have access to a large-cap index fund, VIIIX, at 0.02%. I realize I can combine the two of these to achieve your total stock market recommendation. The question is, what ratio should I hold the small/mid-caps to the large-caps to replicate the total market.
Any info or links would be great. Thank you!
Hi Ryan…
Personally, I’d just use VIIIX and that very sweet .02% ER.
For more, check out Addendum I & II here: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
I also agree you should be leery of holding too much in your company stock. Doing so focuses too much of your net worth in one equity. Plus your job and income are tied to the fortunes of that same company.
Jim,
I’ve very happy I found your website. In the last year I’ve gone from “I want to buy real estate to grow my wealth” to the “I need to find a good financial adviser” to “I can do this myself and low fee index investing makes sense”. I’m ready to put my plan into action, however, I wanted to ask for your thoughts.
I am 27, recently married with no kids (yet). I have a job that provides a matching 401k and my wife works independently as an S-Corp. She takes a modest salary and then takes a larger dividend at the end of the year. We are in the 33% tax bracket.
My plan:
Max out my 401k at work with the only index funds they provide (mix of S&P, small and mid cap index funds). 18,000
My wife to max out her SEP-IRA… 25% of her income. It is held through Vanguard so we are putting the money in VTSAX. around 18,000
Each of us starting a IRA and contributing $5,500 each then using a backdoor ROTH. Keep that in VTSAX.
Leftover income: put in a non tax advantage account (VTSAX).
My question…. This is a lot of money to be putting away into retirement. Should we be focused on maxing out these accounts BEFORE starting our VTSAX fund? Or should we slow down the contributions to these account and dedicate more to growing our simple investment portfolio with VTSAX.
Should we be investing in VTSAX in our retirement funds? or a target fund? My guess is that at our age we should be full stocks so why not go low fee index. When we reach 40 then we would start to hold more bonds.
Thank you for your time.
Hi Brian…
First, congratulations!
It sounds like you are off to a great start. I agree with everything you are doing and VTSAX is the only stock fund we own. We own it in our Roths, IRAs and taxable account.
To answer your question, fund your tax advantaged accounts first and your taxable account last. Especially in the 33% bracket.
At your income level, you should be able to fund them all comfortably, especially if you are shooting for FI.
If you retire before 59.5, you likely have enough in your taxable account to draw on before you can access the others penalty free. But if not, here are some other strategies:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Good luck!
I’ve been having this issue with the talk about 15% and 25% tax brackets. Where does it come from? Can you help me understand?
I want to understand, I want to see that it’s not just some mysterious mythical idea, but I just don’t see this easy cut like below 78k is 15% tax bracket and above that number it’s 25%. I want to see where it is coming from so I can believe in it, so then I can understand how to manage my “bottom line”, that is my taxable income….. All financial bloggers talk about it but i don’t understand where this information was acquired. Can you help me? Do you know where it comes from and why i don’t see it?
I just did our taxes…. after all deductions and stuff adjusted taxable income was 126k, we are family of 3, i specifically asked my accountant what my federal “bracket” was, she pointed in the printed tax-software generated paper that black on white says “effective federal tax rate is 15.09%”… with 126k (already adjusted) we’re sure suppose to be in 25%, right? so how come? can you help me understand…. i am confused and this “discrepancy” makes me skeptical of everything else i read on blogs, so i really want to see this to be right, but i just don’t understand….
Thanks
Hi Galina…
While it is always good policy to be skeptical of everything you read, including blogs, in this case you should also be skeptical of your accountant. Either she doesn’t know or she was unwilling to take the time to explain this to you. In any case, I’d be concerned.
It’s really pretty simple.
Your tax bracket and your effective tax rate (what she showed you in your tax software) are two separate things. Let’s look at both:
Your tax bracket, sometimes called marginal tax bracket, is is the level at which your last earned income is taxed. Here’s a chart: http://www.bankrate.com/finance/taxes/tax-brackets.aspx
If you look at the section for married filing jointly, you’ll see that the 15% bracket starts at $18,151 and runs up to $73,800. This means your income between those two numbers is taxed at 15%. Below $18,151 is the 10% bracket, so your first $18,150 is taxed at 10%.
The 25% bracket runs from $73,801 to $148,850. For you this means your income from $73,801 to $126,000 is taxed at 25%. Because 25% is the highest rate at which you are taxed, you are said to be in the 25% bracket.
But since you are paying 10% and 15% on some of your money you are not paying a total income tax of 25%. Rather, you are paying the combination of these three brackets which, in your case, evidently comes to 15.09%. This is your “effective tax rate”
Your tax bracket is 25%
Your effective tax rate is 15.09%
Every extra dollar you might have earned, up to $148,850, would have been taxed at 25%. This in turn would have had the effect of slowly raising the percentage of your income taxed at 25% and thus your effective tax rate. Had you earned more than $148,850 you would have moved into 28% bracket, but you would only pay 28% on those dollars above that amount.
Make sense?
Yes it does. This is exactly what i was missing. Thanks so much. My math comes to 18% effective rate but in any way, it’s closer and it makes sense and i will def. talk to my accountant again and check her knowledge.
I am skeptical of everybody, that’s true, that’s why I am looking for answers 🙂
Thank you again
Hi Jim,
Quick question for you…(I think its quick 🙂 )
I know you say that index funds i.e. Vanguard do much better over the long haul than individual stocks or most professionally run mutual funds. My problem is that investing in index funds does not excite me. Investing in blue chip – dividend paying companies does!
If I invested in different blue chip companies for the long haul–will my returns be much lower than say the Vanguard index fund?
Thanks!
-Cesar
Cesar,
I’m no JLCollinsnh, but one thing to keep in mind (and perhaps it will help to adjust your mindset?), is that investing in a total market index funds, you /are still/ investing in every single blue chip stock that has ever excited you, and a whole load more. Every publicly traded company in the stock market is working had every day of every week to make the best of their business, and thereby make the most for your profits.
I think we’ve all had “fun money” to throw around at some stock that catches our eye, but as JLCollinsnh has mentioned in his stock series, the odds that you can pick a winner consistently over decades is vanishingly small. I cannot speak about the precise difference between picking individual blue chips versus the total market index approach, but I’m not sure if anyone can with certainty (or the choice between blue chip picking and total market indexing would be clear cut).
Just my $0.02!
Hi Steve,
Thanks for the reply! I do agree and understand that trying to pick winners is a losing proposition. One road I dont want to travel. But I was thinking about maybe owning 10 (arbitrary number) blue chip stock like Coke, Johnson and Johnson, GE, etc.. and holding for 20-30 years (adding funds regularly to buy more shares).
Would this ‘plans’ performance / returns be much lower than an index fund?
If it was substantially lower then I may forget the notion and invest in an index but if they were comparable I think I would prefer the 10-20 stocks of companies I like and admire.
Thanks again!
Also not Jim Collins but this is a question that can’t really be answered without knowing the future. However, statistically we will likely lose the stock picking game. depending on whose numbers you trust index investing tends to out perform 2/3 to 3/4 of the people on Wall Street who know astronomically more about finance than I do. I can’t tell you that you won’t be one of these statistical outliers or that you shouldn’t try, after all, it’s your money. There are people that make cogent arguments that an individual can properly diversify with a portfolio of 20ish stocks. However, I don’t believe this to be the best path for my personal financial goals. I’m saving for retirement, not private jet, fleet of yachts, pet jungle cats style wealth. Unless you are a very high income individual you will not get their with index funds, at least not quickly. You likely also won’t end up broke in 30 years. If extreme wealth is your goal and picking stocks is your method I wish you luck, no one has ever gotten there that way without it. If your goal is early retirement or financial independence and the most efficient path to that end I would stick with the index funds, at the very least for your tax advantaged accounts.
Hi David,
Thanks for the reply. No fleet of yachts in my future as well! Just trying to save for retirement and financial independence as most of Jim’s readers (I assume) are. Well said..thanks!
-Cesar
Hi Cesar…
First, I think Steve is spot on with his comments.
If you took any group of 10-20 stocks, there is always a chance that they might equal or outperform the index over a given period of time. But the research indicates the odds are very much against it long-term. There is also no way to know how great the variation might be.
That said, the more stocks you hold the closer to the index performance you are likely to be. If that’s your goal, why bother. Just buy the index. If your goal is to try to outperform the index, then the more focused you are the bigger the variation is likely to be. Of course, this dynamic can work against you too.
I think perhaps your core mistake is seeking excitement in your investing. Better to seek increasing your wealth in investing and your excitement elsewhere. 😉
If you do decide to invest in individual stocks, do yourself the favor of measuring your performance against an index. For blue chips, I’d use this one: VFINX
At least that way, you’ll know how much your excitement is costing you. 🙂
Oh, and if you outperform for a bit, don’t get too cocky. Remember, you have to do so for decades to make this picking the superior strategy.
Hi Cesar,
I have 2 stories about real people I know who experienced “investment excitements” (which I would really categorize as speculation).
One is my cousin, who’s a software engineer making decent living. During the tech bubble of the late 90s, he made plenty of easy money trading stocks. At one point, he made enough that he wondered if he should take the profits to pay off his mortgage. But alas, greed and the excitement of winning got the better of him, and he decided against his own better judgement! What’s worse, he’s playing with Margins!! So when “stuff” hit the fan, he got a margin call from his brokerage and had to sell at huge loss to settle his account. Then in the 2000s, his employer was also on decline and laid him off. He had to sell the house and move for better job prospect; and when the lender and real estate agent and all the fees were paid, he barely broke even. Not to mention all the mortgage payments he’d made in previous years. So really, he lost money and opportunity cost of what those money could have earned him.
Another story is about my friend from the Bay Area, who also happens to be a software engineer (what else in this area!). He also got into trading stocks actively, during the mid 2000s. When I saw what he’s doing, I of course warned him against it and told him my cousin’s sad experience. But I guess innocence (and/or ignorance) and testosterone won the day and he continued. For Christ’s sake, he was listening and subscribing to that loud mouth Jim Cramer!! At the height of his trading days, he made over $200k profits (on paper at least). But guess what, you guessed right, all’s lost when the bubble burst in the Great Recession.
Is that the kind of “excitements” you want? Maybe take up rock climbing or bungee jumping? 🙂 I understand people have to grow up their own way and perhaps make their own mistakes along the way. I certainly did, although not quite as spectacularly in personal finance. So whatever you decide is best for you is fine. I just have to reserve the right to say, I told you so, eventually:). Good luck!
Hi Jian,
Not looking for too much excitement! I prefer buy and hold vs. picking up ‘hot’ stocks. But thank you for the illustrations. I can see where this type of thinking and acting would lead one into trouble!
Thanks!
-Cesar
Hi Jim,
LOL! Agreed…I should seek my excitement elsewhere! Actually I’m not much into stock excitement or picking stock or trading them as this (from what I’ve read) incurs fees and taxes that kills performance. I would much rather invest in the 10-20 (or more) stock companies that have been around forever (Coke, GE, Colgate, P&G etc..) and hold them until I retire. If this strategy would at least match the index returns I would be happy. I guess part of the ‘excitement’ for me, comes from being able to tell my kids (and showing them if I buy a stock certificate) “look we own a part of the coke business so when that person buys a coke we are making money!’). This would hopefully make them see the value in owning parts of a business for the long haul and not trying to ‘pick’ stock based on a ticker price they see that day.
I do get what Steve is saying, that by investing in an index fund I am (in essence) owning a part of every company out there but it just feels different (to me) than actually investing money in the 20 or so stocks I chose (again nothing fancy or new just common blue chip companies that we all know and use).
Thus the question was born…would I trail the returns of an index fund by a lot with a strategy like this? If so..then I would rethink my plan as this would be my retirement money/plan (apart from some rentals).
Thanks to all for the responses and feedback! Greatly appreciated!!
-Cesar
Hi Jim!
Since getting the “WAKE UP DRONES” call on MMM’s site; I’ve come through my stupor and am looking at a possible early retirement. I’m asking you my question here though because I’m afraid of the facepunches that would be sure to come from MMM. (I did once buy a Jeep TJ because it was orange!) I think I slipped into the consumer world because everyone else was doing it and I didn’t see any alternatives (until reading your blog). I bought stuff to make up for having to work full-time in an insufferable job. My only asset is my house. I would like to sell it and live on that money invested. $500,000 x 4%= $20,000 or $1667/month plus a work pension of $609 which includes bridging till 60 (I’ll be 50 in 18 months, I’m Canadian and divorced). You talk about investing ‘for the long term’; what do I do if I need the money to live on right away after I retire? ie. within two years the kids will move out, I’ll turn 50 and will have the house paid off. If I throw it all in Vanguard, can I then expect to turn around and start withdrawing the 4% to live on after a few months?
LOVE your blog!
Hi getting there…
and welcome. No face punches from me. 🙂
I can hardly criticize you for buying an orange jeep when I bought this one: https://jlcollinsnh.com/2011/06/22/the-worst-used-car-ever/
You have the basic idea on how the 4% rule works, but these two posts might help:
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Other than that, be prepared to reduce your spending should the market take a major plunge, especially early on. Just like you’d do if you got a pay cut at work.
Hello Jim,
I’m a longtime reader, and have turned many friends onto the practices discussed on your website. You pointed me in the right direction in the past, but I wanted to touch base as my financial situation has changed, and want to make sure I am heading in the right direction.
I am 27, single, and debt free. I work in sales and am self-employed, and 100% of my income is commission based, so it can fluctuate. With that being said, my income has risen from 24k in 2012, to 84k in 2013, to 125k last year, and I am on pace for 200k this year. It has been surreal and very exciting. With that being said, I haven’t changed my lifestyle with my income, and am saving a lot more money on a monthly basis as a result.
I first found your blog in 2013, and quickly built up an emergency fund (6 months of expenses or 12k). I then started a Roth IRA (VTSAX) , and funded that. I started a HSA since I pay for medical out of pocket and fully fund it every year. I am about to transfer the HSA from my credit union to Vanguard in order to put it in VTSAX. All extra money that I have had left over after funding the Roth and HSA have gone into a standard investment account (VTSAX).
My friends with ‘normal’ W-2 employee jobs utilize 401K’s, but that isn’t an option for me. Since my income has risen, I am slightly worried about my taxes as well (which is a great problem to have as you say). According to my CPA, I will save 10k on 2014 taxes by deferring 24K into a SEP-IRA, which I had never even heard of. After doing a little research, it seems like a no-brainer. But…I want to retire by age 40 (and by then I will hopefully have a wife and possibly kids aka higher living expenses), and I am worried about my inability to access the money in the SEP-IRA without the penalty.
My questions would be:
1. Should I put the money in the SEP-IRA this year to save the 10K in federal taxes if I plan on needing to access the money by 40 ?
2. Moving forward, what should my financial strategy with the leftover money be every month? I usually have around 7-9k leftover after taxes and living expenses. It is my understanding I can not fund my Roth any longer due to my income being too high. Should I be funding the HSA (3300), maxing the SEP-IRA (VTSAX-55k and a tax deduction), and putting whatever is leftover in a standard investment account (VTSAX)?
3. And on a side note…I know you advise against purchasing a home, being that it isn’t a great investment. I live in the Bay Area, which has become one of the most expenses rental markets in the country. I life in a rough part of town to keep my rent down, and could purchase the home I am renting and would have a mortgage equal to my current rent ($2700/month divided by 4 people). The home is 4 bedrooms and I share with 3 other roommates, who would pay rent to me. At what point in the world of extremely high rent prices does it makes sense to purchase? I feel like I am throwing money away every month at rent ($675) that could be going towards owning the home instead. The home is worth around 500k on todays market, with 50k down my mortgage would be about the same as my current rent with everything rolled in (I have great credit).
Thank you very much in advance your response. I was just down in Nicaragua for a vacation, and was thinking about how awesome it would be to meet you and attend the events in Ecuador. Maybe some day soon. Thanks a lot, I feel so empowered with the words shared in this space!
E-Fund: 12k cash
HSA: 9k
VTSAX investment account: 75k
VTSAX Roth: 18k
VTSAX SEP-IRA: 2k (just opened)
Hi FI T…
Welcome back! Thanks for passing the blog along to your friends.
First, congratulations on the rise of your income. Very impressive and, in sales, a very direct reflection of your performance. Good sales people are rare and this should serve you well. If I might ask, what do you sell?
Second, congratulations on avoiding lifestyle inflation!
OK, on to your questions:
1. Yes, fully fund your SEP IRA. As a single guy at 200k you’ll be in the 33% tax bracket. Further, with your savings rate by age 40 you should have plenty of money in your taxable account to live on until you hit 59.5. And, if not, there are other strategies: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
2. Yep, you are beyond a Roth. For a single guy the eligibility begins to fade out at 116k and is gone by 131k. All the more reason to fully fund your HSA and SEP. After that, there is nothing wrong (and a lot right!) about investing in your taxable account.
3. I don’t advise against owning a home. I advise against buying into the standard line that it is always a good idea. It is an expensive indulgence in most cases. That’s OK, as long as you know that and that is an indulgence that is important to you.
In any case, run the numbers: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ That way, you’ll know just how expensive. Once you know that you can decide if the indulgence is worth the price.
Consider also this: https://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/
As for your current house, why in the world would you want to trade a low rent of $675 and tie up 50k for all the hassles and responsibilities of ownership, especially managing your roommates who now become your tenants? And just to have the same cost? If you are going to take on the responsibilities, costs and risks of ownership and land-lording, you should expect to do far better than that.
Purge from your mind the idea that paying rent is throwing money away. That’s RE industry propaganda nonsense.
It would be great to have you join us for a Chautauqua one of these years. Unfortunately the two for 2015 are fully booked. In fact they sold out within a week of being announced. So when the time comes you are serious, act fast! 🙂
Jim,
Thanks so much for your response. I thought I had my plan of action figured out, but wanted to run it by you as I so value your expertise, and even more your willingness to take the time to help strangers like myself. This was great confirmation of my current path, and if things change with my income, I can always re-evaluate my strategy at that time. I sell medical devices to hospitals, and work with a variety of products but focus on employee and patient safety. I appreciate your opinion on paying rent as ‘throwing money away’ as nothing more than RE propaganda, that is a very enlightening thing for me to let set in. I will continue to check in with you as I move along the road towards FI, and I wish you and your family all of the best. Much love
Jim,
One last question. I am trying to switch my HSA from my credit union (which doesn’t offer investment/VTSAX options) to an institution where I can invest the money. There are so many HSA services out there, is there one you recommend with the lowest fees and Total Stock Market Index funds investment options? I know there are some websites that compare them all, just wanted to see if there was a good one you recommended. Thanks Jim!
Why not start with Vanguard? VTSAX is their fund.
https://personal.vanguard.com/us/whatweoffer/overview/healthsavings
The Vanguard website is a bit misleading on this, but Vanguard doesn’t actually offer a HSA account service. There are many other companies that will allow you to invest your HSA with Vanguard, but unfortunately it can not be done directly through Vanguard. I couldn’t believe it so I called and they confirmed this. There are so many HSA services out there with various fees and set ups, it is pretty confusing. It would be so much easier if I could just set it up through Vanguard…
Hi FI T,
I have been very happy with Health Savings Administrators. I can invest in VTSAX along with other Vanguard Funds. The annual administrative fee is $45 but the costs seem to be the same otherwise.
http://healthsavings.com/
We are 64/63 and 3 years from retirement. Never gave investing much thought until now, just kept sending in monthly money to our advisor. We have an actively managed account plus a target 401 through work. We have been reading your blog recently and see that your a fan of VTSAX. We are ready to take our money away from the managed account. Is it wise to put all of it in VTSAX at our age?
Hi Diana…
That’s a question that will be influenced by lots of factors:
—Do either of you have a pension?
—How much of your spending needs will be covered by Social Security and a pension?
—What is your personal risk tolerance?
These posts might help:
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
But, yes, for the stock portion of my portfolio, I use only VTSAX.
Hope this helps!
My husband does have a small pension which will be around 1,000 a month. SS for the two of us will be around 3,500 a month. At this point I’m not sure we will take all of the pension, maybe half since I will more than likely live longer. (my mom is 98) The money we are currently making thru dividends and capital gains in our IRAs, traditional and Roth is around 12,000 a year with our advisor taking approximately 3500 of it. And then there is the target date 401 thru work for my husband. That is generating about 14,000. per year as of now. My calculations are probably wrong but if I took all of the money that is with the financial advisor and put it all in VTSAX it looks like I would be making less per year. I really hate seeing those fees being taken out every quarter though. At this age our risk tolerance is medium. I think we will need 6000 to 6500 per month as income. Our house will be paid off in 6 years because I’m paying an extra payment each year. I will read the links you sent and see if I can make sense of it all. Thanks!
Hi Jim,
First of all, as a young professional, your blog inspires me to do stocks or investments. But the problem I have is, where should I start. I am a foreigner currently living here in US for 4 years, and obviously I do not have any idea at all about this taxes – IRAs. Although I am currently working, In my whole stay here and doing income tax returns, I have only been using turbo tax to do the things for me. I am planning to do a Roth IRA first, but I have read that it should not reach a current threshold when you are contributing into it, like if I remember, one of the articles I’ve read says that it is related to your 401k? Yeah, I really don’t know where to start, and it will a blessing if you can help me figure out how to do this.
Thank you, and thank you for your blogs!
Philip
Hi Philip…
I have little knowledge of how this all impacts investors from countries outside the US, but this guest post might help:
https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
For info on IRAs and 401k plans: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
You can contribute to both a 401k and a Roth, but there are income restrictions on a Roth: http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015
Finally, since you use Turbo Tax, you might find this tool from them useful: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/#
That should get you started.
Enjoy your stay here in the US!
Hi –
I just want to say wow…I just discovered you blog (referred from GoCurryCracker). I need to preface this with – I literally know nothing about investing–so my comment will be…under whelming, and…well, I will sound like the rookie I am.
I’m a total newbie. I’m a freelancer who hasn’t had an office job since 2008, and my income varies widely from year to year. I hate working for anyone other than me–and gladly sacrifice “security” for relative freedom, even if it means working 80 hours a week at times. I’m 32 years old and recently inherited about $70K from an awesome and beloved grandfather. My goal is to touch as little of it as possible. As of now, I haven’t touched any.
Prior to that, I had no savings at all. Right now, I’m making anywhere from $5k-$10 a month, and live in NYC with a rent of $2k, and total expenses of about $3.5K per month. In total, I have about $100K to my name.
I literally (like 5 minutes ago) just transferred $10K into VSTAX account with admiral shares and my hands are shaking. But, from what I’ve read from you and a few other blogs in the last 48 hours…it seems like I made the right choice. My question is…what do you think? Should I add more? Since I’m late to the savings/investing game…what do you recommend as an investing strategy for a 30-something living in NYC? Is it possible to “retire” at 40 on an annual income of anywhere between $60-$100K ? If not, what’s realistic?
Thanks so much in advance. (I know the answers to these questions are most likely contained in this blog. However, without any financial background…I’m at ground 0, not being lazy, just confused! There’s a lot here to digest 🙂 )
Welcome Bekah…
Glad you found your way over here, especially from GCC. Jeremy has one of the best blogs going, in my opinion.
First let me say there is nothing wrong with being new to all this stuff and you don’t have to make any decisions instantly. Better to take your time, learn what you need to know and then act. This way, when the market plunges as it naturally does periodically, you’ll understand why you are in it and not panic. That last is crucial.
To help you get started, this post provides an overview of the approach I discuss here: https://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
Next, start at the beginning of the Stock Series and read it thru once or twice: https://jlcollinsnh.com/stock-series/
Take your time. It is designed for beginners and as you go things should fall into place for you.
As you’ll read, I am a fan of VTSAX and it is in fact the only stock fund I personally own and just one of two that I hold. The other is in bonds.
If your monthly income ranges from 5-10k and you are only spending ~3.5k, you should have a very healthy savings rate. If you take a look at the chart at the end of this post you’ll get an idea of how many years to financial independence (FI) it takes at various savings rates: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
As you’ll learn, the rule of thumb is that a portfolio of about 75/25 stocks/bonds (and close variations) can support about a 4% withdrawal rate. This is commonly called the 4% Rule. Another way to look at it is to say 25x your annual expenses is what you need to be FI.
So for 60k a year you’d need 1.5 million. 100k per year requires 2.5 million.
These posts will help with that:
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
That should be enough to get you started.
Curl up, read and enjoy the journey! 🙂
Thanks so much for such a fast response! That roadmap is exactly what I was looking for. I’ve been haphazardly jumping around, following every link, so was a little overwhelmed.
It’s amazing–in this world of FORTEX pushing affiliates and Motley Fools- that you offer all this advice for free. Your daughter is a lucky woman to have you as her dad and I hope she follows your advice.
Can’t wait to keep reading…in 10-12 years, I’m sure I will be able to say that discovering your blog changed my life. And, will make sure to leave a comment from my future (rental) home on whatever exotic island I’ve decided to retire from.
Thanks again!
My pleasure Bekah…
and thanks for the kind words.
Good luck and I look forward to hearing which exotic isle you chose!
Dear Mr. Collins,
First, thank you so much for your blog and your continued writing. It has been incredibly elucidating for me and I’ve recommended your site to anyone who would listen (and some who would rather not! 🙂 ). The past year has been something of a financial renaissance for me; while recently deployed a friend turned me on to “robust saving” ideas which led to MMM and then most fortuitously to your site. Since returning I’ve converted both IRAs and my wife’s old 401k to Vanguard accounts, trading in 1.4, 0.8 and 0.4 expense ratios for VTSAX’s .05. Score! I’ve convinced my kids in the value of saving to the point where their Valentine’s Day present—a check from my mom—was quickly and unanimously voted to be deposited in their investment account.
Though I have myriad questions for you about my own way ahead, I write seeking your advice for my dear parents. My childhood could have been a case study from Millionaire Next Door: two Baby-Boomer, graduate-level educated parents (MD and educator) from two upper-middle class families who paid for cars, clothes, prep schools, and private college for my siblings and I and now have too little in retirement savings. Once the kids were launched they saved a reasonable amount but were over-exposed to stocks in 2008, panicked, and then sold low. I’ve never been told how much was lost, but know the inheritance from one side of the family was completely lost.
Both are reasonably healthy, roughly 70, already drawing SS, and father is still working full time for a good salary. No pension or 401k, but some money in traditionaly IRAs. They’re still paying on our childhood home (turns out home equity paid for our schooling) and still maintain car notes, cable, etc. I’m working on the debt repayment argument with them and would love to fire their investment advisor. Without a list of their budget particulars, what advice would you have for such a couple? What mix of funds would you *think* best for them for the money they are able to save each month? Being a neophyte myself I’m reluctant to push too firmly, but would love for them to be able to retire and spend more time with their grandkids. I feel very much a financial sophomore—just enough knowledge to be dangerous!
If you’ve covered such scenarios before, please point me toward a page on your site and I’ll gladly try to absorb the lessons there. Also, please edit for clarity/succinctness if you see fit to post it.
Again, and very sincerely, thank you for all you’ve put into your site. It has been a font of knowledge, understanding, and joy when I consider the future that I can make for my branch of the family tree. Past mistakes be damned—I’m getting FU money.
Sincerely,
Jager
Hi Jager…
First let me thank you for your very kind comments about what I do here. It is always encouraging to hear that it makes a difference.
Next, I wish you’d been around about 15 years ago to teach me how to get kids to take gift money and “quickly and unanimously voted to be deposited in their investment account.” Well done, however you did it! 🙂
I am deeply saddened to hear about your parents’ investing mis-adventures. My guess is they weren’t entirely comfortable with the stock investments they owned and so panicked and sold at the bottom. Where the hell was their advisor?
Advisors who object to my distain of the profession often tell me they earn their money by keeping their clients on course in the tough times. My guess is that too often they are too busy panicking themselves to be much help: https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
Like you, my advice would be to get rid of the advisor, especially if he/she was on duty when the market tanked in 2008.
Next, simplify whatever investments they have. This post will help: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
At their age their allocation should be set mostly to their comfort level.
Depending on how bad a hit they’ve taken, they may want/need to reassess their spending levels. This can be a hard adjustment, but spending money is not what creates happiness.
You’ll need to go gently with this and with great respect. They probably already feel bad enough about their 2008 experience. It might be worth reminding them they are not alone and in fact most investors did exactly the wrong thing at the time.
Finally, if their situation is really tight, you might rally your siblings and together begin sending your folks some cash each month to smooth the way.
Good luck to them and to you!
Mr. Collins,
thanks for your prompt and considerate reply. We will certainly proceed with gentleness in discussions with my folks; as you have mentioned in your posts there is such an emotional/behavioral angle to saving that even conversations can be fraught with anxiety. I’m hoping to have the conversation with them this summer when we’re home and will keep you posted if we make any progress.
Incidentally, the quote from their advisor in January 2008 matches exactly your assessment above: “We have no idea how low this is going to go. You should sell now to at least get SOMETHING out of it.” This was especially frustrating since they didn’t need the money right then!!
All the best to you and your family. If I ever make it back to Lake Sunapee (a favorite childhood haunt) I’ll offer to buy you a beer or coffee for all your trouble!
Jager
Just stumbled across this post again and realized there is a typo–it was January 2009 when my parents were told to sell, at the absolute bottom of the crash. And yes, some were load funds, some were stock funds from local companies/banks my grandmother had preferred. Hopefully that clarifies a bit for any future readers.
That comment from the advisor is absolutely infuriating.
It indicates he had no real understanding of why he had put your parents in the investments chosen and/or what their goals were. Or he was simply using the drop to churn the account for more commissions. My guess is he has them in load funds?
On a happier note, Lake Sunapee is a beautiful place and a regular destination when I have the motorbike out. A coffee or beer sounds great.
Mr. Collins,
Thank you for your work on this blog. I’m actually excited about the possibilities of investing outside my retirement for the first time. I’m starting to overcome my ignorance and fear as I make my way through your stock series.
I’m in my early 40’s, 28% tax bracket, and my retirement is not where I need it to be, but I’m a saver. I max out 401k and Roth IRA (I’m in the phase out for the Roth). I’m still able to save 60% of my take home. I used to just shove it into my mortgage, once that was paid off I just dumped my saving in an online saving account. I now have over 4 years of expenses just sitting there because I’m too afraid to open up a taxable account. Yes my dollar slaves are fat and lazy and never worked a day in their life. I wasn’t sure what I would ask for if I called Vanguard about opening an account. If I asked for one ordinary bucket they would probably think I was talking about chicken.
Anyway, my fears are in part about taxes and record keeping. Would I have to pay taxes quarterly now? Will I be able to do my own taxes anymore? What happens if I want to invest in it on a monthly basis, how complicated is it going to get? If the market is going up should I sell and pay the taxes before the gains get too large? When do I start harvesting? There is so much complexity that I’m not sure what to expect? I’m not even sure I know how it all works since I don’t deal with it in a tax advantaged accounts.
Do you have anything that explains that process and complexity? Sorry if I’m jumping the gun and just haven’t gotten to it yet.
thanks,
Hi Dave…
You had me chuckling my way thru your comment. Thanks for brightening my day. 🙂
One of the problems with becoming wealthy is that it does complicate your life a bit, especially around taxes. But it probably won’t be as bad as you fear.
With investments in taxable accounts, you’ll have to file:
–Schedule B to report interest and dividends. You likely already do this to report the interest on your savings.
–Schedule D to report any capital gains or losses if you have them. This will come into play if you start tax gain/loss harvesting.
Vanguard, or whatever investment firm you use, will send you tax documents reporting any and all of this activity if it occurs during the year.
If you are currently comfortable doing your own taxes, this shouldn’t be anything you can’t handle. And certainly you shouldn’t let the prospect of dealing with it prevent you from investing. So get those lazy dollar bums off the bench and put ’em to work!
As for tax loss/gain harvesting, here are two great posts:
http://www.madfientist.com/tax-loss-harvesting/
http://www.madfientist.com/tax-gain-harvesting/
Thank you so much for your comments and links. I’m glad I was able to give you a chuckle.
I’m going to go through the links and need to finish your stock series. I’m so thankful that you were willing to share your knowledge and experience through your blog. I may have more questions in time, but for now I have a lot more reading to do.
cheers!
Hi, Mr. Collins,
I can’t tell you how much I have enjoyed reading your blog. I am very new to the investing world and your blog has really taught me a lot. I have a question about a couple 401k plans I have. I have an old 401k with a former employer with Fidelity. This plan is diversified into 5 funds, one which is VITNX. The second (Merill Lynch) 401k plan is active and I am contributing and getting the full company match. It is currently in Vanguard 2045 and company stock. I looked at it and it also offers VITNX.
My question is, do you think I should move all my money into VITNX in both plans and also should I roll my old 401k plan into my new plan? The fees are minimal with this fund but my guess is rolling them into one would only cause me to have to pay the fee once. I am aware of the risk of putting all my money into VITNX (from reading your blog), but I have a long time before retirement and can withstand the ups and downs. Thanks for any insight you may be able to give.
Hi David…
Glad you like it and I hope it is helping to demystify some of this investing stuff for you.
VITNX is an institutional shares version of VTSAX. That is, they both are total stock market index funds. The only difference is that VITNX has an even lower ER: .04% v. .05% — So I would be very happy holding it instead of VTSAX.
Ordinarily, I’d advise rolling your old 401K into an IRA for more control and selection. But since you have this wonderful option available, I’d just keep it in your 401k.
Because I like simplicity I’d move the old one into your current 401K, but you don’t have to. The .04% ER will be the same regardless as it is a percentage of the assets.
Make sense?
Mr. Collins,
I have been reading your material and have been sticking with trying to read your material exclusively due to one of your rules “simplicity”. I am a young 27 year old and very ambitious and want to make the correct moves. I have no debt besides the poor investment I made “my house”. But I only took a 15 year loan and am projected to pay it off in 9 years. What I have is patience and perseverance, with the ability to not let emotion effect my money. Being a civil engineer I am able to think more analytical about situations. But what I lack at the moment, even though it is growing, is the financial investment knowledge. I only have a few questions and a few requests of advice, please.
I would like to follow what you have set up for you daughter somewhat. In short, here was my thought of my plan:
4% – Company 401(K) Matched Plan
86% – Vanguard Total Stock Market Index Fund
10% – Cash
Thoughts on this tactic?
My second question is what/how should I invest in my company’s 401(K) plan? I am only doing the 4% match because I feel as if my companies plan is sub-par. Here is what they offer:
Bonds;
Franklin High Income R
Franklin Total Return R
MFS Government Securities R
PIMCO Total Return
Asset Allocation/Balanced;
American Funds Capital Income Builder R1
American Funds The Income Fund of America R1
Franklin Templeton Conservative Allocation R
Franklin Templeton Growth Allocation R
Franklin Templeton Moderate Allocation R
MFS Total Return R2
Large-Cap;
American Funds AMCAP R1
American Funds American Mutual R1
American Funds Fundamental Investors R1
American Funds Investment Company of Amer R1
American Funds The Growth Fund of America R1
American Funds The New Economy R1
American Funds Washington Mutual Investors R1
Invesco Comstock R
MFS Growth R2
MFS Value R2
The Hartford Capital Appreciation R3
Mid-Cap;
Invesco American Value R
Pioneer Mid-Cap Value R
Small-Cap;
Franklin Small Cap Value R
The Hartford Company R3
Money Market/Stable Value;
JP Morgan Prime Money Market Fund Cash Management
I know that is a lot there. I had taken your previous advice earlier in the string of people commenting and the financial group offering this plan didn’t just give the ER numbers so I looked them all up with the lowest being. There was also a few international options but I didn’t even care to list those.
MFS Total Return 0.98%
MFS Value 1.13%
Which both of those are higher than all of that other gentleman’s, but my lowest.
At any rate, I also wanted your opinion on opening up my own traditional IRA over at your favorite Vanguard? I continue to reread your material but I am always confused as to when the percentages are given to either say 100% stocks and/or 70/30, does this include your 401(K)? Do you also set up your 401(K) this way? Do those ratios carry across your whole portfolio?
Again I realize this is a lot of questions and time for you to answer and I respect time is money. I will appreciate even the smallest of responses!!
Thank You
Hi Jonathan…
Since you are covered by a retirement plan at work, there are income limits that determine whether your IRA contributions are deductible. You can find those here: http://www.irs.gov/pub/irs-pdf/p590a.pdf in the chart on page 14.
If your income is low enough, by all means open and fund a deductible IRA.
You should, as you are, absolutely take advantage of the 4% match in your 401K.
And even though your fund options aren’t the best, the tax advantages are such that you might consider fully funding it as well.
Check out this post and especially Addendum #1 in it: https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
When thinking about asset allocations, think about every asset you hold regardless of where, including the equity in your house. For instance, if you had 50k in a stock fund, 25k in a bond fund and 25k equity in your house your allocation would be:
50/25/25 — stocks/bonds/real estate
Make sense?
Sounds like you are off to a fine start. Enjoy the journey!
Hi Jim,
I am a New Englander who telecommutes full time and hates being here February-March. Next winter, I am thinking about spending a few weeks somewhere in South America, in a similar time zone to EST/CST if possible (maybe within 3 hours time difference), and enjoying some warmer weather and great food, as well as natural beauty and/or nice architecture. I would need a home base with a reliable (preferably wireless) internet connection, as I would work for a couple of weeks while I was down there, and then I would probably spend another week or so traveling around. Access to a reliable internet connection is the most important thing on my wish list, as otherwise I would be limited to shorter-term travel. I am a runner and also would prefer somewhere I could run/walk/hike outdoors or otherwise get some regular exercise, even if it’s in the middle of a city. Since you’ve traveled around a bit, is there anywhere in particular you’d recommend?
Hi Jess…
I’ve always said, NE is just fine if you skip February. 🙂
Regarding internet connection, I’m clueless. I refuse to travel with a laptop and only last summer grudgingly brought my cell. You’ll want to check, but these places should be OK.
Second, there are many more places in SA I haven’t been to than have, so this list is limited and there are surely wonderful places missing.
In no particular order:
Guatemala:
—Antigua. Beautiful old colonial city. Bit of a hipster vibe among the young expats.
—Lake Atitlan. Smaller towns on a gorgeous lake
Avoid: Guatemala City. Huge, congested and can be dangerous.
Ecuador:
—Cuenca. Beautiful old colonial city in the mountains. Spring time all year and slightly on the cool side.
—San Clemente. Tiny fishing village on the ocean. Miles of flat hard beach to hike/run. Very friendly. Least likely to have great internet. Bahia, up the coast, is larger and probably will, but it is not as picturesque.
Avoid: Guayaquil. Huge, congested and can be dangerous.
Peru:
—Arequipa. Colonial city in the mountains, right at the foot of a perfectly formed volcano. The city is built of the pure white volcanic rock from the area and is gorgeous. Great night life and 1st class restaurants.
—Cusco. Colonial city, gateway to Machu Pichu. Very high altitude, so most need time to adjust.
Avoid: Lima. Huge, congested and can be dangerous.
San Miguel de Allende in Mexico is very nice and comes highly recommended, but I’ve only been there twice and each time only for a few days. But I would happily give it a try for a longer stay. Again, Beautiful, colonial, mountains, great restaurants.
I’ll be curious to hear what you chose. Personally, I’d suggest you go someplace other than these so you can guide me to my next place. 😉
I’ve been hearing great things about Columbia, especially Medellin in the mountains and Cartagena on the sea.
Keep us posted!
Two questions
1-You were asked over on 5000000000000days (something like that) what if you were to get 1 mill dollars you said invest in VTSAX and take 4%. Well I am getting about 1.3M in inheritance and can not due the 4% yet I am not retired. I will be investing the majority, some will be for fun, some for home improvement, But the question is does your answer still stand,
2- I think I messed up I opened a traditional 401K for my wife this year (stay at home mom) but it was done with taxed money how does that work
1. If you don’t need to pull the 4%, don’t. Just leave it invested to grow and reinvest the dividends.
2. If your wife has a 401k it was funded with pre-tax money diverted from her pay into the account. Unless it was a Roth 401k, in which case the money diverted was post-tax.
Hello Jim,
Your blog is an amazing service and one that I have read over and over but still have some lingering questions. I’m 41 and single (for now). My company 401(k) matched 50% of every dollar up to 6%. I contribute 8% (90% stocks/10% bonds). I just recently transferred a tIRA to Vanguard and out it all into VTSMX for $5500. I also contribute $100 every month to a Roth IRA (90/10) at Betterment that holds roughly $350 (I just started). I have $3k in a savings account as my emergency fund (about 2 months + living expenses).
My question is should I contribute less to my 401(k) and more to the tIRA or Roth? I currently make $48,500 and have a student loan balance of $3600 that I pay $100 per month to. I also know I need to continue funding my EF to get at least a full 3 months expenses in. I doubt I can max out an IRA this year but will shoot for that next year. Should I move my Roth to Vanguard? I’m just trying to put a map together of where my money should be going. Too many articles in the last few months have my head spinning.
Thank you for all you do. If you need additional info, please let me know.
Rob
Hi Rob…
Welcome and thanks for the kind words.
First, you mention contributing $5500 to your IRA and $100 a month to your Roth. $5500 a year is the total you can contribute across all IRAs for 2014 and 2015. It sounds like you might be overfunding these accounts. If so, you’ll need to remove the excess to avoid penalties.
Ok, on to your questions.
I’d fund the 401k first up to 6% to capture the full match. Then fully fund your IRA. I’d focus on VTSMX in the tax deferred IRA for the tax deduction, rather than the Roth. Once the IRA is fully funded, I’d turn back to funding the 401k until you hit the max. (excepting, of course, what you need to build your EF)
While I like Betterment, if you are comfortable using Vanguard, you really don’t need them. So, yes, I’d move the Roth to Vanguard. Theoretically. But with only $350 in it, you really don’t have that option. And if that $350 is part of an overfunding, you’ll have to pull it anyway.
Depending on your interest rate, you might want to accelerate paying off your student loans. If it is much over 5%, I’d make that a priority. (but after capturing the full 401k match) Less than 3%, I’d pay it slowly. In between, what ever makes you most comfortable.
Finally, once you get these basics handled just relax. Keep reading here and slowly it should all fall into place for you.
Good luck!
Thanks for the quick reply Jim!
I used bad terminology on the tIRA to Vanguard. It was a rollover from another brokerage firm. A rollover shouldn’t count as a contribution, right? In the meantime I will knockdown my paycheck % to my 401 (k) and work on maxing out my Roth.
I appreciate the help and advice you’ve provided.
Rob
Hi Jim,
My plan is to retire by 45 and I am looking to add another retirement account, but am not sure what the best route is given my situation. Your feedback is appreciated.
I am 30 yrs old and own a s-corp with no employees. Our gross revenue in 2014 was $250k. My salary was $50k and I am utilizing an owner only 401k with $30k total invested per year ($17.5k employee and $12.5k employer).
I plan on increasing my salary to $60k and utilizing an HSA account this year.
Would you recommend increasing my salary in order to increase my 401k contributions? Or should I keep my income level the same and invest cash savings/profits through a traditional IRA through Vanguard?
Here are my current account balances…Savings $100k, 401k $39k, Roth IRA $20k.
Thanks,
Chris
Hi Chris…
My guess is there are advantages to keeping your salary low?
If that’s the case then funding your IRA is a good option. Keep in mind you are limited to $5500 a year and if you are single the deductibility begins to drop off once your modified AGI goes over 60k. 96k if you are married.
I also assume that you have full control over the 401K options? If that’s the case and increasing your salary doesn’t cause other issues, adding more to it works equally well.
Hope that helps!
Mr. Collins,
I have a 401k that unfortunately doesn’t have access to VTSAT, but it has access to vanguard 500 index fund (VFIAX). After reading your incredible blog, I think you would recommend that fund as a close 2nd best option. But as 2nd best, I’m losing a little something.
I also have access to a vanguard growth index VIGIX and small cap index VSCIX.
My question is can I gain anything back by investing any % in those two funds along with VFIAX or is it just not worth it and go 100% VFIAX. Your opinion please.
2nd question: I have a SEP and Roth IRA at Schwab that represents 35% of my retirement so far. I plan on opening my taxable account at Vanguard. Schwab has its version of a total stock market index fund SWTSX with a .09% expense ratio. I know some will say that Schwab does some things better and some worse and it may not be worth transferring my SEP IRA and Roth to Vanguard. What is your opinion; would you transfer them from Schwab to Vanguard if you had these accounts?
Thank you!
Hi Dave…
VFIAX is just fine and the difference between it and VTSAX isn’t worth worring about. My VTSAX preference is a slight one.
VFIAX is also my preference over VIGIX and VSCIX.
I’d move the SEP and Roth to Vanguard. SWTSX is fine, but VTSAX has an ER of only .05% and as for why I such a Vanguard fan: https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
Good luck!
Thank you so much, I know everyone tells you this but the clarity and detail as well as content of your writing really has educated and inspired me to make better choices with my money.
Did you finish the book you were writing?
Not everyone, and I never get tired of hearing it. 🙂
Thanks!
Not yet, but I’m getting there. Fortunately I have a great editor pushing me. 😉
Hi Jim,
Long time reader, first time commenter. Love your stock series!!
I just read this article on Slate http://www.slate.com/articles/news_and_politics/view_from_chicago/2015/04/mutual_funds_make_air_travel_more_expensive_institutional_investors_reduce.html?wpsrc=fol_tw
Would love to hear your thoughts on it??
Thanks!
Hi Emma…
Thanks for commenting and glad to hear you love the Series!
Unfortunately, I don’t accept homework assignments. 🙂
I simply don’t have the time or inclination to read and comment on all the books and articles people suggest. Please see my remarks in the post above opening this comment section.
Thanks!
When you are aiming for the 25x annual expenses for FI/RE, do you think about your retirement accounts (401k, IRAs, etc) differently from your non-retirement accounts? Obviously you may want to hold certain assets in tax/non-tax advantaged accounts, but for the overall portfolio, are you just trying to hit 25x or is there a certain amount needed in your non-retirement accounts based on the age you plan to hit FI?
In my case, my “magic number” for FI is $1M. I have $660K in investments, and roughly $100K of that $660K is outside of IRAs and 401ks. Since I’m on track to RE at 45, it feels like I should be focusing on boosting the non-retirement aspect of my portfolio, but not sure if this is just emotions or if there is a logical way to think about how much I should have in my non-retirement accounts when I decide to stop working.
Nope.
I look at everything together. This is also true when considering asset allocation: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
I recommend maxing out all your tax-advantaged opportunities first. Every dollar you don’t pay in taxes can continue to work and compound for you over the decades.
If you are on target to retire early, almost by definition you will be saving more than it takes to max out your tax-advantaged accounts. This excess goes into your taxable account, which you can access anytime.
If it is not enough to get you to 59.5 and penalty free withdrawals on your tax-advantaged accounts, here are some strategies to help:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Good luck!
Mr. Collins,
I want to give my sincere thanks to you for creating & sharing this blog. I’m so thankful to have found your site as my family will be able to enjoy FIRE in the future. We are not there yet but working towards this dream.
My 1st question is in regards to having a growing stash. Is there any need to worry about having too much money in your Vanguard account?
2nd question is about bonds/stock allocation. So far I have been doing 100% stock, I want to get to FI as soon as possible. I’m not crazy about bonds either.
3rd, my husband is getting $85000 we can put into investments after selling a house he owns. I know you like putting the whole lump sum in instead of dollar cost averaging. But it’s still a little scary. I know-Toughen up cookie!!!
I hope you continue to keep this blog going for a long time as I thoroughly enjoy reading your content. I can never wait for the next post to come. Thank you.
Hi Leigh…
Thanks for the kind words and I’m glad you are enjoying it and find it helpful.
As for your questions:
1. I have all our assets with Vanguard and don’t worry about it in the least. Here’s why: https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
2. Stocks power your growth, bonds smooth the ride. While you are working and adding money to your investments, that added money serves to smooth the ride and to take advantage of any market drops. More: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
3. Yep, I’m not a fan of DCA: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/ But as I say in that post, if it makes you more comfortable it’s not the end of the world to use it.
As for fear: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Enjoy your journey to FI!
Jim,
Thank you for the resources! I’ve been sharing your how I failed my daughter post with everyone. Thank you in advance for the opportunity to ask JLCollins.
I have a great job that will unfortunately be coming to an end in the next 1-2 years. I am planning for a year + off from work to have a second baby — a pre-early retirement? My husband is not yet on board so I’m working on a solid proposal. You’re opinion would be greatly appreciated!
My biggest immediate concern is what to do with my “baby no. 2” savings that may be needed to offset expenses while I’m off. Some background: Me (34) employed until mid-2016; My husband (35) self-employed (construction & sales)
ASSETS-House/Office/Model home $275k; Land $80k (partially constructed garage w/ hopefully income generating apartment & eventual homesite); Retirement $220k (TSP $90k; IRAs $130k (at Vanguard, rolling $32k to TSP for lower fees, $15k traditional, $83k Roth)); Cash $90k ($15k emergency fund, $50k garage/house fund, $10k baby fund & remainder for monthly expenses); 529 $5k
DEBT-Mortgage ($181k, 3.5%, $860/monthly payment); Student loan ($32k, 3.375%, $225/monthly payment)
INCOME-My salary $108,500; Husband’s income is unpredictable but @$45k & business covers some of his expenses; Rent $10k (business rents 1/4 of house, which is depreciated)
I haven’t rushed to pay off my student loan (I add an extra $25/month) or mortgage (we pay an extra $40/month) because I figured whatever money we would be borrowing later would be at a higher rate. We are hoping to build a house in the next 2-3 years.
I tried to run the math on investing the $70/month into VTSAX instead of prepaying and that seems to be a smarter option (we use the interest deduction from both loans) and potential returns could grow to $40-80k over the remaining 25 years of our mortgage amortization vs. the total $8k in interest savings over the life of the loans. Does that sound right?
We have too much in cash but I haven’t figured out the best way to put it to work in a taxable account given that we could need withdrawals in the next 18-24 months. The babyfund is currently in an online savings earning a paltry 1%. Vanguard recommends a 50/50 stock/bond allocation in ETFs for a 1-2 year investment timeline. Do you agree? Should we open just one account? Keep more cash than our emergency fund since the timeline is short? I want my dollars working not getting fat on a beach!
Thank you so much in advance,
Karina
p.s. we are your neighbors in Vermont
Welcome Karina…
Always nice to hear from our neighbors in VT!
While my mantra is “avoid debt at all costs,” once you have it, it is worth considering if paying it off ahead of schedule is the best use of your capital. In today’s low rate environment, here’s my rough guideline:
Less than 3%, pay it off slowly
3-5%, whatever feels most comfortable
More than 5%, pay it off ASAP
As for your cash, 90k is a shocking amount to have on hand. But then you are planning a shocking amount of expenses over the next two years: New house, new baby and you are planning to give up 2/3rds of your household income. I can see why your husband is “not yet on board.” 😉
If you really are going to do this, then your 90k needs to be in readily available cash and this means accepting <1% returns. While a 50/50 stock/bond allocation is conservative, it could easily be down 25% or more in a bad bear market.
Of course, 1% returns are not the fast track to FI. But given your plans and the spending level implied by a 15k ER and 10k cash on hand for expenses, FI is not your goal anyway.
Good luck!
Thanks so much, Jim, I really appreciate the input and apologize in advance for my wordiness! I’ve spent the past couple weeks digesting your response, doing more reading, and further thinking through our situation. FI is my goal, though probably on a longer time table than most of your readers (20 years/55). With the wonder of compound interest, our current retirement savings should meet our needs if we continue to invest in our IRAs.
I think we’ve put ourselves in a good position at this point to enable the conscious decision for me not to work for a year or two. As you say, what could we spend our money on that would be more important than my time with our kids? Of course, perhaps I’ll hate being a SAHM and want out after a few months!
So, I’ve decided to keep most of the babyfund in the 1% savings account (which has already paid more this year than my old acct did all of last year!) but invest a portion of it along with seed money and at least the extra amounts we had been paying toward loans into VTSMX/VTSAX. The goal/hope is this account will remain invested and all become long term savings as we lower expenses with me home and have the cash if we need to dip into it. We avoid bond funds in a taxable account, get our stability from the large cash reserve in the short term and plant the seeds of the money we’ll need for the time until we can access retirement accounts/begin drawing my pension.
In hindsight, the majority of my confusion was created by thinking about the 4% rule in relation to our situation. I don’t think an early retiree would pull all the money she would need to live on for the first couple years of retirement a year or two before she retired? She should continue to invest right up until retirement (at least that’s how I read your advice).
We have invested/able assets (so not including home equity/land value) as of now (and I plan to increase them a lot before I’m done working) that based on the 4% rule should support $12k/year which is what I calculate we may need to offset living expenses. Our 15k ER is also my personal escrow account to pay property taxes and insurance (home & life). Other accounts were high because savings hadn’t been transferred. Given our assets and the amount I project we’ll need to add to my husband’s income to offset our expenses (conservatively estimating), it seems to me we are “FI” for this gap in my working years–and that’s not including the money I’m planning to sock away between now and then.
So the moves I’ve made so far are moving my rollover IRA to TSP for insanely low fees until retirement, breaking out my Roth IRA into underlying funds which halved my fees at Vanguard, increasing pre-tax TSP contributions/discontinuing Roth contributions (and will frontload TSP next year assuming job will end during year), moving almost all cash to 1% savings, opening taxable account at Vanguard. Next steps include saving/investing in cash & taxable accounts, continuing to trim expenses, selling/donating unneeded items ($72 made last week!), and finishing apt so $800/month renter (already found) can move in in July.
I plan to keep my nose to the grindstone these next 18 months and the prize will hopefully be an expanded family I get to enjoy without too many financial worries.
Thanks again for your input.
Hi Jim!
First, thank you so much for what you’re doing to improve countless lives through sound financial advice! Secondly, as most others, I’d love to hear your advice regarding my specific situation. I am very new to the idea of early retirement and FI, but so excited it’s all I can think about any more! I am 28 and my goal is to retire at 45 (sooner if possible).
That said, I want to get started in the right direction asap, as I feel I’ve already wasted many valuable years! First, I’d like to put out there that I am graduating from grad school in a week with a whopping $85k in student loan debt. However, because I will work in public service, I am eligible for the public service loan forgiveness program, meaning that after 10 years (or 120 payments) at a hugely discounted rate (like $100/month) my debt will be forgiven, tax burden free. In my mind, paying only $12,000 on an $85,000 debt seems like the best way to go rather than forgoing retirement savings for a few years to throw everything I make at it and ultimately paying the $85,000 plus interest. But, I’d still love to hear your take on it. So, now for the fun part…
Income: $40,000
$25,000 (job 1, local government)…hoping for major increase in near future
$15,000 (job 2, self employed)
Debts:
Student loans. $85,000 ($92/month, )
Mortgage: ~$73,000 ($355/month)
Car loan: $9,000 ($263/month)
Assets/Accounts for potential investing:
TIAA-CREF ~$3,000 (from prev job, not sure what to do with this)
401k (brand new job, this along with 401a and iras are brand new, very low balance)
401a (employer only contributes at 3.25%)
Roth IRA
Traditional IRA
Cash in savings with 1% rate ~$3500
Liquid cash ~$2000
I’d love to know what you think I should do right now, where to start, where I should be investing, how much I should be investing, whether I need both the IRAs, should I consider vanguard, and if so how much and where should I invest in vanguard?
Thank you so much in advance. I am greatly looking forward to seeing what you have to say! Let me know if you need any more info. 🙂
Hi Leslie…
With the potential of having your student loans forgiven, I agree you are right to pay the minimum required on those.
Next, max out your tax-advantaged plans focusing on low cost index funds that track the total stock market or S&P 500. Use Vanguard where possible.
If your goal is to be FI in 17 years, your savings rate should be ~45% per the chart in this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
To understand all this, and much more, I’ve written this for you:
https://jlcollinsnh.com/stock-series/
Good luck!
Thanks so much, Jim!
Should I roll my TIAACREF into a vanguard IRA? Also, once I’ve maxed out my 401k each year, should I invest the rest in VTSAX?
There are at least 10 TIAA-CREF funds and I don’t know which you have. But, that said, all have higher ERs than Vanguard. So yes, I would roll it to there.
VTSAX is the core fund I recommend but, again, read the Stock Series. It is important that you understand why and the risks entailed.
Hi Jim,
I have been reading your blog religiously for the past few months, enriching my knowledge on saving and investing. I have been fairly frugal with spending but have found additional ways to curve spending from your site, as well as MMM’s site. Thanks for all you do to helping others get a better understanding of their finances so we can all focus on what’s most important…quality time vs. stuff (junk).
I am 43, single mother of a 20 y/o college student and looking to be FI in 12 years. I had put 6k into my states 529 plan, and saved money in an ESA (education saving account) years prior to my daughter leaving for college. Between those savings, and her father transferring his remaining GI Bill funds to daughter, her undergraduate cost will be fully funded. I can now focus entirely on my own future and saving for FI. I have put myself on a fast track to pay off my mortgage in the next 2 years. Remaining mortgage is currently $112,00 and I’ll be refinancing in less than a week to a 5/5ARM @2.75%.
Assets:
-Salary is 114k/year, yearly bonus varies between 10-20%
-247K in 401K (my employer plan does not have Vangaurd funds as an option) – 35% high cap index, 30% mid-cap index, 25% small cap index, 10% international managed fund
-25k in Roth IRA 8.5k in individual stocks, 16.6k in 5 Vanguard funds (VEIEX, VWEHX, VMMXX, VGSIX, NAESX, VTSMX)
-6K in individual stocks (non tax advantage Vanguard brokerage account)
11K in savings account earning pennies interest 🙁 (emergency fund)
5k in a CD earning 5% special rate until September (emergency fund)
-Company Pension (will receive approximately 12k/year at age 65 if I were to leave employment today)
My questions for you, if you would be so kind to reply to me, are:
1. should i aggressively continue on my path to eliminate my mortgage in 2 years or spread it out over the 5 years before the 5/5 ARM increases to 4.75% and then invest half of the extra payments to Vanguard VTSMX non tax advantage account?
2. if i stay the current course of 2 years i will not have any extra to invest until the mortgage is paid off, btw I’m really looking forward to $0 debt.
3. is my Roth IRA overly diversified with the fund mixture i currently have?
4. does my current plan look feasible to retire in 12 years or sooner?
Oh, I almost forget to include my expenses:
-current mortgage payment is $750/month and i pay an extra $2500/month, after re-fi monthly payment will be approx $460/month and i will pay an extra $3500/month
-other monthly expenses = 1,500
-I contribute 6% to 401K (amount of employer match), will increase to max when mortgage is paid off
Thanks for your time.
Geeg
Welcome Geeg!
1 & 2: ARM mortgages carry significant risk of increased interest rates and payment when they reset. So, you are wise to have a plan to pay it off completely well before the five years is up.
You could just pay the minimum and invest that $3500 a month. Assuming a modest 6% return over 5 years you’d have ~$236,750, using this calculator: http://www.globalrph.com/invcomp.cgi
Of course, this path entails some market risk along the way. And, since you indicate a strong desire to be debt free, there is nothing wrong with your plan to pay the mortgage off in 2 years and then focus on building your investments.
Using that same calculator and the 6% return, but now over three years, you’d have ~$150,238. With no mortgage to pay off. Looks good to me.
3. If you’ve read far in this blog, you know I highly value simplicity. So, yes, I think your Roth has far more investments than needed. This adds to your expenses. I’m particularly concerned that one of your choices is a money market fund paying virtually zero interest. This has no place in a long-term investment, which is what your Roth should be.
4. If your expenses, other than mortgage, are $1500 a month that’s $18,000 a year. At a 4% withdrawal rate, you’d need $450,000 invested.
If my math is correct, adding up your assets you already have ~294k, leaving you 156k to go.
Looking at your investing plan after paying off the mortgage for two years and investing for three, you’ll have about another 150k. So, with just a little wind at your back, you’ll be there in about five years. 12 years should see you there even with stiff headwinds. 🙂
Plus, as you point out, come age 65 you’ll be getting nice pension. Social Security, too.
For fun, check out the chart at the end of this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
I think you are well on your way. Enjoy the journey!
Thank you so much for your insight, and quick response.
It is reassuring to know that I’m on track. I’ve been stressing about it for a while. I’ll be ready to get out of the rat race as soon as I reach FI.
I’m going to go with paying off the mortgage in 2 years. Then continue to invest the $3500. Would it be wise to put it all in the VTSMX fund? Should I change my Roth IRA to only have VTSMX since my 401k is diversified with the International fund? The money market fund only has about $450 in it from a sweep after selling some stocks last year. I probably should have moved it over to VTSMX a while ago.
Thanks for the link to the calculator, it will help keep me on track. I’ll also share it with my daughter to show her what is possible if she starts to save early. I’ll also be re-reading your stock investing series, excellent information you have there.
Thanks again for your time and feedback…very much appreciated.
I would. By consolidating you’ll qualify for the even less expensive Admiral Shares version VTSAX. You’ll be broadly diversified, owning virtually every publicly trade company in the US, some 3600 last time I checked.
Hi Jim,
I gave birth to my wonderful daughter almost 4 months ago, and I would like to open an account for her now that she can take over down the road. This is where I will make contributions, and put any gifts and allowances into. I do not want it to be restricted to education/college savings, in the chance that she decides not to go to college. I also would like to have some control over it when she comes of age, in the chance that she is completely financially irresponsible. What do you suggest is the best way to go about this?
Thank you so much!
Hi Sophie…
As you’ve likely discovered, most of these plans are geared toward funding education.
This is a good overview: https://investor.vanguard.com/529-plan/
For something not tied to education, you might also consider a UGMA. These can be used for any purpose that benefits the child: https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma
However, once the child reaches legal age, it is theirs.
At that point she can spend it helping Spike, her new boyfriend, customize his motorcycle so it is even louder when he pulls up into your driveway. 😉
Here is a nice comparison of some the options: https://investor.vanguard.com/college-savings-plans/which-account
If you want to retain control after she comes of age you’ll need to keep the assets in your name, perhaps in a separate account you mentally earmark as hers. Of course in doing this you forgo the tax advantages of the other choices.
Hope this helps!
Hey Jim
Your site really changed my life. The stock series really changed my investment philosophy. I also came across Jack Bogle’s “Common Sense to Investing” which blew me away as well. It made the wealth management industry look like Soylent Green. In short, I think you two have saved me years off my life, financially speaking.
Your site really came into my life at the right time. I had just gotten married. My wife and I thought we “had” to buy a house. After reading one of your posts on a house as an investment, we opted to continue renting. Also, because of you, I fired my two “money managers.” When I became wise to their charges and how tax-inefficient it was, I pulled my assets out and moved them to Vanguard. Over the last month, the VTSAX has provided more gains than those two money managers combined.
Some info about me:
I’m 30-years-old. I have no debt. I rent a 1 bedroom in Queens (just outside Manhattan for about 1300 a month—cheap by NYC standards).
I have the following investments:
$370K in VTSAX
$40K in savings (kept to weather me through a “black Monday.” I figure this gives me some padding to not make a knee-jerk reaction)
$27K in a Roth IRA—recently, I moved this from a “managed” fund over to the VTSAX.
$73K in a company 401K (I recently switched the asset allocation to index funds, as well.)
$37K in a 529 (don’t have a kid yet, but wanted to be proactive with this. Same theme, moved this one into vanguard funds too.)
I’m a salesman. I have good years and bad years. This year, I’m projected to make around $250K. My wife is a teacher; her income is around $50K. So, together we make around $300K which puts us in a super-high tax bracket. (As a side note, she is considering quitting this year due to the crazy stress of being a NYC public school teacher).
In terms of upcoming expenses, we’re planning to have two kids. We’ve also decided to delay purchasing a home until about 7 years out (when the kids will be about school age).
My goal is to be financial independent by the time I am 45. To me, this means that I’ll have enough income from my investments to do anything I want. I’ll probably still work, but won’t be tied to any form of employment for survival. Based on the 4% rule, I’d need about 1.2 million in savings that are yielding me a return of roughly 5%. I’m guessing that my basic living expenses will be around $60K—this will cover housing and other necessities.
I wanted to reach out to you to get your feedback on my financial situation. I also wanted for any suggestions on what I could be doing better both tax-wise and life planning wise. I really appreciate your wisdom.
Thanks Brian…
I really enjoyed reading thru your comment. Obviously, I agree with the changes you’ve made. 🙂
Including the 529, your assets are ~547k, not quite halfway to your 1.2 million goal and FI. With your income and what appears to be a great savings rate, you’ll hit that long before you reach age 45 in 15 years. Check out the chart at the end of this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
Of course, having the two kids and buying a house will likely raise your expenses, changing this. Nothing wrong with that and, in fact, having structured your finances so well will make it far easier and far less financially disruptive.
I think it is also great that your financial picture allows for your wife to leave her high-stress job and not have to trade that stress for financial stress. I gather the plan is for the kids to follow on shortly after that and for her to be a stay-at-home mom? We made the decision for my wife to quit and stay home with our daughter as well. I can’t think of any better way to “spend” (lost income) money!
Sounds to me like you guys are hitting on all cylinders: Careers, income, savings rate, investing and family planning. Well done!
My only suggestion: With your income and tax bracket, be sure you are fully funding your tax-deductable accounts to the max. But my bet is you already have this covered. 🙂
Enjoy the journey!
Hi Jim
New to your site and new to thinking about retiring –
With the way companies work today and the downsizing that I understand is around the corner in my industry and firm, I was hoping if i could get your perspective on my specific situation below as it pertains to:
*Ability to retire today if I had to without any health insurance with 3% draw down Vs 4%
*How do you candidly think we have done
I have not had any financial training and kinda work real estate as a side hobby and was lucky to have a strong Corp Profit Sharing plan –
Apologies in advance if the information below becomes confusing –
In a nutshell, the financial moves I made detailed below were gut moves and ideas, without alot of financial research and/or direction – I wish I could go back to my 20’s to start all over 🙂
Background
I am a 51 year old Male. I have 2 children a boy 11 and a girl 2 1/2 years old.
I am not married but live with my children and their mother she is 45 years old
Our financial position/holdings:
$1MM in 1 stock “Profit Sharing Program company offers” and I now allowed to move 60% of that into a SP500 fund :Blackrock” I am planning to move 60% of this June 1st after the dividend is paid after May 15
$400,000 in 401k in a S&P 500 fund
$100,000 in Vanguard Dividend Fund
$125,000 in Vanguard Dividend Fund IRA
$250,000 girlfriends IRA/401K value
$400,000 ski rental properties -value after sales commission all condos no mortgages
$600,000 value of my primary home no mortgage worth after sales commission
3 additional properties
1st property – I will move in permanently in 6 years when my son gets out of the local public school system so not planning on selling – no value cannot be sold
2nd property is One whose rent is funding my brothers living expenses- not ideal promised mom
3rd property will be sold to fund $200,000 of my son’s college cost –
my daughter college is being funded by my wife’s buyout from her firm so we are good helping her with college
Here is my game plan if I got fired today – 🙂 as well as my wife –
Do not touch the $1.4MM for 15 years – that is the goal hoping this can double in that time period
I need to come up with 15 years worth of living expenses – this assume my wife gets fired on the same day –
we would sell $400,000 worth or real estate and combine with the $100,000 in savings we have – to build up the safety stock and fund the 6 years i need to stay in my primary home so my son can attend school system
I think the $500,000 or so would take care of our living expenses
When my son graduates from HS we sell the Primary home and net $600,000 move into the permanent house
That gives us another 6 or 7 years to live on
that gives us depending upon our budget 12 to 15 years of spending money.
We would of course look for work that is low pay but no stress to help offset any bills –
Concerns would be health insurance costs –
Will the 15 years allow the $1.4MM to double?
I might be jumping around here on this one but would be interested in your thoughts on our situation.
Our backgrounds, are from poor families, we are the both the first to attend college and first to own any real estate or a home to live in. So from that point of view we have achieved alot
Greatly appreciate any advice or general comments about our situation –
My game plan in simple form
*get 15 years worth of living expenses from real estate sales/savings
*allow the $1.4MM to double in size in 15years
Thoughts –
thanks for your time
Chris:)
2
Welcome, Chris…
Let me start by saying, we ALL wish we could go back to our 20s and start over. 🙂
I confess, I am a bit lost in sorting thru your holdings, but here are my reactions and answers:
1. From what I gather, you have about 1.875 million in stocks and funds and ~1.2 million in real estate. So ~3 million+
2. Since I don’t know what your spending rate is, I have no idea how you are doing. But using the 4% rule, 3 million properly invested can provide $120,000 a year.
3. Your investments are far too complicated for my tastes. A read thru the Stock Series will give you my suggested approach, both for investing and drawing the 4% in retirement.
4. 15 years is plenty of time for your 1.4 million to double. Using this calculator http://www.globalrph.com/invcomp.cgi you’ll see that a very modest 4% annual return gets you to 3.067 million in that time. In all but the very worst long-term bear markets, you should do much better. This assumes using a simple index fund like VTSAX.
5. I know very little about health insurance. What I’d look for is a high-decutable policy pared with an HSA: https://jlcollinsnh.com/2014/08/18/stocks-part-xxv-hsas-more-than-just-a-way-to-pay-your-medical-bills/ My understanding is that the ACA has made this easier.
6. You mention that you are not married and that is, of course, a personal choice. But there are tax, estate and insurance issues to be aware of as an unmarried couple.
Hope this helps and good luck on your journey!
If you could only invest at the $1000 minimum into Vanguard, would you choose the Target Retirement or STAR Fund? I’m just barely shy ($2831) of meeting the $3000 minimum for VTSMX, but want to roll my 401k over to get started asap. What’s the smartest move?
Hi Leslie…
I’d choose one of the Target funds, simply because their expense ratios are ~half that of the Star fund.
But seeing as you are only $169 away from the minimum for VTSMX, there is no harm in waiting till you’re there.
Remember, if you are going to follow my advice, you’ll be holding this for decades.
Hello! Let me begin by saying that anything investment-related might as well be in Mandarin Chinese as I have no understanding of where to begin. I’m slowly wading through your blog posts to try to become more enlightened!
We recently began considering the prospect of early retirement since our only debt come June will be a mortgage with 3.25% interest rate. My husband and I are 31 and combined, make $115,000. Right now, I am putting $6000 per year into my 403b and my husband puts about $100 a month into his 401k (matched to a measly $20 per month). We recently purchased a life insurance policy, which I’m afraid might be way too high (I think $500,000? mostly term, with a small amount perm) and disability insurance. I will have a pension coming. I have a few questions.
– What do you recommend for life insurance?
– How/should we diversify? Roth IRA? Vanguard? Put more in 401k? Put less in 403b? I’m not sure how to distribute my contributions to get the most bang for our buck and the best situation for taxes when we do retire.
– How much should I have in savings? I don’t have much to speak of now as I’ve been paying off debt. Plus we really LOVE to travel… : )
– I don’t get a paycheck in the summer – so there are two months were I do not contribute to 403b and we live off of my husband’s income with a bit of extra savings. Do I need to do anything differently because of this?
Thanks so much!
Welcome, Rabbit…
–As little as possible. Life insurance is financial protection for when you are dependent on a person’s income and the family would be devastated without it. Think sole breadwinner with children. If you and you husband don’t have children, you don’t need life insurance. Should one of you die, it would be heart breaking, but since you are both working you should be able to support yourselves as single people. If not, your spending needs to be reigned in.
–Here is my basic hierarchy for deploying investment money:
1. Fund the 401k type plans to the full match.
2. Fully fund a deductible IRA, rather than the Roth. The reason is the money you don’t pay in taxes will compound for you over the decades.
3. Finish funding the 401K to the max.
4. Fund your taxable account with any money left.
–As much as possible. 🙂 Once your debt is paid off, just shift that money to your investments. If FI is your goal, you should focus on an aggressive savings rate. Check out the chart at the end of this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
–Nope, and living off one paycheck is a great start!
Hope this helps!
Thank you! It definitely helps. So, should we cancel our life insurance completely, or just reduce it significantly? I’m so frustrated that that money is now just gone. Darn slick salespeople with their fancy charts! I should say that as of right now, we don’t plan on having children. That could always change, but it hasn’t yet.
These might be dumb questions, but where do I go to begin an IRA? And would a taxable account be something like Vanguard? Where does my 403b come in? I’m sorry for being so clueless… like I said, Mandarin : ) I’m going to have to read your stock series several times before it makes sense.
Lastly, how much cash do I keep on the ready and out of investments? I’ve seen recommendations of emergency funds from anywhere between three and six months worth of income. I want my money working for me, but don’t want to be in a pinch if something should happen.
Thanks again!
As I say, unless you have dependents who would suffer without your income there is no need for life insurance. Unless you want to have extra money if your spouse is gone. 😉
Even then, I’d rather take the premium money and invest it. And for those that need it, term insurance is the way to go.
You can have both your IRA and your taxable accounts with Vanguard. We do. If you call them they’ll help you get set up. Your 403b is a tax advantaged plan and, like a 401K, is offered by your employer. For more: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
As for emergency funds, you’ve hit on exactly the dilemma: the balance between having enough, but as little as possible so more of your money can be working for you.
Things like kids, houses, debts, car payments, high expenses, one income = a need for more EF cash. The simpler and more frugal your life the less the need. Your call. 🙂
Great. Thanks so much. I have a lot of reading to do!
Hi Jim –
As I mentioned in an earlier post I’m totally new to investing – but since I started reading this, have invested $25K in VSTAX – opened a Roth IRA (although, since I’m self-employed, learned there are better options – but that must wait until next year) and couldn’t help myself from “trying out” VTWSX with $5K of the $25K.
It’s definitely been a little roller coaster over the last month. I know what I have is chump change compared to many on here – but it’s still exciting when you your money makes $300, and (a bit) devastating when you see it lose a few hundred too.
But – just to clarify – we are in this for the long haul, right? All these predictions that the market is about to “correct” itself by 40-50% – that investors are set to lose big money….that shouldn’t phase us, right? 😉
Biting my nails…but in the meantime, my boyfriend and I are finally leaving Manhattan for…Queens (Gulp!). Our rent will go from $2.3K for a studio, to $1.3 for a one bedroom- and that extra $1000 per month will go directly into our Vanguard account.
Bracing myself for short term losses – but hoping (believing?) it will all be worth it in 20-30 years !
Thank you once again for this amazing resource!!
Welcome back, Rebekah…
Congratulations on your new investments! VTWSX might be my 1st choice if the expense ratio were a bit smaller. 🙂 Nothing wrong with holding it.
You’re worried about a 50% correction??!! You should be praying for a 50% correction. In these early years of your investing life it would be an absolute GIFT!!
Your newly freed up $1000 a month would be buying shares at bargain based prices.
Market drops during your wealth accumulation phase are to be welcomed and cherished as the wonderful opportunities they are.
Now don’t think this means you should wait for one. It might be a decade or more before it comes and you would have lost all that growth.
You can’t predict them and you can’t avoid them. But you can enjoy them when they come.
Also, Jeremy of GCC just had an excellent post about a hypothetical worst case scenario for early retirement that’s well-worth reading:
http://www.gocurrycracker.com/the-worst-retirement-ever/
The market can only go one of two ways – up or down :). Unless you’re a media pundit, the best thing we can do is to ignore the hyperventilation and ride it out over decades of investing. Hang in tight and enjoy the ride!
+1 on that link. It’s a great post and GCC is well worth reading overall.
Thanks, Jian!
Hi Jim,
I have a question about Roth vs Traditional IRAs. More specifically, which one is better for me. I read the MadFientist’s post about the Roth Conversion ladder, like the idea of it, and will consider implementing it myself. I am 18 right now and have been working for four years, however, my wages are all cash so I don’t have earned income, don’t file taxes, and can’t open an IRA. But this year, I will be starting a paid internship where I will be earning taxable income and want to open and max out my IRA. Since I will be in such a low tax bracket, should I just start off with opening a Roth IRA and then start contributing to a traditional IRA once I start making more money?
Thank you,
Frank
Hi Frank…
Your thinking is spot on: Start with the Roth while the tax deduction has little or no value. Once your income and taxes rise, switch new contributions to a T-IRA.
Even though you won’t be contributing new money to the Roth, hold on to it and let it grow. You can always add to it anytime your yearly income drops to the point it makes sense, as during a sabbatical. Plus 40 years from now you’ll be very glad to have it!
Jim,
What do you mean by: “Start with the Roth while the tax deduction has little or no value”? I didn’t think you could deduct contributions to Roths.
Also, at what point approximately should I switch new contributions to a T-IRA?
Thanks
While the possible tax deduction has little value to you because your tax rate is low.
Once you are paying Federal and State income taxes the deductibility of a T-IRA becomes valuable and the higher your rate the more valuable it is.
Every dollar you don’t pay in taxes is not only a dollar you get to keep, you also benefit from all the money it can earn for you over the decades.
Good morning, I was referred to your site by J.Money and enjoy reading the blog … quick question that he suggested I ask you.
I’m 43 with 3 kids, the oldest is a sophomore in college and the youngest a freshman in high school. I have a simple ira w/ my current employer with Fidelity. I currently have it in these funds which I selected on my own:
FCPGX
FIGFX
FMCSX
FMILX
I also have a 401k from a previous job with Merril Lynch … should I look to combine all in one account w/ fidelity? Move it to vanguard? Also, any other funds I should be utilizing?
Welcome Steven….
As they say, any friend of J Money… 🙂
You don’t mention what other funds you have available in your Simple IRA, but since Fidelity manages it, you very likely have one of their Spartan Funds that tracks the total stock market or the S&P 500 index. These have very low expense ratios, broad market coverage and would be my choice.
What you currently have is:
FCPGX — a small cap growth fund with an ER of .90
FIGFX — an international fund with an ER of 1.04%
FMCSX — a mid-cap fund with an ER of .78%
FMILX — a fund of small and mid caps with an ER of .81%
Looking just at those:
I don’t feel the need for holding an international fund for reasons I outline here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
But if you do, holding it is fine.
With he other three you have some unneeded overlap and I’d simplify to just the FMILX fund.
I’d definitely roll the 401K from ML into your own IRA. I’m a huge fan of Vanguard for reasons discussed here: https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
But if you want to keep it all with Fidelity, their Spartan funds are fine choices.
Hi Jim –
It’s Bekah again – I hope I’m not asking too many questions on here! If I am, just let me know . I know your preference is for VSTAX – and that’s where I’m keeping as much money as I can afford to (“corrections” and all…just plugging my ears, and closing my eyes!) – but as I mentioned before I also put a small amount in the world fund as well.
I can’t seem to get international investing out of my mind – particularly India. I was reading up on the Matthew India Fund – it’s up 57% in a year! That growth is pretty hard to ignore – although, I’m sure it can’t possibly continue to increase at such a high rate.
It seems that you don’t dabble much (if at all) outside the US – but do you know of any reputable places to buy into the Indian stock market? Vangaurd doesn’t seem to have anything in this area (aside from FTSE – but not really a fan).
There’s so much information out there – lots of articles on investing in India – but nothing on how to start. If you have any info – would much appreciate it.
Thanks much!
Welcome back, Bekah…
Clearly my lessons here have failed to sink in. Sigh. 🙂
I’m afraid I don’t have any insight into India funds, but I’m sure there are a bucnh out there if you Google it. I’d look for one with a major fund company. If not Vanguard, then something like Fidelity, T. Rowe Price or Dodge & Cox.
But I must caution you. As you are lusting after those 57% returns you are being lured into what is called “chasing performance” and that is something that rarely ends well.
Good luck!
Your advice is my gospel ! But even the most devout Christians are intrigued by Eastern religions, no?
In all seriousness, I know you are right about the chasing, and I’ll stop.
I couldn’t find anything on how to start investing in India (just articles advising to do it – not where to start), and have no one in my life who knows anything about investing, so that’s why I came back here – but alas, I found my way to the Morningstar forums where there’s an international and newbie thread.
I won’t get seduced by big returns – when I know so little about all of the other factors. But – my God – there’s so much out there that is so tempting (and probably a quick way to go broke).
Even if I do venture into Indian territory – I’ll stay conservative. I’m total Collinsist – even if I do occasionally fall prey to reading up on other options 🙂
Trying to beat the market is a loser’s game – Invest most everything in VSTAX …sticking to those tenants its hard to lose.
Thanks for replying to my silly question. Hopefully – my next comment/question will be an intelligent one!
Hello Jim,
First off, thank you for the advice you offer at your site. I’ve already made use of much of it and feel that I really should buy you a beer some time.
My question: I am a clergyman and have the option of opting out of social security contributions (~15% of my income). Since I am also a disciple of jlcollinsnh.com, I will have no trouble investing this money elsewhere. I am inclined to opt out and boost contributions to my index fund. Your thoughts?
All joking aside, your approach to money and wealth is much more “Christian” than most Christians I have met. I am sincerely grateful for you and your website.
Godspeed,
Fr Joshua
Welcome Joshua…
(That’s a pretty good name for a man of the cloth) 🙂
Here’s my take on SS: https://jlcollinsnh.com/2013/01/29/social-security-how-secure-and-when-to-take-it/
If I had had the option to opt out of SS back in the day, I would have grabbed it. That money invested in VTSAX over the decades would have done far better for me.
Is this right for you? A lot depends on if you will have the fortitude to really leave it alone to grow over the decades. It is easy to say you will, if all you have experienced is the great Bull of the last ~6 years. But if you were invested going into 2007 and your reaction to the plunge was, “Yawn!” your chances are better.
Another advantage is, should you die early, your invested money will still be there for the heirs you designate.
That said, as I approach the time when I’ll take SS the prospect of those government checks reliably rolling in is a very pleasant one.
Further, should you live to a ripe old age your mental abilities will inevitably begin to diminish. At that point a government check has more value than just the money.
I’m not sure this helps or is worth a beer, but I’d be happy to share one with you anytime!
Hi Jim,
I have 401k plan offered by my employer and it is invested in FFFFX mutual fund. I have separate $25000 saved in my savings a/c. Can you please suggest me where to invest my saved money.
Thank you
Hi Satish…
That’s a very tough question as I know nothing about you. But I have written an entire series of posts to help you answer that very question: https://jlcollinsnh.com/stock-series/
Read thru it carefully. Then you can decide if my thinking resonates with you and is worth your consideration.
Am looking at retirement. No debt. Both spouse and I currently working, will both have pensions, will have medical benefits in retirement, will both wait until age 70 to take SS. Life longevity (95+) for both. both excellent health. KEY: Enough cash flow to make living expenses in retirement. What is your opinion of keeping large percentage (80%+) of investments in equities in retirement? Don’t need to take $$ from investments for day to day living; primarily used for extras: new car, travel, funding grandchildren education, etc. Am not risk averse at all. Have some bonds now (15%) and sort of regret not having that $$ in equities. Have done well with indexed ETF’s over the years. Thoughts?
Another scenario and your thoughts on it: home paid for (value: $500,000). What is your opinion of doing a reverse mortgage and investing the $$ as it is paid to us each month? Would be leveraging an asset that is just sitting there doing no financial work.
Hi Charles…
It sounds like you are in excellent financial shape. This being the case, most would advise NOT being in equities. The thinking being, why take the risk if you don’t have to.
I disagree. I see our wealth as more than just there to serve our needs. I am also investing it for our heirs. Even those who don’t have children or other relatives they plan on leaving money to, will leave to to someone or some organization. Most, if not all, these options have the long-term horizon that stocks will benefit.
My take is that those who have managed their fiscal affairs well enough to have invested money they don’t need, are ideally suited to deal with the added risk of holding equities.
I’m no expert in reverse mortgages. but my understanding is they are layered with heavy fees. So look carefully before accepting one.
I do understand your interest in unlocking that capital. Our solution was just to sell the house. This also had the benefit of freeing us from the hassle of owning the thing.
We are happy renters now and we enjoy the prospect of being able to freely move about. Should the time come again when owning makes sense, we’ll just buy another. Mostly likely for cash.
If you like your house and want to stay in it, I wouldn’t worry about it too much. While your 500k isn’t earning anything, you are also not paying any interest on a loan or rent. So it has some value.
Hope this helps.
Jim,
Thanks for the feedback. Your comments go along with my thinking as well: even if I won’t need the money that can be earned via equities, somebody will: heirs, charitable organizations, etc. It’s an honor to be in the position to have a legacy of some type.
As far as risk: I think it’s actually riskier to NOT be in equities over a long period of time (several decades). With fixed income options paying so little, a person is almost better off to spend the money rather than put it into a vehicle that has a fee on both ends of the transaction.
One last thing: I see a number of comments on these blogs from individuals who are serial savers / investors: spend their entire working life building a solid financial foundation. Uber-savers or uber-investors. Almost defines them. Believe me – I can relate. When the time comes to begin taking assets out, these people struggle with that prospect. What better way to be able to use those saving / investing muscles throughout their lifetime than by making a goal of maximizing those assets in order to leave something that will outlive them: eg, funding college for academically qualified students in need, renovating a section of an animal shelter, purchasing playground equipment for an inner city daycare center, etc. The list is endless. Let the hunt continue!!
Hey Jim,
For some reason, there’s an issue posting on the site. I tried to post this through your “ask jim” entry field and I got an error. Anyway, I appreciate the advice you sent me a few weeks ago. Your advice has greatly helped me. I wanted to get your opinion on two things, since I defer to you for financial advice.
First, I wanted to ask your opinion on retirement planning, as opposed to early retirement planning. I’m 30 years old and have been maximizing taxable accounts with the intent of pulling them out at a 4% rate in about 15 years. So, I’ve got about 300K in the VTSAX. I’ve also got 100K in betterment—which I found through your site. The 100K is a bit more diversified (85% ETFs and 15% bonds)—the time horizon is about nine years because I’d like this money for a house, if my wife and I decide we need one. With that said, I realize that I haven’t planned too much for my actual retirement…My company 401K is pretty terrible. Based on my income, 200K+ I’m really limited with deductible retirement options. With that said, I was considering utilizing the “Roth Backdoor” and created a Roth IRA through Vanguard and investing in both the VTSAX and international index fund (I’m basically mirroring the portfolio of the target retirement funds but dropping the bonds…) What are your thoughts on that approach? Should I allocate money for the ROTH or should I just continue doing what I’m doing?
Second, this is kind of a weird question but I share your financial logic with life decisions. I’m wondering what your thoughts are on the “right” time to start having kids. I know people say “there is no right time” but there certainly is a wrong time. We’re weighing the option of my wife leaving her stressful job and trying to start a family. However, I’m not sure if we’ve thought this through completely. I was wondering what your advice was here.
Anyway, I really appreciate all your advice. You’ve given my wife and I so much direction. Your website really helped me to move away from predatory money managers and take my financial well-being into my own hands.
Hi Brian…
Backdoor Roths can be useful, but there are complications that need consideration. As I am not an expert in these, I’d suggest you check out the Bogleheads:
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
https://www.bogleheads.org/forum/viewtopic.php?t=147307
As for your second question, I’m certainly no expert in when to have kids. 🙂
Personally, my wife and I were both on the far side of forty when our daughter was born. This worked out very well for us for these reasons:
1. We both got to enjoy our 20s as completely free individuals.
2. We got married just past 30 and had a decade to just enjoy each other, while traveling and building our careers.
3. By the time our daughter was born, we were both more mature and had reached FI making us better parents in a more stable environment.
If I had it to do over again, we’d do it exactly the same way.
But that’s us, and that said here are the advantages I can think of for having kids much earlier:
1. The kids get to see part of your struggle as you reach for FI. This might give them a better sense as to the effort it takes for when their time comes.
2. You will still be very young once they are grown and on their own. This will give you more time to enjoy their journey as adults.
3. It will also give you more time with grandchildren, if any.
4. You will be reaching FI at the same time your kids are leaving, freeing up your time to enjoy your early retirement. Assuming, of course, this was your goal and you achieved it.
Hope this helps.
Thank you so much for the info! You’ve helped me out so much:
Aside from the tax implications, do you agree with my strategy to disregard the Roth (post-tax/no tax advantage other than long-term shelter) in favor of a taxable investment account (vtsax) so that I can access the funds in 15-20 years? The issue with the Roth is that it limits my flexibility to use the funds if I want to leave work earlier than 60.
So, my plan has been put the max in 401k (to use pre-tax dollars even though my company plan is no good and doesn’t match) and then keep buying VTSAX in a vanguard taxable account. My income is too high to get an advantage with a traditional Ira…
Just wanted to make sure I was on track to have FU money.
Thanks again!
My pleasure, Brian!
No, I would say always favor tax-advantaged accounts and fund them to the max before taxable accounts.
Roths are particularly good for easy access as you can withdraw your annual contributions tax and penalty free anytime. Only the earnings have restrictions. If you fund your Roth with a rollover from an employer plan you must wait five years and then you can access the contribution tax and penalty free.
But even traditional IRAs can be tapped. Here are some strategies for early retirees: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Also see: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/
Hello again Jim!
Would like to get your feel about how to go about my pension.
In Israel we have something that is sort of a mesh between individual accounts and pension insurance. The way it goes is you contribute up to 7% and the employer must(!!!) match between 12.5% and 14.33%. Your total is usually put into a managed fund which is managed by one of the big insurance companies. When you get to retirement age your total is divided by something called the conversion coefficient which is the average amount of months the pension company believes its retirees will live after retirement, and that becomes your monthly stipend. As of now its around 200, but the government allows them to update it every couple of years. Anyway, I was given two choices by my employer:
Option 1: Pension fund – ER 0.2% of the total and 2.55% of the deposits.
The most aggressive allocation offered: 5% cash, 25% company bonds, 40% world stock index, 30% government bonds promising 4.86% interest adjusted for inflation (so nominal about 7.86%) – this is the government benefit (we are still a socialistic country after all).
According to my company’s pension consultant, the predicted conversion coefficient should be 250-270 when I reach 67.
Option 2: Executive Insurance (fancy name for essentially the same)
ER 0.5% of the total and 2.5% of the deposits.
Most aggressive allocation: 80% – world stock index, 20% – Total Israel bond index.
Here’s the kicker: in the executive insurance the conversion coefficient stays constant at 200 (that is why the ER is higher).
Now the questions:
1) which should i prefer? On the one hand the 0.2% ER should tilt in favor of the opt.1 on the other hand since this is a 35 year investment 80% stocks is a must (my taxable accounts have all stock).
2) Can i count the gov’t bonds (4.86% adjusted for inflation) as stock for allocation purposes as they give a high yield (with the added benefit that it is gauranteed)?
3) Is the guaranteed conversion coefficient better than an unknown variable one given the difference in ER?
I know there probably are too many variables here to give a conclusive answer, but my feel is go for maximum stocks as in the long run it should outperform the difference in ER.
Thank you so much in advance for you answers and insight, and in general for this site and wealth of information.
Welcome back, Yaacov!
Very interesting scenario!
With the caveat that I know nothing about how this system works, it sounds to me like your thinking is spot on.
While in general I tilt towards the lower ERs, in this case the portfolio makeup changes the balance.
As you correctly observe, 35 years is a great run of time to let stocks work their magic.
So….
1. Option #2 would get my money.
2. Nope. Bonds is bonds. 😉
3. Beats me. I’m just betting on the long-term performance of the stocks out weighing the higher ER. If the guaranteed conversion coefficient works out better, it’s just frosting.
Hello, Mr. Collins. My wife and I enjoyed your stock series and posts tremendously. While we thought we had things sorted pretty well, reading your material has us rethinking some things, as well as wondering what to do with some of our “limbo” funds. Should you find time or have interest in adding your keen insight, we would be most appreciative!
Current Situation:
I am working while my wife is taking care of our two young children (4 and 2) at home. I have an average gross annual income of $100k. We have the following in play:
1. My wife’s former employer 401(k), currently vested market value of $65k (a 90%+ stock-heavy target retirement Vanguard mutual fund managed through Fidelity). This has not seen contributions in five years. We are puzzled as to the best move to make with this fund, but after reading your material, we are anxious to put it to work, rather than have it languish in its current condition.
2. $1 million term life insurance policy for myself, which we plan to leave in place for the term.
3. My Roth IRA, with current market value of $50k (employer is a small business with no retirement investment offerings). We contribute the annual max (currently $5.5k) each year to this. It is currently a T.Rowe Price Target Retirement Mutual Fund with 90%+ stock holdings, but an expense ratio of roughly .7%. After reading your material, I am planning to move this into a Vanguard fund for the lower expense ratio.
4. We have $30k in a money market savings account earning pretty much nothing. We like having the emergency cash, but it seems a waste to have this much money not working for us…wondering what could be done here.
5. We have an LLC that holds currently one rental property, though we hope to add more in the future. We hold a mortgage of approximately $100k on this property. Gross rents are $19.2k. Paying off this mortgage is our highest priority at this time. It is a commercial 5/25yr ARM, so we intend to have it paid off within the first 5 years, prior to an interest rate reset. We are on track to accomplish this.
6. We also hold a mortgage on our personal residence with a balance of approximately $158k. This is a 30yr fixed mortgage, which we are interested in paying down/off as soon as possible.
That’s pretty much it! After reading your material, I do hope to open a new IRA for my wife and contribute to that from my income…feels a bit of a waste we haven’t been doing that since she quit her job. Other than that, any advice you might proffer for our consideration, based on the above, would be most helpful. Our goal, like many, is to get debt free and retire as early as possible.
Kind Regards,
Aaron
Welcome Aaron…
I can’t promise keen insight, but I’m happy to offer you my perspective. 😉
1. I don’t favor leaving investments in old 401K plans. The fees are usually high and the choices limited. Plus I find it creepy having old employers still in my life. Personally I’d roll this into an IRA with Vanguard. If you like the TRF, it is fine to stay with that: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
2. Since you are not FI and you have two young children and the family is dependent upon your income, you definitely need life insurance. Term is the way to go, so keep what you have.
3. Nothing wrong with the Price TRF, but as you know from reading the Stock Series my strong preference is Vanguard. I’d move it there.
4. How much you need in an emergency fund depends on a lot of factors: How secure is your job? Do you own a house and need to have ready cash for unexpected repairs? Any one time expenses on the horizon? But in general, I like to keep mine as lean as possible and my money working hard.
The real risk in having too little is that you’ll need to tap your investments when the market is down. Tapping them when the market is up is no problem. Since the market is up most of the time, that too influences how much you might want to carry.
5. You certainly want to have the cash on hand to pay off an ARM by the time the first potential interest rate comes due. But it might be better to build that money in investments rather than in paying the mortgage down each month. It depends on the interest rate. For my guide on this, see Addendum 1 in this post: https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
6. Same as #5.
Finally, by all means open an IRA for your wife.
Hope this helps!
Hi JL, your blog is really informative and I appreciate how many times you must repeat the same advice, so here I go probably asking the same question you’ve heard before! This is in regards to the capital gains issue.
I have a non-retirement taxable account at Vanguard which I raided last year to get downpayment for my first house. I knew I would get hit with capital gains taxes and at tax time I found out it was much worse than I thought.
So my accountant said that if I maximize my 403b contribution (and I am this year) I can get my taxable income down to a level where I wouldn’t be hit with capital gains if I kept taking money out of this taxable account. I can add the mortgage interest and property taxes in to be at this taxable level.
So I am withdrawing a monthly amount from the nr taxable investment account to pay my bills partially and then I am pushing the money into the 403b by payroll deduction.
I also have a Trad IRA and a Roth IRA which I could take money from, but don’t. I can’t figure out if I am making a good move by taking it out of the non-retirement account or I should take it out of the Roths which hasn’t seen the same growth that the non-retirement account has.
This nr account has the VBLTX, VIMAX admiral and VSIAX admiral. My 403b is all in a target fund. They have NO Vanguard available.
So, does this seem to make sense- essentially moving money out of the nr investment account and then maximizing my 403b contribution? I have about 10-15 years to retirement.
Thanks again for your time and attention to all of our questions!
Hi Frank…
Maximizing your 403(b) contributions lowers your taxable income. Since capital gains rates are tied to your taxable income, it would lower these as well.
But you are best served by funding your 403(b) from your earned income rather than shifting money out of your other investments.
If you must do that, the money should come from your NR, but of course this might trigger additional capital gains.
If you take the money from your IRA you’ll pay taxes and penalties, assuming you are under age 59.5.
You can pull your contributions from your Roth tax and penalty free, but any earnings are subject to both.
But, again, your best move is to leave your investments alone and fully fund your 403(b) with your income.
I’ve been thinking about this more and just finished reading your post about withdrawing 4% during retirement.
Thanks for advice to me about using earned income first, to fund my 403(b). In my situation though, I can’t max it out using earned income only and still pay my bills so I’ve turned to my taxable investments with Vanguard to draw on for another ‘paycheck’ to make ends meet.
Back to the 4% rule you blogged about, I noticed that my yearly draw on my taxable investment account is about 3.2% of my total assets (held in cash, 403(b), Trad IRA, Roth IRA, HSA and taxable investments). After reading your post I feel like I’m doing something very financially sustainable- using a retirement strategy in my wealth building years!
This still seems like a good strategy and I understand it would be better, as you say, if all my 403(b) and HSA (I had forgotten about that little account till now) contributions came from earned income.
But, I still feel uneasy about taking money out of an account for which I already paid taxes on the contributions (the non retirement investment account) and putting it into the 403(b) and HSA accounts, but especially the 403(b).
Am I just setting myself up to pay tax on the same money again when I start withdrawing money in retirement from the 403(b)? Perhaps I am over thinking it and I have read your post about the Roth conversion ladder, but still I wonder.
I can see (in a bit of a financial fog) how the benefit may outweigh the cost but would love to hear your take on it.
Also, I am doing a monthly contribution to my Roth IRA to max it out yearly. I’m leaning towards switching my future contributions over to my existing Traditional IRA after reading your blog. When I started funding the Roth, many years ago, I was at a lower income and maybe I should be utilizing the tax advantages of the Traditional IRA now. Any advice is very appreciated.
By the way, I also read with GREAT interest your post about HSAs, I had no idea I could sandbag medical bills and pull them out years down the road to pull money out of the HSA tax free- wow! I’m going to straighten out my filing system for those medical bills pronto.
I think you are right to be concerned.
The key advantage of funding a 403(b) is that you are using pre-tax money and thus reducing your tax bill.
This is important as employer plans tend to have lots of high costs that need to be overcome: https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
If I understand you correctly, you need to draw down on your investments and add this to your earned income to meet your expenses.
If this is the case, you might be better served not contributing to these retirement accounts, taking your full income to live on and drawing less from your existing accounts and leaving them to grow for you. It would certainly be simpler.
The exception would be the HSA. It is worth funding as it works for you on a couple of levels as this post describes: https://jlcollinsnh.com/2014/08/18/stocks-part-xxv-hsas-more-than-just-a-way-to-pay-your-medical-bills/
Jim,
Thanks for this blog, I’m learning a ton reading through. I’d be curious to hear your thoughts about equity crowdfunding and how it might fit into an investment strategy. Thanks!
Hi person…
I’m afraid I don’t know enough about equity crowd-funding to comment.
Perhaps someone else here will have some perspective to offer….
fair enough. future post maybe? 🙂
Good idea and I’ve added it to the queue.
But be warned. It’s a long queue. 🙂
Jim,
It has been a pleasure to read your blog, especially the stock series.
I am pretty sure that I read your wife spent her career as an educator, have you looked into the benefits of a 457b? It seems like it gives the same benefits as a 401k only no employer matching and no early withdrawal penalty after your employment ends, even if you are not 59 1/2 yet.
I am looking for 30 and out to retire at age 52, after the employer match in a 401k is there a downside to a 457b?
Thanks Thomas!
Actually, I’ve not paid any attention to 457b plans so I can’t speak to any potential downsides.
I’d expect them to closely mirror 401(k) and 403(b) plans.
Hi Jim,
I just watched this 30 min video from Ray Dalio about the economy (found here: http://www.economicprinciples.org/) and I found it very informative and helpful. I think you’d be interested if you haven’t seen it.
However, at the end he gives 3 Rules of Thumb to takeaway. I’m trying to think about how his rules would apply at the level of the individual person, and I’m a little confused about the last two.
His rules are:
1. Don’t have debt rise faster than income.
2. Don’t have income rise faster than productivity. (“Because you’ll eventually become uncompetitive.”).
3. Do all that you can to raise your productivity. (“Because in the long run, that’s what matters most.”).
The first rule makes perfect sense, and the second two rules make sense if we’re talking about the government, but I’m wondering what an FI-interested person might takeaway from this? Thanks!
Hi Jake…
Actually I have seen that video and in fact linked to it in one of my replies here: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/#comment-4212753
I see it more as a good primer on understanding how economics works rather than rules for FI-interested person.
Well worth a look for those interested.
Hello –
I have found your blog very informative. I am 40 and would like to retire as soon as practicable. I am curious about your thoughts regarding our current financial situation and any potential ways we could invest differently:
We are about 40 years old. We have about 150k in IRA accounts with Vanguard – completely invested in the total stock market index fund.
We will have our house paid off in the next couple of months.
Our gross income is 109k in a secure government job. They offer a 457. I am investing the max (1,500 a month) in that plan. The only passable offering is a broad market index and even that has an expense ratio of 1%. Since I recently started the job, there is only about 6k in it.
Not much cash in the bank accounts, since I have putting money towards paying off the mortgage.
I suppose my questions would be:
Is having all our Vanguard money in the total stock market too aggressive?
Is it even worth putting money into the tax deferred 457 given the expense ratio, or would it make more sense to put in taxable vanguard index funds?
Any other advice you could offer based on this?
Thank you very much for your excellent blog and time with this.
Mike
Hi Mike…
Yes an allocation of 100% stocks is aggressive, but it is also what I recommend. The only drawback is the volitility and since you’re in the Wealth Building Stage your continuing investments from earned income would take advantage of that and smooth the ride.
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
But this only works if you can stay the course when the market plunges. And it will. It is part of the process. Reading the complete Stock Series will help you understand how this works and will prepare you to decide if it can work for you.
The 1% ER on your 457 isn’t great, but its not terrible. The tax advantages out weigh it and I’d fund it to the max.
You can read my rant on high fees here: https://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
But be sure to read Addendum I. That’s what you should do.
Hope this helps!
Dear Jim,
Thank you for your blog. I’ve read through all your past post and some of the comments. I appreciate the time you have put into your insightful post, especially your Stock Series. I am now in the process of trying to reorganize my financial situation, and was hoping you might be able to answer some questions that I have.
First, some background. I am in my mid fifty’s, living in southern California, and working as an engineer. I am a home owner with just over 60% of my original (30 year) mortgage paid off. This mortgage was refinanced to a 15 year @ 4.375% a few years ago, and the value of the property has appreciated to approximately 2.3 times its original cost. My savings are in several different places. I have a Roth IRA with Vanguard (VWENX), and old Traditional 401k with ING (mostly in equity funds), a current 401k with Fidelity (mostly equity funds, about 25%/75% Roth/Traditional split), after tax money is invested at Janus (JANWX, JANEX, JNGLX, & JNGTX) and USAA Brokerage (individual stocks). I also have a little cash in a credit union and a Health Savings Account.
Here’s what I’m planning to do. Reallocate my funds to obtain a distribution of 10% REIT, 10% Bonds, 5% International Stocks, 72% Domestic Stocks, and 3% Cash. I plan on doing this by:
1.) Reallocating the Vanguard Roth IRA mainly into VGSLX, VBTLX, & VFIDX with minimum investments into VFWAX and VTSAX.
2.) Converting the old ING 401k into a Vanguard Traditional IRA, investing in the same funds as my Roth IRA in #1 above.
3.) Reallocating my current Fidelity 401k into FSRVX, FSITX, FSGDX, FSTVX, while retaining minimal amounts in the funds that I now have that are closed to new investors (FDGRX, FSCRX, & YACKX).
4.) Slowly moving my Janus and USAA funds to Vanguard, investing in VGSLX, VBTLX, VFWAX, & VTSAX.
5.) Investing my Health Savings Account.
My goals are to retire as soon as possible with enough FU money to never have to look back, get out of Southern California and head for the American Southwest, traveling, getting outdoors, hiking, hunting, fishing, etc. I do have a significant other (also an engineer) that is younger and enjoys her work way to much, so this may slow down the process.
Questions:
1.) While looking at the available funds with Vanguard and Fidelity, I came across VEXAX (extended Market Index – Adm) and FSEVX (Spartan Extended Market Index – ADV). Do you have any idea what these extended funds are and if they are worth looking at?
2.) I believe that I read in one of your post that you were going into VFIDX for your Bond funds (because short tern isn’t paying much and long term will get hurt when inflation hits). I saw on Morningstar that this fund has recently changed categories from intermediate-term to corporate bond. Does this affect your thinking and what are your feelings about VBILX Intermediate-term Bond Index – Admiral Shares? This fund is in the Treasury/Agency Category. I have no idea of how this is different from the Investment Grade Category that VFIDX is in.
3.) I believe there are tax consequences to reinvesting my Janus and USAA Brokerage funds. All the Janus funds have been held for several years with no further investments other than dividend reinvestment, and most stocks in the USAA Brokerage account have been held for over a year. Does it make sense to convert these funds slowly (over several years) or should this be done all at once?
I’m hoping you will be able to further enlighten me and rid me of some of my overabundance of ignorance. Keep up the great work. I’m always looking forward to your next post.
Thanks,
Brian
Hi Brian…
Since you’ve read my Stock Series, you know I favor simplicity. So my first take is, my goodness but you own a lot of funds! 🙂
Before we get into your questions, let me offer a couple of observations.
1. Looking at points 1&2 of your plan, there is no need to duplicate all those funds in both your Roth and T-IRA. For allocation purposes, look at the whole. Check out the FAQ part of this post for more: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
2. As you also know from the Series, I don’t feel the need to hold REITS or International Funds. But if you want to, here are the funds I would use to achieve your allocation:
10% REITS — VGSLX
10% Bonds — VBTLX or VFIDX
5% International — VFWAX
72% US Stocks — VTSAX
Cash in my bank
OK, on to your questions:
1. VEXAX and FSEVX invest in small and mid-cap stocks. They are for those folks who want to focus attention to those sectors. You could combine them with an S&P 500 index fund and cover the total market. Or just hold VTSAX, which is what I do.
2a. VFIDX is an intermediate investment grade corporate bond fund. As far as I know, this is unchanged.
2b. VBILX is also an intermediate bond fund but it includes government bonds. I haven’t looked at it before, but it could be an interesting alternative to VFIDX. The ERs are the same at .10%, but it pays 2.75% interest v 3.1% for VFIDX. Still, when I run the charts, VBILX has provided a better return over 10, 5, 3 and 1 year periods. However, those were all periods of declining interest rates so capital gains played a role. I’m not sure it will retain this advantage if rates start to climb. But I don’t know that it won’t either. Could be an interesting choice.
3. If you have capital gains in those funds, which is likely if you’ve held them for a few years, those gains will be subject to capital gains taxes if you sell. Of course, if any have a loss, you can use that to offset your gains when you sell them.
The amount of capital gains tax due depends on your income and tax bracket. For 2015 it looks like this:
Tax bracket Capital gains tax rate
15% or less = 0%
25, 28, 33 or 35% = 15%
39.6% = 20%
As you can see, how you unwind these depends on your circumstances.
One thing you might consider, if you are close to retiring, is to sell these first to raise the money you need to live on as you need it. This keeps the gains low and, presumably you will be in a lower tax bracket. More on this here: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Hope this helps!
Jim,
Thanks for your quick response. I appreciate the fact that you’re willing to take the time to read, research, and answer a letter from someone you don’t even know.
Yes, you’re correct; my logic in duplicating the funds in both the Roth & T-IRA was for reallocating in the future. I’m starting to lay everything out in a spreadsheet, so re-balancing to hit the target distributions as a whole, would not have been too difficult. What I hadn’t done was considered the tax implications. After reviewing “Stocks-Part XXIII: Selecting your asset allocation – Q & A”, I think I have a better understanding of how to go about reallocating. Assuming gains, I’ll do most of my reallocation in my Fidelity 401k – no tax consequences. If I have to re-balance at a loss, I’ll do it in my taxable funds (Vanguard Fund that I have set up by selling my Janus Funds & individual stocks) – capturing the losses to deduct against any other gains.
I also see your point in divesting yourself of REIT and International funds. But as you could see from my collection of funds up to this point, I have a bad habit of spreading out. I am slowly trying to correct this problem, and at the end of this process I will have reduced the total amount of different funds I have quite a bit. I will also have put myself almost completely into low cost index funds, and will be keeping the allocation in VGSLX & VFWAX at a low percentage of the total. Eventually, I may roll them into the stock & bond index funds.
Thanks for explaining the extended market index funds. I’ll omit these from consideration, and stick with the VTSAX & the Fidelity equivalent – FSTVX.
Since VBILX survived your scrutiny, I think I might put a small portion of my bond allocation into it. As I get more comfortable with the idea of fewer funds, I may also roll this in with the majority of my bonds that will be in VFIDX.
I knew that I would have to pay taxes on the gains if I sold my Janus Funds or individual stocks. What I didn’t know was how your tax bracket affected your capital gain rate. I don’t think I’m in any danger of running into the 39.6% tax bracket, but I’ll check where it is just in case. I may also spread the selling of these funds and stocks out over a few years, even if I can stay within the 15% capital gains rate. I just hate the idea of forking over so much cash to the government. I see your point about selling them as you need them in retirement. Unfortunately, that may be in a while. Therefore, the Janus funds will be the first to go. I’m ticked off at myself that I haven’t done it sooner. The expense ratio of these funds is terrible compared to the Vanguard Index Funds.
Jim, thanks again for your blog and taking the time to respond. I greatly appreciate it.
Brian
My pleasure Brian…
You can check your tax bracket here: http://www.forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/
The top bracket doesn’t kick in until over 400k so, if you’re in it, if ever we meet you are buying the coffee! 🙂
Owning VGSLX, VFWAX and/or VBILX is fine if you like them. While I don’t feel the need, they are low cost and certainly won’t hurt.
As an aside, I used to own some Janus funds back in the ’80s when I still believed active management could make a difference. They had a good reputation but they sure had high fees!
Good luck!
Jim,
Thanks for all the help and the link to Forbes. I see that it will be impossible for me to get even close to the 20% capital gains tax rate. Even so, if we ever do meet, I would be more that happy to buy the coffee. If you are ever going to be in Southern California, shoot me an Email.
Now it’s just a matter of implementing the plan.
Thanks again,
Brian
Jim,
I am thinking that is very likely you have read this speech written by Bogle before. It was given at Drexel University back in 2003.
But just in case you haven’t I thought I would post it. It is called Chasing the Rabbit:
http://www.vanguard.com/bogle_site/sp20030614.html
” I hope you will ask yourselves whether you’re going out there to chase the fake rabbit of success—wealth, fame, and power—rather than the real rabbit of meaning—the contributions to our society that stem from principle, virtue, and character.”
I think it is a great message for younger folk. A great reminder even I hope I can remember over the long haul as I build. Where financial know-how gives you the ability to have the flexibility to leave indentured servitude if that becomes your lot and instead gives you a fighting chance to pursue using your energies for a greater good or fulfilling your potential.
Brief History of Indentured Servitude in the U.S. (PBS):
http://www.pbs.org/opb/historydetectives/feature/indentured-servants-in-the-us/
Cheers sir,
PD
Thanks PD…
Actually I had never read or even been aware of it. But it is one more reminder of why I hold Mr. Bogle in such high esteem.
It is a great message for young…
…and old.
Cheers to you as well!
Mr. Collins,
I really enjoyed your stock series and I would have to agree that the market always goes up…the big concern is how long that may take to occur once the market plunges. I was looking at the Japan Nikkei market as an example of a slow trend back with a market high of about 40,000 in 1989 and today’s value at just above 20,000. I’m sure the US stock market is not immune to the same circumstance that happened with Japan. Do you have any thoughts on mitigating this type of risk?
Thanks,
Kurt
Hi Kurt…
Questions like yours remind me I really should put together an FAQ one of these days. 😉
In short you’d mitigate it, as with all risk, with your asset allocation. I suppose the ultimate would be to hold cash, but then you’d have to watch its value slowly erode to inflation, something that is pretty much a sure thing. That’s a big risk.
So the real question is do you organize your portfolio to withstand a possible but exceedingly rare event or for the far more likely historic gains? In the first you guarantee that eroding loss over time. With the second you accept the risk for the wealth building and historically far more likely results. Your call.
For more: https://jlcollinsnh.com/2012/04/29/stocks-part-iv-the-big-ugly-event/
Be sure to read the post linked to in the Addendum as well.
If you have money, you have risk. You only get to chose what kind.
Hi, Mr. Collins. I love your blog and have learned so much from you – thanks! I am hoping that you can please help me.
Unfortunately for my husband and me, “FI” refers to any and all of the following: Financial Idiots; Financial Insanity; Financial Insecurity – you get the idea – and we are perhaps better described as FE – Financial Excrement. We are in our mid-40s and have zero investments and little cash on hand. We have lived, up until around 2 years ago, well beyond our means, racking up credit card, car, and student loan debt, and have saddled ourselves with a mortgage, right here in beautiful NH. We have been irresponsible and immature, and the reality of our circumstances is embarrassing, humbling, demoralizing, and scary. We are hoping, though, that our kids will learn from our mistakes, and not find themselves in FE when they are in their 40s.
The light finally came on 2 years ago, and since then we have cut back on our lifestyle, lived on a budget, paid off $20k in credit card debt ( and closed the accounts), $10k in car debt, and around $9k in student loan debt. We accomplished this in large part be selling a ton of stuff, downsizing our cars, and cutting out “extras.”
We still have $65k in student loan debt ($5k at 6.8% and $60k at 4.8%). We owe $110k on our house, which (realistically and conservatively) could fetch $200k in a sale. The interest rate is 3.875%, and we have around 27 years left on the mortgage.
We are strongly considering selling our house and paying off our remaining debt. Selling at $200k would, after all fees are paid, enable us to do so, plus leave us with around $20k in cash. A small rental home in our area (when they can be found) would run about $1300 – $1500 a month.
We are eager to finish cleaning up our mess and are trying to decide if we should cut our losses now and sell the house, or stay put and slog through the debt. Our take home pay is around $4k per month. We are trying to see what would put us in the best position 5 years from now. We are concerned that, if we stay and slug it out, our ability to set aside $ for “retirement” will be delayed by however long it will take to pay off the debt. With an old house and 3 young kids, odds are that something will pop up along the way that sidetracks us or delays our progress.
What would you recommend? Thank you so much!
Hi FE…
How about “Finally Interested”? 🙂
While I am not a great fan of homeownership as a given – https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ – if you are looking at understanding the better financial choice you need to carefully run the numbers as described in this post:
https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Based on your information above, I did a quick analysis and my guess is that you’d be better off keeping the house. I’m not going to share my numbers with you as I don’t have all the details you have and it is important that you do this yourself so you fully understand what they look like.
If you wind up renting at $1500 a month on a $4000 monthly income, you’ll not have much room to pay down those debts. So…
It sounds like you’ve made great progress in reducing your expenses. Keep pushing on that front. Mr. MM is a very useful guide: http://www.mrmoneymustache.com
In addition, you’ll want to figure ways to expand your income. This is beyond the scope of my blog, but my pal Paula has some ideas to offer: http://affordanything.com/2015/05/11/what-is-passive-income/
Good luck!
Finally Interested – indeed! Thank you for your kindness. 🙂 And, thank you so much for the reply and helpful suggestions. I actually found you via MMM, and because of your many (refreshing!!) posts on home ownership (as well as debt), I was very interested to get your take on what might make sense for us, given our ages and desire to get on track vis. saving and investing for the future. (I really enjoyed the video of you with Mike & Lauren, btw.)
If we did sell, we would walk away with $85k – enough money to completely wipe out all of our debt, and also leave us with around $20k in cash to start over, and begin investing immediately. This is why we are considering selling. If we stay, we’d pick away at the debt very slowly, and would be able to set aside only a small $ amount to save /invest, and continue to pay down the mortgage. Our current monthly payment on the house – including taxes, interest, principal and insurance – is only $1000. But, as you know, electricity in NH is expensive, as is heating oil (especially this winter!), in addition to home maintenance and repairs, so in reality, we’re not too far from the $1500 we’d have to pay in rent. Financially, it seems, it’s a close call – I’m not confident in my own calculations, but I will work them out again as you suggest and see where that leaves us. We have made so many missteps in the past and are trying our best to make an informed , financially sound decision.
Thanks so much for the suggestions and encouragement, and please keep doing what you do! It is so helpful, informative, and inspiring.
Hi Jim,
I’m a 33 year old father of two. I started making real money in the past few years. I have been married for three years. I’m trying to decide how to allocate my money now to give my family the best results later.
Your blog has been a huge inspiration to me. (Thanks for alerting me to the existence of Admiral shares!) I have already made many changes based on your advice. I understand that my financial future is wholly my responsibility. I’m trying to master my finances once and for all.
Here are my questions:
I have one Roth IRA for myself. Should I open up a Roth IRA for my wife? Should I open up two 529s, one for each of my children? (I live in Washington State). Should I do these things before opening up a VTSAX to dump my money into as my “retire early” bucket, or after I contribute to it? Also, how much should I save/invest per month if I want to retire early and maintain the same comfort?
My Goals:
I want to work hard and retire early. I love my work, but I feel insecure with every job I take. I work in tech, and startups come and go–my current gig could go at any time (this has happened to me thrice before). I want to be financially independent at some point so I don’t need this dread of losing my job hanging over me. However, I fear that if I ever did that, it would tie me to a fixed spending limit each month that I may not be able to sustain. My expenses vary wildly from month to month (I’m trying to get a handle on that).
I want to buy a house someday. I have read everything you have written about home ownership. I agree with you that homes are not good investments. I want a house, but I don’t know when the right time will be. When my kids are teens? After their college? ASAP? I want a home for the feeling it gives me (and my wife, in particular). I want a place to “plant roots”.
My Income:
Salary: ~$100k (before taxes/health/etc.) My wife is a full-time mom.
Side Gig: ??
I see about $6.5k hit my bank account each month from my salary. Let’s say I see about $1.5k each month from my side gigs. That makes ~$8k per month.
I make some good money on a number of side gigs, but the income is not reliable. This year I have made about $15k so far from the side gig. Last year I made about $25k. I tend not to count it in my calculations, because I never know what I’ll walk away with.
My Assets:
VTSAX (Emergency Fund) – 24k
VTSAX (Roth IRA) – 18k
Stock – 33k – (I earned about 33k in stocks from a company I worked for. I cannot touch them until November without being hit by a capital gains tax. My plan is to throw this into some sort of investment once I can.)
TOTAL: $75k
My Debts:
Wife’s student loans: $3.7k
Car: $4.7k
TOTAL: $8.4k
I have been aggressively paying off debt over the past few years. We started at about $35k in debt. I paid off all credit card debt and my own student loans last year, and now I am working on hers and the car.
My Costs:
I love my wife and we have a great marriage. She is not financially minded, and our only source of strife is about money. I like to save it, she likes to spend it. Finally this month, I put her on a spending budget of $800 a month, which she is responsible to use on our food, shopping, entertainment, and baby needs. She feels this is too little; I feel like it is too much. I don’t expect to be able to dwindle this amount any time soon.
Rent: $1,400 (Seattle rent SUCKS).
Utilities: $230
Side-gig expenses: $128
Phone/Internet: $300
Life insurance: $120
Gas: $230
Car payment: $300
Student loans: $130
Total (including wife’s budget): $3,638
Note: Our family has to take two big trips per year, for family reasons (not vacations). That’s around $500 per person–$4k a year, not including rental cars, hotels, food….arg.
My monthly spending on food, shopping, and entertainment has been MUCH higher before this month. I hope this new budget will help.
Sorry for the deluge of numbers. I hope you can share some sound advice, and maybe a good thumping if you think I need it.
Hi Stephan…
Glad you found your way here and good to know it has been helpful.
Here are my thoughts on your comment/questions:
1. You should definitely fund IRAs for yourself and your wife, but I’m not sure they should be Roths. Check out this post for a discussion of them and my my basic hierarchy for deploying investment money: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
2. 529 plans come with lots of restrictions. I’d pay off your debt and fully fund all your IRA/401(k)/HSA opportunities first. Build your wealth and pay for your kids’ college from it when the time comes and if needed.
3. For a chart outlining savings rates/years to retirement, check out the Addendum in this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/ The more you save, the sooner you reach FI.
4. No job is secure, so you are wise to be concerned. This is why you need F-you Money: https://jlcollinsnh.com/2011/06/06/why-you-need-f-you-money/
5. Owning a house is almost always an obstacle to reaching FI. Plus, in an insecure job market, it ties you to one geographic area. So you’ll need to decide which is more important to you: FI sooner or homeownership.
6. If you decide you want the house, and it sounds like you do, I’d buy it right away. Rates and prices are still feeling the effects of the last crash. You might as well begin enjoying it while you and your kids are young.
7. If “She feels this is too little; I feel like it is too much” that $800 a month is probably just right. 🙂
8. As you can see from the chart in the link in #3, savings rate and controlling expenses are critical to reaching FI. Other than that, I won’t comment on your expenses. That’s out of the scope here. But for input on those try Mr. Money Mustache and/or the Forum:
http://www.mrmoneymustache.com
http://forum.mrmoneymustache.com
Overall, it sounds like you are thinking about this and starting to take the first steps. Hope this helps. Enjoy the journey!
Hello Jim,
First, my wife and I love your blog. You among others have opened our eyes to the possibility of financial independence and are very greatful for it, thank you! I have to admit we just recently started on this road. Retirement, let alone early retirement, never seemed like a attainable goal, but we see the light now!
Some background info on us. Im 32 and my wife is 28. I’m currently and have been the sole provider for us and our two small children. My wife just earned her cosmetology license and will hopefully be contributing income soon.
I work for a hospital and make about $40,000 annually. I recently bumped up my 403b contribution to 7% with a 3% employer match for a total of $5,700 invested. I also have a part-time job which contributes $2,000 annually that I’m putting in a savings account. I opened a Roth IRA this year and maxed it out at $5,500. We also have $8,000 in an emergency fund.
My 403b is through Fidelity and is invested in a S&P500 equivalent. The Roth is also through Fidelity and invested in a Total Stock Index fund. I do plan on switching that over to Vanguard soon though.
Debt wise we only have my wife’s student loan of about $14,000. We do plan on buying a home this year though. Something modest. Hopefully with a mortgage of about half of what we’re spending now on rent.
Since we’ve managed to get by on just one income all these years once my wife starts working we plan to wipe out her student loan first. And eventually place her entire income into investments.
What advice can you give as to what we should change or what we should do from here? Thank you in advance!
Welcome Gabe…
Glad you guys like it!
Ordinarily, I prefer deductible IRAs to Roths for the tax savings. Every dollar you don’t pay in taxes is a dollar that can grow and compound for you over the decades.
That said, you’ll want to look closely at your actual tax bracket. With two little ones the tax advantage might be minimal and the Roth the better choice.
Second, I’d suggest you fund an IRA (of whatever type you determine is best for you) for your wife. She doesn’t need earned income for you to do this.
Since you have more control over your IRAs than your 403(b), they are the better choice. So:
—Fund 403(b) up to the match
—Fully fund both IRAs.
—With any investment money still left, further fund the 401(b)
Third, $8000 is a very large emergency fund for someone who doesn’t own a house. (Houses are prone to large, unexpected expenses)
Fourth, a savings account is a poor long-term investment as the value of your cash erodes over time to inflation. But it is the right place for saving a downpayment.
Fifth, carefully run the numbers before buying a house. Here’s how: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Finally, take a look at my conversation with Stephan directly above and check out the links in my answer to him.
Good luck!
Thanks for the reply Jim!
We are in the lower tax bracket so Roth’s do seem to make sense for us now.
I came to the same conclusion about opening up a Roth for my wife after coming across another readers post and following a link to the IRS website. All funds in the savings account will be diverted to her Roth to max it out before next April. Thanks!
Housing wise, after running the numbers it is in our benefit to buy. As I said, we are looking for something modest. Shooting for something south of $100k. I also have a father-in-law who I call “Bob Villa” and can repair anything for the cost of a cup of Dunkin Donuts 🙂 Another benefit is the hospital I work for offers forgivable loans to employees who buy homes in the same city as the hospital. In my case I qualify for $7,500. As long as we own the house/continue to work for the hospital for the next 5 yrs. Which we plan to do.
Once my wife starts working we plan to open a taxable account at Vanguard for our boys. We were torn between 529 plans and UGMA accounts, but concluded (as you suggested to others) that opening a taxable account in our names was essentially the best of both worlds.
By the way, we can’t wait for your upcoming book! And also your YouTube stock series with Mike and Lauren. We found your site through there channel. Great stuff for aspiring FI’ers. As you, they make things easy to understand for everyday people!
Glad to be of help, Gabe!
Just to be clear, I wouldn’t fund a taxable account until you have fully funded all of your tax-advantaged opportunities.
The book manuscript is out to readers and fact checkers at this point. Once their feedback is in, it will be another round of rewrites. Seems never ending, but we’re getting there!
I’m looking forward to seeing what M&L produce as well!!
Fully fund tax-advantage opportunities first. Got it! And we’ll be patiently waiting on the book.
Thanks Jim!
Jim,
Great blog. Am 60. Have retirement money in a Roth IRA as well as a traditional IRA and 401k. When withdrawing money during retirement, which of these vehicles is best to access first?. No taxes paid vs taxes prior to 70 1/2 and minimizing RMD’s.
Thanks in advance for your thoughts.
Hi Charles…
That’s a tough question to answer as there are many moving parts, such as your tax bracket.
Personally, I prefer drawing down the traditional IRA and 401k funds first. This reduces the future RMDs which Roths don’t have.
Plus there are tax advantages to your heirs with Roths.
For more of my thinking on this:
https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
https://jlcollinsnh.com/2014/07/27/stocks-part-xxiv-rmds-the-ugly-surprise-at-the-end-of-the-tax-deferred-rainbow/
Jim,
Thanks for your prompt response. That’s kind of what I was thinking as well. RMD’s could become a major headache. An unknown that is best avoided if possible.
Thanks again
Hi Jim,
I read your Stock Series and betterment article and I was inspired by what you wrote. I have kind of an odd question regarding your betterment “experiment”.
Exactly like in your example, I need $10,000 for a car in 5 years. I deposited $2525 to start it off and will auto-deposit $100 monthly. It recommended an allocation of 51% stocks and 49% bonds. When you wrote your article you said it recommended 65% stocks and 35% bonds. Is your allocation still the same and how is your progress on your goal?
Also, I graduated from high school and will be moving on to Kettering University to study computer science. As a part of the program, I have the ability to rotate school and paid internship every three months. I also just had a graduation party where i recieved many generous gifts totallying almost $4000. What should I do with the money I have received from my grad party and will receive from the internships?
Investment-wise, I currently have $1000 in VTTSX in a regular taxable brokerage account with Vanguard, and put $2525 of the $4000 from my grad party towards saving for a car in Betterment.
Should I open a Roth IRA or put additional money in the traditional brokerage account? Should I focus on saving for the car and forget about saving for retirement until I graduate? None of these? Any suggestions would be helpful.
Thank you.
Hi Frank…
I just cashed out my Betterment account. I had opened it mostly to have first-hand experience in what dealing with them was like. (It was great)
But since I wasn’t actually saving for a car, that was hypothetical, I didn’t really need to hold it. So once I was confident in how they did business, I no longer needed to hold it.
The 65/35 allocation is more aggressive and, since the market was up while I owned it, would have outperformed a 51/49. But that’s meaningless hindsight and, since we can’t know what the market will do in the next five years, unhelpful.
51/49 has less upside potential but also less downside risk, which makes it the better choice for short-term investing.
VTTSX is a fine fund and you can hold it for the long-term and do well. But, as I say in the Stock Series, I prefer VTSAX for long-term wealth building.
While your income is low and you have no tax liability, a Roth is a great choice. Once you are paying taxes, switch to a Traditional IRA for the deduction but continue to hold your Roth.
Personally, I’d plan to buy a cheaper car and put more money toward building my wealth.
Hi Mr. Collins,
My husband and I recently discovered your Stock Series and have been devouring it. Thanks for all of the great info! Would love your advice on our situation.
We are both 40, and we have $300,000 invested with a brokerage firm in mutual funds, which we are rapidly going to switch to Vanguard. Our income is about $100k each at the moment, but fluctuates slightly as we are both independent contractors and some years are higher and some are lower.
We don’t have any debt and we can contribute $1000/month to investing (working on getting this higher)!. In an ideal world, we would love to retire in 15 years. We have some cash savings for emergency – about $17k.
Given that we are not in our 20’s but still want to aggressively grow our next egg over the next 15 years. And also given that we both own our own businesses so we may have some income fluctuations, what type of allocation do you suggest? Should we still put the majority of our $300k nest egg in VTSAX?
Any advice on our next move and future plan is appreciated. I know part of the answer is that we need to find a way to save more than $1000/month :).
Thanks in advance!
Hi Kelly…
You need to save more than $1000 a month. 🙂
But seriously…
…You need to save more than $1000 a month.
Check out the chart at the end of this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
To retire in ~15 years you need a savings rate of ~50%. Nothing is more critical. It is just a matter of deciding whether financial freedom is worth more to you than whatever you are currently spending money on. If it is, spend 50% of your money on investments.
As you know from the Stock Series, VTSAX is my favorite wealth building tool and the only one I use personally.
Good luck!
Thanks for the reply! We hear you! 🙂 Definitely working on increasing the amount of savings asap! Still wondering given our age and potential income fluctuations should we put our whole $300k that we have already saved in VTSAX? Or would you recommend putting a portion of it in bonds at this point? Thanks so much!
I discuss that in depth here:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
and here:
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Hi Jim,
I have read your whole series and love it. It’s helped me understand the market a lot more. I have a question for you… I know you advise against financial advisors because of their fees. This makes total sense to me. Vanguard seems like the best choice. Unfortunately, my older brother is a financial advisor for one of the major companies you don’t like (haha). My whole family uses him to manage money. We are diligent people, but for the most part know nothing about entrepreneurship or investing. We just fill our 401ks and do what he advises. He’s a great and trustworthy person. That said, I’m a little worried now that it may have been the wrong move. Is it possible that if you have an “in” with an advisor, it will work out? Or is vanguard really the only smart choice?
Hi Jerry…
There are good advisors out there, but they are tough to find.
To best serve their clients, they must put their own needs second. Even for those willing to do so, depending on the company(s) they represent, they are frequently under enormous pressure to generate commissions.
Of course, I don’t know your brother and you are a far better judge of how much pressure he can withstand in doing what is best for you, your other family members and his other clients.
Here’s my take on what makes it so tough: https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
It is important to remember that the first people financial firms sell, and they are very persuasive, is their sales people (advisors). So it is very possible for an advisor to put his/her clients in terrible high cost investments while absolutely believing they are doing the right thing.
Since you’ve read my Stock Series you should know what low-cost effective investments look like. And you know high-cost, load funds are designed to profit those who sell them, not you.
It should be easy enough to look at where your brother has put your money and decide for yourself.
Good luck!
Hi Jim!
I was wondering if you have any advice specifically for someone in college who will graduate with no debt – I’ve been reading your stocks series (very quickly, I might add – I’m very interested in your advice!) and I plan on starting your recommended Vanguard fun before the week is out. Is there anything else I could be doing? Specifically, I’m curious about the idea of starting some sort of IRA, but I’m not sure which type would be best for someone as young as I am and without any sort of employer-based retirement fund available.
Thanks in advance!
Here you go, Katie:
https://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
https://jlcollinsnh.com/2013/06/04/my-path-for-my-kid-the-first-10-years/
https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Thank you for the quick reply!
I guess my main confusion is at what point a traditional IRA becomes more favorable than a Roth IRA. My tax rates are kind of inflated right now because I have a full ride scholarship, and everything that doesn’t go towards tuition counts as taxable income. This year I should have about $18,000 in “taxable income” even though I just work part time and am paid by a stipend as part of my scholarship. Thus this bumps me up to a higher tax bracket than the average college student. Any additional advice for me? Is Roth still the way to go for now since my income will likely still be significantly higher after I graduate? Or should I wait on an IRA altogether and just put money in my VTSAX?
Thank you again!
Those questions are why I gave you that last link.
Toward the end of that post you’ll find my basic hierarchy for deploying investment money.
The link in Addendum 1 allows you to find your tax bracket. 15% in your case, assuming you are single.
If this is money you plan to invest for the long-term, it should definitely be in an IRA for the tax advantages.
Jim. Your ‘stock series’ is incredible. It catalyzed a major change in my investment knowledge base…devouring finance books, firing my Financial Advisor, and transitioning to low-cost mutual funds. I think I’ve read nearly every installment 2-3 times. Thank you so much for writing and inspiring me to learn more about investing and take control!
OK, to my question: Here I am today, sitting on about $120,000 in cash in a taxable account and am struggling where/how/when to invest it (I just liquidated some individual stocks, tax-efficiently). This in addition to a 5% cash position I hold in my portfolio. Yes, this is a question asked and answered by you previously, sort-of: I am not a market timer, and I understand (thanks to you) the logic behind lump sum vs dollar cost averaging.
But, I also understand that valuations matter. The PE10 is at 27 today, 63% above the 16.6 mean… As I understand it, investment returns are a function of dividends, earnings growth, and valuations/speculation. Consequently, buying at these highs (and holding) means I can expect a lower long-term return. So, equities don’t look great to me. Interest rates *apparently* are going to go up this fall. So, bonds don’t look great. I have no idea if valuations will come down anytime soon, and there will always be uncertainty. I am not a market timer and have a high tolerance for risk. I am 40 years old and have the discipline to ride-the-market-roller-coaster.
So, here’s the question: Is my dilemma real, or just manufactured by me? Are there any alternative strategies I should consider? Maybe there are a couple options/strategies you can suggest I investigate?
Thank you!
HI Colin…
Glad you enjoyed it.
Your dilemma is real and common. Since you’ve read my Series, you know one of my basic tenets is, since attempts to time the market are doomed to fail, one should avoid letting those considerations influence when to invest.
You say, “I am not a market timer.” But in the next paragraph you invoke the tools of market timing. So clearly this is an unresolved issue for you.
My take runs throughout the Series and in detail here: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
The internet is filled with those who espouse timing. Only you can decide which view resonates with you.
Good luck!
Hi Jim,
Thanks for creating your great stock series, I have referred many people to it.
My question is, can you comment on why you would choose VTSAX over VGHCX, the vanguard healthcare fund, considering it’s ridiculously strong track record over the past few decades?
I’m guessing you’d say:
1) Only 88 stocks in VGHCX is not as well diversified as VTSAX and it’s 3800+ stocks.
2) Not as tax efficient given how often it turns over companies and generates capital gains.
3) This sector may be killing it now, but there’s no guarantee it will continue to do so in the coming decades.
It’s just, well, since VGHCX’s inception on 5/23/84, it’s average annual returns are 17.68%. VTSAX’s average annual returns are skewed due to it’s inception date of 11/13/00, but I think I recall that the market returns on average around ~8% historically.
So what are your thoughts on VGHCX, Jim? Thanks for taking the time.
Hi Kevin…
Thanks for passing it on.
VGHCX has certainly been on a tear. So has Apple stock and any number of sector funds and individual stocks.
Looking back, you’ll ALWAYS be able to find sectors and stocks that have outperformed over the last given period of time.
Yep, those three points are pretty much what i’d say, adding this…
My pal, Mr. 1500 Days, is running an experiment: http://www.1500days.com/the-asset-class-battle-update-1-with-a-side-helping-of-floccinaucinihilipilification/
He has invested equally in 10 different asset classes and is measuring the performance. So far, VTI is third overall. But here’s the important thing: Had he put all his money in VTI he be ahead of the group.
Why? Because while two other options have outperformed, VTI has bested the other 7.
Here’s my prediction. There will always be 2 or 3 of the options on his list besting VTI at any given point. But they won’t remain the same 2 or 3. And, overall, VTI will outperform the group as a whole ALL the time.
It’s worth noting that the REIT (VNQ) came in dead last. Last year REITS were superstars and it likely would have been first. Those who “chased performance” into them have gotten killed.
I am 29, married, and have four kids and my wife stays at home with our children. I currently am maxing out Roth IRAs for my wife and myself and maxing out a Roth 401k at work (enough to get the match). I am also maxing out ESAs for each of my children.
I read about tax-advantaged savings on both yours and mad fientists website and have been persuaded to recharacterize my roth 401k and roth IRAs to traditional 4o1k and traditional IRA.
My current savings dilemma is this: I have student loan debt and a mortgage. The good news to these is that I can utilize Public Service Loan forgiveness and pay 1/2 of the standard repayment for 10 yrs and have the rest of the loan forgiven. My mortgage is a 15 yr mortgage. This, however, limits my savings to 25% of income.
What are your thoughts on 529s (I would convert this from the ESA) considering my situation? Both my parents and my wife’s parents paid for both of our undergrad degrees and we would like to do the same for our children.
Also, in light of trying a Roth conversion ladder down the road how should I go about building the taxable accounts? Would you mind explaining the “capital gains/dividends” terms and how I would utilize these while for waiting for the conversion to take place.
Thanks!
Hi Joshua…
The nature of your questions indicates some basic misunderstandings and so I am a little afraid to try answering.
I suggest you carefully read the Stock Series, paying especially close attention to these two posts:
https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Very quickly:
—You don’t want to re-characterize your roth 401k and roth IRAs to traditional 4o1k and traditional IRA.
—A Roth conversion ladder is something separate from building your taxable accounts.
Those posts will help you understand why.
Regarding 529s, please read my conversation with Deacon directly below.
As I said in this post:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I’ll be traveling for the summer and unable to further answer investing questions until the Fall.
If after having done the reading I’ve suggested you still have questions, feel free to post them then.
RE 529 – One thing i have experienced when applying for financial aid for my two college kids is that if IF you would like financial aid (taking advantage of the many huge University endowments) a 529 is in the kids name and thus comes right off the bottom line in aid calculation. In other words if applying for need based aid, then the students cash in hand (ie 529) gets subtracted from the calculated need. Although it seemed like a good idea at teh time …It doesnt seem fair to me this way and i wish i had never opened the account. I may feel different about it if ihad started eariler and had grown a small amount to a BIG one tax free….
Anyway, something to keep in mind.
Cheers
IMPORTANT NOTICE ON THESE COMMENTS
As I say in this post: https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
We will be traveling for the summer and I will be unable to answer your investing questions until the Fall.
So please don’t post them now. If you do, you might miss the answer by the time I get to it come September.
In the meantime, you might consider continuing to read the posts and the comments already there, and the wealth of information on this page. The chances are very good that your question has already been asked and answered.
If not, post them come Fall and I’ll do my best to help.
Thanks!
Hi. I’m 58, FI with about $1.7 million, about $1 million of which is invested for me by an investment advisor. I’ve earned about 5% on those investments since late 2005, net of fees of 1%. After reading your column (love it! thanks!), I’d like to take over those investments myself and am wondering the best way to go about it. Currently, the money with my advisor consists of $580K in a traditional IRA, $65K in a Roth and $408K in a taxable account. (The remainder is $500K in a paid-off house and $240K in a personal loan earning 6.5%.) Altogether, my advisor has me invested in 17 different mutual funds, 2 ETF’s/Closed End Funds, and 2 fixed income instruments. All are at Schwab. I’d like to move to Vanguard. Should I move everything all at once right now? Or should I move a little more slowly to spread out transfer fees and taxes on capital gains?
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
Thanks!
Hi Jim,
I have been reading through your blog recently, currently working through your stock series and other case studies. (So much to read) I found you while reading through Mr. MM’s blog and forum.
So, I recently posted a case study on Mr.MM forum, (http://forum.mrmoneymustache.com/ask-a-mustachian/reader-case-study-what-can-we-do-in-order-for-me-to-quit-my-job-start-a-fam/) and the nice people over there helped me realize that we could start a family and still save a few hundred a month on just my husband’s salary. However, they have only so far helped with budgeting. I don’t plan to stop working until I actually have the kid, which leaves us in a little different position. I asked on the forum too, but would love to have your wise and informed opinions as well.
We have a lot of savings (37k) – we would like to keep about 10k for a big solar room/ green house/ aquaponics project, but we would be more than willing to put into something if it would work better for us. (We won’t need to spend it all at once since we are going to building it ourselves. When we have time.)
We don’t know what to do with it all/ how to make it work the best for us. We could pay off the car loan (21k @ 3.25%) but would it be better used towards paying down one of the mortgages, or invested somewhere else? If we do pay off the car, we would have 17k sitting in our savings.
With me working, we have a monthly income of 5175 minus the mortgages and expenses (4342) we have a savings of about 833.90 per month (~16%). (~22% without the car payment in there)
If I were to stop working it would cut gas, restaurants, groceries, pet food, phones costs, and even insurance (we could sell extra vehicles then). That in addition to paying off the car loan would allow me to stop working, and still save a little bit per month. (Couple hundred, not very much)
Since I won’t stop working until after I have had kids what can we do prior to that point so that we would have extra money for home renovations and be set up for early retirement, if possible, for my husband. (If I could find a decent telecommuting job, I could work from home and still contribute some income too)
We would like to invest more into retirement and pay down the principal on the house we live in, we would like to invest our savings(so that it is working for us) but we would also like to be able to access some of it for renovations or emergencies.
I would also like to point out that I am not wise in the ways of investing and it is slightly overwhelming, to say the least. We have the accounts we have because it was “common” knowledge that it was good to have, but we do not understand the nuances. I am trying to remedy that, though it looks like I have a lot to go through still. Any help/ advice/ direction is greatly appreciated.
Here is our details.
My husband’s take home pay is about 1444 every 2 weeks or about 37.5k per year
My take home pay is about 606.32 every 2 weeks, which is about 15.8k / year
We have a monthly income of 4100.64 with rental income for a total of 5175.64
Savings- ~37k
Other assets-(no loans or money owed on any of these)
2004 Chevy Silverado- paid for and in good shape- permanent registration this year- value ~5k
2004 Saturn Vue- gift- excellent shape- permanent registration this year. Value ~2k
Honda rebel motorcycle- ~$1000- permanent registration. Used for commuting during good weather.
5 dairy goats (1 in milk, and currently supply’s all our milk needs), 28 heavy breed ducks( 10 of which are of laying age) we get 4-10 eggs a day and can sell a dozen for $6(I only have 1 customer so far, sell about 1 dozen every week or so), surplus ducks will be meat. 1 breeding pair of geese (guard birds, lawn mowers, surplus will be meat). 3 dogs (large rodent exterminators, guard dogs). 1 barn cat (small rodent exterminator).
Retirement/ Investing-
Vanguard- Roth IRA (mine) – VEMAX @ 23.7k. Inactive- nothing added (Should we change this over to the VTSAX or some other fund? Can we?)
TSP- G fund @ 13.1k- inactive- nothing added (Should something be done with the TSP? Nothing is added to it and it just sits there. Should it be rolled into a Vanguard account, something that we could pull from for early retirement?)
Vanguard- Roth IRA (husbands) – VTIVX @ 49.2k- 100 added per month
Husband’s 401K(work) – He thinks ~45K is in there.
We have 2 mortgages
WA house mortgage- I bought the house brand new in 2006, 30 conventional Fixed with PMI @6.5% for $235k. The payment was ~1600, but split 3 ways since I had roommates. We refinance before moving to MT to get the payment down.
So it is currently a 30 convention fixed W/ PMI @ 4.5% Original loan was 198.4k currently it is 188.5k (We tried to sell it last year, but it turned out that we would have had to pay someone 20k just to get rid of it, if anyone had even wanted it. We did not get any offers and hardly any one looked at it) PMI payment is 85. Total 1340 Principal and interest is 1005. Escrow is 334. Property tax is ~2k
Rental income- Rent is set for ~1200, property management takes 10%, and then any maintenance done comes out of it as well. We get about ~ $1075. (We lose about 300 a month from this)
We are going try and list the WA house again this year, but we do not anticipate any better luck. If we do manage to sell it, it would most likely be at a significant loss. Guess time will tell…
MT mortgage is a 30 convention @ 3.25% no PMI Original amount was 255k. Current principal- 242.5k. Payment of 1253.57, 455 in principal, interest 658, 140 escrow. With an additional 100 a month towards principal.
Bills/ monthly expenses-
We have no credit card debt.
Car Payment-
2013 Subaru Impreza- financed. Has a loan total ~23k @ 3.25% with 20.8k left. Monthly payment of $333.17
Electric bill-88
Phones -133
Insurance180
Internet-60
Gas-250
Entertainment -20 (movies, maybe 1-3 times per year)
Restaurants-150
Groceries-330
Pet/ animal food-150
Home improvement-Most of our extra money goes into home renovation or the bank account for future home improvement
Firewood- ~$100 a cord- use 2-4 cords per winter for heating- 33/ month
Propane- $500 to fill tank- may use 1/2 a tank a year- 21/ month
Monthly expenses run about 4441.74 (with an additional 100 going to our homes principal)
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
Thanks!
Jim, Thanks for all the comments and advice. Very insightful.
Equities have shown the greatest return over time (80-100 years). Is there any research that has examined rolling 25-30 year periods that show similar returns? Or is that too short a time frame to expect the same kind of high returns?
Looking for research that examined the returns ONLY. Would be exclusive of risk / volatility, and would have no restriction of asset access. In other words, market fluctuation would be a non-issue, and an individual would not have to cash in any of the equities during that 25-30 year period.
Thanks in advance.
I think Jim is on vacation. But the “Trinity study” is referenced in this blog (and many others) as the base for the 4% safe withdrawal rate for all 30 year periods in the past century. So I would imagine you would be even better off without withdrawing anything for 30 years.
Hi Jim,
I hope this mail finds you well. Thank you for all the great advise you give on your site.
I am 51 years old, live and work in France and have enough money saved to retire comfortably, however, since I like my job I will probably work for another 3-5 years. Currently, 15% of my net worth is invested in stocks or stock funds, 15% in an annuity, 10% in physical gold and the rest is held in cash or cash equivalents.
I am about to buy a house to live in and to rent out for parts of the year for cash flow. The price of the house is about 15% of my net worth. I could pay it in cash or finance 50% of it through a fixed rate 12 year mortgage at 2.5% all fees included. The mortgage can be payed back early without penalty if needed.
I am unsure about the mortgage. Would you advise to take out the mortgage? My preference would be to pay in cash and lock in a “safe” return of 2.5% rather than pay the interest on the mortgage. I would invest the monthly savings in an index stock and bond fund.
I would like to invest up to a total of 70% of the savings I currently hold in cash in stock and bond index funds. How do you suggest to manage interest rate risk on the bond fund portion of the portfolio? Would it be better to hold the bond funds in a taxable or tax-deferred account? What to you think about building a bond ladder rather than using bond index funds?
Thank you very much for your input. The information you provide on your site is greatly appreciated.
Kind regards,
Marcel
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
Thanks!
Hi Jim
Thanks for your excellent blog. I have been a follower of MMM for a few years and recently came across your website from your guest post there and have read every article/blog you have written. I intend to read them all again so that things sink in:)
I live in Australia so I need some advise on a decision that I am struggling with. In Australia we have ‘Super’ which is similar to a US retirement fund (401k) (i think).
We are allowed to put in $30k per annum maximum into it. That is $60k for a couple. The tax rate on the any amount added into Super is taxed at 15% instead of ‘our’ marginal rate of 37%.
I am currently putting in ~$27k into my super and my wife isn’t putting any money into hers yet. (Although we would like to). We are in our 30s and still have many years of working career in front of us. (although I would like to retire early but my wife is not so sure and I don’t see how we can do it for at least another 15 years)
We own 2 Investment Properties (in a different city to where we live) one of which is positively geared and another which is negatively geared. We are in the process of building our own home which will be ready some time next year. Currently we are renting.
I would like to buy Vanguard ETFs (75% shares / 25% bonds) but I am not sure if this is the best decision for us.
Our options are:
1. Max out our Super or
2. Pay our mortgage off on our principle place of residence (when construction is finished)
3. Buy Vanguard ETFs.
I am really keen to buy the ETFs but am not convinced that it is the ‘best’ option financially as I could be maxing out the our Super.
Any guidance would be much appreciated. Thanks for your help.
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
You might also post your question here: https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/ Perhaps my Aussie readers can help.
Thanks!
Hi Jim,
Thank you for your blog. It has helped a lot and I only wish I had found it sooner than just a few months ago. Once I began reading it I realized I had probably made some serious errors with our money.
A quick review of my current situation is that I am married and my husband and I both have:
Emergency funds in place – total 95k
401k to the max (I contribute up to 8%) – 115k
Max out our Roth IRA each year – 57k
Once I started reading the blog I also took 11k from our savings and opened a Brokerage account at Vanguard and invested in VTSAX. I then transferred my Roth from Scottrade to Vanguard which I handled poorly but it is there now.
Other factors are that we do not have children and are not planning on having them. I am 35, he is 33 and are both willing to take risk if needed. Our combined income is about 140,000. I would like us to retire at 55 but I am not sure how this is possible right now. Our house will be paid off by 53 and then we shouldn’t have too many expenses.
The Roth breakout is below:
My Roth: $40,017 total invested
VTI 184 Shares
JAHYX 419 Shares
NAESX 111 Shares
DIISX 330 Shares
IAU 107 Shares
My husband’s Roth (still at Scottrade but will soon be transferred) 17,365 total invested
Dissx 221.7 Shares
VIGRX 62.8 Shares
VOO 21 Shares
VTSAX 52.7 Shares
1300 in cash that I am unsure what to do with.
Now for the questions:
1. What is the best possible way to handle the funds that were bought other than VTI or VTSAX? Should they stay as they are and just invest in VTI and VTSAX going forward? If they should be bought, when is the best time to sell and what are the implications of selling?
2. Should I continue to buy VTI in the Roth IRA at Vanguard or start to buy VTSMX so that it can be converted to VTSAX?
3. Since the VTSAX was bought in my husband’s Roth at Scottrade where the min to invest was much lower than 10k, what will happen to it once it transfers to Vanguard? Especially since it will not meet the VTSMX min? It would with the cash but I don’t want to spend another $20 to buy more shares if possible.
Any guidance is appreciated. Thank you so much for your blog and all your help!!
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
Thanks!
Hi Jim,
I am 35 and I quit a job last year that was making me miserable. It felt great to leave and, frankly, I wasn’t contributing a very large percentage to our income anyway. After much vacillation, we decided there was never going to be a “right” or “convenient” time to start a family, so I went ahead and got pregnant. We have spent the last year learning to live on one income, so I can stay home and be a mother until I feel ready to reenter the workforce. We are hoping that if I stay home it will save us a decent amount on childcare expenses, plus we already save a lot on meals since I have time to comparison shop and cook at home. But I do worry about the added expense of a child in a one income family. Especially since our emergency savings and f-you funds are not as large as I would like.
Right now, we USUALLY make more than we spend each month, despite the loss of my income. We have a low interest car payment, a bit left on a low interest student loan, and a super low interest home mortgage on a house that is closer to work (my husband commutes 6.5 hours/week fewer than he used to!) Mathematically speaking, we would rather invest our money for growth than pay our remaining debts off at a faster rate. The problem is we could be saving and investing a lot more if we didn’t have one big liability:
We own a condo which we used to live in before we moved into our house. We are still underwater on the condo, though its value is slowly recovering since 2008. It costs us more each month than the home we actually live in even though it is about a quarter of the size, because it is in a neighborhood where home prices are at a premium and because when he purchased it my husband did not put money down. We are currently renting it, but just cannot rent it for enough to cover mortgage, insurance, and HOA fees (HOA fees are the worst.) Meanwhile, the HOA sued the original contractors for some incorrect work on the renovation of the building. While technically they have reached a settlement the suit is still not closed completely. We actually put the condo on the market last month, between tenants, to see if we could get any bites. Lots of interest, no buyers. Agents told us their clients were scared off by the lawsuit, and who can blame them? We also cannot refinance until the suit is closed. At this point, we watch $511 dollars each month disappear into this condo. Imagine what we will be able to do when we can invest it instead!
We are squirreling away a little each month to try to build an emergency fund and contribute regularly to a 401k and ROTH 401k (about 9% of our income so far, with a match up to the first 6%.) We also have a Vanguard IRA in a stock index fund, where I parked the money rolled over from my 403b. And I have a Roth IRA, which I contributed to on and off for the past several years but haven’t prioritized lately.
So I guess my question is, while we are waiting to be able to refinance and/or sell the condo, is there something we should be doing differently? Does keeping afloat in this condo strike you as financial suicide? Is it dumb of me to not be earning right now, even if I have other goals I am pursuing (motherhood, Master Gardener certification, getting a grip on our finances, etc)? Should I be spending my days learning about tax arbitrage and other ways to hack more savings out of our income? We bought this house 3 years ago and have already earned good equity in it. Should we be seriously thinking about selling it to get the equity out for our investments? We could buy a cheaper place to maximize savings but we couldn’t rent for less than we can own right now. Having a kid on the way has made financial security feel pretty damn important, but we are trying not to be ruled by fear. We feel stuck in the condo, but if there is an angle that we are not seeing, maybe you can see it.
Thanks for any insights you have.
Anna
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
Thanks!
For what its worth, my view is that you have made the right choice on staing home to take care of your children. You should NEVER regreat this over any financial matter. With the diligence that you seem to have on financial matters i am sure over time y ou will do great financially. We did the same thing over 20 years ago with our kids when i was earning 28k per year … never buying a new car, renting small houses, etc. while many friends had two incomes and loads of car notes, big houses, etc…. It wasnt easy with the peer pressure. However, over the years things have slowly improved , we always maintained the low cost lifestyle and with slow steady investing (and some luck too) it has turned out pretty good. I hope this non-financial note helps a little. 😉
Hi J. Collins,
I mostly agree with your ideas on indexing. But I find it interesting that Jacob Fisker from ERE seems to not like index investing. (E.g. here http://earlyretirementextreme.com/the-cult-of-index-investing-why-it-will-be-gone-in-ten-years.html).
I think it would be interesting if you could debate Fisker, maybe via Skype, on indexing or investing in general. You could release it as an mp3 or podcast.
He is usually right about things when he’s confident, so I’m intrigued to learn more about his views on indexing, especially if he were to talk with an indexing pro such as yourself.
Thanks!
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
Thanks!
Hi Jim,
I love your blog, I try to get others to read it, and educate themselves on the markets, but it is difficult. As a younger reader, I was wondering if you had any thoughts on my current situation:
30 Years old, Long Term Girlfriend, No Kids
Net-worth = 600k
Yearly Income = 110k (Pre-tax)
Yearly Expenses = 42k (much of that is home ownership as you’ll see below)
Retirement accounts = 165k (all in VTSAX or SP500 Index Funds. Mostly in 401k or IRA, 25k is in a Roth IRA)
Rental Home = 315k, No Mortgage.
Personal Home = 400k, 200k Mortgage @ 3.5% and 75k HELOC @ 3.75% (used HELOC to pay off Rental House Mortgage)
I’m selling my Rental House and cashing out while I can sell it and take the gain tax free (I used to live in that house). I estimate I’ll have 290k cash after accounting for the costs of selling the house.
My question is really “What should I do with the proceeds of the rental house sale?”.
I’m planning on Paying off the HELOC, but right now I’m wavering between killing the mortgage or putting all but 6 months of of living expenses in VTSAX in a taxable account. I’m only planning on living in my primary residence for 2 or 3 more years, and I’m thinking that I should leave the mortgage and take the tax breaks that come with the interest deduction. I should also note that the Property taxes on this house are $8000/year and going up 10% every year. As a single I get a pretty decent tax break over the standard deduction between this and the mortgage interest.
I like the safety of paying off the mortgage vs. the tax deduction, but I would have a large % of my net-worth tied up in my residence, which I’m not a big fan of at all.
Cashflow vs. Net-worth allocation which do you think has the stronger case?
Thank you for your comment.
However, as I say directly above here:
https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213093
and at the beginning of my last post here:
https://jlcollinsnh.com/2015/06/28/gone-for-summer-an-important-note-on-comments-and-random-cool-stuff-that-caught-my-eye/
I am unable to respond to questions until September.
Please feel free to post yours again at that time and I’ll do my best to help.
In the meantime, may I suggest you read thru the Stock Series and related posts? https://jlcollinsnh.com/stock-series/
Odds are the answer I’d give is already there. 🙂
Thanks!
Mr. Collins,
Like most of you’re readers, i too very much appreciate your time in developing this blog and keeping it active. I have read most of the various posts and in the last month or so have made some decisions using your (and other similar minded people – even Tony Robbins) advice. Thanks to this, I have gone from a position of rather neglecting my assets, to looking to hire a financial advisor, and finally now to having the confidence to go at it alone. So this is what im doing…
My question today is around the safety bucket of my portfolio, and where are the best places to invest. I give you a summary of where my portfolio will be within the next few weeks when I get most of it gathered into Vanguard from various other places.
401k Vanguard – 260k
IRA – Vanguard – 25k
Roth IRA – Vanguard 10k
Indiv Acct – Vanguard 670k
Company Stock – 1,000k (receiving 10% dividend currently)
>Total asset= 1.96M
If I make the following allocations, amongst the accounts above:
ALLOC AMOUNT GROUP FUNDS
51% 1.000k stocks company stock
25% 500.000 stocks VTI/VTSAX, VGSLX
6% 125.000 secure VBTLX?
15% 300.000 college cash MMKT, or VFSTX?
2% 40.000 emerg funds VBTLX? VFSTX?
I am not really confident about the secure/cash/emerg groups, where I want to have less risk in the “secure” portion of my portfolio, and basically little to no risk in the college and emergency buckets. To be clear on the college spend – I have one kid in 2nd year uni at the moment and the second enters next year. So have a 5 year spend period.
Any suggestions would be fantastic, as I am not very confident I understand bonds and treasury aspects well enough to select among the many Vanguard options. Especially, given the tax and timing aspects I get confused over the best choices when I will be gradually spending the college money over the 5 years.
Many thanks
Welcome LC and…
thanks for your kind words and your insightful participation in a couple of the other conversations here. Much appreciated!
I’m glad to hear my site has helped you realize you can, and are better off, managing your money yourself.
Looking at your holdings the first thing I notice is that you have 51% of your assets in your company’s stock. This kind of concentration is very risky, even if it is a great company. Plus, if things go bad, your risk in the stock walks hand-in-hand with the risk to your job and income.
As for your actual questions…
I suggest holding VBTLX (bonds) as a balance to VTSAX (stocks), but not as a way to hold cash short-term and with low risk.
For more on Bonds: https://jlcollinsnh.com/2012/10/01/stocks-part-xii-bonds-and-a-bit-on-reits/
For more on Asset Allocation: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
For those funds where you seek “little or no risk” you want to look at FDIC insured bank savings accounts and/or money market funds like VMMXX. Understand that these are for holding cash short-term: <5 years. Over longer-terms you have inflation risk as inflation slowly destroys the spending power of your cash.
The problem with those is that they currently pay close to 0% interest.
This makes your suggestion of VFSTX an interesting one for your funds in the "less risk" (meaning slightly more risk and volatility than the "no risk" options) category.
VFSTX is a short-term bond fund with an average maturity of ~3 years. This means that there is less risk should interest rates begin to rise. Less, but some; unlike the MM Fund or savings account. (see the bond post above for more).
On the other hand, it is currently paying 1.84% interest, pretty healthy in this environment. Looking at the last five years the price has varied between ~10.6 and 10.9, a narrow range. But keep in mind there were no Fed interest rate increases to speak of in that time frame.
As to which is best, that depends on your personal risk profile. 😉
Hope this helps!
Thanks for the response – since the company stock is a private company that i am a partner in, i have struggled to decide what asset class to include this in. I suppose that it is in the “stock” class but it is someting that is quite stable and i am required to keep a certain amount to stay in the company anyways. Plus, it now gives 10% dividend plus any share price growth in the future. So while risky perhaps, i feel compelled to keep this for a few more years and contribute to the company and reap the benefits. On leaving, i would get payout of half at the time and half some time later.
Are there any risk reduction strategies you may suggest for keeping this in the portfolio as it is for a few years?
Ah, so private equity?
That’s a bit different in that it is not as liquid as publicly traded stocks and, hopefully, you have an insider’s knowledge of the business and the ability to influence how it is run.
I can see why you’d want/need to continue holding your stake and would only caution you about continuing to hold it after your active involvement ends.
You got it, we have a PE as a majority shareholder.
Hi Jim!
I was wondering if you know how selling my stocks will affect my financial aid for college. I had some stocks through alliance bernstein, and decided to move them over to Vanguard earlier this year. I didn’t think about how this would affect my financial aid for 2016-2017 until now (I’m a junior in college). Will it be anything drastic at all? I’m an independent, have a daughter of my own, and have about a $16,000/yr income.
Thanks so much!
Hi Sofi…
I’m no expert in college financial aid, but my guess is they look at all your assets wherever they are. I doubt moving them to Vanguard would make any difference.
Hope this helps!
My recent experience as a parent in charge of the aid process for my kids confirms that where your assets are does not matter, FAFSA data only tracks asset classes like investments, home, property. The schools themselves judge financial need based on these data classes …but majority weighting is on AGI (adjusted gross income). So I also don’t think you need to worry.
Thanks so much for your blog – it’s been a huge breakthrough regarding investing.
Here’s my situation I was hoping you could help me with.
1. 42 years old, single, recently laid off, striving to become FI since my early 20’s, no home (rent in-laws quarters), lived well below my means for 15 years, ZERO debt.
2. My current net worth is $1.25M ($700k Cash, $500k in Stock (half of which is in VTI – I’ve moved a lot to VTI over the last few months after finding your blog). $470k ($170k of which is in cash) of the 1.25M is within an Traditional IRA.
3. My job was in precarious situation for years, so I simply saved a lot of cash as opposed to investing (big mistake I now know) as I feared another 2008 which would delay my FI date.
4. 1k per month pension at 65, SS of $1500 or so at 67, inheritance of 500-700k by the time I’m 65 or so.
Anyway, her are my questions I was hoping you could help me with:
1. Do you think I’m FI at this point considering the above information? My annual spending is currently $36k, but I’d like to be up around $50k moving forward to live the way I want to. That puts me in the 4% safe withdraw range as I see it (although with 470k in the IRA not accessible until 62, I’m not sure).
2. If it were you, what would be your plan for applying all of the cash I have? I’d say I’m somewhere between the accumulation and preservation stages (I’ll probably do some work going forward, but I’d like my portfolio to be built as if I’m fully retired). VTI and the bond ETF (forgot the ticker) are my main vehicles of choice going forward. I’ve been DCA into VTI over the last few months and selling off other funds to reinvest in VTI (I know you’re not a fan of DCA, but I feel a bit more comfortable with it at this point).
3. I’d just like your overall take on my situation as well. Being laid off was a blow and I’d just like some reassurance (if it’s justified) that I’m in a decent situation.
Thanks so much for your time and your blog – I’ve read it multiple times now.
Welcome Eric…
Glad you like the blog and have found it helpful.
1. Yes, I’d say you are safely FI, especially at the 36k spend rate which only takes 900k using the 4% rule.
Even at a 50k spend you need 1.25 million, exactly where you are.
But not if you continue to hold so much cash. The 4% rule needs at least 50% in stocks and the rest in bonds to work over time. Check out the charts in this post: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Don’t worry about the 420k in the IRA. You can access that at age 59.5 and you can just pull from your accessible accounts until then. Remember, you want to look at your assets as a whole.
2. If it were me, I’d decide on my asset allocation first and it would be something like 75/25 stocks and bonds. https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Once I decided I’d implement immediately. By DCAing you are continuing to hold an outsized cash position as your allocation.
3. You are in a great position; especially with the pension, SS and inheritance coming your way later in life. Potentially.
But if you continue to hold so much cash you are destined to see it’s spending power relentlessly erode over the years, and all bets are off.
You clearly have a fear of investing and the wild ride it represents.
Before doing anything, you need to resolve that. This post might help: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
Otherwise you’ll never invest and never benefit from the growth stocks can offer. Or worse, you will invest and then flee for the exits every time the market drops.
Hope this helps!
Thanks so much for getting back to me Jim – you’re impacting the quality of people’s lives in a positive way. Tip of the hat to you sir.
A few follow up questions if you don’t mind:
1. I’m committed to boosting my VTI position to 75% of my net worth. I don’t consider myself to be scared of the market, but I do enjoy a bargain; hence the DCA approach. The PE ratio of the market also seems historically high at this point and the market has shown some cracks of late. But I hear you and the studies back you up – opportunity cost is just to high to warrant a DCA Approach.
2. I am VERY leary of putting the other 20% in bonds at this point. The interest rate risk just seems ridiculous at this point. Limited upside and a HUGE downside. I’d rather keep that 20% liquid in case of further stock market pullbacks and then apply the cash?? I’d like to get your thoughts on this. I know timing the market is a fools errand, but in what scenario would Bonds be big performers in the coming years (deflation?)? Your overall thoughts on throwing $250k of my net worth into a bond fund at this point (i.e. 20% of my NW).
Thanks again for your contributions. IF ONLY I would have found this information in my 20’s. Oy Vey!!
Happy to help, Eric.
OK, let’s see….
1. Mmmm. I don’t see an actual question in here and it sounds like you’ve already read my DCA post: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
2. There is probably no scenario where bonds will be a big performer in the coming years. But that’s not why I hold them. I hold them as a deflation hedge and as a counter weight to stocks that both smooths the ride and provides a pool of capital for buying stocks when they take a major plunge. Plus they pay interest.
You could accomplish this by holding cash and you’d avoid the interest rate risk inherent in bonds. But you’d take on inflation steadily eroding the value of your cash and with today’s low rates you get paid next to nothing in interest.
As for throwing 250k into a bond fund at this point, see point #2 in my original response. 😉
Thanks Jim – I appreciate your help and quick response.
Eric
Hey Jim,
I wanted to start by thanking you for all the incredibly helpful insight into a complicated and unfamiliar topic for myself. I’ve truly gained a greater understanding on the topic of investing and feel more confident for the future. I wanted to run by my own personal strategy with you to get some feedback and insight in order to optimize my own situation.
We have a household income of roughly $225k and take home about $150k after taxes/benefits.
Our main liability besides a $268k mortgage is $168k worth of student loans. The breakdown is as follows:
Student Loans – $168,817.25
6.613% – $14,270.91
3.15-6.55% – $79,864.35
2% – $7989.54
4.565% – $17,281.10
3.15-6.55% – $49,411.35
Our current minimum payment for the loans monthly is: $2131. In terms of savings, we are able to set aside about $3k per month. My question is in regards to how to utilize this $3k. If I were to put it all towards the student loans, I calculate that I will be able to completely pay them off in roughly 3 years. The other option would be to completely invest the $3k (max out both of our 401k & max a backdoor roth for each). The latter option would put the student loan repayment out to 9 years. Obviously, if all the loans were paid off we would be able to devote a little over $5k per month towards 401k, roth, & taxable. Is it worth sacrificing the three years in order to be completely debt free? Or is it foolish to lose the three years of investing in order to maximize the debt repayment. Thanks for any input you can offer.
Hi Tim…
Glad to hear you find it helpful here.
Looking at your situation, first I’d fund the 401(k)s up to the level needed to capture any match from your employers.
After that I’d focus on paying down the debt.
In this post – https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/ – Addendum I lays out my current heirarchy for paying off debt v. investing:
While the mantra here is “avoid debt at all costs,” if you already have it, it is worth considering if paying it off ahead of schedule is the best use of your capital. In today’s low rate environment, here’s my rough guideline:
–Less than 3%, pay it off slowly
–3-5%, whatever feels most comfortable
–More than 5%, pay it off ASAP
So blow out the expensive debt and once you’re left with only debt at 2-3% interest rates, you can shift that money to building your investments.
There will still be plenty of investing opportunity three years from now.
My only exception to this would be if we were to see a 40%+ plunge in the market. In that event, I might shift to investing to take advantage of the giant sale in stocks. But I don’t see this happening anytime soon.
If you are really lucky, it will happen just as you pay off the last of your debt. 😉 🙂
Hello Sir. Love your site and thank you for your wisdom. I am a firefighter/paramedic for the last 12 years with the Houston Fire Department. I’ve recently decided to resign from this job to pursue a dream of mine. I’ll be leaving with approximately $54,000 from my pension account and of course don’t want to lose any to taxes. My question is this. Should i roll it over into an IRA (traditional or Roth) or deposit into the VTSAX (can i even do this?) Thanks!
Thanks DKO…
but now I’m feeling a little guilty if I’ve helped a firefighter/paramedic leave service. 🙂
I’m afraid I don’t know the rules for rolling a pension into an IRA, or if it is possible. Your HR department should be able to help you with this.
I also don’t know how your pension is invested. Some government plans, like TPS plans, have great and very low cost options.
I also don’t know if your pension is local or state sponsored, and I don’t know how fiscally strong Houston and TX are. But more and more state and local governments are getting into fiscal trouble.
If the answers to those questions are positive, you could be best served leaving it alone.
But in moving it to your own IRA you have far more control. So if there is any doubt, and if this is possible, that would be my move. Roth if you can, but that might not be an allowable choice.
VTSAX is a great fund for long-term growth. But whether it should be your only fund depends on your personal allocation needs. This should help: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Good luck with your new venture!
JL,
Love your columns. Can no longer ignore the years of my Dad’s praise of and insistence of investing with Vanguard. I guess parents do know some things…
I have a question about specific index funds.
I currently have my 401k (taking advantage of company match) 100% in VIEIX. It’s a Vanguard mid cap index fund with ER of .08%. It’s the only Vanguard index fund available to me (submitted a request to Treasury Committee to add VITSX). Out of curiosity I looked to see if there were other index funds and what the ER’s are. It turns out that I can also invest in a BNY Mellon S&P 500 index fund. It is not publicly traded and has no ticker symbol. The ER is .06%.
Personally I like the idea of a large cap over mid cap and it has a slightly lower ER. However I do not like the fact that it’s not a Vanguard fund and I am not at all familiar with BNY Mellon. I am very familiar with Vanguard and their philosophy, my wife used to work for them. Is there any potential down sides to selecting the BNY Mellon fund? Are you at all familiar with BNY Mellon index funds? Can they raise their fees? Since I would have more peace of mind in the Vanguard fund should I just eat the .02%? Currently this 401k is only about 50% of my portfolio. And, odds are I am with this company for a long time.
Thanks,
-Adam
Yeah, every now and again us geezers find an acorn. 😉
Odd that your 401(k) offers only a mid-cap Vanguard index fund. But then, 401(k) plans do lots of odd stuff. 🙂
I also don’t know anything about the BNY Mellon S&P 500 index fund, but that’s the one I’d go with. Here’s why:
—An index fund is an index fund and all Index 500 funds are going to have the same performance with in a whisker or two.
—@ .06 the ER is where it should be.
—BNY Mellon is an established firm.
Sure, they could raise their fees, but it is unlikely.
—Index funds are in part about low fees and competitive pressures will keep them in line. In fact, those pressures are the only reason the fees aren’t already higher.
—If they were to raise the ER, you could just move your money to another fund. This is a tax advantaged account so you can sell and move with no tax consequences.
Meanwhile, you can use the BNY Mellon S&P 500 index fund as long as you are at this company. When you leave, if you like, roll it into a Vanguard IRA.
Thank you for your blog! I was referred to you by Jeremy at GoCurryCracker. I’m a recently retired firefighter, age 51. Pension of $2,000 / month. Unfortunately I didn’t know what you know 30 years ago… I have a 401k with $180,000 – but I kept everything in very conservative investments – was afraid of the ups and downs…
Should I move my $180,000 to all stocks now, or is it too late to reap the returns?
Thank you! 🙂
Jeff
Welcome Jeff…
Glad to hear you are also reading GCC, Jeremy is one of the best out there.
It is never too late to reap the market’s returns.
But the real question is what is the right allocation for you, and only you can decide that.
Investing in stocks requires being able to stay the course when the market plunges and plunges are to be expected. If you panic and sell, you would have been better off in cash. Not that cash is a good idea. 🙂
Before moving your 180k, read this a couple of times: https://jlcollinsnh.com/stock-series/
It’s a lot, but after you absorb the info you’ll be able to look in the mirror and decide.
Good luck!
Hey Jim. I was excited to see you back from your summer respite and already sarcastically commenting on the latest market swing. Surface quality entertainment with a moral. Since then, I’ve been thinking a lot lately about early retirement within 10-15 years, specifically what my wife and I will do with her state teacher’s pension—wait 10-15 years until age 60 to collect, or rollover to our traditional IRA and start a Roth conversion ladder when she leaves the classroom?
Our current path and early retirement strategy does not account for my wife’s public school pension, so it’ll kinda be a substantial retirement bonus. Albeit one that won’t start paying out until age 60, but one more than large enough to meet our projected annual living expenses.
My inner “stick-it-to-the-man” persona can’t help but wonder if we’d be better off rolling it over to an IRA when becoming financially independent between ages 45-50. If we did the rollover, we’d immediately start a Roth conversion ladder, which brings me to another point about rolling over a pension vs. leaving it be. Tax implications. Are there not more and better tax-minimizing strategies available with an IRA than a pension?
Correct me if I’m wrong, but the only downside I see in this move would be sacrificing the security of a pension. Or, is that really a moot point given that we won’t even need the pension to be financially independent?
I read further up in the comments that you’re not a pension rollover expert, but as every good and faithful follower should ask—WWJD? (What Would Jim Do)?
Thanks Andrew….
https://jlcollinsnh.com/2015/08/25/mr-markets-wild-ride/ was fun to write, but I like this one from last year’s dust up even better: https://jlcollinsnh.com/2014/10/18/nightmare-on-wall-street-will-the-blood-bath-continue/
Maybe I should have paid a bit more attention to my own teachers back in the day, but what is “Surface quality” entertainment?
Also back in the day, when I had the chance, I rolled my own small pension into an IRA. Mostly I didn’t trust them with it.
My wife is a school librarian and she’ll have a small pension. We’ll likely keep that one, just because it is kinda nice to have a check rolling in with no effort and it provides a bit of diversification from our otherwise very aggressive allocation. Plus, I trust them a bit more although I really haven’t looked into it enough to be sure.
In your position, especially as you indicate it would be very secure, I’d likely keep it and go aggressive on the rest of the portfolio.
Plus some states give pension income preferred tax treatment.
So that’s more WWJLTAT (what would JL think about this?) 🙂
I do see WWJD plastered all about. Never realized it was referring to me. 😉
I appreciate your insight and perspective. I’ll have to look into any preferred tax treatment on pensions here in Ohio, not to say that it can’t change within the next 10 years. Also, I hadn’t thought about the situation as a way to diversify our retirement funds. I knew I kept your blog bookmarked for a reason!
BTW, “surface quality” is how something initially appears, so in this case, the post appears to be full of sarcasm and humor, but upon further inspection there’s actually some good substance in there. Or…I could just be making this shit up 😉 Either way, I thought it sounded good at the time.
Thank you Jim for your quick response to my very first comment to you it did confirm and guide me. Another troubling issue I have is a rather new auto loan I made last year which still has a 26k balance attached to it ….apparently at the time I felt I needed a nice new truck ( Nevada Mountains ) and now I fell like its the worst decision I made that year. So my question: Is there any way to get out of this? Should I try to sell it, or double up the payments and bite the bullet? I feel that 420$ a month is really now holding me back from some serious compounding……
your thoughts very appreciated as always!
JPerez
Glad it helped, Jeff…
I am opposed to virtually all debt and it has no place for those on the path to FI:
https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
Car loans are especially bad as they lure folks into buying overpriced stuff they don’t need. Like new trucks. 🙂
That $420 a month is definitely holding you back. As are all the related expenses of owning a new vehicle.
Unfortunately, there is no easy way out. You could…
1. Sell it. Depending on how much you put down, you might be underwater and have to come up with cash to make up the difference.
2. Just keep it as is and live with the pain.
3. Accelerate payments and/or savings to pay it off asap.
Choosing between the last two options is a function of your interest rate and the post I linked to will help guide you there. Both also mean keeping a truck you don’t really need and that really costs more than you want to spend.
#1 would be my choice. Dump it. Pay what it takes. Lick your wounds and move on.
Worth reading:
http://www.mrmoneymustache.com/2013/04/22/curing-your-clown-like-car-habit/
http://www.mrmoneymustache.com/2015/04/28/what-does-your-work-truck-say-about-you/
http://www.mrmoneymustache.com/2012/03/19/top-10-cars-for-smart-people/
While I’m eagerly waiting for your reply on the financial mistake I made buying a new car, I thought I would fill you in a little about me to maybe get a “Best course of action for my situation” approach. I’m 47….I have a net worth of 12,866 ( which is actually -14,099 due to the auto loan) I have approximately 42k in 2 old 401k’s which I need to roll over to Vanguard ASAP, I have NO credit card debt. And I recently opened a Cap 1 360 savings account to bet a better return than my worthless BofA accounts provide. I know I’m starting late but I also know there are worse scenarios than mine and obviously my mind has been feeling this which led me to you,MMM,and ERE. So any insight on what you think would be my best approach would be greatly appreciated.
Thank you for you time,
JPerez
Read thru this: https://jlcollinsnh.com/stock-series/ and the comments.
Keep reading MMM and ERE.
Add Go Curry Cracker and Mad Fientist. You’ll find plenty of links to both in my posts.
Then let’s talk more. Although by then, you’ll have it figured out on your own. 😉
Jim,
It has been a blessing to have discovered your site recently. Just by reading through all of your posts and following links to other sites (MMM, etc.) I have learned so very much about personal finance that it pains me to admit I was woefully deficient! I work in commercial banking and always considered myself fairly financially literate (compared to the average Joe, I was!) but I definitely have a much better feel for things now.
I have two questions for you sir:
1. My wife and I are both 28, homeowners (1.5 years in), and currently are saving about 16% (me) and 11% (her) in our 401ks and plan to raise that percentage each year as our income grows and avoid having lifestyle shocks.
Side Note: Our 401ks are both excellent in that the fees are only $19 flat per quarter and we are offered fabulous low-cost Vanguard funds to choose from. After reading your site, I realize how lucky we are!
The only debt we have is our mortgage of $175K and an auto loan of roughly $19K (dumb, I know but that was before your site haha). After all debt payments and expenses we have roughly $800 a month available for saving/debt reduction. We recently reached our Emergency Fund goal of six months expenses ($23K) and also have another $6K in taxable index funds and $7K in a Roth. Additionally my wife is 5 months pregnant with our first child and once its here in February our extra cash each month is conservatively projected to drop to $100-$150 based on child-care, insurance, etc. Do you think I would be best served by killing as much of my auto loan as I can now (2.99% interest rate) or put this extra money in the market to get a leg up on future college costs, etc? If you do the math, I can only expect to kill a maximum of $4000 extra on the loan so I will still have that payment over our heads for a while after. What say you, oh Wise One?
2. After a lot of research, I’m convinced that Betterment would be a perfect fit for my single mother. She is about to retire from teaching next year with a little pension and also has roughly $45k in a 403b, $50k in stocks held at an expensive broker, and is expecting another $50k-$100k in stock from my grandfather’s trust soon. She is not very financially literate so I think the benefits of Betterment are obvious. However her stocks are currently sitting at a loss and she is adamant about not selling them for a loss. Any thoughts on an argument to try and persuade her to shift her funds to Betterment and diversify into index funds? My thought is that taking the loss this year while her income is still high is not too bad since she would then immediately put the cash back into the market via Betterment? I’m sure your words would sound much more impressive than mine! LOL
Thanks and God bless!
Welcome JLed…
Glad you are here and thanks for the blessings!
1. I’d sell the car, pay off the loan and buy a beater. With your low savings rate and a kid on the way there is no room in your life for a car like that. At least if you are serious about financial freedom. Really.
Here’s my take on debt: https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/ Note the title. 🙂
If you chose to ignore my advice on this, and I think you will, you’ll find some guidance in that post on how to carry that car loan.
2. I agree with you on Betterment for your mother. Her’s is, in my opinion, an ideal situation for their service. Plus I’ll bet she’ll find the website and contact from them helpful and motivating. Here’s my full take:
https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
In clinging to her losing stocks your mother has fallen prey to what is known as the “sunk cost fallacy.” http://www.lifehack.org/articles/communication/how-the-sunk-cost-fallacy-makes-you-act-stupid.html
It makes not a bit of difference what she paid for them. They are worth only what the market says they are worth today. Could they go up again? Sure. So too could they continue down.
The key question she needs to ask herself is, if she had the cash in hand would she buy them again or invest in a diversified portfolio with Betterment?
Should she decide to sell and take the loss, she’ll be able to deduct that loss on her Federal Income Tax. First against any capital gains she might have and then up to $3000 in ordinary income. Should the loss be greater that those two, she’ll be able to carry it forward to future years until she has used all of the deduction.
You can tell her that while you were wrong to borrow money to buy the car, you are right about this. 🙂
Thank you so much for replying!
I think I will print out your answer for question 2 above and use it for a discussion with my mother this weekend.
As for your advice about the car loan…that’s a tough one for sure. I love my truck and it does make me happy, but balanced against its expense it’s awfully close. I have great memories of riding in a pickup truck with my dad as a child and I want to make the same memories with my son also…
Alas, how much of a beater would you recommend if I go that route? I’ve got roughly $4K equity in the truck plus the cash account I mentioned above. Would you go uber cheap and replace in a few years or a bit newer and less mileage?
I’d go uber cheap. Certainly no more than the $4000 equity you have in the truck.
A vehicle is not where I’d want my money.
I’ve never had a car loan, no vehicle has ever been worth it to me.
I actually like cars and trucks, so I get the appeal.
The choice is pretty simple. What do you want to buy with your money? Freedom or the truck? 🙂
Good luck with your mom.
Hello Sir,
After reading your blog, and committing to some lifestyle changes, my husband and I are moving our savings goals from 20% to 50% of our income. We currently invest separately because I inherited money before coming into the marriage. Should we at this point continue in our respective course of dividing to our individual accounts or open a Vanguard VTSAX jointly and put our remaining 30% into that account? We are open to other advice as well. I am currently medically retired from the Army. My husband cannot officially retire from the Army for 11 years (he had a break in service to attend college). He is open to retiring early if that is possible.
Net Worth: $556,446.44 *(20 Sep 15)*
Income: Annual Gross $269,445
Monthly Net: $12,587.75
—Husband current annual gross salary (fluctuates with location): $98,876
—My annual gross compensation (combat related-tax free): $47,693
—Annual rent from investment home: $24,000
Retirement Accounts: $205,261
—Husband TSP: $13,809
—Husband TIAA-CREF Roth IRA: $43,527
— My TSP (cannot add to or use without penalty I have been told): $22,795
—Teachers Retirement (cannot add to or use without penalty I have been told): $2,852
—My TIAA-CREF Roth IRA (no longer add money to since unemployed): $122,278
Investments/Savings: $257,684
—My TIAA-CREF Mutual Funds: $119, 350
-Bond Plus Fund-Retail Class TCBPX – $14,589
-Growth &Income Fund-Retail Class TIIRX- $35,563
-International Equity Fund-Retail Class TIERX- $19,932
-Large Cap Growth Fund-Retail Class TIRTX- $28, 639
—Cash in primary checking and savings: $74,107 non-interest
bearing
— Cash USAA Savings: $64,227 APY.30%
Assests: $267,657
—Rental Home: estimated value $247,357 (has current renter paying off mortgage)
—Land: estimated value: $20,300
Debt:
—Mortgage is 4.99%, 30 yr. $1558.13/month. Currently owe: $174,720
Bills: average $4800 per month
No significant debt other than mortgage. Credit cards paid off monthly, Cars are paid for.
We have two young children currently 6 and 11 (so I am actually NOT retired lol). My father has a 529 plan for them and we have a savings account for each that we contribute a small amount to each year.
We are Alaska residents though we move all over the US and world. I am 41 and my husband is 36. I currently have Tricare Prime being an active duty spouse so health insurance is basically free. I can also be seen free through the VA system or purchase Tricare for life insurance at reduced rates for being a military retiree. My husband will be the same as far as health insurance goes. Our goal is to travel overseas post retirement. Maybe come home to the States to let the kids wash our laundry every now and then.
Thank You,
Erin
Welcome Erin…
and congratulations on boosting your savings rate. Looking at your income and spending you are right about at 50%. Well done.
Your net worth at $556,446.44 is a solid foundation and the precision with which you are reporting these numbers tells me you are on top of the game.
My guess is that when your husband is able to retire in 11 years, with his pension and your investment growth, you should be in fine shape.
Regarding combining your investments or continuing to keep them separate, this is more a marital question than a financial one and, as such, above my pay grade. 🙂
If you see yourselves still being married 20 years from now, I’d combine them. If you think maybe you’ll chose to go your separate ways, it will be cleaner to keep them separate.
I will say that in crafting your asset allocation, as long as you are together, consider all accounts as a whole. https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Hope this helps!
Thank You Jim,
I was hoping we were on the right track. Statistically speaking we are beating the 75% military officer divorce rate with our 14 years so maybe we should take more of a risk and just go for it lol. If I do transfer and sell my mutual funds from TIAA-CREF (which does have higher fees) to invest in Vanguard will this be worth the tax hit now?
Erin
That’s a tough question, Erin…
…only you can decide and you’ll have to do some math. But here are some considerations:
1. Figure out how much capital gains you have in each fund.
2. Do any have capital losses you can use to offset the gains?
3 Are they long-term or short term?
4. What is your tax bracket?
5. Can you defer income to 2016 and get down to the 15% bracket?
The 10% or 15% tax bracket for ordinary income = 0% long-term capital gains rate
The 25%, 28%, 33%, or 35% tax bracket = 15% long-term capital gains rate
the 39.6% tax bracket = 20% long-term capital gains rate.
Thank You for the information Jim.
I really don’t know that much about the tax side of things so this is a great chance to get educated. After looking at last years tax return we fall into the middle of the 15% tax bracket and all of the funds are long-term. I would expect we will stay in the 15% bracket this year, but not next year. We moved this summer and are now receiving housing pay which is taxable. The funds cost is .89 on average (not sure if that is high, but higher than Vanguard). I am going to close the money market for sure as it is gaining no money. I plan to move it to Large Cap. This is a tough decision to move all the funds and I guess it would be now or never.
Thank You,
Erin
Mr. Collins,
Firstly, excellent website. I have learned so much.
Because of all the information I’ve taken in, I have reached out to my employer and asked if they offer a 401k and an HSA. Luckily, they do offer an HSA so that is a bit of a no brainer in terms of maxing this out.
My question comes into play is that their 401k is through Wells Fargo. My employer does NOT match, but they do offer some Vanguard funds. Specifically, TRF 2060 Trust II, Target Retirement Trust II and a Vanguard 500 Index Sig (is how it’s labelled on the WF site). Even though there is no match, do you recommend still opening one up since they do have Vanguard Funds I could choose from?
My second question is that I want to reallocate what I currently have and would like to know what you think. I’ve opened up a Standard account with Vanguard as well as a Roth IRA account for retirement. Here is how it is allocated:
Standard Account:
– Mutual Funds
– VGENX (Expense Ratio .37%)
– VGHCX (Expense Ratio .34%)
– VWESX (Expense Ratio .22%)
Roth IRA
– Vanguard TRF 2045 (Expense Ratio .18%)
My thought was to exchange all of the Mutual Funds into the VTSAX. Being 35, I like growth so not sure if I should add the bond fund in there as well (Funds would only allow for the 3k version, not the admiral version [names escape me]). What are your thoughts on this? Should I leave the MF’s and just open up the VTSAX? I make weekly automatic contributions as I get paid and then any extra income I generate I throw in there as it is.
Secondly, I max out my Roth IRA annually. Should I convert this to a traditional IRA? I figured if I do that, I would still be contributing after tax dollars but I’m assuming that with a traditional IRA, I can deduct the contributions come tax time whereas you cannot with a Roth. Is my thinking correct?
Any help would be appreciated. Excited to buy into the VTSAX!!!
Thanks for the great website!
-Michael
Thanks Michael….
and welcome.
1. Yes, I would definitely fund the 401(k) for the tax deduction and tax sheltered growth.
In it I would go with the S&P 500 index fund for the low cost and long-term performance. But this is the aggressive choice and you must be prepared for the wild ride.
The TRFs are also fine options and likely won’t be as volatile. But they’ll have a bit higher ER. Here’s my take: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
2. By Standard Account, I assume you mean your taxable account?
What you have are two sector funds and a bond fund. With the sector funds you are betting that you know these two sectors will outperform all others and the market as a whole. Maybe, but this is akin to selecting individual stocks. I’m not a fan.
The bond fund is a conservative choice for a guy in working, earning, investing and saving and in The Wealth Building Stage.
Personally, I’d prefer to be in VTSAX, wild ride expected.
But in moving these funds you might be faced with a capital gains issue. See my reply to Erin directly above.
3. If you are paying Federal income tax, I prefer a deductible IRA to a Roth. Your thinking is correct.
However, DON’T convert your Roth! You’ve already paid the taxes and it is a great thing to have. Just leave it and let it grow.
Simply open a new deductible IRA for future contributions.
Hope this helps!
Thanks for the response. I appreciate it and I’ll certainly be making some moves now. I don’t mind the wild ride at all.
Thanks again.
-Michael
One last question, and just to be sure I understand best.
Me being young (relative I suppose) at 35 years old, and not minding a wild ride, I am going to put everything into the VTSAX. As I get older is when the allocations will change and a small percentage (15-25%) will go into the bond index fund. No issues with this, correct?
Basically, yes.
When you are in the Wealth Accumulation Stage you are saving and investing aggressively. These new money flows into your funds serve to smooth the ride.
When you stop working you enter the Wealth Preservation Stage and you no longer have new cash flowing in. Bonds now serve this smoothing roll.
This typically happens as you get older, but it could also happen if you took a sabbatical. It is possible to pass from WAS to WPS and back again.
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Hi Mr. Collins,
I have a very quick question I’d like to ask because I can’t seem to find a clear answer no matter how many ways I “google” it.
I have a 401k through my work place. I plan on maxing it out completely (the $18,000/year as of 2015). What would be the next best thing to have: a Roth IRA or a Traditional IRA? I’ve heard it doesn’t make sense to have both because the max each year for both combined is $5,500. I make $69,000/yr. Would it be better for me to have a Roth or a Traditional IRA?
I also understand that my MAGI would determine how much more I can deduct if I contribute to a Traditional IRA. I have no idea what my MAGI is, but at $69k/year it can’t be “too much” to disqualify me from taking advantage of the additional tax savings, right?
Thanks so much for your time! Your blog is amazingly inspirational!
Hi LL…
At 69k a year you will certainly qualify for an IRA deduction. However, depending on your martial status, children and other deduction you might not have any Federal Income Tax Liability at all. If so, Roth is your best bet.
However, if you are paying Federal income tax you’ll want to do a Traditional IRA and take the deduction.
Even at in the 10% bracket, you are saving $550 on that $5500 contribution with the T-IRA. With the Roth that $550 goes to taxes and is gone forever. As is all the money it could have earned for you compounding over the years.
Check out my conversation with Michael directly above. I also discuss this more toward the end of this post: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Mr. Collins,
I have very much enjoyed your blog and YouTube interviews, I first learned of you while watching an interview at Mike and Lauren.com.
I am new to FI thinking and have just turned 52 years old. My wife an I decided to downsize and relocate from Ohio to Florida as our last child went off to college.
To make a long story short (if possible) when we moved to Florida, a situation occurred that required that we take custody of our two Grandchildren.(3 and 6 at the time, now 9 and 12 years old).
I reentered my field of work and have progressed to VP of the company I work for and now make about 110K per year.
Several years back we learned of Dave Ramsey and used his plan to get rid of all debt except for our mortgage which is currently at 190K.
I very much want to get on the frugal plan and save. I would love to retire (quit my exec job) and be able to spend time with the girls before they get older. Something I missed with my grown kids.
I think I can replace my income with Swing/ Day trading which is something I have learned in the last year and have been doing quite well at.
My plan would be to save as much as possible for the next 3-4 years and slowly build my trading business up during that time while still working my job. The trading only takes about 4 hours per day normally.
At my age, should I continue to invest in my 401k at work knowing that I would like to quit my job in 3-4 years or just invest in the Vanguard Total Stock and Total Bond Funds ??
I only have about 50K in stock and 20 in cash for emergency’s saved up right now since I pretty much started over when we got the girls and I ramped my career back up.
Your advice please on were you would start if you were in my shoes. I am working on reducing expenses now.
PS. I cannot find any blogs that deal with early retirement starting at my older age(52).
Thanks for your time, much appreciated!
Hi Charley…
And welcome!
First let offer congratulations for burning off your debt. Well done!
Absolutely you should continue investing in your 401(k). Every dollar you save in taxes can continue to work and compound for you over the decades.
Please take the time to read (and reread) the Stock Series here.
Early retirement blogs are mostly written by those younger than us, but the principles apply all the same. It doesn’t matter when you start on the road to FI.
Here are two I recommend:
http://www.gocurrycracker.com/how-we-saved-multi-millions/
http://www.mrmoneymustache.com/2015/04/01/impossible-dream/
Both these guys are ~40, which puts them closer in age to you than (sadly) I am. 🙂
Don’t think in terms of your age, but in terms of your life stage with those two little ones!
Finally, I hate, hate, hate, hate, HATE! your plan to replace your income with Swing/ Day trading.
Doing so puts you in direct competition with those who have far more information, training, powerful computers and illegal inside information than you can ever hope for. And it that’s not enough to fleece you, they just illegally rig the system.
Did I mention I HATE this idea? 🙂
Seriously, there is no way in hell I would put my future, and the future of those little ones, at the mercy of this plan. It will bring you grief.
At the very least, please read the Stock Series a couple of times before you do anything.
Oh, and if I were in your shoes, I’d lace them on tight and RUN from your plan to replace your income with Swing/ Day trading. 😉
Mr. Collins,
Thankfully I took your advice and read (and re-read) your Stock Series. In my 401k, I was invested in just about everything and most with high fee’s. (some well over 1.0%) What a blessing this has been!
I have now changed my 401K to the following:
Principle Global Investors Core Plus Bond Sep acct R-6 20% Fee .71
PGI LargeCap S&P 500 Index Sep acct -R6 64% Fee .31
PGI MidCap S&P 400 Index Sep acct -R6 5% Fee .31
PGI Small Cap S&P 600 Index Sep acct -R6 11% Fee .31
This was as close as I could get to the VTSAX on the Equities, hopefully I did this correctly?
I do have a couple more questions:
Question #1
My 401k only has 25K in it now. I am currently only contributing 7% to get the match. It is a Roth 401K. My HR tells me that I can have both Roth and Tax Deferred inside my 401K as long as I am not over my max for the year. Per your series, should I be looking to max this account out?
Question#2 Should I leave the 25k as Roth and make the continuing contributions Tax Deferred?
Thanks again for the great series!
I look forward to reading and learning more.
God Bless
HI Charley…
The three stock funds you picked should replicate VTSAX closely enough.
#1. Yes, I favor maxing out tax-advantaged accounts whenever possible.
#2. Yes, leave the Roth you have and let it grow. They are wonderful things to have. But since you have to fund them with after tax money, if you are paying federal income taxes, a tax-deductable 401(k) is your better choice. Every dollar it saves you in tax is a dollar you keep and that grow for you over the decades.
Mr. Collins,
Thank You very much for your reply!
Charley
Jim,
Great Website. Thank you for putting this together.
I think I saw a paycheck calc on your website a few days ago when I was reaching. However now I can’t find it. Could I ask you to repost a calculator that allowed for calculations and deductions to a paycheck. I would like to compare various contributions to my 401K and what that would do to the balance of the check.
Mike
Thanks Michael!
Sorry, but I don’t recall a paycheck calc here, unless a reader posted it in a comment I have forgotten.
It would be great to have.
If you find it, please return and share it and I’ll add it to the others here: https://jlcollinsnh.com/calculators/
I think he is talking about a post I did do in your calculator area (last one). He may have hit my link.
This one?: https://jlcollinsnh.com/calculators/#comment-4213282
Thanks for the reply,
I will keep searching it was a really good calc. Allowed for 401K calculations and federal deductions comparison for each state. The one above is not the one.
Mike
http://www.calculatorsoup.com/
Thanks MM…
just added it: https://jlcollinsnh.com/calculators/
Hi Jim,
Three months ago, I came across your site and spent hours to read your posts. First, I want to say THANK YOU! Many of them were really helpful for me to plan my finance future. I have this one question I am having some trouble to solve, so here I am asking your opinion.
I will start with little bit of background information. I am 38 years old college professor. I am a single and no debt besides student loan (about 5k left which I plan to pay off within a year). I do not make much money, but it is good enough and will be quite stable once I get my tenure. I am renting, and plan to buy small house in 3 years.
I was quite ignorant regarding investment, so I started to contribute IRA like two years ago. I have about 8k in my roth IRA (vanguard target retirement fund). University I works for provides small retirement contribution which is about 5% of my salary (I cannot contribute, though). It is in TIAA CREF target retirement index fund which is about 10k. I have about 15k in saving account. Again, I was pretty ignorant in terms of investment. After I read your blog, I recently opened vanguard total stock index fund with 5k from my saving account and contribute monthly now. As you can see, my net worth is pretty small. But I have relatively steady income and I am relatively young, so I believe that I can keep contributing money toward stock index fund I recently opened.
The thing is that I have large sum of cash I recently received. My mother passed away about two years ago, and she left about 200,000 dollars as inheritance to me (It is little less than 200k). To some people, it may be small money. But to me, it feels like 2 million dollars. So I was just very much overwhelmed about what to do with this money, so I put them into 2 years cd. Now that cd is matured and I will have that money soon. I was literally clueless what to do with this money except I will use about 20k for down payment in the near future.
However, after I read your blog, I was considering to put 75% of them to VTSAX and 25% of them to vanguard’s target retirement fund 2045 (I like an idea they will adjust asset allocation automatically). But I did not do it right way because I was so worried about the tax situation because this will be taxable account.
Last week, I found that my university offers 403(b) program. It is called tax sheltered annuity program. There is no vanguard, but fidelity is available. Clearly I need to gather more information about it, but I believe that would be tax sheltered program. So another option I can do is to put those money into 403(b) instead of taxable account. Of course, I can only put 18k in a year… I don’t know what I will do with rest of money until I put all of them into 403(b)… I am even sure that this is a good idea…
So, this is my question. What would you do if you are in my shoe? Tax issue regarding capital and dividend gains from index funds will be serious enough? Considering 403(b) for this money would be really stupid or something I should do?
My mother was so frugal and worked so hard to leave that much money to me. I want to make best out of it… Any advice would be greatly appreciated.
Thank you!
Hi Ellie…
and welcome! For someone claiming to be ignorant of investing, you are doing just fine and you are asking the right questions. So let’s build on that!
Let’s start with your 403(b) plan.
These are employer sponsored tax-advantaged accounts. The money you contribute and your employer’s match (if any) grow tax free until you begin withdrawals mostly likely in retirement.
You should definitely contribute, at least enough to capture any company match, and I would suggest you fund it to the max.
You say: “It is called tax sheltered annuity program.” But my guess is a tax sheltered annuity is only one of the options? It is one to avoid.
What you want to look for is a total stock market index fund or an S&P 500 index fund (or maybe a total bond market index fund as we’ll discuss below). Those from Fidelity are fine.
See: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Next, your 200k. Two options:
TRF
You could put it all in a Vanguard TRF (Target Retirement Fund) and be done with it. The fund will automatically adjust your allocations over time and you can just leave it on autopilot to grow. See: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
Nothing wrong with doing this.
Roll your own
If you are willing to learn a bit more and do a bit more work, you could create your own very simple asset allocation (AA) and maybe rebalance it once a year. Your birthday is a good time and easy to remember.
This will allow you to hold funds that have slightly lower ERs (expense ratios) than TRFs.
This post will help you decide on the allocation that best suits your needs and temperament: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Asset allocation is how you adjust risk to suit your needs and I prefer it to DCA (dollar cost averaging) for reasons described here: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
To keep this simple, you need only two funds: VTSAX (Total Stock Market Index Fund) and VBTLX (Total Bond Market Index Fund). https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
Decide on your AA and split your 200k between them accordingly. A call to Vanguard will get you help in making this happen.
Tax considerations
VTSAX is considered tax-efficent and as such is a good option to hold in taxable accounts. It does pay ~2% in annual dividends and you will have to pay tax on those.
VBTLX holds bonds and these pay interest and as such are considered tax-inefficient. But rates are so low today it is only paying ~2.46%, so not too much to worry about.
Now, if you want to take the next step and get things as tax-efficent as possible:
1. Select your AA
2. Apply it across ALL your investments: Taxable with the 200k and 403(b)
3. Find the bond fund we mentioned in your 403(b) as we discussed above
4. Hold VTSAX in your taxable account and the bond fund in the 403(b)
Any of these plans will work. Here is what is much, much more important:
Once you set this up, other than annual rebalancing as needed, leave it alone to grow and compound. If you panic and sell during the drops, you will have been better off not investing at all.
Now, about the house. In my view houses are an expensive indulgence. There is nothing wrong with expensive indulgences as long as you recognize them as such. Don’t fall prey to the real estate industry propaganda houses are good investments.
Before buying, please read this:
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
and this:
https://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/
and finally this:
https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
If you still want a house after that, put the money you’ll need for a down payment and closing costs and any initial repairs in an FDIC insured bank savings account. It will pay next to nothing in interest, but that’s where money you plan to use in the short-term belongs.
When investing in stocks, think in terms of decades.
Hope this helps!
Hi Jim,
Thank you so much for your answer. It certainly answered much of my questions. Thank you!
To be honest, I actually met so called “financial advisor” last year. He was a fee based one I could find (I paid $200 per one hour…), and his recommendation was investing money into all types of loaded funds (He actually wanted me to invest with him, and he guaranteed that he can make 10% interest return which I found red flag right there…).
Based on your recommendation, I opened up 403b with fidelity. Every month I will contribute to their total stock index fund (expense ratio was pretty low: 0.1%). Also this is what I decided to do with 195k (this is an exact amount I have).
1. Put 20k into Ally saving account for the house down payment (I completely understand your point about buying a house. But I live a small college town that rental market is pretty limited and horrible, so it is much more desirable for me to buy one).
2. After I read your stock series and reply, I decided to do asset allocation by myself. For now, I think it is desirable to invest 175k to VTSAX (My IRA and school sponser TIAA CREF one are all in target retirement so…). Eventually I will go 10 to 20% of my asset to bond funds when I am about to retire. I will move some of my asset to VBTLX. I have one more question about bond fund. While I was playing in the Vanguard website, I found that there is tax-exempt bond index fund (VTEAX) and long-term tax-exempt fund (VWLTX). Those are certainly very tax efficient with 4.5% return rate in average. I am wondering what do you think about them? Do you think VBTLX would be still better?
Again, thank you so much for your kind and thorough reply!!!
Those are both muni-bonds funds that invest in the bonds of state an local governments. The interest is tax free at the federal level and, if you live in the state that issues them, at the state level.
In return, they pay less interest than taxable bonds.
Also, long-term bond funds are especially risky in this low interest rate environment.
Typically these are best for those in high tax-brackets and who live in high tax states (there are muni funds that focus on the bonds of one state) as the tax savings offset the lower rate.
Unless you are going to be in a high bracket in retirement, I wouldn’t bother.
Better to hold your bond fund in your IRA for tax efficiency.
For more: https://jlcollinsnh.com/2012/10/01/stocks-part-xii-bonds-and-a-bit-on-reits/
Thank you! I will stick to the VBTLX when time comes.
Hi Jim,
First off, I cannot thank you enough for this educating, if not overwhelming, blog. I have only recently become a reader (only roughly a week) but have read through the majority of your articles including the entirety of “Stock Series” and have truly grown to appreciate your views on investing as a whole.
A quick (or perhaps not so quick) blurb about me: I’ve just reached 25 years in age, and make about $150k/ year (I say about because that is assuming I work 183 days/year, which is rarely the case in my industry, but assuming the minimum that is the number I attach to my wages) with 14 years left on a 15 year 240k mortgage of 3% (I do loathe carrying such a burden, and I have read your thoughts regarding renting vs. owning, but the rental options in my area are none too attractive, and I have accepted that I live in the house beyond my requisite means at a premium and that this was not a financial investment that I can expect, if any, appreciable gains upon.)
I’ve been an active investor for the last seven years or so, but much of my earlier investing was misguided, though successful. As per such, I have been lured back in time and time again with the seductive taste of gains in my mouth, and now that I find myself work in the Oil and Gas Industry (in very close proximity with drilling majors and oil majors) I have tied up a larger portion of my invested assets in energy stocks (outside my roughly 35% of invested money in VFINX which I have held for 7 years and counting).
Currently operating at a minimal loss (3%) I am hesitant to simply dump them in favor of VTSAX. My intent is, of course, to ultimately push the majority of my invested assets into 90% VTSAX/ 10%VBTLX (with the exclusion of my 401 in which VTSAX is not available, nor are any Vanguard funds, however I have elected for the nearest option being the Spartan S&P 500 fund which only costs .08% gross fees per annum)
All of that being said, would you suggest that I accept the minimal loss I have experienced over the last few months in favor of acquiring VTSAX or stay the course and wait for the industry to recover upon which time I would sell and stay the VTSAX course.
On another topic, due to the downturn my company has recently cut its 401(k) match to reduce operating costs. The only favorable option in our 401(k) plan is the Spartan S&P 500 index fund, but I wonder if since the match has been cut is the 401(k) worth it now? The fund is advertised as a .08% gross fee, but after a few calls to Fidelity investigating what additional fees I am charged for such holdings I have received numerous different, and questionable, answers.
Accepting that the fees are that low, the tax advantage of the 401 plan indicates to me that while the company match is no longer available, it might still be worth it for me to continue to max out the 401 option as I have been doing. And no, this has not been in lieu of me first maxing out my IRA options (which until recently I considered the ROTH to be my most desirable option, but I am reconsidering a traditional IRA until the time in which I would utilize a conversion ladder discussed at length through your and MMM’s blogs).
There is so much I would like to ask you, but I understand that your time is not solely mine to consume, and I find that many of your articles broadly can address my concerns and questions. There’s nothing quite like a dialogue between the man himself and the reader and I truly appreciate all that you have and (hopefully) will continue to do for all facets of the personal finance community, albeit novice or approaching FI.
Thanks,
EJ
Welcome EJ…
Glad you found your way here.
Sound like you are off to a great start in your financial life.
Kudos for recognizing that, even with the success you’ve enjoyed, picking individual stocks is a poor long range plan. Plus, while you know the oil and gas industry, investing in it ties you to it both for your income and for your investments: A double risk.
If you have decided on a 90% VTSAX/10%VBTLX allocation, just do it. We have know way of knowing if or when your stocks will recover.
I would still fully fund your 401(k), especially at your income level and tax bracket. Every dollar not paid in taxes can compound for you over the decades. The S&P 500 fund is just fine.
For the same reason as above, I would favor the T-IRA over the Roth.
Plus, once you’ve maximized these, don’t hesitate to further save and invest in your taxable accounts. You are in a great position to reach for FI.
Thanks for the expedient reply Jim!
I have some money in taxable investing accounts, but I find that the majority of my post-tax money has been devoted to bills, primarily the aggressive mortgage on which I currently am paying $400 over the minimum. Not so much as that I wish to mitigate the 3% interest on, but rather, my despise for such a bill lasting any longer than it needs to. It is more of a psychological choice than a financially driven one. I understand that I have been leading a consumer-driven lifestyle, and as an engineer, purchasing (perhaps too many) tools and building materials as a source of entertainment as much as a work instrument.
I understand that my not-so-wise energy industry investments have doubled my exposure to the volatility of the Oil and Gas industry, which is why I find myself pressed to pump them into a more wisely-geared investment strategy. And you are absolutely correct, that despite the knowledge you have imparted on this blog I still find myself trying to “time the market” and much to no avail. The potential earnings of VTSAX or something alike could easily recuperate my losses instead of trying to wait it out and achieve the impossible/ unlikely.
On another note, my company offers a fairly generous Employee Stock Purchase Program of 15% off the share price on either the opening day or closing day of the 6 month participation period, whichever is lower. This serves as, at a minimum a 15% return. While, again, this serves to increase my exposure to the industry, am I misguided in saying that it’s an easy guaranteed 15% which can be liquidated after the offering period and put into our Golden Child, VTSAX?
I’m curious, why is it that you believe indexing is an approach not more universally utilized? The logic and numbers are so sound, and backed up with over a century of historical supporting evidence, it embarrasses me that I have missed it for the first seven years of my misguided investing career. Is it the lack of allure of massive swings and excitement? Do you think this method is suppressed by media outlets such that many of their financial advisors would be, to say the least, less than necessary?
Your time is, as always, greatly appreciated.
EJ
1. Depends on how long you have to hold the shares and your guess as to their prospects over that period. But, yes, starting up 15% is tempting and worth consideration.
2. Human nature, mostly. It is very hard for humans to accept that they can’t outperform. Same reason casinos continue, and will continue, to prosper. It’s not like you can’t look at these billion dollar edifices and figure out the house has an advantage.
For more:
https://jlcollinsnh.com/2013/02/05/stocks-part-xv-index-funds-are-really-just-for-lazy-people-right/
https://jlcollinsnh.com/2012/01/06/index-funds/
Hi Jim,
I recently found you through MMM (which I also fairly recently found).
I’m 26 and a year into my first “real” job out of law school. My husband is 2 years into his engineering career. We’ve been married 5 years, and it’s just in the past year that we’ve really been able to start stocking money away (my last year of law school involved us living 300 miles apart while he had his first job–2X rent, utilities, and groceries that year was rough. Even so, we managed to emerge with that with slightly more in the bank than we went in with).
We do have student loan debt, but we have a solid payoff plan that we are both comfortable with (and they’re all federal loans). We have so far avoided all other consumer debt, and plan to keep it that way, with the possible exception that I would consider a mortgage under the right circumstances (however, home ownership hasn’t ever been high on my priorities list. I do like the freedom of renting.).
I’ve read your stock series, and got my husband on board with throwing all $10,000 of a recent windfall in to the VSTAX (Vanguard was already where we had our Roths, which we max out, and where his 401K is).
Thirteen percent of my gross salary goes into my retirement (8% from me, 5% from work, no option to increase…state job weirdness), with an additional 10% into the supplemental plan that the state requires. My plan is to throw just under $1,400 additional into our VSTAX fund each month, which would put our total monthly savings towards retirement at right around 50% of our monthly take-home pay.
My question is where to put/what to do with different types of savings. We have $16,000 in our checking account right now for in case of catastrophic job loss (we both lose our jobs at the same time. If just one of us was unemployed we would just live on the other’s salary.), which would cover 6ish months of living expenses (likely closer to 8).
We are also saving some per month for a car replacement (which won’t be soon, but will be eventually, and when that time comes, we’ll buy whatever we can get with that cash) and a probable eventual down payment (*when* our landlord decides to sell, we want to buy the house we’re in. But we don’t know exactly when that will be).
It seems like we lose out on a lot by keeping that money so very liquid in our checking account, but we also want the money to be fairly available if we need it. What would you do? Also, any words of encouragement as we really get started on this journey? Saving this much should put us in a very good place by the time we’re 40, but that seems so very far away right now…
Hi Margret…
Let’s start with the words of encouragement:
You are off to a fine start at a very young age and your thinking about this stuff is clear. 40 may seem far away now, but one day you’ll wake up there saying, “WTF, how did this happen?!” 🙂
Hopefully, if you stay the course, you be able to console your creaky bones with being FI. (and oh what I wouldn’t give to be 40 again…)
As for your 16k emergency fund, that does seem high and it implies a real concern that you both might lose your jobs. But with your husband working as an engineer and you for the state, your job situation sounds pretty secure to me.
This really comes down to a personal choice based on your temperament and the risks in your particular situation. As you’ve already identified, the more safety you require the more opportunity you sacrifice.
As for saving for a house or car, if you know you want these things by a certain time you really are stuck with low interest FDIC insured savings accounts to make sure the money is there when needed.
But if you have some flexibility, here is another option.
Let’s say you want that new car in three years. You could invest more aggressively and if the market moves
–down you simply make the old car last longer
–up you can buy the car sooner, buy a nicer car, or buy what and when you planned and keep the difference.
Betterment is a great tool for this: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Thanks for the response! And the encouragement. I *know* it’s not really that far off and that 14 years will fly right by (I mean, I’m still shocked that I’m not 17!), but we have lots of friends with lots of very nice things that they’re in lots of debt over, and sometimes the delayed gratification is hard (but so worth it.).
You’re right that 16K seems high, and I was actually wrong, the real number is 18k (2K of that is stashed in an account we opened when we were eligible to the Navy Federal Credit Union, who we would likely get our mortgage through). I’m starting to feel like it is just a lump sitting there doing nothing, when it could be working much harder for me, but at the same time there are life experiences that make me crave security, which is really what this FI business is all about (well, for me. My husband wants to go snowboard in Argentina for long chunks of time!). I don’t want someone to be able to come take my things away, and I love my job, but I don’t want to be dependent on it to live. I’ve been considering moving some of that into the VSTAX, but would probably still keep at least 10K in cash reserves.
Do you have any concerns about Betterment’s fees? That’s something I’ve seen people express before. There would be some flexibility regarding the car, because we could go down to just one for a time, although that wouldn’t be quite ideal. What about throwing the 3K we have now into Vanguard too, then withdrawing a reasonable amount when the time comes? Do you recommend Betterment because the exact amount I would have saved specifically for the car would be more clear?
The house, if we’re stuck on this one, is out of our control. He will very likely sell eventually, probably within a couple of years. The purchase price will probably be at least 350K (land is expensive on islands) and I’m not willing to risk a market downturn right before we need the money.
I want to say thank you for this blog. I’ve spent the last year being astounded at how much money we’re making, which will probably increase steadily for the next several years–we started in very lean times and last year was the very first we owed any type of income tax. We’ve been doing our best to get things figured out and doing okay, but finding a clearly written out plan with good explanations that is simple to follow has been amazing (I’ve always been a big fan of Occam’s razor). I feel so much more confident that we’re headed in the right direction and all of this would have been so much more difficult without this resource!
Jim,
I have a question regarding the differences between the risks and returns when comparing Vanguard’s VTSAX fund and VTI ETF.
I’ve recently transferred all of my retirement savings and investments over to Vanguard to access their VTSAX fund based on your advice. Once I got set up I realized that by using “buy limit orders” I could take advantage of the daily market fluctuations and purchase VTI at a lower rate than VTSAX. Since, the mutual funds are sold at a single rate at the close of day, and, the ETF of late is swinging more or less within a 1% range throughout the course of the day it led me to believe that I can buy into the fund at a discount just by setting a “buy limit order” on the cheap side of the swing.
For clarification, I am a “buy-and-hold” investor in the purest sense, and, am very risk averse in these terms. And, I understand how an ETF can tempt a normal fund investor into dabbling with day trading. But, if we remove that temptation from the conversation, is there really any difference in the risks/rewards associated with buying VTI vs. buying VTSAX? The expense ratios are identical. They show very similar historical returns. I did not research the differences from a tax perspective. However, my holdings are mostly (though not entirely) encased in tax advantaged accounts.
In short, it all seems too good to be true. Am I missing a key element regarding ETF structures? Is my math bad? Does this tiny discount even make a meaningful difference?
Your wisdom on the topic would be much appreciated. My brother and I (both avid readers) have been dithering over the topic for a week now.
Thanks in advance,
Alex
Brooklyn, NY
Hi Alex…
First of all VTI and VTSAX hold exactly the same portfolio, so with either you own the same thing.
ETFs were created to enable trading and, as you observe, owning VTI makes that tempting as well as possible. Avoiding this temptation is what inclines me to prefer funds.
The only issue (I can think of) with putting in “limit” orders – buy or sell – is that your price might not be met and your trade not executed.
Personally, I don’t use them. On the rare occasion I buy a stock, I put the order in when the price works for me. (I’ve never bought an ETF but I’d do the same.) If I want to own it, I want to own it. Same with selling.
Hope this answer means your brother has to buy the next beer. 🙂
I have a question that I’m pretty sure I know the answer to. My employer provides a 401k (S&P 500 is the only index fund available) and obviously the advice is to fund up to the match if there is one. My employer contributes 6% regardless of any contribution from me. Should I still fund up to that match, or should I move on to fully fund a traditional IRA first, then the 401k?
And if it matters I also have a pension provided by the employer (2% x average top 5 salaries x years of employment) and a brand new baby’s brand new 529 fund with my state (special tax credit).
Hi Travis….
I’m pretty sure you know the answer too. 🙂
If you don’t have to contribute to get the free match, I’d fully fund your IRA (over which you have more control) first.
Hi Jim-
I come seeking your wisdom once again. My family and I moved earlier this year from a low COL area in Florida to the much more expensive Los Angeles area to pursue career advancement opportunities and to be closer to family. We are still managing to save over 50% of our take-home pay, which will soon be increasing when my wife starts a new job this week.
We have been renters for over 5 years since selling an upside-down condo that we bought in the Bad Old Days of the housing boom (big mistake) and are continuing to rent here in the LA area. The rent is probably @$5-700 per month higher than a mortgage payment would be for a house in this area and although I am a true believer in your philosophy on buying vs. renting, I’m also looking ahead to the future and interested in your thoughts.
We are 38 right now and would like to “retire” from our day jobs at 55, when our youngest will be finished with college. We of course would like to reach FU money before then, but we want to make sure the kids get through school without a huge debt burden. At that point, our plan is to relocate to a lower cost area, downsize the house (kids will be gone) and enjoy whatever comes next.
So the question is whether we should save to buy a house in this area to stabilize housing costs (would probably cost $700K) or just keep renting and investing our excess earnings in our taxable account. We already max out 401k and IRAs as well as save in our kids’ 529 plans- all extra goes either into VTSAX in a taxable account or in a CapitalOne 360 savings account earning a whopping 0.75% APY.
We currently have $37K in cash in CapitalOne and $26K in the VTSAX taxable account, so we still have a few years to go to get to the $140K that we’d need for the down payment.
I’m not in a huge hurry to own a house right now and am A-OK with renting, but it seems to me that owning a house free and clear is such a huge part of eventual FI, and there is risk that rents continue to rise faster than inflation. I think that once I hit “retirement” I’d definitely want to own my home outright so as not to even have to worry about rent/mortgage payments. But again, my plan is to live in a smaller place in a lower cost area when that time hits.
What should I do? Save and buy a house here, live in it for 15 years or so, then sell it when we retire, using the proceeds to finance the smaller/less expensive retirement house? Keep renting and investing and then perhaps have enough to buy a smaller/less expensive place outright when I retire? I’m very interested in your perspective. Thanks!
Hi FS…
Welcome back!
First, my take is the very opposite of what you say here: “…owning a house free and clear is such a huge part of eventual FI, and there is risk that rents continue to rise faster than inflation.”
The last thing I want in FI is a house to tie me down and the risk of inflation driving up the cost of taxes, insurance, maintenance, repairs, etc, etc. If my rent increase is more than I want to pay, or if anything else is not to my liking, I can easily and cheaply move on.
But that’s me.
Sounds like you really want a house, both now and in retirement. Roots v. Wings: https://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/
Nothing wrong with that, although I urge you to run the numbers: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Once you do, you’ll know where you stand. It might be that buying is cheaper. But if not, you’ll know just how much more it will cost and you can decide if owning is worth it to you or not.
Since you are OK with renting, you can keep investing your taxable money aggressively in VTSAX. If the market moves in your favor, you’ll get to the downpayment sooner. If not, you are in a position to wait.
Meanwhile, you can play with the numbers and work thru what is important to you.
Hi there!
Excuse me if this question is on repeat. It is extremely hard to filter the comments to find the answer I am looking for.
I am wondering if you can roll your employee 401k funds into the Vanguard IRA before you quit working there? Once the account reaches $10,000 increments, could I roll them out? Or do you have to NOT be an employee to move your own money?
So far my employee 401k has lost money…never gained. In five years. It is disappointing for sure.
Thanks,
C
Hi C…
Unfortunately you cannot roll your 401(k) until after you’ve left your employer.
The only work around of which I am aware is to, with your employer’s cooperation, quit, roll and get rehired.
Not sure that’s practical for most.
The last five years have been very good in the market, so if your 401(k) investments are losing money they are either not in stocks or in a truly terrible actively managed fund.
In any event, most 401(k) plans offer multiple options. Time to look for something better.
For more: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Any posts on which American Funds options to pick would be great! Right now I am a Simple IRA in Growth and Income Portfolio-C. Fund 351 Symbol GAITX, 100% in there. I honestly have no idea what they offer or how it works, it is really new to me, but after finally paying attention so far this YTD I’m at a -7.25% and since investment -4.42%. Seems a little crazy and I don’t know what fees they even charge because on my statement is only shows a $10/year fee. Just getting the crappy match I’m finally at almost $10k. So for a small town farm girl, that’s a lot of money to be messing with. Thanks.
Hi C Sargent. I’m no expert, but if you login to your account online and look up the funds offered by your plan, you could post them here and ask for people’s input. American Funds has many choices, but they are different for each individual company, so you would have to post what is available to you in order to get any specific advice. The things to post would be the name of the fund, and the Expense ratio (ER). Hope that helps.
Hello Jim,
I found your stock series through gocurrycracker.com and have loved all the other helpful financial advice I’ve learned so far over here..so thank you! I have just a few questions if you are still taking them 🙂
Here are our vitals..if you will.
We’re both 27- we would love to be financially free by the last year of our kids college.
We have a one year old and will most likely have another one in a year or two
We’ve been married for 3.5 years and within that time we have paid off all debt ($26,000 student loans) and saved $45,000 in cash and $13,000 in our Roth IRA in Target 20145 fund. We also have about $2,500 for our sons college in a savings account.
we’ve managed all of this on just my husband working at about $40,000 a year and me working odd jobs and selling on ebay while taking classes…but he just got a new job that will start at $45,000 with possibility to earn up to 40% bonus as well and he’ll finally have access to a 401k with matching! 🙂 phew!
ok, so my questions are…
1) After reading your series I opened a traditional IRA for me and my husband-so should i roll over the Roth IRA amounts to it or just start fresh and invest the max in both this year in the total stock vanguard fund you suggest?
2) What should we do with the $45,000 of cash we have-we had it to buy a house but we will be relocating for his job so we’ve decided to just rent. I was thinking invest it in the same vanguard total market account but not sure if that is best since i can’t put it in a tax saving vehicle?
3) What is the best way to save for our son’s college fund?- I feel that I must keep his savings separate from ours since most of the savings for him has come from family gifts specifically meant for his college fund. Is it possible to have a separate account invested in the same total market fund or would that not make since?
We are both very thrifty and I have a very generous family, that usually gifts us around $2,000 a year for birthdays and holidays. We also have one used car we bought outright.
Any advice you could give would be very appreciated. We are very comfortable with risk- oh and I understand that you are not a financial advisor 🙂
Thank you
Hi Hope…
Welcome!
First, congratulations on the great progress you’ve made so far.
1. No. Leave your Roths alone. You have already paid the tax on the money in them. Your T-IRAs should be started with new moneys invested. See Part 2 of this post: https://jlcollinsnh.com/2015/10/07/personal-capital-and-how-to-unload-your-unwanted-stocks-and-funds/
But before you switch to T-IRAs, look closely at your tax situation. Right off the top you have:
—$12,600 in standard deduction
—$12,000 in personal exemptions @ $4000 each.
You’ll likely also qualify for various tax credits.
http://www.irs.com/articles/2015-federal-tax-rates-personal-exemptions-and-standard-deductions
Run your numbers thru something like this: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
This way you’ll know what your Federal Tax might be and whether Roth or T-IRA is your best choice.
2. If you are investing it for the long term, then it should be invested just like your long-term IRA money. If you will be using if for a house sometime in the next five years or so, you’ll want to be much more conservative.
3. Here is an excellent overview of the various options for your son’s college fund: https://investor.vanguard.com/college-savings-plans/which-account
Think of this college fund, your IRAs and your taxable accounts as “buckets” in which you hold various investments. You can hold the same investment across all buckets: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Hey again,
Thank you so much for the response and information! The tax calculator was a huge help and I see now that it would probably be best to do half in a T-IRA and half in a Roth IRA since we only have about 5k in taxable income after all the deductions (kindof sad but I’ll choose to look on the positive side:)
I had read your bucket article before and I still just have one question..and it’s one i’ve been looking for the answer for a while now. I’ve never been great at math but with compounding interest…does it make a difference if I have one lump sum or two smaller sums if they both equal the same? For instance, If we split the IRA monies but it’s still the same total will we still earn the same compounding interest? The reason I am so concerned with this is I would rather open a non tax saving account for college savings but if it won’t earn anything because it’s such a small amount then I could just add it to our other funds that have a higher amount? I hope that makes sense.
Thanks again!
Assuming that both lumps of money are invested in the same thing and have the same tax liability, the returns will be exactly the same.
Of course if you invest one lump in one fund and another in a different fund, the returns will be different.
But $1 invested in VTSAX, for example, will have exactly the same percentage return as $1,000,000.
That makes perfect sense now!
Thanks again…am happy to have found your blog! I really enjoy the simple interface and your no-nonsense methods.
cheers!
Please note:
From October 15th thru November I will be traveling in Ecuador, mostly attending our Chautauquas: https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
WiFi connections will be spotty and I will be unable to respond to your questions in the comments. Please save these for December 1st and after.
Of course, other comments are welcome as always.
Thanks, and enjoy the blog!
jlcollinsnh
Various Vanguard funds recently became available in my 401(k). Unfortunately, the VTSAX is not an option, but VFIAX is along with large, mid, and small cap options (and thus allowing my to put together the 81%/6%/13% allocation). But, VWIAX is an option and I was curious as to your thoughts on this fund.
Thank you in advance!
Thanks for your question/comment.
As I said here: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213694
and here: https://jlcollinsnh.com/2015/10/07/personal-capital-and-how-to-unload-your-unwanted-stocks-and-funds/
I have been traveling in Ecuador for our annual Chautauquas: https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
If you are still tuned in and interested, please post your comment/questions again and I’ll try to help if I can.
best,
jlcollinsnh
Hey Jim.
I just started my HSA through my employer and it is handled through Wells Fargo. I am going to contribute the max but when I logged in, I noticed an option to “Activate HSA Investment Account.” Should I activate this?
I clicked into it to check it out but it seems odd. Firstly, it states “Choose a target balance based on how much of your HSA you think you’ll need immediate access to.” The choices are $1,000, $2,000, and $3,000. I plan on not using it at all.
Secondly, the options for investments are all WF options with a couple other companies thrown in there. No Vanguard. Question is, if I should activate this, what type of investment option should I look for?
Thanks Jim.
-Michael
Thanks for your question/comment.
As I said here: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213694
and here: https://jlcollinsnh.com/2015/10/07/personal-capital-and-how-to-unload-your-unwanted-stocks-and-funds/
I have been traveling in Ecuador for our annual Chautauquas: https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
If you are still tuned in and interested, please post your comment/questions again and I’ll try to help if I can.
best,
jlcollinsnh
Hi Jim,
Hope your enjoying your time in Ecuador. I’m trying to get an opinion on what to do. Recently my wife was laid off of her job after 18 years.. She has a chance of continuing to work for them but would have to move which we do not want to do at this time. Anyway, we have 310K in a 401k, 170k in a pension which will pay approx, $1500 a month for 20 years starting at 65 years of age, and finally 70k in the government TSP. At this time I thought about rolling everything over to Vanguard VTSAX in a IRA. The 401k is limited Vanguard funds, the annuity is something I’m not a fan of. I like the idea of having control of our money and being able to help the kids out later. The TSP is 80% C and 20% S funds. And I’m just letting it sit there until 701/2 years of age. My wife plans to retire at 66, but since losing her position her income and benefits have dropped dramatically. And who knows when she will be able to find permanent work. Regardless of what anyone says, when your in your late 50″s, jobs are harder to find. Right now she’s working temp jobs on a regular basis. I retired after 32 years with the Federal government. I have some serious spine issues so I’m limited in what I can do. Right now we have 300k in equity of a 400K home. My idea is to sell the home and buy something for cash, then use the money saved to continue to invest in the 401k. It’s not going to be anyway near possible for my wife to get the same pay or benefits she was getting before. Were trying to be realistic at this point. Once she reaches age 66, we will move to a more affordable city and closer to family. I have a pension of 30k per year, and my wife SS will be approx 27-30K per year. Bottom line, is it a good idea to roll over everything to VSTAX, or because my wife is not investment savvy, I would consider using Betterment, which would make it maybe easier for her to understand and get help if and when I pass on. My first and foremost concern is too make sure she will be ok. Thanks for your help.
Thanks for your question/comment.
As I said here: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213694
and here: https://jlcollinsnh.com/2015/10/07/personal-capital-and-how-to-unload-your-unwanted-stocks-and-funds/
I have been traveling in Ecuador for our annual Chautauquas: https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
If you are still tuned in and interested, please post your comment/questions again and I’ll try to help if I can.
best,
jlcollinsnh
Mr. Collins —
I understand you are out of country until December. I can’t wait until December. I am sending this to you now. If you get to it, you get to it. If not, that’s ok. I just needed to share and perhaps gain some insight into my circumstances. Thank you very much for listening.
Please, I hope someone here will assist me. I need to get my financial life figured out, stat. I am 56 years young, saved often, but dithered away my economic capabilities on two spendthrift husbands and a job loss that extended for four years. So, enough of that.
Consider me a zero. These are my current circumstances:
Monthly 6970
Pension Fund -669.12
401K -1951.5
537B 0 (has 600.00 in it)
Dental -2.32
Supplemental Life 0
-2622.94
Fed Witholding 6 -278.64
Fed SS -101.07
Fed OASD -432.14
Taxes -811.85
Short-term disability -20.91
Long-term disability -43.91
-3499.61
3470.39
Tithe -450
Rent -1350
Electric -50
Gas -50
Phone -50
Household Insurance -15
Auto Insurance -25.5
Gas, Auto -35
Metro -41.5
Food, Dry Cleaning, Household -300
Internet -25
Emergency Savings -500
Roth/Traditional -541.66
Personal Account -35
-3468.66
1.73
Yes, the elephant in the room is rent. I live in a rather high cost
area. Moving within walking distance of work is not an option at this
time. Rents that close are over 2000K monthly. I live in a University
town that is booming tech. Moving further out would decrease my rent,
but not by much. However it would increase my commute time to 4 hours
each day (I do public transit – current commute is 1:45-2:00 hours per
day @ 41.50 per month ). I am still looking for a sweet living gig, but until that appears, it is what it is.
Of note:
I am not shucking my car. It’s been paid off for years, except for
insurance and maintenance. 16 years old (bought it in 1999) and under 93K miles. It is necessary to visit my parents, do weekly errands and get to my place of worship (unless I want another 4 hour bus commute). The car, for the time being, stays. I walk/bike pretty much where ever I need to go but to those places where it is necessary for me to drive. I fill up the tank about every two-three months.
9.6% into a pension system: there is no choice about that. At some ephemeral time, I am supposed to get an additional 8% on top of it to make up my pension payment. If that ever happens. While I do pay into a 401K system, there is no match. I am currently invested in two Vanguard funds @ 28.00% of gross income in the 401K (VIIIX @ 50% and VWENX @ 50%). Only potential show stopper is the fees the 401K management company charges. Depending on the balance, it can be 0 to 26.00 per month, per fund. The management company is Great Western.
Emergency savings accumulate in two places: Betterment (want to get
it to 12K, currently at 6K), and a 1.05% savings account that holds my
medical, auto, and renters deductibles. (about 6500.00) And the “last months paycheck” I keep in my checking account (4000.00)
I switched on my Roth again this year, as my income was rather high. I intend on bouncing back between a Roth and a Traditional, depending on several things, and I am beginning to wonder if I am too much “tax advantaged” with the pension and 401K. Perhaps the max should go into my Roth.
There is an HSA that I hold that has a nominal amount in it (1200.00), enough to invest through the current company who holds it. It is not yet invested. It appears that my new employer has got a clue and will offer HSA during our next benefits offering (09/2016). The managers of my current HSA will “manage” my money for the nominal fee of 7.50 per month until I can get it out of there and potentially roll it over.
A credit union account that has about 500.00 in it. Been with them for years and have an substantial overdraft account with them. Cancelling with them now would probably hit my credit rating and I don’t want that right now.
Look to pay off the last of 18K of dental work in December 2015. (4000K). Took on that burden in November of last year — without incurring any interest payments. I will buy a bottle of cheap champagne and celebrate. 🙂 I have no other debt but my monthly bills. And loving my fellow man. 🙂
The immediate questions are these:
Is the “budget” noted above a good course of action? What do you do? How would you change my method for moving forward?
Am I not saving enough? Am I saving too much? Am I saving in the wrong places?
Does it appear I am oversaving in vehicles that may not have the best ROI? (Great Western)? If so, how do I decrease my tax hit if not take advantage of the 401K to its limit, even if there is no match? Then potentially the 537B, again, no match?
Anything else I could be doing?
While I tried to do the right thing when I was younger, I got derailed by poor decisions and associating with people who did not have my best interests at heart. I can’t fix the then. Now I am seeking to put the wheels back on this bus. If it has to be a slow slog, I guess I am up for that. Anyone who can help me see through the muck, thank you!
Thanks for your question/comment.
As I said here: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213694
and here: https://jlcollinsnh.com/2015/10/07/personal-capital-and-how-to-unload-your-unwanted-stocks-and-funds/
I have been traveling in Ecuador for our annual Chautauquas: https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
If you are still tuned in and interested, please post your comment/questions again and I’ll try to help if I can.
best,
jlcollinsnh
Hey Jim!
First of all, I love this site. Your Stock Series has changed my life! After reading about how amazingly awesome HSAs are ( thanks MadFientist! ) I decided to sign up for one through my employer. The HSA is through Health Equity – unfortunately they don’t offer VTSAX, or any of the alternatives you’ve listed in your post: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
They do, however, offer the following Vanguard funds:
Vanguard Total Bond Market Idx InstlPls (VBMPX) Intermediate Bond
Vanguard Total Intl Stock Idx InstlPls (VTPSX) Foreign Large Blend
Vanguard Institutional Index Instl Pl (VIIIX) Large Blend
Vanguard Growth Index I (VIGIX) Large Growth
Vanguard Extended Market Idx InstlPlus (VEMPX) Mid Cap Blend
Vanguard Materials Index Adm (VMIAX) Natural Resources
Vanguard REIT Index I (VGSNX) Real Estate
Vanguard Small Cap Index Adm (VSMAX) Small Blend
Vanguard Inflation-Protected Secs I (VIPIX) Inflation-Protected Bond
Vanguard Wellesley Income Adm (VWIAX) Conservative Allocation
I’m wondering if I can come up with an allocation, using the above indexes, that would give me a similar holding to VTSAX. Any advice would be appreciated!
Thanks in advance,
– Jeff
You recommended this in an addendum:
~81% Large cap (an S&P 500 fund)
~6% Mid cap
~13% Small cap
So I’m leaning towards something like:
~81% VIIIX
~6% VEMPX
~13% VSMAX
Thanks for your question/comment.
As I said here: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213694
and here: https://jlcollinsnh.com/2015/10/07/personal-capital-and-how-to-unload-your-unwanted-stocks-and-funds/
I have been traveling in Ecuador for our annual Chautauquas: https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
If you are still tuned in and interested, please post your comment/questions again and I’ll try to help if I can.
best,
jlcollinsnh
8) When you can live off the dividends VTSAX provides you are financially free. Actually a bit sooner. VTSAX typically pays a dividend of ~2%. Sometimes this will be higher, sometimes lower. Anytime you can live off it you are financially independent. But when you can live off of 3-4% per year of your net worth you are also free.
Hi love your blog! I had a question on this part in your stock series. I just opened up a brokerage account with vanguard and plan on investing in the vtsax fund. I’m wondering what I should do with the dividends and capital gains option, reinvest or receive as cash? For tax efficiency purposes, would the best option be to reinvest during the wealth building stage and then change to cash out option later when I stop working? Thanks so much!!
Thanks for your question/comment.
As I said here: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213694
and here: https://jlcollinsnh.com/2015/10/07/personal-capital-and-how-to-unload-your-unwanted-stocks-and-funds/
I have been traveling in Ecuador for our annual Chautauquas: https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
If you are still tuned in and interested, please post your comment/questions again and I’ll try to help if I can.
best,
jlcollinsnh
Hi Jim,
First, I only recently discovered your site and have to tell you how much I truly enjoy it. You message of making the complex (and expensive), simple (and inexpensive) is truly refreshing. Love your advice to your daughter, as I have provided the same to my children. Made them read that post!
My question – former Federal employee – still in the workforce – but no longer with Fed. Have a reasonable chunk of money still riding with the Fed’s version of 401 k – called the Thrift Savings Plan (TSP – see http://www.tsp.gov). Plan is exceedingly cheap – averages .028% of assets under management. Not many investment choices – missing, for example – a total stock market fund. But you can invest in indexes of S&P 500, an international fund, small cap fund, couple bond funds (one just USG short-term bonds, another government and corporate bonds), and a few target retirement funds. Given my age (50), I’m targeting an asset allocation strategy of 80/20 stock/bond. I’ve toyed with moving the funds to Vanguard, but actually TSP’s expense ratios are lower than Vanguard’s. I’m not a big fan of bonds, but if the duration is kept short to intermediate, it can make for a smoother ride without the gut wrenching 2008 losses.
So, my question is – living within the fund choices I have in the TSP, how would you allocate a TSP account desiring an 80/20 split? Also, how do you feel about target retirement date funds, which shift your asset allocation to a more conservative stock/bond model as you retire?
Thanks Jim – please keep up the good work.
Best,
Ted
Welcome Ted…
Glad you found your way here and are already inflicting this site on your children. 🙂
TSP accounts, with their low ERs, are great things and are one of the few times I don’t recommend rolling into a Vanguard IRA after leaving employment.
I discuss them, and your questions, in this post: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
As for TRFs, here’s my take: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
I was reading your Pulling the 4% guide, and looked at my investments and am kind of worried I didn’t do my retirements correctly.
While my idea was to go somewhat around what you had, I made a couple of changes.
Mind you, I still have many years to retirement (mid 20’s), I just want to make sure I did this correctly.
Brokerage Acct-
– VTSAX- $50k
– VMBFX- $3k
Roth IRA Acct-
– VTIAX- $11k
Did I do something wrong and created a Brokerage account rather than an Traditional IRA?
Hi Anthony…
Nothing wrong with have investments in a taxable account.
However, depending on your income, tax-bracket and job situation, you could be saving money in taxes by using a 401(k) and/or IRA.
This post should help: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Mr. Collins,
I want to begin by thanking you for the great work you’re doing and I look forward to reading your new posts.
I was hoping you could offer some advice for my current situation that I believe may resonate with some of your readers.
Background:
I am 28 and married to a wonderful, likeminded woman (very important first step to FI). We both have graduate degrees and good paying jobs, but we also have graduate level debt. A couple other considerations that apply to us: we are planning on having our first child next year and we want to return to our home town in the next 3 years to raise our kids near family. While this move will lower some of our costs (such as housing and child care – thanks grandparents!), this move will also mean the end of our great paying jobs (we anticipate a 50% cut in income when we return home). With these parameters in place, here is our monthly breakdown:
Income: $18,000 pre tax
401K: $2,400
HSA: $550
Take home pay: approx. $9,200
Expenses:
Housing (rent, utilities, internet, ect): $1,350
Commuting costs: $350
Car payment: $533 wife’s car (I know… face punch. But, it’s a 4 year loan at 0%. Also, we have made some cuts in this department, I recently sold my motorcycle, and my next promotion comes with a company car so we will be able to sell my current car at that time).
Food/Entertainment: $600-$800
You should now be wondering “what the Hell is this 28 year old spending the remaining $6,000+ on every month!?”
Well, this where I would like some guidance.
We currently have $100,000 in student loans:
$45,000 at 6.8% – $750/month min
$7,500 at 5.9% – $180/month min
$22,500 at 5.6% – grace period
$25,000 at 5.4% – grace period
We currently pay:
$1,800/month to the 6.8% loan
$250/month to the 5.9% loan
$150/month to the 5.6% loan
$130/month to the 5.4% loan
Total monthly loan payment of $2,330
The remaining cash goes toward a couple items:
Home down payment savings: $2,000 (I know that a home is a terrible investment, but the rent to own ratio in our hometown is between 12-13 so it’s typically a better decision to purchase).
Stocks: $800-$1,000 (investing in 10 separate dividend paying stocks through DRiPs, DSPP, and Loyal3 to avoid fees and commissions)
Travel fund/emergency fund: $600-$800 (this is our catch all account for anything that’s leftover and we typically spend around $6,000/yr traveling. It’s one of our few indulgences and something we have decided to prioritize now since it is likely to be the first item on the chopping block once we have children).
Assets:
Cash: $17,000 in a high yield savings account 1.0% (this is for the home down payment)
401K: $40,000
Stocks: $8,000
2006 Cobalt: $4,000
Liabilities:
Student loans: $100,000 ranging in interest rates
2014 Subaru Forester: Owe $23,000 at 0%
My question:
We are keeping our expenses relatively low even with a stupid car payment (expenses are approximately 25% of our take home). If I were converting that remaining 75% into savings, I could have FI in 6.7 years per your handy chart. But, because of our student loans, that time horizon feels so much further out. Since we only have another 3 years of this income geyser before we head back home (again, for personal preferences beyond financial reasoning, it’s not an option to not return home), how should I be spending that $6,000+ of expendable income every month? Since FI before 50 is my goal, I have been focusing a lot of cash on taxable accounts, but now I’m wondering if I should max my 401K (good right now because of our high tax bracket) and try the Roth ladder approach instead. Also, we’ve been throwing a lot of cash at the student loans, but I’m not sure if this is the best strategy since long term stock market gains could give us an additional 2-3% return on those funds (one caveat, carrying a large monthly debt obligation will make it much harder to purchase a home later despite having a 20% down payment, and the bigger our monthly debt burden, the harder it is to absorb the major decrease in pay that is coming in a few years).
Any direction or corrections to our current plan would be greatly appreciated. And, again, thank you for the great posts.
Thanks!
Matt
One thing I forgot, we are also adding $635/month to a 529 plan that we will switch over to children once they are born (saving for their college is a high priority for our future kids, and we get a nice state tax break for these contributions. However, the same question remains, would these funds be better used somewhere else considering our limited time as high income earners).
You’re teasing me, right Matt?
Pulling my leg?
Yanking my chain?
This is a blog about achieving financial independence (FI). In my world, you have everything backwards. FI is so far down your list of priorities, nothing I can say will likely resonate with you.
But, as you suggest, it might with some of my readers who are interested in FI, so here goes:
—You have a royal mess on your hands.
—Until you have it straightened out, cling tightly to those high paying jobs.
—Until you have it straightened out, forget about quitting, having kids, moving, buying a house, $6000 in annual travel and hanging on to $533 car payments.
—$100,000 in debt at 5.4%-6.8% is a DEBT EMERGENCY!
—Take the $17,000 cash house fund and put it to your debt.
—Take all of your free cash flow and put it to your debt.
—Stop playing the loser’s game of picking individual stocks.
—Once your debt is gone, shift to investing in low-cost stock index funds and start building your wealth.
—Once you get that company car, get rid of the Subaru and the $533 payment.
—Keep the cheap car.
—Once you have made serious progress on building your wealth, you can SLOWLY begin to reintroduce some of those indulgences: Quitting, kids, car, travel, house.
—But not all at once. Rank them based on what is important to you.
—Keep your wealth building investments front and center.
Please understand, you are free to ignore all this and I strongly suspect you will. It is your life and I have no interest in trying to persuade anyone of anything.
But this is what I’d do.
Good luck.
Jim,
I appreciate the advice, and I anticipated the response. $100,000 in student loans is no joke, but we honestly ended up in better positions than most of our classmates (federal graduate school loans come with a heftier price tag than undergraduate loans despite the lower default rate and we each have classmates who graduated with $250,000+ in debt).
I understand your lean that I’m just another mindless consumerism drone with his fancy car payment and extravagant vacations, but I would argue that you’re only seeing part of the story. One of the great ironies of life is that when we have the most amount of adventure and fearlessness and wanderlust and energy is also the time in our lives when we are the poorest. My wife and I made the conscious decision that we want to spend our money on experiences while we have the opportunity (I’ve seen 3 continents and 13 countries in the last year alone and I wouldn’t trade those trips for being 1 year closer to FI). We don’t eat out, we don’t buy clothes, most of our furniture was free, and I lived without a cell phone until 2 years ago because I couldn’t justify the cost. Our money is spent on experiences not things.
Also, I hate the car payment, but it’s my wife’s from before we got married. I don’t know about you, but my wife doesn’t take kindly to me telling her to sell her new car and buy a 1999 Honda. So I’m stuck with it and I’m working around it.
With that said, I’m not a completely lost cause, and you have reopened my eyes to the debt emergency. You accept the loans because they are easy and convenient at the time, and when everyone else has a quarter of a million in student loans, my $50,000 for 2 years didn’t seem so bad. To this end, we have emptied most of the savings account and we now have around $85,000 in student loans remaining. Furthermore, I have paused my contributions to stocks and that money is now being funneled to the student loans. As an aside, I will probably continue investing part of my portfolio in individual stocks at a later time for 2 reasons: 1) I enjoy being actively involved in my portfolio. 2) I’m anti-fee (even the crazy low fees associated with index funds).
At this juncture, I have one clarifying question: Were you suggesting that until our student loan debt is paid off, I should stop investing in every account, including all the tax preferred accounts (401K, HSA, and 529), take the 28% tax hit, and focus on paying down the student loan debt first? Or, should I still max out the tax preferred accounts and then send the remaining funds to pay down the student loans (now close to $4,000/month with the above adjustments)?
I want to end with a closing comment regarding my situation. We have really wanted children for years but we kept postponing for financial reasons. The timing isn’t perfect but now feels like the right time to start for us. I still have the goal of FI in 15yrs (43yrs old), but my 3yr timeline to head back home to be with family to raise the children is more about accumulating enough F-U money that I have options. Maybe my first post should have had a preamble that I’m more interested in having the options that come from a good stash of F-U money instead true FI.
Thank you again for the previous response and thank you in advance for the answering the clarifying question above.
Matt
Hi Jim,
Hope your enjoyed your time in Ecuador. This is a reposting from Oct., sorry about that. I’m trying to get an opinion on what to do.
Recently my wife was laid off of her job after 18 years.. She has a chance of continuing to work for them but would have to move which we do not want to do at this time.
Anyway, we have 310K in a 401k, 170k in a pension which will pay approx, $1500 a month for 20 years starting at 65 years of age, and finally 70k in the government TSP.
At this time I thought about rolling everything over to Vanguard VTSAX in a IRA. The 401k is limited Vanguard funds, the annuity is something I’m not a fan of. I like the idea of having control of our money and being able to help the kids out later.
The TSP is 80% C and 20% S funds. And I’m just letting it sit there until 701/2 years of age.
My wife plans to retire at 66, but since losing her position her income and benefits have dropped dramatically. And who knows when she will be able to find permanent work. Regardless of what anyone says, when your in your late 50″s, jobs are harder to find.
Right now she’s working temp jobs on a regular basis. I retired after 32 years with the Federal government. I have some serious spine issues so I’m limited in what I can do.
Right now we have 300k in equity of a 400K home. My idea is to sell the home and buy something for cash, then use the money saved to continue to invest in the 401k.
It’s not going to be anyway near possible for my wife to get the same pay or benefits she was getting before. Were trying to be realistic at this point.
Once she reaches age 66, we will move to a more affordable city and closer to family. I have a pension of 30k per year, and my wife SS will be approx 27-30K per year.
Bottom line, is it a good idea to roll over everything to VSTAX, or because my wife is not investment savvy, I would consider using Betterment, which would make it maybe easier for her to understand and get help when I pass on.
My first and foremost concern is too make sure she will be ok. Thanks for your help.
Hi Tom…
Thanks for your patience in waiting for my return from Ecuador and for reposting.
Your situation is a great reminder to younger people: No matter how much you love your job today, things change and you need to prepare for the often uncertain future.
I’m a little unclear as to the details of your situation, so let me start by reviewing where I think you are.
—You don’t mention your ages, but I gather you are in your late 50s.
—You also don’t mention your annual spending.
—You have three coming pensions/SS revenue streams: Your Government pension of 30k, your wife’s of 27k and the 170k pension that will pay $1500 per month, 18k a year.
—Those all = $75,000 per year once you both are 65/66.
—You have 70k in your TSP account split 80/20 C/S which roughly = the total stock market index like VTSAX.
—You have 310k in an old 401k you plan to roll into an IRA with Vanguard invested in VTSAX, or into Betterment.
—You have 300k equity in a 400k house.
With this understanding, let me first answer your specific questions and then offer some additional thoughts.
Only you and your wife can decide if Betterment will make her life easier. Here is my take: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
But Betterment will cost more and a couple of simple investments at Vanguard should be fairly easy for her to deal with as well.
If you plan to hold the TSP accounts and add VTSAX in the IRA (both good ideas), once these are set up there is nothing more to do. Easy peasy.
But, since you are both no longer working, I would suggest you add some bonds (VBTLX) to smmoth the ride. This will help you decide: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
My other thoughts:
—As you suggest, finding new employment at 50+ can be a challenge. Unless she is fairly confident that she’ll be successful, you might consider that move to the lower cost city closer to family sooner rather than later. You’ll sell the house, lose the remaining mortgage and free up some capital.
—Maybe give the job search 6-12 months and if nothing comes together, make the move.
—Use your 310k and 70k and freed up house capital to bridge the gap (5-8 years?) between now and when those pensions/SS start rolling in.
—Pick up some extra cash with part-time work in your new location that hopefully you’d each enjoy.
Hope this helps!
Jim, Thanks for the quick reply. I’m 61, and my wife is 56. We roughly spend 30-33k a year for everything. Everything else mentioned is right on. It’s great to get another opinion that you can trust. Can’t tell you how many times one can second guess themselves. We are grateful for everything and don’t take anything for granted. Happy Holiday Season!
My pleasure, Tom…
Have a wonderful holiday season yourselves!
Book update?
When will it be available and what can you tell us about it?
I was hoping it would be released by now so I could send it as Xmas gifts to family and friends.
Thanks.
Thanks for your interest, Kevin!
Unfortunately for both of us, it won’t be out in time for Christmas.
I got burned out on the project over the summer, my editor entered a monastery and it has been sitting since then.
The good news is the manuscript is nearly done, but I gather there is a lot more to do after that before it gets published.
Sigh!
Hi, Mr. Collins
Hopefully your few weeks of traveling went well. I look forward to reading about them!
I’ve read all your posts, as well as all off MMM’s and bits and pieces of other recommended blogs and I can’t find a good enough answer to this nagging question. My feeling is that I can’t see the big picture and the answer will be an “ahhhh, of course” moment but maybe it’s as difficult as I make it out to be – the issue is that it’s such a niche thing and there’s not much advice that is specific enough for the situation.
My wife and I are both 24, and we have an energetic 7 month old (unplanned, but the light of our lives). We’re not aiming for financial independence ASAP; rather, my intent is to be able to walk away from my job in a little more than 15 years if I’m ready (I enjoy what I do yet I find myself longing for more freedom to pursue various interests.
We have a little over $53,000 in gross income. I’m working and anticipate some degree of a raise with the next year or two. My wife is in school full time.
We contribute to our 401(k) (Vanguard) up to the company match and will be putting a small amount of money into a HSA starting next year (the company contributes $2,000 a year into the HSA regardless of our contribution!). We also have a 529 plan (also through Vanguard) for our son which we contribute to when we can.
We have just over $28,000 in debt split among a credit card, a car loan, and some private student loans. The credit card will be paid off by January . We owe somewhere around $7,200 on the car at 4.7% and just under $20,000 on the student loans at a net 4.3%. We make extra payments on each loan because I just don’t like the feeling of debt
We’re currently renting an apartment which is exactly halfway between work and school but are seeking something a little less expensive with some more room. All in all, we have a small but positive monthly cashflow that is currently going to short term (yet necessary) significant expenses. In a few months the cashflow will be freed up.
Here’s my conundrum:
My wife had a trust fund opened in her name a long time ago, when she was about 2 years old. Its intent was to only be used for education expenses until she turned 21 at which point it would be shifted from custodial control to her name. At one point, it held somewhere over $120,000 in assets, maybe more. As I write this, it currently holds between $35,000 and $40,000 in very conservative assets. A large part of the fund is composed of municipal bonds. The rest is in dividend earning equities and some miscellaneous funds. Since I have no access to it and we only receive quarterly statements, it’s hard to nail down the exact composition.
Last year, her trust earned about a 6.5% interest rate (yuck) and has roughly 1.5% in fees (yuck yuck). It’s set up to reinvest any dividend income so it’s grown moderately despite the lackluster performance. The silver lining was that many of the assets sold when money was withdrawn were municipal bonds, so the amount of taxes we paid were very low.
This fund is what finances her education, which she has at most 2 more years of. It also has financed many large expenses (for example – medical bills related to her pregnancy). We both fully intend to eventually transfer it to our own control but don’t know when.
Here’s my question – would it be wiser to empty the fund, pay off our debt, and move it into a Vanguard account as soon as possible, or wait until she graduates? Or similarly should we empty it ASAP and move it all to a Vanguard account, keeping enough for her education and paying off our debt faster but not immediately?
We have a plan to have our debt paid off within 3 years but we’re itching to buy a house (we’re at that roots point of life) so it could also be used as a down payment towards a house.
I can go into more detail if you need, but from where I stand, this is a huge grey area. The way I see it, we’re not in a situation where we NEED the funds, but I don’t want to miss out on an opportunity to maximize their use. Our 5 year plan simply involves paying off our debt, buying a house, and investing anything extra.
Your thoughts are very much appreciated.
Thanks!
-John
Hi John…
I’m afraid I don’t have any definitive answers for you, but here are some things that occur to me:
—If custodial control has been shifted into your wife’s name, she should have complete access to a list of what investments are held in the trust.
—You’ll want to determine what advantages there are, if any, to keeping these investments in the trust. The company that holds the trust should be able to help.
—Once you know what the investments are, you’ll want to evaluate them and decide if these are still what you want to hold.
—You’ll want to understand and consider the tax implications of any changes.
—As for your debt, here is my take: https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
Hope this helps get you started.
Hi Jim – hope the travels went well.
Stumbled across your site tonight and have been going through a ton of your posts. Great stuff and really helpful. Read a lot of MMM when I found it about a year ago.
I know that you aren’t holding yourself out as an investment advisor and it seems you’ve answered a millions comments – as is evidnet on this page – so thanks for being a great resource.
With that said, just wanted to shoot you a couple questions – hopefully in the most simple manner I can.
One – I saw in a post of yours a link to Wealthfront. Are you a proponent of Wealthfront? If yes, why?
Second – and it’s a little longer with some specific detail peppered in –
I have $13,002, to be specific, of liquid assets AND $12,727 of student debt at 6.8% (this is the only debt I have in life, no CC, no car, etc.) I make $46,000 annually plus a $20,00 bonus contingent upon performance.
As of this moment and specifically after reading your posts I’m a little torn over what to do. I have been looking at purchasing a condo/ townhome over the past couple months and using my liquid assets as a down payment. Do you suggest I continue down the purchase path – parents keep telling me that it’s a great investment – OR – do you suggest I invest that large chunk of cash in index funds – possibly Wealthfront? Or maybe there is way to purchase and invest – I assume the simple answer here is more time and more money ha?
If I spend all that chunk of cash on the down payment it will be some time before I have a good amount of money to invest.
Anyways, thanks in advance for any response! Much appreciated.
Thanks Kyle…
Ecuador and the Chautauquas were exhilarating and exhausting. I’m still in recovery. 🙂
https://jlcollinsnh.com/2015/03/12/chautauqua-october-2015-times-two/
Welcome and I’m glad you found your way here.
OK…
1. I haven’t written about Wealthfront and haven’t looked into its services. My understanding is it is a close competitor to Betterment so perhaps my take on it might help: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Overall, if you read my stock series and are comfortable with the concepts, my preference would be index funds at Vanguard.
2. I would focus on getting rid of that debt. 6.8% is huge.
https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
I would also urge you to go slowly on buying a condo:
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
At least run the numbers first: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Good luck!
Thanks for the quick reply, Jim!
Rest assured I’ll be reading all those links, so thanks for answering anything that you may have already answered before on here!
My pleasure Kyle…
Hope the links help!
Hi Jim –
I was hoping you could help me with a question I have pertaining to 4% SWR.
For what it is worth – I have recommended your site to a number of folks in my life and to say the least- it is positively impacting ALL of them:) Greatly appreciate all your articles and advice on the site – “game changer!
I read the research paper titled “portfolio success rates: where to draw the line” – quite interesting.
The various graphs highlighting various SWR %’s and their success rates is where my question lies….
Question –
If I retire today with a portfolio value of $2 million dollars and I withdraw 4% a year that equals $80,000 a year
What happens if my portfolio drops to $1 million dollars the following year? – (assume 100% is invested in stocks)
Do I continue to withdraw $80,000 or do I now withdraw 4% of the $1 million dollars which would be $40,000?
I do not clearly understand based on the SWR Tables if the dollar withdrawal amount stays the same or varies – based on the portfolio value at the time of the withdrawal
A co-worker thought – the charts in the research article – were based off the initial withdrawal amount staying Fixed – regardless of the value of the portfolio – over the stated period of time— If this is the case – then a portfolio can go up and down in value but your dollar amount you withdraw can stay fixed at the initial dollar amount first withdrawn at the start of retirement –
I hope I am communicating my question clearly –
thanks for your time
Chris
Hi Chris….
The 4% SWR originated in the Trinity Study which I discuss in some depth here:
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
The researchers looked at a variety of withdrawal rates and allocations, running them over 30 year periods both adjusting the annual withdrawal for inflation and not adjusting.
4% adjusted annually for inflation was found to work 96% of the time. You could set it and forget it and you’d be fine.
If you followed the “4% rule” in your example you would continue to pull the 80k and adjust it upward each year for inflation.
However, a portfolio that got cut in half the first year would very likely not survive 4% withdrawals over 30 years. It would fall into the unfortunate 4% of times that failed.
While a solid guideline, the 4% rule should not be followed blindly. It is a place to start, but flexibility is the only real security. As I discuss here: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Thanks for passing the site along!
Hi Mr. Collins,
It’s so good to have you back and laboring on the blog again! I have a tax-related question and hope to hear what you think.
I’ve decided to sell my rental property which has doubled its value since I bought it in 2011 (crazy area that I live in!), but wonder if I can take full advantage of the mortgage interest tax deduction by making a much larger mortgage payment before the sale?
It seems like a tax gimmick to me, but also perfectly legal after some google research. You are way knowledgeable in our depressingly convoluted tax rules, and mentioned in previous posts that you volunteer with VITA each year, so I’m really hoping to hear your thoughts on my tax loophole “scheme”. Thanks again for keeping up this wonderful, sometimes life-changing blog!
Hi Jian…
Always a pleasure to hear from you!
I think your question actually has more to do with how mortgages work than taxes.
Any mortgage interest paid is deductible in the year you pay it, assuming you itemize your deductions.
But if you pay extra on your mortgage, that money would go to paying down your principle. But you wouldn’t owe any more interest with the extra payment, so nothing deductible would happen. Just like when you sell and pay off the mortgage, interest stops accruing.
This is really not an area of expertise for me, but that’s my take!
Hope it helps!
Dear sir,
You are right, again and of course. I actually knew extra payments would count against principle rather than interests; somehow, wishful thinking came over me! 🙂
In my defense, lots have happened and I just made “the leap” of getting myself unemployed LOL. Now selling the condo, debating where to travel to in my new found freedom, what volunteer work/”do-gooder” stuff I can attempt, …, it’s all a bit too much to handle at once. Anyways, that’s my excuse for coming up with stupid schemes!
Again, I can’t thank you enough for this blog and your always cool-headed advice. I can’t say I’d never have done it without your wonderful blog, but am sure it would have taken me much longer and more detours. So, thank you again from my heart!!
Dear Mr. Collins,
I’ve been meaning to write and tell you my small victory, while still basking in the afterglow of saying goodbye to the 9-to-5 life :).
There’s nothing extraordinary here, just a somewhat independent and contrarian disposition, distaste for wastefulness and mindless consumption, a few lucky breaks, plus wise advice from bloggers like you and MMM.
The only thing that might stand out is I’m an immigrant who only came to the US in my late 20s. After getting an MBA, I worked as a software engineer/project manager for 12 years at rather modest salary (under $100k/year, VERY modest by Bay Area standard :D). Took a break for a year and half, then came back and worked another 2 years.
Basically after ~15 years of working decent but not really high-paying jobs, I’ve accumulated enough (according to the 4% rule) to no longer having to depend on regular pay checks. I didn’t even save that hard to be honest, with the biggest savings being maxing out 401k contributions. Also made plenty of mistakes along the way, picking individual stocks, buying a brand new VW sedan AND a 3-bedroom 2.5 -bath townhouse (all for one-person household!).
If I, overall a pretty average person, can do it, everyone can if they choose to. Everyone who’s got a decent education, average intelligence, and a bit of luck, that is.
Of course I’m also a bit terrified! The stock market is very much over-valued, so is my net worth naturally. But obviously I’m not going to be dogmatic about the 4% rule and will adapt. I could always free-lance for supplemental income. There are a few ideas I’ve been tossing around in my head that have to do with promoting local businesses, building communities, etc., etc. Geographic arbitrage will also play a role.
Anyways, I’m probably in a too excited state to write intelligently; except that I truly want to thank you for your excellent blog, your unfailing patience and sage advice! It’s rather lonely to be financially intelligent, oddly enough, as the Bay Area is full of super smart people. I’m so glad I can always count on you, MMM, GCC, and Mad Fientist for a sense of community and fellowship. So thank you again and looking forward to your next post.
Yours ever-grateful,
Jian
Hi Jian…
Anybody referring to my “excellent blog, unfailing patience and sage advice” is clearly writing intelligently. 😉
Congratulations on reaching FI! I’m deeply honored to hear my blog has played some small roll.
Well played.
Well deserved.
You are right: Financial intelligence is rare and the path to FI is lonely. That fact is always brought home to me at our Chautauquas where attendees invariably report that the best part is finally being sounded by like-minded people.
Enjoy your new found freedom!
Warm Regards
Dear Mr. Collins,
Happy New Year! Thought I’d send in a quick update about my life post-FI :).
So partly a bit worried I’d get lazy with too much time on hand, partly as a challenge to myself, I decided to ride my newly acquired secondhand bicycle from SF to San Diego, in mid December, 3 weeks after quitting the day job. I’m always a bit fanciful about doing something slightly crazy like that, and tend to think such things can’t be that hard. So I thought I’d just roughly follow Highway 1, and how bad/hard could it be?! In a way, under-preparing and under appreciating the challenges worked out in this case, coz if I did my research properly and thought through all potential risks and difficulties, I might not even get started!
Long story short, I did it, with some dumb luck of someone new to long distance cycling; and it was the BEST ever road trip I’ve done! It was so exhausting and exhilarating grinding up the hills then flying down along Big Sur coast! I hardly have the words for that experience and how I felt while in the middle of it. I have always been someone who lives more in their head than in the real world, if that makes sense? Riding the PCH (pacific coast highway, what’d you know there’s actually a book about it called “Bicycling the Pacific Coast Highway”!) was the most physical thing I’ve done! Also the beauty I saw and the closeness to nature I felt while on a bicycle was so much more intense than merely driving through.
Now all fears of living an idle life and squandering my good luck and good fortune have been buried. I know what I’m capable of, both physically and mentally, and what kind of endeavors bring me real joy and satisfaction. Again I feel so insanely lucky and joyful that I had to share it, as I’ve been thinking of you as a mentor.
Thank you again for this wonderful blog that has provided so much help and encouragement to me and others, and wish you a healthy and joyful 2016!
Hey Jian…
Great to hear from you and, Congratulations!
I did some bicycle touring (way) back in the day and loved it. Is there more in your future?
Thanks for posting this Ask jlc. It is inspirational and a good antidote to all the fear people have around FI and early retirement.
Here’s to many more exciting adventures in 2016!
Thanks and good to know you used to cycle around too! And yes, I’m totally going to do more cycling trips in the US, and in Europe as well.
In fact, I’ve always wanted to see fall colors in New England, and am planning to do just that, on my bicycle, later this year! Would love some cycling tour tips around there, things like is mid October a good time for fall leaves? Are there good bike paths, sharing roads with cars, hostels/B&Bs, places of good food, things to see, etc., etc..
mid October should be great timing, but since I don’t bicycle around here I’ll not be much help otherwise.
Hi Jim Collins ~
As slightly older parents of a four year old, I am wondering how best to set the child up for her future. You’ve done well writing about your experience(s) in posts about your daughter (regardless of the misleading titles) and I am looking for your thoughts.
I’ve gleaned more useful information from you that it is a ‘given’ when I have a question, I check your blog (and MMM, GCC, MF, as well). Thank you, in advance, for being such an incredibly kind, patient and pleasant voice of genuine concern when it comes to financial matters.
Our Background:
I am self-employed & my wife is part of the company (and a stay-at-home mother). We are each funding our SD401K (index funds), receive profit sharing from the company and contribute to our Family HSA. We each have a ROTH account – many years old, and without much in them. We “might” be able to contribute to these, however we may be ineligible (yet to be determined, for certain).
We save 50 to 70% of our income monthly, and are fortunate enough to do so. This is the first year of being this “savings / investment aggressive” for us, and we feel that we can maintain these goals, all things considered.
My wife & I have worked diligently to get to where we are – and we want to instill this work ethic in our little one. We do expect that our child will have to work / struggle to fund some of her own education – however, we also want to allow her the freedom to pursue her interests.
With that said, I want to begin saving for my child, and would appreciate your suggestions. I’d like to start her path to FIRE, as well as start contributing toward her college savings. Presently, I don’t know if she will want to go to college, but it seems a wise & prudent plan to save for such, regardless.
The 529 plans have limitations as to what can be done with the monies if she chooses to forego higher education – this makes me a bit nervous. We don’t have other children, nor other “qualified individuals” to give / gift this to – and neither my wife nor I will attend college again. (Tax rate + 10% penalties on withdrawals IF not used for purpose).
I would consider a trust, if that would be a better choice? (I am not sure what the rules / tax regulations are surrounding this idea).
You have “F-You” monies set up for your child – what did you do / set up for her? What would your plan be today, if you were doing this again? The same? Something different? If so…what?
Much like you, I’ve been blessed with a little gift from God: I want to make sure I do right.
Thank You,
Todd
Hi Todd…
Well, that’s a HUGE question. 🙂
It sounds like you are in a very similar situation as we were: Namely our child was born after we’d reached FI and so missed out on witnessing the effort it took. Kids, of course, learn by example.
One of the key factors in success is having grit. And just this week I finally came across this short Ted Talk that supports my opinion on this: https://www.ted.com/talks/angela_lee_duckworth_the_key_to_success_grit#t-173597
My wife and I came by our grit by facing some tough times when we were young. So the question becomes, how do we instill grit into our children who, because of our success, won’t have the benefit of their own tough times?
For that matter, is it even possible to instill grit?
Now 23, she seems to have a fair share and her current life in the Peace Corp is testing it well.
I’m not sure how much any of this helped (how your kid turns out is at least in part due to the genetic lottery), but here’s some of what we did:
—Living modestly and below our means she never really grew up “rich”
—While we lived in a fairly wealthy town (for the school system) we never indulged her by buying brand name, fashionable stuff.
—Unlike many of her friends, she didn’t get a car for her 16th birthday. (although we allowed her fairly liberal use of the family car)
—While we paid for her college (tuition, books, room & board) she had to work for any extras (clothes, entertainment). She was a waitress.
So, not as tough as we had it, but much tougher than many of her peers.
Once she started working, each year I funded a Roth IRA for her.
Like you, I’m not a fan of 529 plans and never used one.
Trusts have always struck me as overly complex and expensive. Maybe if you come to see your child as immature and irresponsible the complexity and expense might be worth it. But fortunately, we don’t have that problem.
In the end, the best you can do is to love them and guide them and hope they use the benefits you are able to provide to become (rather than weaker) stronger and more successful.
And, yes, I’d do it pretty much the same way if I had it to do over.
Hope this helps!
Hi there Todd,
I was reading your question to my dad, as well as his response, and I thought I could add a bit from my own experience.
While I can’t give you details behind his mastermind plans (only he knows what’s going on in his brain), I can share a bit about how he and my mom taught me about money.
When I was very little, my parents started giving me an allowance. I don’t remember exactly how old I was, or how much it was, but for as long as I can remember, they gave me an allowance, until I started working.
Anyways, when I received my allowance, my parents always encouraged me to divide my allowance into three parts: a college fund, savings and personal use. When I was very young, my parents told me how much to put in each, but once I got a bit older (maybe around middle school?) they started leaving the choice up to me. I would also do this with birthday money and Christmas money.
Now I will admit (and I ofter joke with my dad about this), at a young age I did not really understand this concept. Let’s say my allowance was $1. I would put 25cents into my college fund and 25cents to my savings, so I would have 50cents for myself to spend. At the time, I didn’t realize what I was doing. I just thought I had 50cents and the other 50cents disappeared and I would never see it again.
Eventually, I began to understand what I was actually doing with my money was investing it in my future. Yes, I went years not understanding why my parents would give me an allowance, only to take half of it away. But, by the time all this clicked, I was already in the habit of putting money aside. I was in the habit of saving. Even while I’m here in the PeaceCorps, making no money, I am still putting aside money from my tiny monthly allowance every month, in hopes of saving even a small amount while here.
Another thing my parents would do with me while I was growing up, was they would sit with me and go over my finances. I know, sounds really intense, especially for a little girl (and it was- I hated these talks!). We would sit at the kitchen table and go over my money: how much I had saved, and how much I had personally to spend. When I was old enough to have a bank account, we would go over my bank statements as well. We would discuss what I had spent my money on. They never lectured me on how to spend my money but just talking about it brought to my attention what I was spending money on and how much. Over time, this helped me prioritize what I value and would prefer to spend money on.
My parents also kept me very involved in my own finances. When it was time to open a bank account, my dad took me to the bank, where I talked to the nice bank lady about my options. Of course I didn’t make the decision on my own, but being involved helped me feel more in control of my finances.
Sorry to ramble on, just wanted to share my side! I think as long as you keep your child involved in their own finances (whatever that may look like), then they will be ok. They may not enjoy it and they may push against it ( I know I did!) but they will come around. It’s better to start them young and have to kind of force them; at least when they realize it’s importance, they will be prepared with the necessary tools.
I think the thing that made understanding money so difficult for me, was that, in order to understand money, one must have life experience. Most little kids don’t have life experience. However, it’s once those life experiences start to come, that thinks will start to clink into place. And although they may not understand right away, they will remember.
Hope this helps! 🙂
I have read about Vanguard being at risk of losing upcoming state and federal lawsuits about its tax-free status. Vanguard would then owe billions in back taxes. I assume the expense ratio for the funds would skyrocket. What will happen immediately to the value of Vanguard ETFs if Vanguard loses these lawsuits? Are the ETF values tied to the market, or can Vanguard choose to devalue its ETFs in order to raise money to pay back taxes?
If the value of my Vanguard ETFs is at risk, should I sell out before the lawsuits are decided?
Hi Chris…
Thanks for bring this to my attention.
So everyone else is up to speed, here is the article:
http://www.newsweek.com/vanguard-whistleblower-tax-dodge-complaint-400901
I reached out to my Vanguard contact and here is her response:
“Hi James.
“I understand why your readers are concerned about the highly speculative Newsweek article. We have not issued a public statement on the article, but let me give you some background so that you can get your arms around the issue.
“First, the New York Supreme Court dismissed the suit in question last month. The Court agreed with Vanguard’s position that the former employee violated attorney-client privilege and New York state ethics rules in bringing the claim. We are not aware of any other lawsuits on these issues.
“Second, there have been many inaccuracies in news accounts on this matter and pure conjecture about payments and the potential for rising expense ratios. The tax payment we have paid to Texas—the result of a routine, unrelated audit—will not change any fund’s expense ratio or performance, nor the account balance or tax obligation of any client.
“The Newsweek article also speculates about the potential for higher fees for Vanguard clients. Given our strong cash inflows and solid financial markets, we expect to continue to lower the cost of investing for our clients.
“Finally, we remain confident in our approach to paying our fair and appropriate amount of taxes.
“Let me know if you or your readers have further questions.”
Here’s my take:
This sounds to me like a despicable money grab on the part of this “whistleblower” and the idea of punishing a company (Vanguard) for doing right by their customers is outrageous. I would have been stunned if this suit had been successful.
But even if it had, the worst outcome I can imagine is that Vanguard would be forced to raise their expense ratios to the level of the rest of the other fund companies. Initially this cash flow would be used to pay any back taxes and penalties. After that it would flow back to us shareholders as thru our funds we are the owners of Vanguard.
https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
This might then be taxable income to us which, while not ideal, is hardly the end of the world. 😉
In short, even in the worst case scenario (which is not happening), there is nothing here that would cause me to sell.
Hope this helps!
Hi Jim,
I just recently came across your site. Thank you very much for all the information, guides, and lessons you have provided. I’ll preface these questions by saying I have read some, but not all your articles just yet, and I was eager to reach out to you directly for answers:
1) Why are the expense ratios of VTI lower than VTSMX, but equal to VTSAX? As I understand the holdings of the funds are identical, so should I choose VTI over VTSMX until I hit the Admiral threshold?
2) Can you elaborate on the statement below? I was surprised to read that a 20% bond holding has outperformed 100% stocks. Is the caveat here “some studies?”
“Adding bonds will serve to smooth the ride and, if you are conscientious about rebalancing, will give you the chance to buy low and sell high with the stocks. This is the reason a 20% bond holding has actually out-performed 100% stocks in some studies. But it takes a bit of extra effort.”
3) Are you a proponent of traditional IRA over Roth IRA today after MF’s IRA article highlighting the opportunity to convert traditional IRA to Roth IRA for early retirees? As a 29 year old in the 28% federal tax bracket expecting to retire in a lower income bracket this would help alleviate any doubt I have about continuing to go traditional or also add a Roth IRA.
4) If I maximize my 401K contributions of $18K and make a $5.5K traditional IRA contribution would I still be able to take the full $5.5K tax deductible? My AGI is over $70K. I would like some confirmation on this if possible!
Thanks again!l Looking forward to hearing back and continuing to learn from your teachings!
R,
Brandon
Welcome Brandon….
1. Beats me. However, if you start with VTI and then sell to move to VTSAX it will be a taxable event. Better to start with VTSMX. When you reach the 10k level needed for VTSAX you can roll into it with no tax issues. Or just stick with VTI once you start.
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
2. Not sure how to elaborate on that. It is as clear as I can make it. Sometimes 100% stocks will outperform, sometimes adding it a bit of bonds will.
3. Yes.
https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
4. Yes. See Addendum 3 in the first link above.
Keep reading. It is always better to get these answers in context. 😉
Hi Jim,
So sorry, but your answer to Brandon’s question 4 confused me. If Brandon’s single, wouldn’t he be exceeding the income limit for contributing to both a T IRA and the 401k? Or am I misunderstanding and the 18k is subtracted from his salary for this calculation, making him eligible after all, or is it understood that if he’s married he still qualifies for both?
I ask partially for myself, as my understanding was that at my salary of >85k ( single), I could fill my 401k and a Roth, but not a T-IRA.
Thanks for your help!! I have been devouring your QA section over the course of many long flights recently….
Tracy
Hi Tracy…
Very possibly, which is why I referred him to Addendum #3 in the post in that first link.
It will allow you to check on your own situation as well.
Could you describe how you set this up and continued to fund it? I’m considering doing something similar for my 20-something son and daughter. And wondering if there is a better mechanism than handing them a check and hoping. Obviously there has to be some trust that it will happen as they could just withdraw the money anyway. It would be nice though, if the money ended up in the correct place without much effort and coordination.
Hi John…
It’s been a while and I don’t entirely remember the mechanics of it. But you can call Vanguard, tell them what you want to do and they’ll walk you thru it. You’ll want your kids there as it will be their accounts that are being opened.
Once it is in their Roth it is their money and they can do with it as they chose. If I thought she’d do something other than hold it for the long term investment it is meant to be I wouldn’t have funded it.
Now I just put the money in her bank account each year, tell her and she moves it to her Vanguard Roth.
Hey Jim–
(Sorry for the public post. Didn’t see a way to email you here.)
We recently mentioned you on our blog at https://jlcollinsnh.com/about/since we loved the story of having f-you money. Appreciated your call.
Would you ever be interested in coming on our podcast? I know our community of Scavengers would love to listen to your ideas.
Jay (TheScavengerLife@gmail.com)
Welcome Jay…
I very much enjoyed your podcast this morning and your reference to F-you Money and my journey.
For some reason the link in your comment is broken, but for my readers who are interested here it is: http://www.scavengerlife.com/2015/12/scavenger-life-episode-231-freedom-is.html
I’d be honored to be a guest on the podcast and I’ll shoot you an email.
Perhaps, in turn, you’d consider a guest post here? I think my readers would very much enjoy your story and learning more about Ebay.
Hello Mr. Collins,
I have 50,000 dollars that I would like to invest. After reading through your stock series I would like to invest this money in the VTSAX fund. I am not sure if I should initially invest 10,000 dollars meeting the minimum requirement for Admiral Shares and divide the remaining 40,000 to be transferred on a weekly basis through out 2016. Would it be wiser to buy 50,000 dollars worth of the Admirals shares or is it better to buy stocks in increments throughout the year?
Thank you for the incredible information you have posted on this site, it has given me the courage to finally start investing.
The best to you and your family
RA
Hi RA…
I’ve written an entire post about exactly that: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
The best to you and yours as well.
Hey jlcollinsnh,
I’ve been following your blog for a few years now after first being introduced to it by Mr. Money Mustache and, as a result, I have achieved a six-figure investment portfolio and net worth using your advice.
I’m creating an expert roundup post for my blog, hahnakane.com. My mission is to interview financially successful people and share their knowledge with college-educated millennials to help them master their money, so that they can achieve the lifestyle they truly desire. I would love to include your insights on the following topic:
What was one major limiting belief that hindered your success with investing and how did you overcome it?
There’s no maximum limitation on the length of your answer, but a minimum of 50–100 words on this topic would be fantastic.
Several influential bloggers have also contributed like Financial Samurai, Healthy Wealthy Income, Money After Graduation and many others!
Deadline for submissions is December 19th, 2015 – hope you are able to participate.
Feel free to email me further at hahnakane@gmail.com.
Keep being awesome!
Cheers,
Hahna
Hi Hahna…
Welcome and congratulations on the the six-figure portfolio. At that level the compounding magic really starts to produce amazing results.
I’m pleased to hear this blog played a role in your success and honored that you’d ask me to participate in your round up post. Thanks! 🙂
Here’s my response so my readers here can also see it:
The one major limiting investing belief that hindered my financial success…
Hands down: The time it took me discover the concept of index investing and the embarrassing long time it took me to accept it.
Somewhat ironically, Jack Bogle launched the first index fund (The S&P 500 Index Fund) in 1976, just a year after I started investing. How much wonderfully easier and more profitable my investing life would have been had I learned about it right away and been wise enough to embrace it.
I didn’t and I wasn’t.
It took ten years before I heard of Bogle and index investing. By then I had been seduced by the concept of being able to pick individual stocks and/or star fund managers who could.
Because I was reasonably successful (and in fact achieved financial independence by 1989) doing this, I was very slow to really examine the research. It is not, after all, that you can’t make money picking stocks and fund managers. It is that indexing is far easier and far more powerful.
To this day I cringe when people intending to compliment me say my blog and its tilt toward indexing are a great option for beginners and those not willing to learn how to invest. Rubbish. It is a great option for those who want the best possible results.
But it took me another ~15 years to finally embrace it. Why? Well besides the fact I was getting good if not optimal results without it, I think there is a lot of psychology behind it:
1. It is very hard for smart people to accept that they can’t outperform an Index that simply buys everything. It seems it should be so easy to spot the good companies and avoid the bad.
But the research over the decades in comprehensive and clear: It’s not.
This was my personal hangup and I wasted years and many $$$ in the pursuit of out-performance.
2. To buy the Index is to accept “average.” People have trouble seeing themselves or anything in their life as average.
But in this context “average” is not in the middle, it is the combined performance of the all the stocks in an index. Professional managers are measured against how well they do against this return. It’s a very tough benchmark.
In any given year – and of course this varies year to year – ~80% of actively managed funds underperform their index. Go out 15+ years and the percent who do is vanishingly small.
This means just buying the index guarantees you’ll be in the top performance tier. Year after year. Not bad for accepting “average.” I can live (and prosper) with that kind of “average.”
3) The financial media is filled with seductive stories of individuals and pros who have outperformed the index for a year or two or three. Or in the rare case, like Warren Buffett, who has done it over time. (I cringe at the often touted suggestion to just do what Buffet does. He is famous precisely because he has done something excitedly rare.)
But investing is a long term game. You’ll have no better luck picking and switching winning managers than winning stocks over the decades.
4) People underestimate the drag of costs to investing. 1 or 1.5 or 2 percent seems so low, especially in a good year. But such fees are a devil’s ball & chain on your wealth. As Jack Bogle says, performance comes and goes. Expenses are always there.
5) People want quick results. They want to brag about their stock that tripled or their fund that beat the S&P. Letting an Index work its magic over the years isn’t very exciting. It is only very profitable.
6) People want exciting. Heck, I’ve even admitted to playing with individual stocks with a (very) small fraction of my money. But I let the Indexes do the heavy lifting and they are the ones that build my F-you Money. https://jlcollinsnh.com/2011/06/06/why-you-need-f-you-money/
7) Finally, and perhaps most influential, there is a huge business (Wall Street) dedicated to selling advice and brokering trades to people who believe they can outperform. Money managers, mutual fund companies, financial advisers, stock analysts, newsletters, blogs, brokers all want their hand in your pocket. Billions are at stake and the drum beat marketing the idea of out-performance is relentless. In short we are brainwashed.
Indexing threatens the huge fees they can collect enabling your belief and effort in the vanishingly difficult quest for the alluring siren of out-performance.
My advice: Use The Index and keep what is yours.
For more: https://jlcollinsnh.com/2012/01/06/index-funds/
I came across your site a week ago and have been very interested. My husband and I are in our early 30s and while we have been fairly good at saving money however we haven’t been good at investing. We each do around 10% in 401k, currently rent a home but we are looking to buy to get into a better school system, and have around 80k just sitting in a savings account earning nothing. My question to you is do we need to up our contribution to our 401k and put some savings into a vanguard stock account in this market? And open up a Roth Ira? How much should we put into the vanguard stock account since 80k is the only liquid money we have? No debt. Thanks so much. I am trying to learn and become Better at managing our money.
Hi Emmy…
and welcome. I’m glad you found your way here.
Your questions cover a lot of ground. Most are best answered with some context, so let me suggest that your first give the Stock Series a read: https://jlcollinsnh.com/stock-series/
You might also want to take a look at some of my posts on homeownership: https://jlcollinsnh.com/category/real-estate-2/
Especially this one: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
As you read thru this, your questions will be answered and you’ll better understand the “why” behind those answers. 😉
Jim, welcome back from Ecuador!
I had a question for you. I’m a fairly high net worth investor relative to my age. 39 years old, $5m net worth including home (no mortgage). I have the FU number but I’m working… I make a nice income, have good upside with employer on bonuses, stock, so no urgency to walk away from that just yet.
I am trying to determine an optimal asset allocation.
I keep gravitating towards one of your original asset allocation models before you “stepped away from REITs” – 50% stock, 20% bond, 25% real estate/REITS, 5% cash. I feel this way because it’s focused on wealth preservation and is more diversified than a stock/bond portfolio.
When you think about a portfolio like this, would you INCLUDE value of the home in your asset calculations, or just use the liquid portion? I seem to remember you saying include the house. I am just wondering why, since REITs are a more productive asset in terms of appreciation and dividends.
The downside of excluding the house and putting 25% into REITs means you are heavy in real estate from a total asset allocation perspective (REITs + home).
Thoughts?
Thanks so much for all you do! Huge fan.
Thanks Eric….
I’m almost recovered from the trip! 🙂
For my other readers, here’s that post on stepping away from REITs: https://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
When I owned REITs and a house, I chose to include both in calculating the real estate portion of my allocation. Unless you chose not to include your house in calculating your total net worth, this seems to me to be the most useful approach.
To ignore the house in either the net worth or allocation calculations would, in my view, give an incomplete result.
If you want to consider only your liquid assets, it is easy enough to run the numbers showing only those as well.
Hope this helps!
Hi Jim,
A year ago, I came across your website and it has helped me get into investing. You helped me answer a few of my questions regarding selecting the right fund for my wife and my 401k.
Today, I have another question and this is about what to do with 401k or 403b in my case when you change a job. Most of the initial reading that I have done tell you to roll over to an IRA.
I wanted your input in this, as I have to make a decision quickly in the next couple of days. Do I roll over to my current employee who has a S&P 500 index fund, or should I roll over to Vanguard where I have my taxable accounts as well as a Roth IRA, if i cool over to Vanguard should I do a Roth roll over or traditional role over.
Thanks,
Sid
HI Sid…
In most cases I’d roll an old 401(k) plan over into my IRA for two reasons:
1. More control
2. To completely remove the old employer from the mix
That said, there are two exceptions:
1. The 401(k) plan offers Institution Shares versions of Vanguard’s Index funds which have even lower ERs (expense ratios)
2. The plan is a government TSP plan. These also have exceptionally low ERs.
If you roll a 401(k) into a Roth IRA it is a taxable event, unless it is a Roth 401(k)
More: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
The exceptions that you pointed out does not apply here, so I guess rolling into my IRA is the choice. Now just to confirm this will have a yearly contribution limit of $5500 correct?
You can roll the full amount of your 401(k), but then additional annual contributions are limited to $5500, $6500 over age 50.
There are also income restrictions: https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
Also see: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Hi Jim,
Instead of creating a new comment, I thought I would continue here. I am about to move my old 403b to vanguard and rollover over my 403b to IRA as we had discussed and you suggested. However, the recent downturn of the market has made me think and I wanted to get your thoughts on it.
I have my 403b with metlife through my previous employer and the last balance in December was about $30,000 and now today when I checked my metlife account the balance is down to $27,000 and some change, this is due to the market. I have just one fund which is the fidelity Spartan 500 index fund FUSEX and the ER is 0.10 (low cost funs again which you had suggested last year).
Would it make more sense in this situation to just stick with metlife for this amount and not rollover? I still have to confirm that I am no longer an employee with the company would that increase the rate of the fund.
If there were not a 60 day limit, I would have waited for the account to go back upto $30,000 and then rolled over, but I don’t think that is an option.
So, am I am thinking it right not to rollover the money and loose the $3000?
Hi Sid…
Welcome back and thanks for continuing the conversation here. Makes it easier for me and for other readers.
What the market is doing should have no bearing on the timing of moving your 403b. That should be based solely on your personal schedule and needs.
The market is always volatile and worrying about your “loss” when it is down (or for that matter your “gain” when it is up) in the short-term is missing the point:
—-Investing is for the long-term.
Plus, since you will be moving from one stock index fund to another, the net result is neutral. While you are selling shares for less than they would have brought a couple of week back, you are buying the new ones for less as well.
If now is the time to move it, move it. 🙂
Thank you for making me look at it from another perspective.
Now, I have another related question, I called Vanguard yesterday and told them I was planning to open a rollover IRA and they explained me the whole process and towards the end said that I could also do a backdoor Roth conversion. Now I have read some of your post on it and the links that you have posted, but I am always unclear on this. The amount I am rolling over is $30,000 and I don’t know if I should just keep it as an IRA or convert it into a ROTH. I know that I will have to pay taxes on the Roth conversion, but don’t know how much.
Your thoughts when you have some time.
There is no one simple answer to this, but here are some considerations:
–When you roll your IRA to a Roth it is a taxable event and the tax owed will be at your current tax bracket.
–Every dollar you pay in taxes is gone forever, as is the money it could have earned for you over the years.
–So how many years it will be earning before you draw it matters.
–With a Roth you pay the tax today and are done.
–With a regular IRA you save taxes today but pay later.
–So your tax bracket today v. the future is an issue.
—https://jlcollinsnh.com/2014/07/27/stocks-part-xxiv-rmds-the-ugly-surprise-at-the-end-of-the-tax-deferred-rainbow/
Is a third reason not to roll over the 401K is that an employer may owe you contributions yet? If the employer makes matching contributions on your behalf for the previous year to a 401K, shouldn’t the employee make sure that the contributions have been made in the current year before starting a rollover?
Here’s my situation:
-New reader
-We are both 50
-Husband will retire this year with $110,000 a year pension with COLA (60% survivor benefits)
-457 retirement money with employer-1.7% fees $ 250,000 invested-can take distributions now
-About $30,000 at Vanguard, VTSAX, Roth, IRA
-Annual expenses-about $65,000 (don’t judge-it’s California 🙂
-no debt
Our plan-move the 457 $ to Vanguard IRA and then figure out if we can do some Roth Rollovers. I know we are in a good position. We just aren’t sure how to lower our taxes.
And he may go on to a second career.
Any thoughts,
Jan
Hi Jan…
I would definitely roll the 457 into the Vanguard IRA. More control, less cost.
That wonderful pension will make lowering taxes a challenge, but you can start by reading this:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
In addition, GCC does great work on tax strategies. Here is his latest:
http://www.gocurrycracker.com/never-pay-taxes-by-moving-abroad/
And finally, if I were to just your 65k spend rate, my judgement would be…
Against your investments and that pension: Well done! 🙂
Thank You for your quick reply. I’m enjoying your blog so much!
One more thing we are trying to decide. He will get a vacation paydown of around $50,000. Originally we were going to tax defer it but we are realizing
1. We don’t want to tie it up for 10 years in an IRA
2. This may be our lowest tax year if he gets another job next year-which he most likely will decide to do.
So we have flipped and figure it might be better just to pay the taxes and toss it in Vanguard now.
Are we on the right track?
If the strategies outlined in the first post I linked to are not going to work for you and you will have a uniquely low tax year to take it in, perhaps you might be better putting it in a taxable account.
But if he does take a new job, will you need to draw on this money? And, if not, why not put it in the IRA?
Hello Jim,
Love your blog– devoured the stock series within a couple hours a year ago and have been an avid reader ever since!
I was wondering if you’re in talks for a Chautauqua 2016 yet? I’m bummed I missed out on this years, and would love to join for next year.
Thanks and happy holidays!
Thanks Stella!
Indeed we are and it looks like we’ll be doing two again back-to-back in November.
Hope you can make it!
I’m loving your site, found it via Mr Money Mustache. However I had a question, your site seems to highly focus on retirement/FI. Where should someone in their 20s keep their money if their plan is to buy a home? VTSAX still? For what it’s worth, I did appreciate your piece on why owning a home a bad investment, because of it I do plan on renting until I get married, figure out how many kids we want have etc.
Welcome Shervon…
As you continue reading thru the posts, especially the Stock Series (button at top), you’ll see it is written for investors in all stages. These two will help you get started:
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Hi Jim
First let me wish you a very Happy Holiday Season! I hope this comments finds you and your family in great holiday spirits !
Question for you – Do you ever have updates to past case studies you have done? I have read case study #4 – using the 4% rule and asset allocations a few times now. I can relate to the “case study” as it closely mirrors my own situation –
I was wondering if you happen to ever get an update from EmJay? Did he decide to pull the trigger and retire? Did he figure out a solution to his concern about health insurance? Or did he decide to fall victim to the one more year (tear) syndrome:)
I was just curious as to how he might be doing as well as how the folks are doing from the other case studies
I work in a rather large company and I been able to get at least half my office reading your blog now! I will not be satisfied until I have the entire company reading your blog!
For what it is worth you are doing a great service to many folks –
Happy New Year
Chris
Thanks Chris…
…and the same to you and yours! 🙂
Interesting question and, no, I have not had a follow-up from EmJay who was the subject of this post: https://jlcollinsnh.com/2013/11/12/case-study-4-using-the-4-rule-and-asset-allocations/
Or any other case study (https://jlcollinsnh.com/category/case-studies/page/2/) subject for that matter.
I know he was responding to comments when the post first came out, so maybe you can ask your question over there and see if he responds.
I’d like to know myself!
Hi Emjay and Jim:)
Sorry for the late reply as I was traveling for work.
EmJay – greatly appreciate the update as I find your situation fascinating – you are an excellent writer and Jim has the Best SITE on the Web – he has a way of making feel like your part of his extended family 🙂
For what it is worth I read your case study at least once a week as I find myself in a similar position but WITHOUT the courage to leave the work force. I re-read it frequently to give me hope and confidence in my financial situation.
I was hoping you might answer a few more questions –
Specifically -is their a total net worth number that you are seeking to attain that would make you and your wife more comfortable with your retirement based on your initial withdrawal from the workforce? For example attaining $3MM with no debt at all and $300,000 set aside for college – would that cause you to go back to the “low pay -low stress job” or is it another number entirely
I ask this – as I wonder – why did you return to working – especially in a very demanding position again – was it to build your wealth to a higher more comfortable level or did you just return based out of boredom.
Also, what advice would you give someone whom is close to pulling the trigger (leaving their full time employment) – since you were out of work – was it harder than you thought, did you rethink the 4% withdrawal rate – should it be higher/lower anything else you would put into discussion from your recent experience? I look at your experience as a “fresh case” and wonder what else you learned – was Health Insurance harder and more expensive than you thought, could you have stayed retired – but you just went back to work out of boredom?
Since I am prying into all your financial specifics it might be only fair if I share my specific situation with you 🙂 – and Jim
I turn 52 this April and my wife turns 46 this April
We have a 13 and a 3 year old –
Before the market drop, we hit $3MM net worth – no debt. This includes Cash, Stock and a few rental properties – value of everything is $3MM before the market drop.
We in addition to the $3MM have $250,000 set aside for college
The $3MM and the $250,000 (college funds) does not include our equity in our primary home. We exclude that equity as we need a place to live
I have worked for the same company for 28 years and make roughly the same salary as you
My wife earns $120,000 gross
My wife and I have been toying with the idea of me leaving work. I am scared to do so. I have read everything I can about withdrawal rates and I am looking (Jim – don’t fall off your chair ) at withdrawing between 2.5% and 3% max.
With my wife continuing to work we would not be withdrawing more than 1% until she was unemployed —hopefully she can last another 5 years
In a nutshell…. I am asking you all these questions….because I feel your case study is very close to our situation.
I am hoping I can improve my probability of success by asking you as many questions as possible since your experience is / was so recent….For what it is worth, you and your wife are very sharp folks to achieve what you have so early in life – so I want to learn as much as I can from your situation
In closing, if I were to leave in June 2016 – I would look for a low stress low wage job so i could take even less from out nest egg, my wife would continue to work as long as hse could but most likely not past 5 years —-she then would join me in the low wage low stress job….
Strangely enough I have asked my employer for a demotion to a more work/life friendlier position, they have not said no yet as they are shocked by my request – they love my output but they do not understand that stress it has caused me over the last 28 years – I am hoping my employer and I can come to a compromise – less pay, less stress and still have a dedicated employee
EmJay, no problem if you do not have the time to respond – i totally understand with your new position and all
In closing I want to thank you again for being an inspiration to me and I can imagine to many others! I hope some day our paths cross, if your interested in sking at Sunday River Maine – let me know I can get you a deal on a rental 🙂
Jim, I read and re-read all the comments from people thanking you for the help and advice, I wonder sometimes do you REALLY understand all the GOOD you have done for folks? I hope you do, I really hope you do – your website serves as an educational tool but your insights – your insights – serve as life changing mechanisms for many people to improve their lives
thanks
Chris
Hi Jim,
First, please accept my compliments for this great blog and all the other blogs you point to!
I am a foreign worker, working in the US. I have access to banks in my country that pay ~7-8% interest rate on fixed deposits (similar to CDs in the US). Obviously if I have to invest in those I have to convert dollars into my country’s currency, so there is some exchange rate related risk there. So far, in my portfolio I use these as safe investments in place of bonds.
It would be great to hear your thoughts on a couple of things:
1) Given that these deposits give me a guaranteed 7-8 % return, should I invest the majority of my savings there instead of the US stock market.
2) I find it hard to model the currency risk in my mind to decide how much should I save in these deposits vs how much should be invested in the US stock market. Any thoughts/resources on how should one think about currency risk while investing?
Would much appreciate your thought on this topic!
Thanks
PS
Thank you PS…
…your compliments are much appreciated!
I’m going to guess your home country is India and we are talking about the Indian rupee?
Bank savings rates are pretty directly tied to inflation rates, so 7-8% indicates high inflation. Doing a little quick research, the inflation rate in India has averaged ~8% from 2012-15. The high was 11.16% in 2013 and the low came this year in 2015 (overall ~5%): 3.69% http://www.tradingeconomics.com/india/inflation-cpi
So, if the Indian inflation rate continues declining, locking in 7-8% is a good deal. If it stabilizes at ~5%, your net return after inflation is only 2-3%. Not so good.
But inflation rates can change very quickly. Lock in too long and a rising rates can crush you. 8% in an economy inflating at 11% is no bargain. Lock in too short and before you know it the bank rates have dropped when your CD comes due.
Right now the US dollar is very strong on the world stage and it has the advantage of being a reserve currency. This simply means it is commonly used in international transactions and is accepted widely around the world as a “hard” currency.
The other major reserve currency is the Euro, followed to a lesser extent (measured by those international transactions) by the Pound, Yen, Yuan (just added in 2015) Canadian Dollar and Swiss Franc. Pretty much in that order.
But the US Dollar is clearly #1 and has been for some time. Will it remain there? That is a subject of much debate. My guess is it will.
But others point to things like our growing national debt (currently pushing 19 Trillion dollars: http://www.usdebtclock.org) and the fact the rest of the world would love to see the US pushed off its perch (a key reason for the support of the Yuan).
Add to these currency considerations, you need to choose between fixed income and stocks. Stocks are volatile and can drop fast and hard, but have a very strong record over time. And, as we’ve seen, that 7-8% bank return is not without risk or as attractive as it seems at first glance.
As for deciding on your allocation between stocks and CDs (bonds), check out: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
You might also want to consider the political stability of India v. the US and where you’ll be living in the future.
No easy choices here, but hopefully this gives you some ways to think about it.
Let us know what you decide!
Thanks for replying Jim!
Yes I am from India 🙂
If I live in the US for 10 years or more or end up settling here…the inflation that I should worry about for that duration is the inflation in America while I get a guaranteed 7-8% interest rate from the fixed deposits in India. Then the only thing to worry about is the fluctuating (best word I can use since I don’t understand the factors that affect currency exchange rates) currency exchange rate. I have seen the dollar go from 39 Indian rupees (INR) to 65 INR in the last 10 years.
As you pointed out correctly, the place where I settle finally seems to be the biggest factor in this decision. I figure if I live in the US for a relatively long time and then decide to settle in India, getting an 8% guaranteed return is not bad while I am in the US, since I am unaffected by the inflation rate in India for that duration. If I end up settling in the US, then the exchange rate when I have to bring money back to the US is anybody’s guess given how currencies are manipulated these days…so in that case I think there is more risk in investing in India
Hi jim!
First off, I am so glad that I found your blog. I have been sharing it with friends and family since I began reading a few weeks ago.
Question that I would like your two cents on. I apologize if a similar question has been asked. I am currently 27 and my fiancé is 24. We have a combined income of approx 130k (95 from me and 35 from her) with about 125k in student loans. We plan on cash flowing the wedding and will get some significant help from our parents but thats not what this post is about.
Currently the debt is a mixture of grad plus and graduate loans all ranging between 6.8 and 7.8 percent- all the loans are from me. We plan on refinancing them at a lower rate between 4.8 and 5.2 percent. We have decided to get serious with our finances and allocated 50% of our monthly take home pay towards paying down debt, which is about $3900. Kids wont happen for another 5-7 years. My question to you is- are we better off throwing all $3900 that we have allocated to debt pay down at the debt, which will clear us of debt in around 34 months. Or should we do some sort of hybrid invest/pay down debt over a 5-7 year period. Perhaps a 65% debt and 35% invest split with the 35% going into VTSAX
My goal is to achieve FI by the time I am 42 (15 years) and have a nest egg of at least $650k. Which can allow my wife-to-be to only have to work part time if she wants and I could find a cushy job that is 30-40 hours a week, my assumption is that it would be stress free as I would have FU money. I am currently working 65+ Hours between two jobs and there is no way I can keep doing this until I am 60+. In most cases, when I have ran the numbers we come out significantly ahead if we go the hybrid route, it just seems more risky. Am I crazy for wanting to possibly extend the term of the loan and focus some funds on getting the nest egg started? I have no doubt that we can’t stay disciplined and stick to a budget.
Side note: we have about 12k in cash in the bank and 1k in checking: most of which will be used for the above mentioned wedding. We live together and have a monthly rent of $1295 no plans to buy a home any time soon. We are happy renters, but may need to find a cheaper place to rent to get serious about our debt.
Thanks,
Steve
Hi Steve…
I’m glad you found it too, and thanks for passing it along!
Congratulations on getting serious about that debt and your 50% savings ratio. You won’t believe how great you’ll feel once the debt is history and how fast your wealth will begin to grow then with that saving rate.
For my full take on debt, check out: https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
In that post you’ll see that your 4.8-5.2% interest rate is right on the border of my “pay it off ASAP” and “your choice” line.
When you “run the numbers” against those rates and using average market returns, investing it or some hybrid version will always show the better performance.
But you are right to recognize the added risk. The market could easily show losses over the next 34 months rather than gains.
So, being right on that border line, focusing on paying off the debt is the sure thing. To the extent you shift some into stocks is precisely the extent to which you take on more risk. Your call.
That said, if you are going the hybrid route, your 65/35 split sounds reasonable to me.
Now, about that $12,000 wedding: Have you considered eloping? 🙂
Hello Jim,
Thank you for all you writings. I heard of you by way of the Radical Personal Finance podcast and have been working my way through your stock series.. I am going to ask this question before I finish because I have 401k rollover I only have a few days to decide what to do with.
I’m 34 and married. We have a 401k @ Fidelity w/ 18k value, a SEP IRA through Wealthfront @ 16k value, an 8k IRA check from my previous employer I need to rollover somewhere, two rental properties that produce about 11k annually. (They are both mortgaged, so about 420k in debt). We own our own home as well with a 200k mortgage @ 3.5% int. rate.
I’ve become completely enamored with the idea of early financial independence and am kicking myself for not going into high gear savings earlier, but no need to dwell on that. We figure we can save about 10k/month and would like to retire in 10 years. I believe this is possible using projection calculators, but I get lost in how exactly to do this given our shorter (10 years) time frame…. soo…
1. You recommend 100% equities, but that is with the assumption that you have plenty of time to ride out the ups and downs. If we only are planning on 10 years, would you still recommend this? If I favor bonds more this take longer as I understand it…
2. Of that 10k/month of expected leftover income, how much should I plow into the 401k? I understand it is generally recommended to max it out, but I won’t be able to withdraw that money w/o penalty for another 20 years after we plan to stop working. I know there are methods, like the Roth Conversion Ladder, but I’m skeptical if I could manage that. Perhaps I would be better off investing that money into after tax investments.
3. Vanguard sounds good, so I’m thinking I’ll send the IRA I need to rollover there and put it in an all market index fund. With my 401k through Fidelity I can move everything into their equivalent market index fund, which is relatively low cost (.07 ER) — assuming that is still a good option with a 10 year window.
What do you think?
Thanks!
Hi MK…
You seem to have a pretty good understanding of the elements you need to consider so this really is all a personal choice for you.
1. Stocks = maximum potential but are very volatile.
Bonds smooth the ride, but at the expense of long term performance.
Which is more important to you? Performance? Lower volatility?
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
2. Accessing your 401(k) money before 59.5 is tricky and requires creativity and effort.
Putting your money in taxable accounts is easier and more accessible.
Every dollar you pay in taxes is gone forever, as is all the money it would have earned for you (compound interest).
Which is more important to you? Easy access or keeping more of your money?
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
3. Assuming they are tracking the same index, an index fund with Fidelity is exactly the same as the equivalent from Vanguard.
That said, Vanguard is structured in a way to align with the interests of its shareholders in ways other investment companies are not. Which is why all my money is invested with them. https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
Hope this helps!
Thanks for the reply. I am wondering now if there is a way to calculate doing this in a “two stage” approach — meaning withdraw from our taxable accounts until age 59.5 and then rely on the tax deferred accounts. I’ve only seen the withdrawal rate calculated for a lump sum retirement investment, but are there tools to calculate how much we would need in our taxable investments (stage 1) and then how much in the 403b+taxable past age 59.5 (stage 2)? I assume there must be, but it is getting confusing in my head. How you can manage both the taxable and tax deferred accounts + Roth IRA conversion + calculating the amount needed for 4% safe withdrawal rate…
I’m not aware of any calculators for the two stage approach.
Mostly likely because the way to calculate withdrawal rates looks at total net worth.
How you pull that 4% is a different story. Here’s my take and how I personally do it: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
You might also check out my conversation with GB directly below, where I run thru some numbers.
Hello Jim,
I’ve been reading your blog for a long time but this is my first comment. This is one of the best blogs about financial independence I’ve ever read. Congratulations and thank you for sharing your knowledge.
Now, my case 🙂
I’m Spanish, frugal, with a safe job for life (in a country with +20% unemployment). But I deeply hate my job. I want to quit a.s.a.p. (I’m in my late 30’s) and get to do more interesting things (like composing music or writing).
Despite my research in many blogs and FI calculators, I’m not still convinced that I’ll ever get to FI. I know that the key point is the savings rate but I still think that with high salaries FI is more feasible. With a +100k salary it’s easier to save +60%, but also the “snowball” grows easier. With a 30k salary everything looks more difficult.
Also European taxes and not having something similar to your 401k makes our journey steeper.
However, I try to be optimistic and keep saving and investing. I’m still fighting my fears, reading your stock series over and over again, learning about investing in a bull market, convincing myself that the market “always goes up”… I hope I succeed. I have a small part of my investments in quality stocks (yes, I know…) and the rest in index funds. However, I still have a big chunk in cash or low interest deposits.
Any advice would be welcome.
Thank you very much!
P.S.- If you ever want to visit Spain, I’d love to help you with your planning, answer your doubts, etc.
jlcollinsnh, January 8
Hi Lemuel…
Welcome and thanks for the kind words.
I am reminded of the Chinese saying:
“A journey of a thousand miles begins with a single step.”
And from my Manifesto:
“If you reach for a star you might not get one. But you won’t come up with a handful of mud either.”
If you convince yourself it is hopeless, you have no chance. If you start/keep saving you might not become fully FI, but you won’t come up with a handful of mud either.
The math for early retirement works regardless of your income level. Those who need 100k to live on need 2.5 million invested. Those that need only 30k need 750k.
https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Stocks are not so much risky in the long-term as they are volatile in the short-term. That makes them scary, especially when the market behave as they have this week of January 4, 2016.
Cash is not at all volatile. But it is a loser long-term as inflation outstrips its buying power. Far more risky in my view.
Truth is, you can’t have money without risk. You can only chose what kind.
https://jlcollinsnh.com/2013/06/14/stocks-part-ixx-how-to-think-about-money/
All of that being said, the worst thing you can do is to invest in the market only to be scared out when, as it always does, it takes one of it’s periodic plunges. When you hear of people losing big in the market, this is most commonly how it happens.
So, as the philosophers say, “Know thy self.”
I’ve actually been to Spain a couple of times over the years, most recently for Christmas 2013. Our daughter was living in France and we met her in Paris for the holidays and then traveled together to Valencia.
Years before we spent ~3 weeks traveling around the country. In fact the statue I describe in and named this post for, we bought in Madrid: https://jlcollinsnh.com/2012/01/27/travels-with-esperando-un-camino/
Beautiful country and wonderful people. We’d love to go back!
Thank your for your answer and encouragement!
I’m in my way, and I’m going to continue this journey – saving, investing and reading jlcollinsnh.com 🙂
(Next time you could visit Galicia – breathtaking landscape, delicious seafood and affordable: http://www.lonelyplanet.com/travel-tips-and-articles/best-value-destinations-for-2016 )
Actually, we were there as part of our first trip. s that where you are? Would love to go back!
While my wife has, I have yet to get to southern Spain: Seville, Granada, Gibraltar….
Yes, that’s where I am. You’re more than welcome anytime. This is quite similar to Ireland: green grass, breathtaking coastline, awesome food, bagpipes… and cows. 🙂 No flamenco or bullfights up here, hehe.
The South is beautiful, too. Really different but beautiful indeed. Granada is wonderful. Gibraltar.. not so much.
So, I’d love to help if you decide to come around here.
Again, thank you very much!
Hello Jim,
I am glad I found your blog, the timing was perfect ! I am a 49-year old female working in high-tech for 27+ years, and it looks like early retirement might hit me square in the face – much sooner than I expected. There is a bit of uncertainty (and I admit, somewhat panic) in my future so I would very much appreciate your advice and recommendation as to whether I am retirement-ready and what I can do to prepare. Here are the numbers:
Salary: $150K
Non-retirement: $949K
Retirement (401K, Roth/Trad IRAs, etc): $1173K
House: $110K equity, $260K mortgage (4.75%)
Expenses: $3700 / month which includes mortgage/taxes/insurance
If I were to retire in ten years (or even in 5 yrs), I would have said that my numbers were pretty healthy. But if I had to retire tomorrow, not sure if this will cut it. I can’t dip into my retirement savings until ten years later at 59½. I might have a small pension that is about $13K/year, but that also doesn’t start until I am 60 or later. That leaves me with only the $949K to work with – and I don’t want to dip into principle until my later years.
It is clear to me how quickly folks get aged out of high tech – I count myself lucky to have lasted this long. Folks same age as me either have long lapses between bouts of employment or just left the career completely. I am guessing the same will happen to me. In retrospect I wish I had been more aggressive in saving – I did ~40% or so without much effort, so I should have upped that. I can also sell my house – I rented for all my life, except for the past 5-6 years and while I love it ( truly is a luxury to have a house), I can see how renting really helped my net worth.
Perhaps I need to do that again – that would allow me to reduce my spending down to say $2900/month (I am in an expensive metro area). If I were forced into retirement tomorrow it looks like I will need to cut expenses further…
Any thoughts from you would be so appreciated !
GB
Hi GB…
I’m glad you found it too!
OK. Take a deep breathe and prepare yourself. I’m going to tell you something very important. Critical to your future and happiness (and your future happiness) 🙂
Here it is. Ready?
You are in GREAT financial shape.
You need have no regrets. No woulda, coulda, shoulda.
You like your house? Keep your house!
If you are forced into retirement tomorrow, you won’t need to cut expenses. In fact, if you like, you can begin working on how to spend more.
Let’s look at your numbers:
Net worth: $2,382,000
Annual spend potential: $95,280 (using the 4% rule*)
Monthly spend potential: $7940
Monthly spend, current: $3700
Monthly Surplus: $4240
Of course I included your home equity in that. Which is as it should be.
But let’s be more conservative and leave it out:
Net worth: $2,122,000
Annual spend potential: $84,880 (using the 4% rule*)
Monthly spend potential: $7073
Monthly spend, current: $3700
Monthly Surplus: $3373
Indeed, to support your current spend of $3700/month ($44,400 annually) at 4% you’d only need $1,110,000, less than half of what you have. Were you to pull at a 4.7% rate, not at all unreasonable, you’d only need $949,000.
Does that number look familiar? 😉
*https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Plus you have that $13,000 pension coming at 60 and come 66 ~$30,000 (my very rough and very conservative guess based on your income and drawing in 2033) from Social Security.
You confusion comes from this line: “That leaves me with only the $949K to work with – and I don’t want to dip into principle until my later years.”
Nope. You have your full net worth to work with, it is just a question of how. It is fine to dip into principle from on pot when you have others growing untouched.
Let’s set aside the fact that there are ways to access tax advantaged accounts before age 59.5. In your situation you won’t need them.
But here’s a look: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
You won’t need them because you have that $949,000 to get you from 49.5 to 59.5, and that’s just ten years.
Drawing your current spend of $3700/month ($44,400 annually) against $949,000 is still only a rate of 4.7%. It is very likely that your $949,000 will hold up just fine at this rate.
The worst that will happen is you dip into the principle a bit along the way. No big deal. Remember, you still have the balance of your wealth growing completely untouched.
Indeed, even if it took fully depleting the entire $949,000, I’d still recommend this approach as you have so much wealth continuing to grow and that will be ready to harvest when you need it.
Add to this your ability to further reduce spending (not that you need to, nor do I recommend it), and you have a powerful flexibility at hand as well.
Not only are you extremely well positioned to handle being laid off, you are also in the position to pull the trigger yourself should you be so inclined.
Relax and enjoy whatever the future may bring. You’ve earned it!
Jim,
Thank you so much for your detailed analysis – wow ! So helpful to get your unbiased, experienced eyes on my situation, I am not much of a writer so it is a bit hard for me to express in words the comfort I felt when reading your analysis.
I really like your financial philosophy a lot, especially the ‘simplicity’ principle ! For the past couple years I’ve been following blogs’ from those that achieved ER by forgoing full-time jobs and developing multiple ‘passive’ income streams. Impressive and enjoyable reading, but I’m not sure I can reproduce that– plus lots of little jobs seem like, well.. one big job with maybe lots more complexity? I can only admire from afar… so yes, for simple folk like me, simplicity is on my wavelength.
I have been trying to get through your stock series, I read it through once before but need to go thru it again. I have some homework ahead of me – my finances are unnecessarily complicated with dozens of separate accounts and investments. Many of them are already in VTSMX (variation of VTSAX) but they are derived from previous IRA’s or 401Ks. I keep them separate because I feel that it is important to understand where they came from (which company’s rollover, which thing got converted to what, etc), but now I am thinking that for the ones that are taxed the same (for example, Traditional IRA and 401K’s are the same, but not the Roth ) could be combined. It would be great if I don’t have to remember that this part came from company A, and that other part came from company B, etc. Also awhile back I was a follower of Brinker’s markettimer (aptly named) – I became disenchanted in ’08 and still need to clean up some of the high-expense funds from that. Thankfully that amount is low.
Lastly, I need to start making some life decisions. When I talk to those close to me, a few (including my doctor a top-notch ophthalmologist that likes to give life advice 🙂 tell me that even though I could conceivably retire, I need to be careful because a single event – like a big illness or major accident – could wipe me out financially. They urge me to not retire. I don’t think they are wrong, but perhaps there is a happy medium there somewhere. Trying to find that right balance is what I need to explore, right now I’m burning the candle at both ends and that is just not sustainable.
At any rate, I just wanted to stop by to express my sincerest appreciation for you and your blog !
GB
Hi Jim,
I was guided to your site from GoCurryCracker, and have read all of your posts and hundreds of question posts. Thank you for all that you have shared–this site is fantastic.
I’ve never been too savvy with money, which is why I’ve made it a major focus of mine over this last year to learn more about. In 2007 we went through BK, and our first house was foreclosed, so we’ve been through the ringer, and have no desire to revisit.
I’m 44, work in the tech industry in sales, and make roughly $80K/yr. My wife (40) has her own gig, and makes roughly $1500/mo. We have 3 kids, and a house on a VA loan (3.25% 30 fixed, and a payment of $1300/mo–we couldn’t rent for less than $1800; we plan to stay at least another 11 years til the youngest graduates HS). There is a decent amount of equity in the home currently, but we’ll see where it is 11 years from now–maybe it won’t be great, maybe it will be real good, who knows? I max my 401K match from my company (5%), and put 5% into our ESPP where I buy company stock at a 15% discount. My 401K today stands at about $70K. I have less than $2K of credit card debt at 0% until January 2017, and have a Roth IRA of $5500.
In April, I will be receiving a lump sum inheritance amount of around $150,000. Dad funded the kids’ 529’s with $18K each, and I don’t plan to add to those. I have a pretty good idea of what I should do with this inheritance money (dump it all into VTSAX), but have a few questions and am requesting your guidance:
*I currently lease a car, payment $368/mo, but will need to purchase a car in November of this year. I’m a Honda guy for practicality and reliability, so I’m looking at 3-4 year old Accord Sports. The idea is to put about $4K down, and take a 4 year loan on the rest ($14K) to keep the payment around $368, and then drive it for 10 years. Would it be better for me to put less down, and carry a longer term of say 5 or 6 years if the rate is less than 3%? Or should I pay cash for a decent car that’s like 7 or 8 years old for around $8 to $10K?
*I’ve been studying the Buffett style of investing over the last few months as well–invest in solid companies with strong management, brand name companies, and hold for 10 years or more. Companies like Costco, Under Armour, Exxon and Google are very appealing, having increased over the years by 60% or more with what appears to be strong upside moving forward. I’m certainly enticed by the higher return, and the risk doesn’t seem to be any less than VTSAX, but like I said, I don’t claim to be too smart. My greedy side says take $40K and pick 10 strong stocks that pay dividends to buy and hold, and put $110K into VTSAX, but my conservative side says put it all in VTSAX, let it ride, and be happy with the return. What is the risk that I’m missing or overlooking if both strategies are to hold for long periods?
Once again, thank you Jim for sharing your site. I’ve been recommending it to all of my co-workers.
Best Regards,
Mike
Hi Mike…
Glad you found your way over here. Welcome!
*Never borrow money to buy a car. Or anything else short of a house. Low interest loans are a sucker’s bet designed to lure you into more expensive cars. Buy what you can afford to pay cash for and the amount of that cash should be such that you barely notice it is gone.
To put this in perspective, our current car is a 2007 Subaru Forester with 112k miles and it’s worth maybe $6000.
While Hondas are fine cars (I’ve owned and enjoyed three Accords), so are many others. Limiting yourself to one brand limits your options. Better in my view to look for the best deal on the best car, regardless of make.
*This idea that you, or anybody else, can study Buffett’s approach for a few months (or years!) and duplicate his results is nonsense. Dangerous nonsense at that.
Why is Buffett so famous and lionized? Because he has been able to do something vanishingly difficult. Countless people have tried to duplicate his approach. But we’re not reading about any of them.
https://jlcollinsnh.com/2013/02/05/stocks-part-xv-index-funds-are-really-just-for-lazy-people-right/
It is like saying, I’m going to read up on Mike Tyson’s training regimen for a few months and then get in the ring with him. Good luck with that, too. Let me know. I’ll sell the tickets. 😉
Why this is so would take a full range of posts to explain. Fortunately, I have already written them: https://jlcollinsnh.com/stock-series/
It is worth noting that upon his death, Buffett’s instructions to his wife’s trust are to invest in index funds. http://video.cnbc.com/gallery/?video=3000251489&play=1
Thanks for passing on the blog! That’s the highest praise of all and it is much appreciated.
Hi Jim,
I hope you are doing well and the holidays treated you and the family well! I have been following you, the stock series and questions since mid-2013. As my wife and I have a little one now (17 months), I thought it best to step up and ask my first question!
We recently opened our daughter a 529 College Savings Plan through Vanguard in the aggressive fund. I have read some recent comments that you much recommend a ROTH IRA over the 529. I tried to do a quick search on any topics, but could not find many through your blog. I was hoping you could either direct me to some previous topics around this or just state your thoughts if we made the wrong choice. My wife and I are 28 / 25 respectively and make about 110k /year with only about 15k worth of family debt (monies owed to family) and 10k on school loans. We do not own a home and live with a family member for the time being to save money.
I appreciate any advice if the 529 is the right thing for our infant (looking 20 years out)
Kyle
Kyle, i can add my opinion and experience…being in the middle of university for two kids, i have tried the 529 game and have the following experience….while i did not have a large sum in the respective 529 accounts for each of my kids, at the time of financial aid applications i quickly found out that the value of the 529 counts as cash (asset) for the child and almost directly comes off of the amount of financial aid awards. I am speaking mostly on experience with private institutions, however, the FAFSA and College Board questionairs each ask for this information and calculate “need” in about the same way. At say 45 to 55k per year for many of the Universities you can easily see the benefits of getting all the aid possible. Of course, there are more reasonable ways to get through college using Jr colleges and state school systems that reduce the need for aid – I have been living out of US so could not take advantage of state funds. So, in summary, give all the variables of trying to see the future, the 529 in my view does not offer the best flexibility…a tax beneficial account not in the childs name is in my view the best way to go. I know its not this simple, but its quite interesting that those of us that save can get penalized at financial aid time over those who didnt. (by the way – in financial aid considerations AGR gross income seems to count much more heavily than assets such as investments, house, etc.)
I hope this helps a little until Jim can chime in….
Hi Kyle…
Always nice to hear from a long-time reader!
I am curious as to where you “…read some recent comments that you much recommend a ROTH IRA over the 529.” That’s not something I’d say.
In the first place, that’s not the only or even likely choice.
The choice really is…
…Save in your name or in the child’s name?
…If in the child’s name, using which vehicle, 529 or other
As for my take on Roths and other tax advantaged accounts: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Basically I agree with LC (thanks for chiming in, LC!)
529 plans come with too many restrictions for my taste and I never used them. Personally, I’d pay off your debt and fully fund all your IRA/401(k)/HSA opportunities first. Build your wealth and pay for your kids’ college from it when the time comes and if needed.
This conversation with John has more and some useful links:
https://jlcollinsnh.com/2012/05/23/the-college-conundrum/#comment-4212644
You might read the post it’s in as well.
Good luck!
Jim,
Awesome blog! It’s one of the best reads I’ve had about investing in a long time.
I have a question for you.. I’m one of the typical guys using a wealth advisor with moderately high fees. After reading your blog and other investment books I’m thinking of moving to the DYI approach you recommend. However after mentioning possibly leaving, the wealth advisor sent me a passive index option that factor tilts to “quality” and looking at their data, it has consistently beat the market. It looks quite compelling..on average they have beaten the index by quite a bit. In fact, the big dip in 2015 they barely went down and the dip this week, they only went down 50%, in real performance. Not many people know about this new approach. Is it something I should consider?
Also I have a couple more questions if it’s possible to follow up privately via email? I could not find your email.. Also I can send you the prospectus to this over email.
Thanks so much!
-Ken
Thanks Ken!
It is not surprising your wealth advisor can serve up a slick presentation and that “looking at their data, it has consistently beat the market.”
It is their data, after all. 🙂
Truth is, there is now decades of research showing how rare and vanishingly difficult constantly outperforming the market is. This is why unicorns like Buffett who have done it are so famous and lionized.
See my conversation with Mike directly above.
Telling you that “Not many people know about this new approach.” sets off all my alarm bells. And it should yours, too. This is the same hook people selling Madoff’s Ponzi scheme used.
Whether you decide on a DIY approach or not, I’d run for the exits with these guys.
Read this and you’ll know why: https://jlcollinsnh.com/stock-series/
Unfortunately, I am unable to provide private email consultations. I can barely keep up answering the questions on the blog. 😉
And I have zero interest in receiving the prospectus.
Hi Jim,
Thank you for your Stock Series. I came across it (from RichmondSavers.com) knowing nothing whatsoever about stocks, and now I feel like I have a much clearer picture of how it all works. I’m now very excited about entering the world of investing, but I could still use some guidance.
First, a summary of my financials:
I’m a single, 34-year-old freelance worker who grossed about $50K in 2015, though that of course will vary from year to year. My only real debt is $3.5K remaining of a student loan (which, at the low interest of 2.625%, I plan on continuing to slowly pay off as per your advice). Unfortunately, though I regard myself as frugal, my spending proves otherwise, as I don’t really have any savings short of a small buffer to float me through the troughs of freelance (such as the time of this writing, when I haven’t worked in nearly a month). So cutting significantly down on my spending is my first goal for 2016.
Luckily, my one real asset that my amazing parents have secured for me is a rental property worth around $200K that nets us around $6K/year. (After reading your Stock Series, I bothered to do some math to discover that that’s only a 3% rate of return, which does nothing more than keep pace with inflation…not bad, but not good. It makes me think that, for all the pain that goes along with the effort, a wiser choice might be to sell the property and put the money in VTSAX or into a more profitable property — or both.) Now after 5 years, we have about $30K saved up from it in the bank. Although I know my parents are keeping that for me, up until now I’ve regarded it as their money and avoided fiddling with it as I try to make my own way in the world. However, after reading your Stock Series, I talked to my parents about how that unused money is not only doing nothing, but actually diminishing in value due to inflation, and perhaps I ought to put at least $20K of it in VTSAX, while leaving $10K as an emergency fund. My mom was initially scared of the thought of putting it in the stock market, thinking real estate is a wiser investment. It seems to me that, barring a dip in the market that may offset my choices for some years, VTSAX might be a better place to hold it until such time as I want to use those assets toward real estate or some other investment.
Anyway, my main question for you is in regards to the different investment “buckets”. I hate the idea of putting money in a place where I can’t touch it for 25 years. Would you advice against just putting everything in the “ordinary bucket” of stocks? Although my goal would be to avoid withdrawing from this bucket, I like knowing that if I ever needed or wanted the money for something (perhaps an investment property, etc.), I could dip in freely. If on the other hand you believe an IRA is essential, how would you approach your investments if you were me? For instance, would you first hit the yearly cap on whatever IRA you held, and only then move on to investing whatever surplus, if any, into the regular stock bucket? Also, within the IRA bucket would I still have to choose how my funds are allocated (stocks vs. bonds, etc.), and if so would you go again for the VTSAX (or whatever its equivalent in that bucket is called)? Last but not least, the TRF option sounds very appealing to me since I wouldn’t have to think about anything, except…would that exclude the ordinary stock bucket?
Forgive my layman’s understanding of all this and if I’ve misused terms.
Thank you so much,
Phil
Welcome Phil…
http://www.richmondsavers.com is a great site and has taught us a lot about travel hacking.
First, VTSAX is the wrong place to hold your money “until such time as I want to use those assets toward real estate or some other investment.” It is for long-term investing only.
You might want to re-read the https://jlcollinsnh.com/stock-series/ 😉
As for the tax advantaged v. taxable bucket choice, please see my conversation with MK above.
You also seem confused regarding the buckets (IRAs, taxable accounts, 401(k)s, etc.) and the investments (VTSAX, TRFs, etc.) that go in them.
These posts should help:
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Ugh…like I said I have a much clearer picture…but I’m still confused by a lot of this stuff. (Having spent my 20s pursuing creative dreams with the faith that money would follow, it’s only now at 34 that I’ve begun to consider “boring” stuff like finances and securing my future.)
Now that I’m going through your Stock Series again, I’m starting to think Betterment might be an easier way for me to enter the world of investing. Maybe putting these concepts into action will make it all sink in more, and from there I could consider going DIY. Plus, I like that they seem to have strategies for short-term investing as well.
Thanks again! 🙂
For those who really don’t want to think about this stuff much, Betterment can be a fine option.
Their website and the way they present reports on your investments are simple and engaging.
If you are interested, this is my full take on them: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Good luck!
I originally came here to ask a question about a strategy which seemed, to me, like it would work better than just index funds. I don’t believe it actually would, certainly not reliably, but I can’t find the flaw. I decided that the question would work better on Part III of the stock series, so I will ask it there shortly.
However, while I was here, I noticed I had another comment which best fits this page. The link in this post to the Disclaimers page seems to be broken, and the text under that does not match the actual commenting legalese on the current disclaimers page. In particular, here you say that the comment becomes property of jlcollinsnh.com but on Disclaimers page you say it goes in the public domain.
Neither one seems like what you actually want (and I think putting something in the public domain implies that you don’t need the part about granting the license), but that’s a different issue; I am not an IP lawyer and you said you consulted one on that paragraph, so it’s presumably at least safe to leave it as is even if it doesn’t mean exactly what I think you want it to.
Hi Dan….
Thanks for bringing the broken link and the inconsistencies to my attention. Much appreciated. Both should be fixed now.
Regarding the investment strategy, both in the post above and on the disclaimers page, please note the policy of not commenting on such things under the title: “The investment ideas of others:”
That said, given your help, let me take a look and perhaps offer a few comments.
Hi Jim!
Thanks for your blog and your advice. It’s been such a blessing. Hope you are doing well in 2016.
I have three questions for you and would be very grateful for your help:
(1) Plenty of people are talking about a near-term market crash. Articles like this one (http://money.cnn.com/2016/01/12/investing/markets-sell-everything-cataclysmic-year-rbs/index.html) are what scare people. Logic dictates that if one could sell everything now (while the S&P is quite high), and buy once this supposed crash comes, everything would be fine. Would your advice be to continue investing as usual over the course of the year, and ignore the fear of an impending crash?
(2) I wanted to clarify your simple path to wealth that you wrote for your daughter (I follow it myself as well, being a 20-something recent college graduate with no debt). Sounds like you’re suggesting the following–
-Set aside a 3-6 month emergency fund for unexpected expenses
-Max out my 401K, and then max out either IRA account
-Invest the remainder of savings into a taxable account (i.e. Vanguard or Betterment) in ~90-100% index funds and forget about it for 20-30 years…
Am I understanding you correctly? This almost seems too simple to be true!
(3) Should near-term (i.e. 3-5 years) expenditures be invested, or kept in a low-interest bearing savings account? For instance, saving for a car, or wedding, or down payment, or graduate school expenses.
Thank you once again and I look forward to your reply as your schedule permits!
Best,
Justin
Oh, and snapshot of my situation, for your reference:
-Age: 23, Single
-Income: 90k
-Net worth: ~65K (Checking: 6K, Betterment @95% stocks: 35K, 401K (1 year of maxing): 20K, T-IRA: 6K)
-No debt
-Considering a career transition that would make me potentially much happier, but income prospects drop to ~40K/yr. Oh, and the 2 year masters program would cost ~60-70K in total).
Thank you for your help 🙂
Hi Justin…
1. If one could reliably predict when to sell before the market drops and when to buy back in once it bottoms it would be far more than fine. It would be the best damn advantage possible. It would make you 100x richer than Buffett and far more lionized.
No one with this ability would bother selling their advice to the likes of us, just like Buffett doesn’t. They’d just parlay their fortune.
Here’s my annual post mocking this idea: https://jlcollinsnh.com/2016/01/07/3rd-annual-2015-louis-rukeyser-memorial-market-prediction-contest-results-and-my-forecast-for-2016/
Also check out the links in it near the bottom to my posts on the last two corrections.
So, yes, continue investing as usual over the course of the year, and ignore the fear of an impending crash. In fact, hope for it. You’ll be buying shares on sale.
2. Yep, you are understanding correctly and, yep, it is the soul of simplicity. This series of posts explains why: https://jlcollinsnh.com/stock-series/
3. Yep. Stock investing is for the long-term. Short-term (<5 years) belongs in cash precisely to avoid being caught in a downdraft like the current one when you need the money.
If you want to take a bit more risk in the pursuit of a bit more return, you can create a bond/stock portfolio and fine tune it to your risk profile. Betterment is a useful tool for this as I describe here: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Have a wonderful 2016!
Hello Jim:
How are you today?
My name is Mike, 54 years old with a wife and a 7 years old daughter. I have always been entrepreneur, for the past 14 years I have been investing in Real Estate. Health issues related to stress has caused me stop perusing further work and steered toward retirement.(I am perfectly fine If my stress level is low). Now I just manage my rentals. I think, I have enough investment to get me through life. However, I worry sometimes if it is enough and what else I can do to enlarge my investment. Here is the breakdown:
My Rental homes worth around : $3,000000
My own home: worth $250000 and have $80,000 mortgage left on it.
I owe around $350,000 in mortgages left from my rentals( for the past few years I have been paying off mortgages one at the time).
I have an average of $12,000 income from my rentals each month.
My average monthly house expenses is around $5000
Around 2 years ago, I got into Stock market investing. My portfolio worth around $190,000 as of yesterday. My investments have been some what you have been suggesting ON Vangaurd, with the exception of I own the ETF’s.. The list VTI(50%), VWO(emerging market 10%), VNQ(Reit, 20%), VCSH(Short term Corp bond%10%) and VYM(high dividend 10%). On Monday I added some VDE(energy) and additional VTI
If you would please have any suggestion if I am on the right path? What else can I do to be more diversified? Are my ETFs choices are correct and or should I have the Mutual fund? Currently I do not owe any IRA. I am considering doing that as well.
Thank you in advance
Mike
Hi Mike…
I’m doing great and hope you are too!
But if I had to manage those rentals, my stress would be thru the roof! Clearly not an issue for you. 😉
You are not doing things the way I would, but you seem to be doing just fine. Let’s take a look.
For this exercise I’m going to ignore your personal home and the equity in it.
Taking the 3m in rentals – 350k in mortgages = 2.65m + 190k in stocks/bonds = 2.84m
Personally, I have my money in only two low cost index funds: 75% VTSAX (stocks) and 25% VFIDX (bonds) https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
Using the 4% rule – https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/ – and your 2.84m, this would provide 113.6k in annual spendable income ($9466 per month) and the portfolio should continue to grow nicely.
Other than perhaps rebalancing once a year and spending the money, this takes no effort at all.
Looking at your situation….
—Your 190k portfolio could provide this same 4% = $7600 per year, $633 per month.
—Add this to your $12,000 in monthly rental income = $12,633
—This is $3167 MORE than my $9466.
—But in exchange you have the work of managing the properties (which maybe you enjoy) and..
—You didn’t say if the $12,000 was the gross rentals or net of expenses. If it is a gross number, you will want to subtract the expenses and use the net number for comparison.
As you can tell from my 2-fund portfolio, I don’t see the need for as many ETFs as you currently own. Needlessly complex and tougher to rebalance. With VTSAX I own virtually every publicly trade stock in the US.
That said, if you like them I don’t see any serious problem to keeping them.
For more on the reasoning behind my approach: https://jlcollinsnh.com/stock-series/
All of this said, anyone pushing a 3-million net worth at age 54 is done lots of things right. Well played!
Hi Jim,
First off, reading the stock series has changed my outlook on investing for the better. I can’t thank you enough for all you do.
That said, I have a “good problem” on my hands, and am respectfully looking for your opinion. As of February 1st, my company is being acquired. The great news is that the new company’s 401(k) plan is in Vanguard! I have basically narrowed down my selection of Vanguard funds down to two: VTIVX (Vanguard Target Retirement 2045 Fund – which is what I currently have in my old 401(k) and have found it to be a good fund overall) and VFINX (Vanguard 500 Index Fund Investor Shares). Given that VFINX is the only index fund in the new 401(k) plan, and after re-reading your posts regarding target funds and the stock market overall…I’m a bit torn. My question is if you were in my shoes (I am 32) which fund would you selection and why?
Thank you in advance,
Danny
Hi Danny…
Glad it has helped!
What would I do? Me?
Hands down VFINX. While it is not the VTSAX I recommend through out the blog, it is very close. https://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/
It is 100% US stocks and as such over the decades should provide the best returns.
But that’s me.
VTIVX is a fine choice too. It is a fund of funds and as such owns other stuff. It will also be volatile, but you can expect this diversity to smooth the ride a bit. It will also automatically adjust the holdings over time as you age.
But you’ll pay a slightly higher ER and I’d expect it to provide less performance.
Sounds like you’ve already read this, but for others here is my take on TRFs: https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
But only you can decide which is best for you.
Good luck!
Thank you so much for your thoughtful response! I had a sneaking suspicion you would pick VFINX over VTIVX 🙂
Honestly, since my original post I have also been leaning towards VFINX as well. Since my previous 401(k) plan had no index funds, but several actively managed mutual funds, VTIVX was the best possible option at the time. I guess I just had some nostalgia, but it’s time to move up to the big leagues.
Thank you so much again Jim!
Thank you Jim. Points taken!
Regarding the inheritance, I feel it’s inevitable that the market will see a huge correction, or even a crash, within the next few years, so naturally I’m on edge as this is twice the money I’ve saved so far, and I want to pass whatever I can on to my 3 kids. Your first post in the series speaks to the market crashing, and why it doesn’t matter, and I understand that. However, my concern is that I put this in as a lump sum, and the stock drops 50-60% in the next few years; I wouldn’t have much in savings to buy at that point so the market has to correct what it lost before I gain anything.
My current thought process is put $110,000 – $130,000 in VTSAX now, and keep $20,000 – $40,000 in savings for the drop.
If you were me, what would you do?
Yer just teasing me now, right Mike?
First, since you didn’t post this under our original conversation and to save others from having to search for it as I did, here’s the link: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213984
OK, you’ve read the first post in the series I recommended to you: https://jlcollinsnh.com/stock-series/ and you say understand my view on stock crashes.
I don’t have a crystal ball and so have no idea what the market will do tomorrow, next week, next month, this year or next. In fact I have a series of posts mocking those who think they do: https://jlcollinsnh.com/2016/01/07/3rd-annual-2015-louis-rukeyser-memorial-market-prediction-contest-results-and-my-forecast-for-2016/
But evidently you do and “…it’s inevitable that the market will see a huge correction, or even a crash, within the next few years.”
If I had such a wonderful crystal ball as to know that, of course I’d stay out until the “huge correction” hit bottom and then I’d pour all my money in (and borrow more for the purpose) for the climb back up.
But I don’t.
So I’d do this: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
But I certainly wouldn’t recommend it for you. 😉
It is worth remembering unpredictable future predictions are: http://awealthofcommonsense.com/remember-when/
First, please forgive me for what came out as a “know it all” statement, as I certainly don’t have a crystal ball. I do have a Magic 8 ball however, which would be just as useful I suppose. 🙂
The crow wasn’t very tasty, and the slimy egg on my face was very uncomfortable after I re-read my post, and I appreciate the smackdown. My statement, “…it’s inevitable that the market will see a huge correction, or even a crash, within the next few years.”, was certainly influenced by all the doom and gloom I’ve been reading. Thanks for the last link about “remember when”.
Please just understand that I’m grateful, and extremely thankful, for the money that Dad left to us and I’m just trying not to f*** things up! I’m concerned, and a little scared, and just want to do the right thing for my family and me.
I appreciate your stock series, and your generosity in replying to each post, and will do my best not make asinine statements.
Regarding not posting under the original statement, I replied to the email which I assumed would link it to the original. Using the Reply button on your response today. Sorry about that!
No worries, Mike…
You caught me in one of my cranky geezer moments and your very gracious response certainly has pulled me out of that.
For what it is worth, I do understand the fear and it is natural to feel that way. And, if you fully invest and the market runs against you (as it well could) you’ll feel terrible.
When I said: “I certainly wouldn’t recommend it for you.” I was being both tongue-in-cheek and serious.
Serious because if you don’t fully understand how this all works you’ll very likely get scared out at precisely the wrong time. And that will lock in your loss.
This, which could equally be titled Investing in a Raging Bear, might help: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
But mostly I strongly urge you to read (re-read) the Stock Series before doing anything. Understand the risks and volatility as well as why it can be so rewarding.
Don’t invest anything you are not willing to leave in place for a decade or, better, longer.
Good luck!
Hi Jim,
Finally got my Vanguard account created with all available funds in VTSAX. I have a Roth IRA at Ed Jones that I need to move over, and we have 3 529’s for the kids at Ed Jones that we wish to bring over as well. Kids’ ages: 13,10, and 7.
My Roth IRA has 3 funds in it currently: VXUS, AMCPX, and AIVSX. Currently I’m down $14/share on VXUS, and down $6 and $7/share on the others. When I move this Roth to Vanguard, would you recommend transferring everything into VTSAX, or let those ride in their current funds and only add anything new in VTSAX? I understand you don’t lose until you sell, but the value of the account is what it is, and if there is a higher upside in VTSAX moving forward, that seems to make sense to me. Am I way off here?
As for the 529’s, all 3 include only AMCPX and AIVSX, so they’ve dropped in value as well. When Dad passed last year, each 529 was funded with $18,100; all 3 are in the low $16k’s now (don’t remember what the last statement read, but the market has dropped since then). Would you transfer all of these into VTSAX since we do not plan to put anymore money into these 529’s? VTSAX is down less than these 2 funds, and has a higher upside from what I can see. We’re looking at 5 years before the 1st child would start to use theirs, and 10 years before the youngest would.
Lastly, is there any way I can move these 529’s into an IRA or some other type of fund for the kids that would make sense, even if there is a penalty? My understanding is that when a FAFSA is completed and a school is chosen, that school in essence immediately looks at that 529 as their money, which may reduce the amount of possible financial aid from the school. However, I read in a Forbes article, “Retirement assets such as 401k, 403b, IRAs, SEP, SIMPLE, Keogh, profit sharing, pensions and Roth IRAs are not included in the calculation of EFC under any of the three EFC methodologies. Assets that aren’t in retirement accounts — balances in checking, savings, CDs, brokerage accounts, money market, investment real estate, stocks, bonds, mutual funds, ETFs, commodities and 529 college savings and prepaid plans—do get included in the EFC formulas.” Do you know of a possible way to move from a 529 into an IRA?
Thanks again for your guidance Jim. Your blog and the others you link to that are FI (MF, MMM, etc) offer the financial guidance I never got from my parents, and I’m grateful. Thank you!
Cheers,
Mike
My expereience is that financial aid process views 529 as students asset and thus is a direct reduction off of the calculated financial need.
Hi Mike…
Let me start by saying that you should not move to VTSAX (or any other alternative) because it has in the short-term outperformed what you have.
You should choose VTSAX only because you understand what it is and why that makes it a good long-term holding. Once you own it, you’ll always be able to find some funds that are outperforming it at any given moment. http://www.1500days.com/asset-class-battle-update-3-embrace-the-chaos/
Once you decide to move to VTSAX, just do it. Worrying about whether it and the others are up or down more in relation to each other is just so much market-timing. And no one can do that reliably.
As far as I know, there is no way to move a 529 to an IRA.
My pal Matt just put up an excellent post on 529s: https://momanddadmoney.com/5-good-reasons-not-to-use-a-college-savings-account/
After you give it a read, you might ask him in the comments there. If you do, tell him I said “hey!”
Hello Mr. Collins,
I was very excited about opening my account at Vanguard, but found out today that as a US citizen working abroad I am not allowed to do so. I file Federal and State tax returns so any earnings would be reported; can you please tell me why I can’t invest in my country?
Thank you for your help.
Gee, RA…
…you make it sound like like I created the policy. 😉
As it happens, I didn’t. 😉
In fact I was unaware of it and my first thought was you had been misinformed. It just seems wrong.
But curious, I called Vanguard and indeed was told…
To invest in Vanguard you must have a legal permanent address in the US, Puerto Rico, its embassies or military bases. Interestingly you do not have to be a US citizen as long as you are a legal resident.
It also seems that if you have Vanguard accounts and then move overseas you can keep them. But you can not initiate one while living outside the country.
This policy is evidently designed to verify identity (as Vanguard is legally required to do) and has its origins in the Patriot Act of 2001.
So, why can’t you invest in your country? Because your country says so. Chalk it up to another erosion of our liberties.
Sorry if my email sounded accusatory, that was not at all my intention; wouldn’t for the world offend the oracle from NH.
I enjoy your blog tremendously, I just wanted to join in and improve my finances ; it feels like I just got uninvited to a great party.
When I called Vanguard, no one could give me a reason for not being able to open an account, other than I was not a permanent resident. It just didn’t seem logical and I felt that I had talked to a rep that was not very knowledgeable. I really appreciate getting a straight answer from you ; thank you so much for taking the time to contact Vanguard.
I will continue to read your fantastic blog, and wish you and yours health and prosperity in this New Year : )
RA
Nah, RA…
You are not uninvited around here and I’m glad you showed up for the party.
I kinda figured your original message had a tone you didn’t intend and I couldn’t resist tweaking you a bit on it.
In truth, you raised a very interesting question on an issue of which I was unaware. It gave me a chance to do a little more digging and to learn something new.
You mentioned the rep you talked to didn’t seem very knowledgable and the truth is the guy I talked to didn’t inspire my confidence either. So I emailed my inside source.
Maybe I should have done so at the get-go, but as I mentioned I thought you had been misinformed and my call would quickly confirm that. It just seemed so “wrong.”
In any event, here’s what she told me:
“Vanguard funds offered for sale in the U.S. generally are not sold outside of the U.S., except to certain qualified investors.
“The reason for this is not to verify identify, for which we have separate processes and procedures in place, but rather to ensure that the U.S. funds do not run afoul of foreign regulation which we could be subject to if we sold funds to persons living outside of the U.S.”
As this was different from what the rep had been saying, I emailed her again, listing what I’d been told and asking her: Can you tell me which, if any, of these things are true?
She did:
—To invest in Vanguard you must have a legal permanent address in the US, Puerto Rico, its embassies or military bases.
“This is accurate. Puerto Rico is subject to the same securities regime as the U.S. and so Vanguard fund shares may be sold to residents of Puerto Rico without additional regulatory obligations. Likewise, U.S. persons living abroad at an embassy or military base are legally treated as U.S. persons residing in U.S. territories and are therefore subject to the same securities regime.”
—Without a legal US address a US citizen cannot buy Vanguard Funds.
“This is accurate. Many foreign countries look to a shareholder’s residence rather than country of origin when determining whether a mutual fund or adviser needs to register under that country’s securities regime.”
—Non-US citizens who are legal residents with a US address can buy Vanguard Funds.
“This is accurate for the reason described above. A Spanish citizen living in the United States may purchase a U.S. mutual fund because regulators look to the shareholder’s legal residence. If that Spanish citizen were to return to Spain, he or she would no longer be able to purchase new shares or open a new account.”
—If you have Vanguard accounts and then move overseas you can keep them. But you can’t initiate a new one while living outside the country.
“Accurate.”
—Can you add to them?
“No.”
—This policy is to verify identity (as Vanguard is legally required to do).
“The reason provided for the policy was inaccurate. Sorry.”
—This legal requirement has its origins in the Patriot Act of 2001.
“The Patriot Act requires that mutual funds have a customer identification program in place which the Vanguard funds do. That program is separate and distinct from the funds’ policy to restrict investment to U.S. investors.”
So there you have it. Hope it helps and thanks for raising the issue!
Hey RA…
If you’re still around I just came across this option for maintaining a US-based street address and mail service: https://travelingmailbox.com/how-it-works
Hello Jim.
First of all thank you for creating such an awesome blog that has really helped me understand the basics of personal finance.
I am interested on what your thoughts are about asset allocation for some of us who cannot buy interest bearing funds such as bonds, CDs etc. I’m in my late 30s and had a late start. I have around $250,000 sitting in a zero-interest bearing account for the last 5 years. I guess in one way at this point I may have F-U Money (5 years of hard work and living like a College grad). I have no need of this money for at least 20 years or so. Shall I just put it all in VTSAX? Since I cannot carry bonds etc, this money is in my IRA.
Thank you for your excellent blog again. This is the 1st time EVER that I am posting a comment on ANY blog!!…nervous as heck.
Welcome Caldude…
…no need to be nervous. If you’ve decided to post a comment, here is as good as anywhere. 🙂
Here’s my take on AA: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
You have me very curious. Why, exactly, is it that you say “cannot buy interest bearing funds such as bonds, CDs etc. “?
Thank you for responding. I read the stock series article and it answered my question!! So here goes…..
Religious/culturally dealing with interest is considered unlawful. Many people I know will only buy a house with all cash instead of a mortgage. Interest bearing accounts, insurance/annuities, CDs, bonds etc all fall in this category. However, owning businesses and receiving a share of the profits is considered lawful, hence I think dividends should be ok. Now no one is perfect, so by owning VTSAX I am also a shareholder on unlawful businesses like alcohol, tobacco etc. (Note to the Internet Police – please don’t eat me up). Now of course everyone is different in their interpretation.
I have searched the internet but could not find any guidance for a small percentage of us with a lot of money sitting in interest free checking/savings accounts. Personally I have no interest in being a landlord and I live in a high COL area where prices are exorbitant anyway. Maybe one day I could be an immigrant case study hehe.
Thank you once again.
Of course!
I don’t know why the religious restriction didn’t occur to me.
That being the case, you are kind of stuck with interest free checking accounts. On the other hand, interest rates are so low these days you’re not missing much. 🙂
While I’m not a proponent because of the cost, there are mutual funds that invest “ethically.” I put that in quotes because there are so many different definitions of what that means.
But there are also almost as many funds matching the definitions.
I haven’t written about this, but my pal Darrow has: http://www.caniretireyet.com/socially-responsible-investing-worth-the-price/
I think an immigrant case study would be a cool idea!
Thank you for your response. I had never come across that website and it does bring out some options for SRI funds. However, I agree that their ER are really high. I think I tend to agree with MMM’s response.
Either way, ever since coming across all the PF blogs and finally making small financial changes I have found this road to be very lonely. It’s very difficult to explain to people these concepts (I’ve always hated math) and many times it can get a little daunting. However, nothing feels better than having some F-U money and these days I just go on doing my business with people in their own mindset. I come up with excuses like I’m going to a conference etc when I’ve really taken a couple of weeks off to travel (using miles of course;).
Some people here will have a difficult time understanding these concepts of living without interest etc. I have 250k in an IRA & roughly 650K or so sitting in a taxable savings account!! Yeah I know. I’m young and naive. I think VTSAX maybe the right way to go…it’s hard to make the move…..I think it’s fear of losing the money….especially for someone like me who absolutely abhorred math. It’s definitely an emotional/psychological battle.
Your genuine interest and all the other PF blogs really allows us to find a place to feel at home and seek some guidance. Thank you once again.
Hi Mr. Collins, I was forwarded your site by a friend and found your commentary very thoughtful and interesting. I work at Investopedia.com and if it appeals to you I’m sure we’d be able to figure out some ways to work together that would be mutually beneficial. I’d love to get your writing in front of a larger audience.
I wasn’t able to find contact info for you anywhere (I’m getting old) so forgive me using your Q/A form but I’ve included my email in the submission so please contact me if you’re interested.
Thanks!
DZ
Thanks Dylan…
I’ll send you a PM.
Hi Mr Collins,
I am going to be 32 this year in August. I have saved and invested aprrox. $205,000 in a Vanguard index fund and have $45,000 in a retirement account. I earn around $4,000 after tax monthly from my job (started 5.5 years ago) and $300 dollars from dividends every month. My monthly expenses are approximately $1,800. Not very interested to own a home or have any children at the moment Survived two emergency brain surgeries in Jan 2015. If my health, financial and lifestyle conditions does not change much, do I continue saving and investing in the high yield index fund. Would appreciate your advise in regards to managing my finance over the next five-ten years.Thank you.
Hi Shaquille…
Doesn’t sound like you need much financial advice. You seem to have things very well handled on both the saving and investing front. So, well done!
The brain surgeries sound very serious to me, but hopefully the problem is solved?
If not…
–and if you are suggesting your life expectancy might be dramatically shortened
–and if you would enjoy spending more money
…you might consider a lower savings rate and doing more of what you want to do.
Does this help?
Thank you Mr Collins. My neurosurgeon have not advised me anything about my life expectancy being shortened by my brain surgeries so I expect to die around the age of 82-89 (according to actuaries table). My brain problem has been dealt with but I will be monitored by my surgeon for the next 10 years. At the moment I don’t have any debts so I will continue to save more than 50% off my income and invest in the index fund. Do you think I am on track to reach a financial position in the future where I can choose not to work anymore and live off my assets? What would be your analysis? Thank you Mr Collins, best regards, Shaquille
50%+ is a great savings rate and certainly should have you on tract to financial independence.
Check out the chart at the end of this post:
https://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
and give the Stock Series here a read.
Let me first start by saying that since reading your blog you have brought my saving and money efficiency to a whole new level.
I have always been a pretty good saver, maxing out my roth IRA and coming close to maxing my 401k. However, my problem has always been where to invest my other money. Up Until this point I have had a Fidelity Account and a Wealthfront account that total around 30k. Additionally, in the last 3 months of reading your blog I have been able to save up another 7k.
I have opened a Vanguard account and have all 37k in their vmmxx fund. I want to put it all into the VTSAX fund but with all the volatility in the market I am not sure if I should wait for that to die down a bit. I know I am not going to be able to time the “right” time to buy I guess I am more concerned with buying in at the wrong time. Regardless I am 29 and this is a long term thing so maybe I just bite the bullet and put it in.
Any thoughts would be greatly appreciated, and keep up the good work the blog is amazing and I have been feeding my girlfriend small doses to try and get her on board.
Thanks again,
Jason
Hi Jason…
As I say many, many times thru out the blog, timing the market is simply not possible. Would that it were.
“with all the volatility in the market…I am not sure if I should wait for that to die down a bit.”
The market is almost always volatile and during those periods of calm it is just getting ready so soar or plunge into another round of volatility.
“I know I am not going to be able to time the “right” time to buy I guess I am more concerned with buying in at the wrong time.”
This says to me you have yet to come to terms with the true nature of the market. As such, if you invest you will be prone to panic during drops and easily scared out.
Risk is not and can’t be mitigated with timing.
Some reading:
https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/
https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
Hello my friend! I wanted to thank you and give the readers a small success story. I was very, VERY nervous about moving out of my former conservative investments; in which I was losing about 8% per year 🙁
I “put my toe in the water” so to speak and moved 80% to VTSAX and 20% to VBTLX. I kept 10% in VMMXX (cash). Even during the recent downturn, I’m doing MUCH better than I ever did in “conservative” / “safe” investing. Today I closed my VMMXX cash account and transferred it to VTSAX. I feel downright giddy! For those of you who are still nervous, I found this article about Warren Buffett on USA Today website 🙂 You are in good company my friend! Thank you for all your help!!!
http://www.usatoday.com/story/money/personalfinance/2016/01/25/warren-buffetts-15-minute-retirement-plan/78376732/
Jeff
Hi Jeff…
Thanks for checking back in!
I delighted you are so pleased with the moves you’ve made.
Thanks, too, for the link. That Buffett fellow is starting to get the hang of this… 😉
For those who might be interested, here is our original conversation: https://jlcollinsnh.com/ask-jlcollinsnh/#comment-4213396
How do I get on the Chautaqua cancellation list? Both retreats are already sold out.
Go to the registration page for the week you want, like this one: http://www.abovethecloudsretreats.com/registration-november-12-19-2016.html
Scroll down to just under where it says “Sold Out” and you’ll find a link under the word “here” that goes to the wait list.
Good luck!
Hi Jim, first I’d like to say thanks for your excellent blog. My journey towards frugal living and FI is only a year old, but your work has been both informative and inspiring as I learn to be smarter with my financial decisions.
I was hoping to get your take on my real estate situation:
As a single guy, I bought a $300k luxury condo in 2014 which I planned to live in, or rent out if my situation changed. Now, a year and a bit later, I spend most of my time at my g/f’s place, while I dutifully shell out $2100 each month on my empty pad (includes mortgage, taxes, utilities, condo fees, etc.). If I manage to rent it out I can only expect about $1500/mth given the current market in Edmonton, but since I owe $270k on the place, selling will likely only net me $10-15k after realtor fees, etc. At any rate, I’m unsure I want the hassle of becoming a landlord.
I want to sell my place and split the rent on my g/f’s apartment until she buys a place of her own, at which time I’ll either pay her rent or split the mortgage. Splitting her current rent will only cost me $800/mth, leaving an extra $1300 each month to invest. The math seems to be a no-brainer, but before I list the place I was hoping to get your take on the situation. Thoughts?
Thanks,
Troy
Welcome Troy…
…glad to hear the blog has helped.
Yep. The math is a no-brainer. What you have is what we used to call an “alligator” — that is a property that is eating you alive.
Right now it is biting $2100 chunks out of you each month. Rent it and you’ll have all the work and hassle of being a landlord and it will still be biting off $600 chunks.
You can sell AND net 10-15k? I’d dump it faster than I can type this reply.
In fact, even if it COST me 10-15k to unload it I would. Alligators are terrible things.
Once dumped, you have $2100 a month to invest and build wealth for you.
Not that you asked but…
I would also encourage your GF to think long and hard before buying. Some reading:
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
https://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/
https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Good luck!
Thanks Jim, appreciate the quick and insightful response! And thanks for the bonus info/reading list for my g/f!
Troy
My pleasure, Troy…
All the best to you both!
Hi Jim,
I have been an avid reader of your blog for a few months now. Wish I would have been reading it for years, I’d be closer to FI if that were the case! Many thanks for your thoughtful opinions and analysis. And the sheer entertainment value of your writing, too! The fiancee keeps finding me giggling to myself as I devour your articles.
Anyway, here’s some background on me before my questions: I’m 26, employed as a software developer making ~$70k per year. I eventually ended up with a Masters Degree, but spun my wheels on a few different career paths, and racked up more student debt than I should have.
I’ll try and keep my question brief as your time is valuable. Currently I’m sitting on $78k in student loans, with a weighted interest rate of 5.86%. Making minimum payments, this will be paid in full on 1/1/2024. Eight more years, yikes! However, the lovely folks at the IRS allow up to $2500 in student loan interest per year to be itemized as a credit. This makes that 5.86% rate an effective rate of almost 0%. (I paid $2600 in interest in 2015, anticipating less than $2500 in 2016 and onward). I would like to start saving $800 additional per month in an IRA, starting immediately. After the loans are paid off, I will continue putting the full amount of my loan payments (~$1800) in my IRA. Let’s call this Plan A.
Part of me wants to kick this student loan debt to the curb, and instead of making minimum payments and saving $800, I can put an additional $400 towards the loans and save just $400. This gives me a payoff date of mid-2021. At that time I will put the full $1400 going towards my loans into my IRA, plus the $400 I’m already saving. Plan B.
Or there’s the more extreme(?) option of throwing all of that $800 directly at the student loans, getting an early payoff date of 1/30/2020, then put that $1800 going towards my loans into my IRA . Plan C.
Assuming a yearly ROI of 7% for the sake of simplicity, at the time of Plan A’s payoff date (1/1/2024) my IRA will contain $101,615.52. The second two plans with accelerated payoff but slower investment show Plan B with $97,330.80 on that date. Plan C will have slightly less at $96,126.76.
I am leaning towards Plan A for that extra $4-6k, not an insignificant amount. And beginning my accelerated savings journey early gives me a warm fuzzy feeling inside. My question for you is this: Am I missing something glaringly obvious? Perhaps the risk that a change in the tax code that might eliminate the $2500 student loan interest credit? Am I putting too little value in the relief of being debt-free? Is that extra money chump change?
Your opinion is greatly appreciated!
Regards,
Jared I.
Welcome Jared…
Glad you found your way here, are finding it valuable and enjoying the humor. Not many mention that last point and so I think I mostly miss the mark. 🙂
You have taught me something. I didn’t know about “IRS allow up to $2500 in student loan interest per year to be itemized as a credit.”
However, you are not quite correct. It is a deduction, not a credit.
https://www.irs.gov/taxtopics/tc456.html
This is a big difference as a deduction reduces your taxable income while a credit reduces the tax owed.
So, for example, if you are in the 15% bracket, the $2500 deduction would save you $375.
Toward the end of this post https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/ I chart my rule of thumb as to when to pay off debt you have based on the interest rate.
I’d suggest you calculate the value of the deduction in your situation and the real interest rate after taking it into account and then use that as your guide.
—Other than possibly confusing deduction and credit, I don’t think you are missing anything glaring.
—It is doubtful the tax code will change on this issue, but if it did you’d just change accordingly yourself. Worry about that then.
—Being debt-free is wonderful and if that appeals to you go for it. Otherwise, use my interest rate guide in that post.
—Nope. Not chump change. 🙂
Hi Jim,
You’re absolutely right. It is a $2500 deduction. I got carried away in my moment of euphoria. A $2500 credit would mean the federal gov’t would be completely subsidizing my student loans. As nice as that sounds, I should have recognized it as too good to be true. 🙂
I fall into the 25% tax bracket, meaning this deduction saves me $625 yearly. This brings my effective interest rate on all my loans from 5.63% to ~4.36%. Still a solid savings. However, this makes me think the slightly more aggressive payoff while still increasing my contribution to retirement savings, is the way to go.
Thanks for your cogent explanation!
Gratefully,
Jared I.
Hi Emjay and Jim:)
Jim – I posted these additional questions after the case study as well in case EmJay is viewing additional questions on that post
My apologies if I am placing my response in too many places
It was Great to hear is update –
Sorry for the late reply as I was traveling for work.
EmJay – greatly appreciate the update as I find your situation fascinating – you are an excellent writer and Jim has the Best SITE on the Web – he has a way of making feel like your part of his extended family 🙂
For what it is worth I read your case study at least once a week as I find myself in a similar position but WITHOUT the courage to leave the work force. I re-read it frequently to give me hope and confidence in my financial situation.
I was hoping you might answer a few more questions –
Specifically -is their a total net worth number that you are seeking to attain that would make you and your wife more comfortable with your retirement based on your initial withdrawal from the workforce? For example attaining $3MM with no debt at all and $300,000 set aside for college – would that cause you to go back to the “low pay -low stress job” or is it another number entirely
I ask this – as I wonder – why did you return to working – especially in a very demanding position again – was it to build your wealth to a higher more comfortable level or did you just return based out of boredom.
Also, what advice would you give someone whom is close to pulling the trigger (leaving their full time employment) – since you were out of work – was it harder than you thought, did you rethink the 4% withdrawal rate – should it be higher/lower anything else you would put into discussion from your recent experience? I look at your experience as a “fresh case” and wonder what else you learned – was Health Insurance harder and more expensive than you thought, could you have stayed retired – but you just went back to work out of boredom?
Since I am prying into all your financial specifics it might be only fair if I share my specific situation with you 🙂 – and Jim
I turn 52 this April and my wife turns 46 this April
We have a 13 and a 3 year old –
Before the market drop, we hit $3MM net worth – no debt. This includes Cash, Stock and a few rental properties – value of everything is $3MM before the market drop.
We in addition to the $3MM have $250,000 set aside for college
The $3MM and the $250,000 (college funds) does not include our equity in our primary home. We exclude that equity as we need a place to live
I have worked for the same company for 28 years and make roughly the same salary as you
My wife earns $120,000 gross
My wife and I have been toying with the idea of me leaving work. I am scared to do so. I have read everything I can about withdrawal rates and I am looking (Jim – don’t fall off your chair ) at withdrawing between 2.5% and 3% max.
With my wife continuing to work we would not be withdrawing more than 1% until she was unemployed —hopefully she can last another 5 years
In a nutshell…. I am asking you all these questions….because I feel your case study is very close to our situation.
I am hoping I can improve my probability of success by asking you as many questions as possible since your experience is / was so recent….For what it is worth, you and your wife are very sharp folks to achieve what you have so early in life – so I want to learn as much as I can from your situation
In closing, if I were to leave in June 2016 – I would look for a low stress low wage job so i could take even less from out nest egg, my wife would continue to work as long as hse could but most likely not past 5 years —-she then would join me in the low wage low stress job….
Strangely enough I have asked my employer for a demotion to a more work/life friendlier position, they have not said no yet as they are shocked by my request – they love my output but they do not understand that stress it has caused me over the last 28 years – I am hoping my employer and I can come to a compromise – less pay, less stress and still have a dedicated employee
EmJay, no problem if you do not have the time to respond – i totally understand with your new position and all
In closing I want to thank you again for being an inspiration to me and I can imagine to many others! I hope some day our paths cross, if your interested in sking at Sunday River Maine – let me know I can get you a deal on a rental 🙂
Jim, I read and re-read all the comments from people thanking you for the help and advice, I wonder sometimes do you REALLY understand all the GOOD you have done for folks? I hope you do, I really hope you do – your website serves as an educational tool but your insights – your insights – serve as life changing mechanisms for many people to improve their lives
thanks
Chris
Thanks Chris…
I appreciate the very kind words.
I guess I don’t think about it in those terms much, but it is always nice to hear!
Jim
I think it is a fact????
You not only will have a legacy with your daughter but you also have a great legacy well after your departure from the many many adopted children and extended family from your BLOG you have helped
I think it is pretty cool to be in a position where you are helping millions of people thru your words and advice
I hope I am so fortunate someday
Ps – thanks for not thinking I’m a nut with all my questions
As I said to my wife today my biggest asset to get us where we are today besides her is my insecurity …..now it is working against me
Have a great evening and thanks for your service to others!
More like thousands rather than millions but, again, Thanks!
Interesting point about your insecurity.
The same applies to thrift. It is a key factor in building wealth but, once wealthy, it can inhibit enjoying it.
Who says I don’t think you’re a nut? 😉
Jim
I think your spot on-about the nut part – at least my wife would agree
A piece of good news my wife has really begun to read and get much more involved into our finances due to my lack of balance I only see worst case scenario – if the kids were older I might feel better
Just food for thought – after reading a number of various blogs – it might be interesting to learn how folks have dealt with insecurity –
With your case study on EmJay your quotes hit home
Time is much more valuable than building your stash
Your not alone in not having much joy in a 25 year career
Your quote pertaining to thrift is one I will be thinking about all week
This week I find out if I get the demotion or resign end of June-
Scary and exciting at the same time
Thanks for all your replies and enjoy your week
Good news not much snow last year in NH as in Ma – we are semi close neighbors
Chris
22 years old, married with one child. I started investing with Betterment at 18 (as soon as I could). I started a taxable account because I was naive and didn’t want the money locked up till I was 60 (I didn’t know ROTH IRA contributions can be withdrawn) . I have about 6k there now. Last year I got into the FIRE blogosphere, and I’ve realized I should have started with a Roth and used a traditional once I started working in earnest (as per MadFientist’s recommendations). Self-employed (took over the family business) and will make 40-50k this year. We’ll have at least a 50-60% savings rate. I plan to use tax advantaged accounts first from now on, but I wondered, would it be worth selling my Betterment shares to fund the 2015 IRA and then whatever is left over toward 2016, or should I just hold tight?
My question is, should I sell and then buy back in, or just not worry about the small amount of capital gains and dividends in an account of that size? Would this be “selling low?” And have enough money saved that I could execute the buy on the same day, so I would not have to wait for the money to clear to my checking account, and then clear back when I buy. I’ve also have thought about buying a Total Stock Market fund with Vanguard (in an IRA of course) but I feel like it would be a bad idea to sell shares and should just stick with the Betterment account. Maybe I’m wrong.
Hi Kevin….
Here’s my take on Betterment:
https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
As I say in it: “If you have/can read thru and understand the Stock Series here on the blog you are good to go and DIY (Do It Yourself) directly with Vanguard.” https://jlcollinsnh.com/stock-series/
That’s how I’d decide.
With your savings rate, I’d fund the tax-advantaged accounts out of your earned income.
If you decide to move from Betterment to VTSAX @ Vanguard I’d just keep it in a taxable account. Like to like.
I wouldn’t let the capital gains influence my decision. I also wouldn’t worry too much about the few days it will take to sell the one and buy the other. Just don’t sit on the money and not get around to buying.
Yes, I’ve read through the stock series (I’ve shared it with several friends, it should be read by anyone who wants to invest.), and that has probably been the biggest push to make me consider to stepping out of Betterment.
Thanks for your answer to my question. I thought since retirement accounts will get maxed out eventually, and I’ll have to open a taxable account anyway, it might be best to just keep it going, but didn’t know if it was a mistake to “lose” to taxes. Your advice is helpful.
Jim,
Good morning! My wife and I are both military and have some questions for you about Home Equity Loans. I haven’t seen much discussion on it here besides a couple of reader comments. I’d like to ask you some questions about it but I first have to explain our personal situation and I really prefer not to do that here in public. On the same note, I also don’t want to post my email address for all to see and I can’t seem to find a contact for you anywhere on the site. Would you be willing to email me so that I can reply with our situation and questions? I am, coincidently, selling some car parts on Craigslist and they have conveniently provided me with an anonymous email address for the duration of my ad. I promise you I am not a spam bot, I am just looking for a sanity check from someone wiser than myself without spilling it all over the net. Here is the temporary email address they gave me: vg7tq-5430165492@sale.craigslist.org
I hope to hear from you soon, thanks!
Hi Logan…
Sorry, but I only respond to questions here on the blog so others can benefit from the conversation.
That said, I might not be the best source for questions on Home Equity Loans anyway. Real Estate is not really my thing.
Paula on http://affordanything.com is my go to for that.
Good luck.
Jim love your blog. Best reading I have done in years. What is the difference between ETFs and Funds? I see Vanguard ETFs charge .05 ER same as Admiral fund shares without the 10 k minimum. I am currently about to move 24 k out of a simple and a traditional IRA to Vangard from ed jones where my wife works as BOA since 2003. Also Re: SEC Yield isn’t higher better?
Have read all of your blog, some several times. But don’t totally understand some things.
Thanks
Tommy T.
Thanks Tommy…
…much appreciated!
For most practical purposes you can consider ETFs and Funds as interchangeable. Especially for long-term investors like ourselves.
EFTs were created to make it easier and faster to trade mutual funds. Where with a fund when you buy or sell you get the price as of the trading day’s end, with an ETF you can buy or sell instantly just like a stock.
I discuss this a bit here:
https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
Be sure to check out Addendum #VI
This is a good FAQ from Vanguard: https://investor.vanguard.com/etf/faqs
Thanks for your comment on UC!
Hi Jim,
Thank you so much for your clear and direct help!
I am 46, no debt, I earn about 75k a year and have my own creative business. I am frugal, maybe too much so…I have an financial advisor to manages my retirement and non-retirement. These accounts are doing “okay.” I want my money to be working for me. After having read your blog suggestion (VTSAX.) Should I take out whatever I can (the minimum is 10k) and open a (VTSAX) fund? I am not sure I feel comfortable to invest it all but am considering taking a big chunk and would love any advice.
Thank you kindly!
Hi Tasha…
You don’t have to read very far in this blog to know that VTSAX is my top fund and it is the only stock fund I personally own.
It (and its variations) is also the only fund I recommend other than other total stock market index funds and S&P 500 index funds when these are the only choice in a 401(k) type plan.
So your real question is: Is it right for you?
That’s a choice only you can and should make. If you read thru this:
https://jlcollinsnh.com/stock-series/
you’ll have as clear an understanding of my thinking as I can provide. Then you can decide.
You might also read this:
https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
for some perspective on advisors.
Good luck!
Hi Jim,
If I want to make a go of achieving FI before the age of 59.5 (let’s say, by 50), would my best plan of action be to focus all my VTSAX investing in the regular, taxable bucket? I understand the benefit of tax-advantaged buckets, but my concern is not being able to employ the 4% rule even if I’ve accumulated my target wealth before 59.5, and thus being forced to continue working until that age anyway. Am I looking at this all wrong?
Thanks,
Phil
Hi Phil…
I’d advise funding all the tax advantaged accounts available to you first. If you are saving aggressively enough for early retirement, you are likely saving more than the limits on these allow. That can go into your taxable account.
Once you retire, you will draw down your taxable account first to get you to 59.5.
If this is not enough, there are ways to access the tax-advantaged account money: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Hope this helps!
Mr. Collins,
Two years ago I posted a question, to which you responded with some sage advice. I thought I would check back in and once again seek your advice. Two years ago I told you I was stagnating at my place of employment and was thinking about making a change. I’ve yet to make that change, but this might be the year I make the move. I’m a 53 year old professional with two young boys, ages 9 and 6, and earn in the six figures. My wife has a part time job earning about $40K that allows her to work at home. Our net worth omitting home equity and personal property is about $1.4M. (the recent stock market decline has hit some of our investments pretty hard, but I’m confident the market will come back, as it always does)
As I told you two years ago, if I leave my current place of employment I will likely end up self-employed and my income could drop substantially. Our monthly expenses are about $4000, but $1300 of that is a mortgage/property taxes/insurance payment. We owe about $92,000 on the house, and conservatively the house is worth $250,000. We have no other debt. I am thinking about paying off the mortgage before making any job change. I’ve read your posts on home ownership and generally agree with your financial views on whether houses are good “investments”. However, with two young boys we will likely stay in this house because of its proximity to their current grade school, etc. We need roots right now, not wings. The reason I am thinking about paying off the house is that if I leave (or am kicked to the curb) my current job, and become self-employed, I will need to purchase health insurance for my family. If I do not have a mortgage payment the monthly cash flow impact of buying health insurance would be less burdensome. Taxes and insurance make up about $500 of my mortgage payment, so a paid off mortgage would leave around $800 a month to pay for health insurance for a family of four.
So, really two questions:
Should I pay off my house?
How would you handle the health insurance issue if you were in my shoes?
Thanks for any advice you can provide. I know that you are likely not an “expert” on health insurance issues, and I will admit I have not yet researched costs either in the open market or through Obamacare. However, your insights would be appreciated.
Thanks,
Ken
Hi Ken…
…Welcome back!
Let me start by saying you are financially well prepared to take this step.
Your annual expenses are ~48k and using the 4% rule your 1.4 million can provide ~56k by itself. Add to that the 40k your wife is bringing in and you have twice what you need before you bring in a dime. You are golden. Well done!
Paying off your house is both a financial and an emotional consideration.
The financial part is a function of your interest rate. I provide a guideline on this in this post: https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
But even if your interest rate is low enough to make it the right financial choice to keep the mortgage, if you still want to pay it off and be done with it there is nothing wrong in doing so. In fact, with my last house I did just that.
BTW, I am not against homeownership. I am against blindly accepting the industry propaganda that it is an investment. It is a lifestyle choice.
In your case it is a choice you can easily afford and with two kids I’d do the same. Indeed, I did and with only one. 🙂
I really know very little about health insurance. Those times when we needed it, we always chose the high deductible plan for the lower premium. Of course this meant we paid routine costs out of pocket. But I didn’t see a reason to cover those with insurance. We were healthy and the bet was that the out of pocket costs would be less than the premium savings. It worked, but if it hadn’t we could have comfortably afforded covering the deductible.
From what I’ve read, it sounds like Obamacare has made things better and easier for the early retired/lower income self employed. But I have no personal experience with it.
Good luck in your new adventures!
Jim,
Thanks for the reply; as always, I appreciate your comments and advice.
Ken
Re: Obamacare
Just 4 simple sentences. Great summary by a Notre Dame University engineer………
Here are the 10,535 pages of ObamaCare condensed to 4 simple sentences..
As humorous as it sounds, every last word is absolutely TRUE!
1. In order to insure the uninsured, we first have to un-insure the insured.
2. Next, we require the newly un-insured to be re-insured.
3. To re-insure the newly un-insured, they are required to pay extra charges to be re-insured.
4. The extra charges are required so that the original insured, who became un-insured, and then became re-insured, can pay enough extra so that the original un-insured can be insured, so it will be ‘free-of-charge’ to them.
This, ladies and gentlemen, is called “redistribution of the middle class people’s wealth.”
Hi Mr JL Collins,
I have read through your stock series but I can’t seem to grasp what kind of account I should open up at vanguard?
If I open up a Roth IRA or a traditional one, won’t there be a limit to that?
So what should I open at vanguard if I decide to save more than the maximum amount allowed in an IRA account?
Thank man!
Looking forward to your reply
Hi Gab…
Yep, IRAs have an annual limit of $5500 ($6500 if you are over 50) and that’s across all of them.
If you have a 401(K)-type plan where you work, you can fund that too. $18,000 ($24,000 if you are over 50)
Once those are filled, just open a regular taxable account and invest there.
BTW you can hold the same investment, VTSAX for example, in all of these “buckets.”
This post should help: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Hi Jim,
I realize this steps outside the scope of your longterm buy-and-hold strategy, but I’m wondering if you have any suggestions as far as short term investing (for instance if I wanted to spend 2-5 years aggressively saving up to buy a rental property).
Thanks,
Phil
Hi Phil…
If you absolutely need the money at a certain time in 2-5 years a boring old savings account is the place.
But, if you have some flexibility and are willing to push back the spend date if the market moves against you, you can reach for a better return with a stock/bond mix. The greater the tilt toward bonds, the least risk.
This is one of the ways Betterment can play a useful role as I discuss in this post: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Good luck!
Hi Jim,
Been reading your stock series the last few days and have learned some great things so far.
I work for a company that offers a 401k with up to a 6% match through Vanguard. I have $17k in my Vanguard Retiremant Savings Trust that accumulated in the recent past due to my ignorance. I am going to move this money into one of the Vanguard index funds they offer but don’t know which one is the best option. (VTSAX is not an option nor is any of the substitutes you recommended).
These are the domestic stock funds they offer and their expense ratios:
Century Small Cap Select Fund Investor Class (CSMVX) 1.40%, Diamond Hill Large Cap Fund Class Y (DHLYX) 0.60%, Vanguard PRIMECAP Fund Admiral (VPMAX) 0.34%, Vanguard Growth Index Fund Admiral Shares (VIGAX) 0.09%, Vanguard Value Index Fund Admiral Shares (VVIAX) 0.09%, and Vanguard 500 Index Fund Admiral Shares (VFIAX) 0.05%.
I know the three Index funds I listed have the lowest expense ratios but none of them are “Total” Stock Market Index Funds like VTSAX. The only one that comes close is the Vanguard 500 Index Fund (VFIAX), but it costs around $177 a share right now. That is almost 4x what VTSAX stock is going for. I don’t know what I should do.
I will only be contributing up to the company match of 6% and plan on opening another account with Vanguard to contribute the rest of my savings into VTSAX.
I’ve made it through Part VIII-b of your stock series and appreciate you sharing your knowledge with those of us who have just began to truly understand the importance of saving. The last section in your series has really got me thinking about my money in the hands of other people and will probably be looking to you again in the future for more of your great advice.
Thank you so much,
JW
Hi JW…
Too bad you hadn’t gotten to Part XVII just yet. 🙂
Your answer is there in Addendum II: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
Basically VFIAX is and excellent option and is so close to VTSAX, I’d just use that.
Don’t worry about the share price difference. Counterintuitively, for comparing them, it is meaningless. The difference is a function of the number of shares outstanding divided into the total value of the fund.
I would also encourage you to fully fund your 401k for the additional tax break before you invest elsewhere.
Hi,
Thanks for the advice jlcollins.
If you wouldn’t mind,
I have more questions.
so with the annual limit of $5500 in an IRA account I wouldn’t be able to invest in VTSAX on my first year because it needs to be $10,000 to be able to invest in VTSAX, correct?
Next question is, where should your F-you money be from?
Should the 25x your annual income be from the taxable account or the IRA?
And where should I be withdrawing the 4% from when I do reach FI?
Sorry for all the questions, I’m really new into this investing thing. I really got inspired by your blog to push through with investing in the VTSAX index fund.
Thanks a lot, looking forward to hearing from you!
Keep reading the series, Gab…
…all this a more is covered.
Briefly:
—you’d start with VTSMX, the investor’s shares version, that has a $3000 minimum.
—F-you money and 25x both come from your total net worth.
—https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Hi Jim,
I read through the stock series. I have a question about how to begin my investments.
I currently have around $8,700 from an old roth 401k that I rolled into a roth IRA at AmericanFunds a few years back. Can I use that $8,700 to roll over to Vanguard to purchase investor shares (VTSMX) until I can get admiral shares when the $10,000 minimum is reached?
Also, I have a roth 457b plan at my new job with less than $1,000, since I’ve only been at my job a short time. There is no employer match. Should I continue to fund this account separately from any potential new accounts with Vanguard? Or should I stop the 457b now, and instead put my monthly contributions into the same account I will potentially open with the $8,700?
I guess what that second paragraph is ultimately asking is should I split contributions to both a Vanguard account and my 457b, or should I stop my 457b while its still small, and instead maximize my contributions to Vanguard?
Thanks for any insight you may be able to provide.
Hi Tyla,
Yep. Start with VTSMX and once it hits 10k roll into VTSAX. I think Vanguard might even do this automatically, but check on it once you get there.
Your 457b plan allows you to contribute up to 18k a year while a Roth only allows for $5500, not counting rollovers and assuming you are under age 50.
With no employer match, I’d fund the IRA first and then the 457b for money over that.
I’d also re-examine your choice of a Roth. Unless you make very little and pay very little in income tax, the tax deduction of a regular IRA and/or 457b can help.
Remember, not only is every dollar you pay in tax gone forever, so is all the money it could have earned for you over the decades. You’ll find a discussion on this here: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Hope this helps!
Thanks for your reply!
So, over the next year or two, if I cannot even max out my IRA, I should not even fund my 457b at all?
Also, my fear of having a traditional IRA is as follows. Maybe I am thinking of this the wrong way and you could clarify…
I currently make $40k a year, with a raise coming in July that will take me to $46k a year, with smaller income growth over the years for the foreseeable future. I accepted a smaller salary so I could have a pension, vested after 10 years. I am 26 now, I hope to retire early, but will hang on as long as possible, as the longer I work, the larger the pension.
Here’s where I get nervous..right now I am in the 15% tax bracket as a single filer. I live with my long-term boyfriend, and he’s in the 25% tax bracket as a single filer. Based on deduction factors for him, I know it is more beneficial from a tax standpoint for us to not get married at this time, and were not in a rush to get married either. My fear is that if we do end up getting married, I will plan to retire early, but he’ll want keep working longer than I will (he’s conservative and stubborn). I will end up paying tax on my retirement because we’d have to file a joint return, and my income will not be low enough to do a Roth Conversion Ladder.
Is my thinking irrational? The stock series says “It’s possible though, due to a low amount of income during early retirement”….but I fear if I am married, our tax return won’t show a low amount of income, and I’d end up paying 25% tax (or more) in 20 years on the income, rather than paying 15% tax now. In my mind, if I already have a roth, I won’t have to worry about converting it before taking distributions. Or should we just not get married so I don’t have to worry about his income at all for tax purposes 😉
Thanks again!
Yes, I’d fund an IRA before a 457b that had no match.
You are right that if you have a Roth you’ll avoid the need for the ladder and that if you are married your tax bracket will be with the combined income.
Of course, if you are married and your husband continues to work, do you really need access to your IRA?
If the answer to that is “yes” because you and he want to keep your finances entirely separate and each carry your own weight, then marriage will get in the way.
Good luck!
Hi Mr. Collins,
I have started to read through the stock series and just finished the section 8 where it discusses Roth IRAs. My question is about Roth 401ks. My new employer offers a Roth 401k where your money can grow tax free. I thought that would be great, but after reading about your information and the information from mom and dad money I am not sure if this seems to be as good of an idea as I originally thought.
Thanks,
Brian
Thanks for checking in and letting me know, Brian.
That’s one of my goals: To present approaches that sometimes conflict with the conventional wisdom. Good to hear it got you thinking!
Hi Jim,
A ‘quality problem’:
We (wife & I) are self-employed, contribute to our self directed 401k’s & profit sharing plan: we put in a little over $76K in for 2015. We also saved a grip of money in our HSA, as well as our general savings account. We do have a rental house (cash flow positive @ $300/mo), but have no other outstanding debt.
The $76K is in an index fund, the HSA goes to VTSMX – no issues there. We anticipate continuing putting this amount or more into our accounts for the next 7-10 years.
We are fortunate to have this problem, but ‘what’ do we do with the extra monies that we have at the end of the year? We don’t utilize the cash flow from our rental property, so it also grows over the course of the year.
There is approximately $25K in savings (at our big bank) doing almost nil. I am mildly hesitant to invest it into a / the same Index funds we already have (ie; what if everything goes in the toilet?).
I do enjoy real estate, but we do not know where we will ultimately settle down. I have a desire to be close / closer to my rentals vs living several states away. I’ve considered joint ventures on larger commercial properties, but those seem to benefit the guy who puts the deals together, vs the money investors.
Again….these are quality problems, and I would appreciate your thoughts, as an unbiased source that I have grown to trust over the years of reading.
Thank You,
Todd
Hi Todd…
Toward the end of this post: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
…you’ll find my hierarchy for where to invest your money. Basically, fully fund your tax-advantaged accounts and then move on to funding investments outside of those.
If you’ve read this – https://jlcollinsnh.com/stock-series/ – you know that market drops, from the little bump we had in January to the meltdown back in 2008-9, are all normal parts of the process best ignored by long-term investors.
If by “what if everything goes in the toilet?” you mean the end of the US economy, where you have your money won’t matter even a little bit. Indeed, the businesses you own in something like VTSAX will be far more likely to survive than your bank. You should be building a bunker and stocking it with food, water and ammunition and even then….
But I don’t see that happening and so what I would do, indeed what I have always done, is invest my money as I got it in US businesses thru VTSAX.
If you prefer RE, I would avoid the joint ventures for the reasons you note. While it would not be my choice, it is possible to manage it from a distance. My friend Paula does this very successfully and she writes about it here: http://affordanything.com/2015/08/07/behind-the-scenes-how-i-manage-real-estate-from-around-the-globe/
Hope this helps!
Hi Jim,
It definitely helps! Thank you for the wise input. The noise that surrounds the day-to-day is enough, however, when it starts coming from INSIDE one’s head – Egad.
We’ve initiated opening the Vanguard (non-retirement) account, and are waiting for that process to complete. I have NO question(s) for you about that one: we are totally clear and confident where that stash will be going.
This will increase our savings rate, and our ability to reach FIRE a little bit sooner.
Thank you, as always,
Todd
Thanks for letting me know, Todd.
Yep, when the noise outside our heads becomes the noise inside our heads: Egad! 🙂
My company 401K is through Prudential. Here are the stocks in the plan. Right now, I have the goal maker setup for aggressive where the algorithm picks the investments and percentages. Should I opt out and put everything in the Vanguard Institutional Index I fund?
Metropolitan West Total Return Bond M
Principal High Yield A
Diamond Hill Large Cap A
Oakmark I
Vanguard Institutional Index I
Fidelity Advisor New Insights A
JHancock Disciplined Value Mid Cap R2
Artisan Mid Cap Institutional
Principal MidCap A
Gabelli Small Cap Growth A
RidgeWorth Small Cap Value Equity A
Voya SmallCap Opportunities A
American Funds Europacific Growth R4
Oppenheimer Developing Markets A
Cohen & Steers Realty Shares
I would.
This is why: https://jlcollinsnh.com/stock-series/
Excellent – thanks
Hello Jim,
What are your thoughts on investing, retirement, and personal healthcare costs, including catastrophic.
I’m learning a lot and the only thing I haven’t found answered yet in all the great blogs and You Tube videos is, is it preventable or at least a possibility to mitigate growing a nest egg for decades, retire (or not), then have a single diagnosis allow the healthcare industry to take it all away?
I would also appreciate any resources you may point me towards.
Thanks for your time.
Hi EP…
I’m afraid I am not well versed in the subject of health care.
HSAs provide some wonderful advantages and I write about those here: https://jlcollinsnh.com/2014/08/18/stocks-part-xxv-hsas-more-than-just-a-way-to-pay-your-medical-bills/
In the US, where health care is so crushingly expensive, it is essential to have insurance. The few times we have lacked access to employer based plans we bought a catastrophic coverage with a high deductible, essentially self-insuring for the little things. But it has been a while and I don’t remember the details. Even if I did, they’re likely not applicable these days.
My understanding is that Obamacare has made self-insuring much easier for early retirees and others lacking employer plans.
My pal Jeremy, at GCC, has written a bit about it. You might poke around his site, starting with this post: http://www.gocurrycracker.com/obamacare-expats-and-visits-home/
Stay healthy and Good Luck!
Jim,
I have no investments, but I am gearing up. I have no debt and I have enough savings to invest in Vanguard but that will deplete most of my savings. I am anxious to invest now, would you advise that I go ahead and then start putting money back into my savings and also into Vanguard?
Thanks!
– Steven
First move, Steven…
…is to read thru the Stock Series here so you understand how investing works and, especially, how to deal with the inevitable market plunges.
Once you’ve done that, the best time to invest is now. As the saying goes: Time in the market trumps trying to timing the market.
The magic of investing is the power of compounding over the decades.
The money you invest should be money you are prepared to leave invested over those decades.
Money you plan to spend in the near term (<5 years) belongs in your savings.
Hope this helps!
That does help, thank you. Yes, the money I’ve saved is for investing . I’ve made it about 90% through your stock series.
Thanks for your response!
Hi Jim,
Huge fan, here. I have read and re-read your stock series and I pass it along every opportunity I get.
I am in my late 20’s, married with a 1-year old baby. No debt, we rent, are worth ~60k, all in Vanguard VTSAX (retirement and non-retirement) and the bank.
Question: I work for a Silicon Valley startup that will go IPO this year. Unfortunately I only started last year, so I wont be getting rich. However, I do have some stock options where I can buy company stock for less than half of what it is worth today, and I wonder what the best strategy is. I already decided that for tax reasons I need to leave it there at least 1 year so I am taxed for capital gains instead of income. But the question is how much longer than 1 year should I leave it?
I am sold on the concept of index, long-term investing. I know that the company is growing and will outperform the market (we have been on various “fastest growing” lists), but how long will this last? How big will we get? Leaving a large part of my portfolio there is “stock picking” and risky.
I’d love to hear your thoughts!
Thanks!
Hi Tim…
Glad you like it and thanks for passing it on. That’s the highest praise of all!
Great question, and no easy answer.
Overall, I think your thought process on this is sound. But this did pull me up short: “will outperform the market”
“looks poised to…”
“very well could…”
“shows indications of possibly…”
Are all phrases I’d use rather than “will.” 🙂
The problem with any company is that no matter how bright the prospects look, you just never know what’s lurking in the wings to blow it up.
I have a very good friend who lost damn near everything when his company stock and it’s bright future dropped from $37 to 25-cents.
Of course, those who held their options from Google, Apple, Facebook, Microsoft and others vastly outperformed and became very wealthy.
Were I in your position I’d be thinking about two things:
1. What are the realistic chances that this company is going to like one of those (or even close)?
2. How important is this money in the stock options to me?
If it is truly “found money” and you’d be fine without it, and if under your flinty gaze the companies prospects are truly bright, you might roll the dice.
It is a wonderful problem to have. 🙂
Good luck!
Hi Jim,
Thanks for your feedback! Very good point about the word “will” – too strong of a word. And I need to be careful not to be overconfident with these things. No question it’s risky and the longer I leave it there, the more risky it is. But you are right that it is a good problem to have.
Thanks again!
Hi Jim,
I did a quick search on your blog for info on holding actual gold and silver. I am not sure if it is buried anywhere, but was wondering if you would post your thoughts. In 2008 an ex boyf went a little nuts on the conspiracy theories and got me into buying actual gold and silver from 08-11. I still own 38k of it. I know that he and a ton of others- think Visionvictory on youtube etc, were all saying that a collapse was coming and it was the only way to save ourselves- apart from ammo and guns haha- oh and tons of freeze dried food. I could see their points, but got sick of the doom and gloom and moved on. I don’t know what to do since what I have, has lost a little value since then, but is it worth keeping some of it just in case? I don’t see it mentioned much on the forums over at mmm, or bogleheads or on different blogs. All the best, hope you have a lovely rest of the day!
Hi Dana…
This is a question I’m surprised hasn’t been asked before. I have a post in my drafts folder from years back started but I’ve not had the interest in finishing it.
I’m not a fan of holding gold and/or silver.
It is costly to buy and sell actual gold. You get hit with hefty and often hidden commissions on both ends, which makes it very profitable for the brokers which in turn is why you see so many TV ads touting it.
It is expensive and risky to store. You can keep it in a safe deposit box at your bank or hide it in your house or buried in your yard. There are places that will sell it to you and store it for you. You never even see it or have to take delivery. Let’s see now. You send me money. I tell you you now own gold and I have it in my vault. Mmmmm. What could possibly go wrong with this?
The easiest and cheapest way to buy and own it is with an ETF like SPDR Gold Shares (NYSE Arca: GLD). But for some of the reasons listed below only holding physical gold will do.
Why own it?
1. You hope that at sometime in the future someone will be willing to pay you more for it than you paid. Possibly, but this is pure speculation. Or, as it is less charitably known, as the “greater fool theory.” Meanwhile, while you wait for this happy day, it earns nothing and pays no dividend or interest.
2. As a hedge against inflation. The idea is that during bouts of high inflation as the currency becomes worth less, gold will hold its value. Problem is, the research indicates gold is not actually all that effective in this role. Productive assets like owning part of a company (stocks) or real estate preform much better as inflation hedges.
3. You live in a country where your currency is already “soft” which is to say without value outside your country’s borders. Gold is a store of real value in these places. So are US dollars.
4. You live in the US but think the US dollar, a “hard” currency and the world’s current reserve currency, is about to loose its position as such and become “soft”.
5. You think the US economy is going to collapse and whatever trading for goods there then is will only take place with gold. If this were to happen, good luck getting into your bank vault or, even less likely, getting that storage company to ship it to you. You better have your gold at home or buried in the yard. Of course, then you run the risk of having it forcibly taken from you by roaming marauders.
6. You think civilization is going to collapse and whatever trading for goods that will happen will only take place with gold. Same problem as with #5 only multiplied. Plus at this point it’s very likely not going to be used at all. You don’t see anybody buying food, guns or ammunition with gold on the “Walking Dead” 🙂
I have a more optimistic view of the future, but if I thought we really were in for a collapse that completely destroyed the economy and/or our civilization, I wouldn’t bother with gold or any other investment. I’d be building a bunker and stocking it with water, food, guns and ammo.
And even then, for it to work out, I better hope the “right” kind of collapse occurs.
As for your 38k already in it, I’d likely sell it and invest in producing assets.
But if it represents a small part of your net worth and you want to hang on to it as a form of insurance or just to see if it moves higher, it’s not the end of the world. (Ha! pun intended! couldn’t resist.) 😉
Thanks so much for your thoughtful response, I read it out to my husband and he says thanks too! I think I will sell it in stages and put it to work. It is doing nada for me right now unless it suddenly goes up again one day, but then I have to learn how to time it, which I’m no good at. It is a worry, that is probably the main reason to sell. Net worth otherwise is 12ok, so I guess right now it is 25% of my total net worth. I could sell it today and only have 10k left on my 5.9 % mortgage 🙂 🙂
Thank you for the follow-up to my questions regarding healthcare costs during retirement.
Hello Jim,
So I stumbled upon your site and I must say it is probably the best thing I have ever come across!!!
I would love to hear your opinion and some advice as I honestly have no one to turn to with your kind of knowledge. I will apologize from the get-go for the possibly long post. I want to paint you a clear picture.
My wife and I are 28 yrs old, own an apartment in Miami which we pay $1125 monthly including taxes, insurance, association.
We don’t carry any debt in our credit cards but do owe about 15k in student loans.
Here is our scenario,
We are currently traveling Europe for a year, its something we always wanted to do so we saved a years worth of our salary and took off last August, we are due to be back home in July. (I know it was probably not the most financial savvy thing to do, quit our jobs and take off but it was a dream before starting a family some day ).
Before embarking on our adventure we were both working in Banks …
We accumulated 50k in our 401k which i rolled over to an IRA at my local bank for lack of any knowledge which is earning us NOTHING.
Now, when we return home we plan to make a change in careers into becoming Teachers because we much enjoy the ” free time ” during the summers as oppose to a potential higher income at a Bank with 2weeks vacation a year.
We are aware that income will be lower so the plan is to rearrange our live around so we can live off a 80k combined comfortable as oppose to previous Banking salaries.
Now before we become teachers my wife has to go back to school for possibly 2 years and myself for 1 to gain the credits necessary to teach… during this time we plan to go to be working in Banks.
The idea is to purchase 2 brand new cars ( nothing fancy just brand new so lasts us a long time, think 15-16k each ) and pay them off before we begin our teaching careers. Also pay off the student loan.
Now once we are settled into our new life we plan to save about 15-20k annually and are interested in putting it into Vanguard. The question is, what type of account I’m I suppose to open? an IRA in vanguard? Can I simply just purchase VTSAX using Schwab although I would have to pay $8.95 monthly every time I make the purchase.
The next question is… with my current IRA sitting in the bank doing nothing.. should I Roll that over into a Vanguard IRA as soon as I arrive in July to Miami?
And put the money into the VTSAX?
My ultimate goal would be to retire by 50 or earlier of-coarse if possible. . That leaves me 21-22 years to make it happen.
Again sorry for long post and potentially silly question, your time and response is truly appreciate it and nn case none has ever told you, I will thank you on behalf of all the potential lives you and MMM probably changed by sharing your knowledge.
Welcome Rudy…
I’m glad you found your way here and for your kind words.
Before answering your specific questions, allow me to comment on your overall situation.
You have several “wants” on your plate, some of which would earn you a “face-punch” from my pal Mr. MM. 🙂
I, on the other hand, am kinder and gentler and will only point out where they conflict with your stated goal of FI in ~20 years.
In my world, there is nothing more valuable to buy than your financial freedom. But that’s me. Your priorities seem to be very different:
–You are coming off a year-long European vacation.
–You intend to give up your high paying jobs.
–You plan to return to school, presumably spending a fair amount, to get new degrees…
–…to become teachers at less pay to have more time off.
–You want to buy two (!) new cars.
–You plan to start a family.
–You plan to save 15-20k on your projected 80k income.
Nothing “wrong” with any of these (except the new cars which I’ll touch on below) but you do have some choices to make.
Last start with that last point first.
@15k your saving rate = ~19%
@ 20k your saving rate = ~25%
Looking at the chart at the end of this post: https://jlcollinsnh.com/2012/05/16/stocks-part-vii-can-everyone-really-retire-a-millionaire/
At a saving rate of ~19% FI is reached in ~29 years.
At a saving rate of ~25% FI is reached in ~25 years.
It takes a saving rate of ~35% to reach FI in ~20 years. 35% of 80k = 28k.
I’ll leave the choice of what to do up to you. Perhaps becoming FI is not really all that important. I will say:
–If you start a family it will become even more difficult to maintain, let alone increase, your savings rate.
–New cars (even cheap ones) are a horrible financial choice and a very expensive indulgence. MMM has some great posts on this. Here are a couple:
http://www.mrmoneymustache.com/2016/01/28/the-man-who-gets-his-cars-for-free/
http://www.mrmoneymustache.com/2012/03/19/top-10-cars-for-smart-people/
http://www.mrmoneymustache.com/2011/11/28/new-cars-and-auto-financing-stupid-or-sensible/
and this one of mine should give you a better way to think about money: https://jlcollinsnh.com/2013/06/14/stocks-part-ixx-how-to-think-about-money/
On to your questions.
–If you are going to invest in VTSAX, why on earth would you open a Schuab account and pay fees to buy it? Buy direct from Vanguard: https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
–The chart mentioned above is based on returns available in the stock market. If you keep your money, IRA or otherwise, in bank savings accounts you will slowly lose ground to inflation. Stocks are very volatile, but to achieve FI you’ll need learn to live with that. They are essential for growth and, yes, VTSAX is my choice. But it is very important that you fully understand why. For that, I have written this: https://jlcollinsnh.com/stock-series/
So, I’m glad you like this site, and MMM. I’ve given you a lot more to read here, and there. 😉
Enjoy your journey!
Hi Jim!
Thank you very much for the reply and all advise, definitely a lot to think about. Perhaps the sacrifice of staying in higher paying jobs perhaps for the next 10 years will be a wise option to achieve FI sooner. Like you say that’s something I must decide.
Now let me ask, I completely agree on the money we would be missing out by purchasing two cars, however what would you recommend being that we have no cars when we return? We use to lease ( sad I know ) and turned them in when leased expired to travel. I considered perhaps buying used cars much cheaper, but in the long run will it be smart? Considering repairs costs etc.
Second question, I only mention Schwab because I have an account with them, but if I go to Vanguard what kind of account is it I would need to open if I’m going to contribute any money monthly to buy VTSAX funds? Is it a IRA account?
Also how is it that when we achieve FI before actual retirement age are we able to withdraw the 4% annually? Won’t we be hit with early withdrawal penalty’s if that money is in 401k and IRA’s?
Again thank you for your time and all advice, I have much to learn.
1. Read the MMM posts I linked to for you.
2. Depends. Do you want to open an IRA or are you planning to invest in a taxable account? This is covered in the Stock Series I linked to for you. Specifically, but not exclusively, here: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
3. Again, in the Stock Series: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Hi Jim,
This is not a question but something I’d like to share with you & your readers!
Here’s the link from the latest “Planet Money” podcast (NPR) where they discuss the famous “Warren Buffet vs Hedge Fund” bet. It’s very short (about 20 mins). They talk about indexing… & Mr. Jack Bogle is there as well!
http://www.npr.org/sections/money/2016/03/04/469247400/episode-688-brilliant-vs-boring
I hope you like it.
All the best,
Jorge
Hi Jorge…
Just gave it a listen.
Great stuff and well presented in a fun and engaging fashion. Always fun to hear Jack Bogle. 🙂
Just added it as a link in the Addendum of this post: https://jlcollinsnh.com/2013/02/05/stocks-part-xv-index-funds-are-really-just-for-lazy-people-right/
Thanks for sharing it!
Hi Jim
I recently found your site and found it very informative. I have a question about how I should go about with my investments.
A little background. I have always thought that I was great at saving money. Even before graduating college, I had about 50k saved up in savings already. I continued to save for a few more years, then I guess I “let loose” a bit. Seeing that I have what it seems to be a good enough savings pile at the time. I started spending more. The more we make, the more we spend, etc. It wasn’t until a few weeks ago when I found your site and started looking at my own numbers. Somehow, we are spending a little over 10-12k a month now. But that’s another story, I know I should cut back now going forward and watch my spending. Just wish that I found your site 10 years ago and not now…
So my question is, I want to start saving for my kids college fund (still a long way to go since they are very young right now). I have read many posts from people saying use 529 plans, some that says stay away from them. Some that says put it all in stock index funds, some that say put it in savings because if the market is down while your kids need the money for college, it could be bad timing. Etc.
I currently have probably way more than I should in a savings account (yes now I know its bad to keep that much in a traditional savings account, I just never looked into it)
I have some more in investments (stocks). Should probably move these to index funds as well since none of the stocks that I pick is or pretty much have never been doing good for the most part. I keep buying them at the wrong time.
I have a 401k acct from a previous company that I am considering rolling over.
I have a house with a mortgage at 3.75%
I still have a few student loans at around 3.5%
So my goal is to start saving for a college fund
Should I first pay off my student loans first since that is an equivalent of a guaranteed return of 3.5%?
Should I start putting money into a taxable acct and buy something like VTSAX, VTI? Depending on how the market is when my kids needs to take the money out for college, this is what’s holding me back…
Or should I start a 529 plan?
Or should I just put it in a plain savings account? Probably not
I also have a savings account for each of my kids and put some money in every year.
Now I am thinking maybe I should move those into index funds as well since it will be a long time before these will be withdrawn
Welcome Dave….
This post has my suggested range of when to pay off debt based on the interest rate: https://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/
This post has my basic hierarchy for deploying investment money: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
This post talks about how to pull money from tax-advantaged accounts before 59.5: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
This post is my take on college: https://jlcollinsnh.com/2012/05/23/the-college-conundrum/ For discussions on the pros and cons of 529-type plans, check out the links in Addendum 2 & 3
Dear Jim
I would like to thank you for taking the time to put together this blog and especially the Stock Series, it has been a pleasure and a huge learning experience to read through.
Sadly, I am a complete beginner at investing and would be ever so grateful if you could assist with a few questions that I have.
My situation is a little different to your average USA reader, I am a British Expat working in hotels, currently based in the Caribbean. Following a sweep of the web trying to find out which method of retirement investing would be most appropriate for me, (sadly not having started), I stumbled upon the books by Andrew Hallam and your website. Both have been a god send.
Closely avoiding a high fee retirement program, I have now opened an account with TD International and jumped in the deep end of Index Investing. So far I have purchased about 70% VUKE, 30% VWRL.
Your preferred method of high percentage of Stocks to Bonds varies somewhat to Andrew’s preferred allocation of Bonds based on your age.
I am close to 40yrs and will need to both work and save hard for at least another 10yrs to 15yrs before I can slow down a little, so I really want my investments to work to my advantage.
So my questions, if I may ask, are as follows: –
My original plan was to steadily balance my portfolio with monthly purchases to 45% VUKE, 45% VWRL, 10% IGLS.
o Following your favoured Vanguard American All Stock Index, should I add VUSA to the mix, say 30% VUKE, 30% VWRL, 30% VUSA & 10% IGLS
o Or a higher amount of VUSA (VUSA is the only Vanguard S&P Index that I have found so far which is based off shore to avoid USA tax issues, I could be looking in the wrong place though)
o Or would you recommend something different entirely.
Do I understand correctly when I see dividend payments as per share owned, for example?
o VUKE Income
Distribution £0.21031 (does this mean if I have 200 shares I’ll receive £42.06)
Ex-dividend date 17-12-2015 (what does this mean)
Record date 18-12-2015 (is it how many stocks you own on this particular day that will determine how much you are paid?)
Payable date 29-12-2015 (I guess this is when you receive the Dividends ?)
o If I have this is correct then VUKE has paid out almost 5 times more dividends in the last 2.5yrs compared with VUSA.
o However, the value of VUSA has increased almost 65% compared with the sad growth of 7.5% of VUKE, in the same period.
Based on these, it seems good to have both, in order to gain better dividends from VUKE and then the future sale value of VUSA at retirement etc.
Please let me know your thoughts on this. (and I do understand past stats do not mean that’s how it will roll in the future, but it is still interesting to compare as well as to hear your views)
With Bonds, how does a Bond really work. IGLS for example is a short term bond for 0 – 5yrs.
o I can see the value is almost steady compared with the rodeo ride of stocks. So for retirement I understand the preference to switch stocks over to bonds to keep the account/portfolio value stable. But what is the benefit if you are in the accumulation stage of investing (if you can ignore the account values, even when they are red, and just focus on the numbers of shares owned ?)
o How does the Dividend pay structure work with these, how does it calculate?
o Do you need to own the Bonds you purchase for the whole 5yrs to receive dividends?
o What happens when they expire?
o What happens if you are to sell before the end of the 5yr term.
Thank you for your time, I hope to hear your views on the above,
Cheers
Your Student .. Matt
Hi Matt…
Thanks for the kind words. I’m glad it has been helpful.
1. I’d keep it simple and go with VWRL.
2. Dividends are stated on what they pay on an annual basis. But the actual dividends can be paid out monthly, quarterly, semi-annually or annually.
–The ex-dividend date is the day on which shares bought and sold no longer come attached with the right to be paid the most recently declared dividend.
–Record date is the date ownership is registered and that determines who gets the dividend. Own the shares on this date, you get it.
–Yep. Payable date is when the dividend gets paid out.
3. Stocks return value thru dividends and/or capital gains. The total return is the combination of both. The high dividend payer is not necessarily going to be the one with the best total return.
4. https://jlcollinsnh.com/2012/10/01/stocks-part-xii-bonds-and-a-bit-on-reits/
Hope this helps!
Many thanks Jim,
I have continued with VWRL, as per your advice.
Now I have owned stocks for 7 months I have experienced dividend income, so have a clearer picture.
I am still reading books on investing and have yours on the top of the list for the next purchase
Thanks again and good luck with the sales
Cheers
Matt
Hi Jim,
I see a lot of talk about investing in a Roth IRA only if you pay little-to-no taxes, and otherwise investing in a deductible IRA. What would you consider “little” enough taxes to warrant a Roth IRA?
As always, thanks for the help!
Thanks,
Phil
Hi Phil…
The thing to keep in mind is that every dollar you pay in tax is not only gone forever, but so is all the money it could have earned for you over the years.
So part of the answer lies in how many years you have before you begin withdrawals. Of course, come 70.5, you’ll be faced with RMDs.
The easy answer is the 0% tax bracket is for Roths if you’ve decades ahead. If you are over age 60 and closing in on those RMDs, you’ll want to move money out of your tax-advantaged accounts, perhaps into a Roth, consistent with staying in a lower bracket than the RMDs will push you into later. In between is a personal call.
For more:
https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
https://jlcollinsnh.com/2014/07/27/stocks-part-xxiv-rmds-the-ugly-surprise-at-the-end-of-the-tax-deferred-rainbow/
I’m 34 and currently in the 15% bracket. Does that make the answer any easier, or is there still a lot of grey area? Thanks again!
Read the first post I linked to.
Toward the end it runs thru a scenario like that.
Curious what you think of this kind of strategy:
As a freelancer, my income varies from year to year. Therefore, I’m wondering if it might be wise for me to save my IRA investment for the end of the year, when I’ll have a better idea of what my income — and therefore taxes — should be. If I expect my taxes to be uncomfortably high, drop the money I’ve saved into a deductible IRA. If not, drop it into a Roth IRA.
Thoughts? And thanks! 🙂
Interesting idea.
The problem is you’d lose the potential gains on your investment for a full year.
Instead, invest in the regular IRA at the beginning of the year.
If at the end of the year you don’t need the tax deduction, just roll it into a Roth IRA before December 31st.
http://www.newyorker.com/business/currency/is-passive-investment-actively-hurting-the-economy?intcid=mod-latest
No question in particular, but just wondering if you any thoughts regarding this article?
Hi Joe…
This is a concern that gets raised on a regular basis as more people embrace indexing. But it doesn’t concern me:
1. While the growth of indexing has been impressive, it is still too small to have such an effect.
2. Most companies offer index funds grudgingly and only to hang on to those customers that would leave them otherwise.
3. Active investing will very likely continue to dominate:
—Active management companies make a fortune from those high fees
—They spend a fortune protecting this business with advertising and PR…
—…aimed at seducing people with the very, very appealing siren song of out performance
—or, like this article, trying to guilt them into it.
—and people very much want to believe this.
—There is an entire media empire –TV, internet, magazines, newspapers — thriving by supporting this effort
Even Vanguard, the company that created index funds and the only company based based on the concept, has more actively managed than index funds these days. (65 v. 62)
More: https://jlcollinsnh.com/2012/01/06/index-funds/
So, much ado about nothing.
Hello Jim,
My husband and I read the stock series and it’s great!! We are both in our late 20’s and found your blog in MMM which we have been reading as well. So our goal is to be FI and not wait until we are 60+ to retire. Now we finally paid off our car and carry no debt besides a mortgage on our apartment. $105k balance at 3.75% 15yr term.
Combined we make about 110k Gross annually. We ran our numbers and for us, what we choose to live with annually is 45k ( this includes all our expenses and vacation ). The rest we want to put into Vanguard as we see from your articles it makes perfect sense.
First I have some questions…
1. We have a traditional IRA with 35k we rolled over from an employer 401k last year and its sitting there earning close to nothing, Is it possible to roll it over to a Vanguard traditional IRA to invest in the VTSAX funds?
2. In the new job i have a brand new 401k, company matches dollar for dollar up to 5% I have it set to contribute 7% at the moment. My question.. if I wanted to max my 401k as advice, and I increase my contribution % to the max, will I be missing out on ” free money ” from my employer seeing as The 401k might potential be maxed out say 7-8 months into the year? Is this a possibility? I just want to learn so perhaps I don’t increase my contribution as much and just enough to max it and get as much out of my employer.
3. If our income allows should max out my husbands 401k and mine at the allowed 18k annually? Even if that means we don’t save anywhere else? Resulting in a 36k savings that year?
4. If we are able to save more then that, then the rest should go to Traditional IRA’s for each of us with he 5k allotted?
5. And lastly if I’m able to maximize all tax sheltered contributions what type of account is it I would open with Vanguard at this point to invest? Is it a typical brokerage account where I would just buy VTSAX funds?
Phew… that’s a lot of questions, thank you for your response and I look forward yo your advise.
Hi May….
1. Yes. You can always roll an IRA from one fund to another and from one fund company to another. If you want to roll it into Vanguard, just give them a call and they’ll walk you thru the process.
2. You’ll want to check with your HR dept. on this. But the only time maxing out your 401k might hurt you is if you were to leave during the year and before you got the full match. But it depends on how they handle the match, so check with HR.
3. The contribution limits on 401k program apply only to the 401k program. You can invest more money in other tax-advantaged accounts, assuming you qualify for them. You can also invest as much as you like in regular taxable accounts regardless of what you invest in the tax-advantaged ones.
4. This post has my basic hierarchy for deploying investment money: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
5. It would just be a regular taxable account as mentioned in #3.
Hope this helps!
Employer contributions don’t count toward the $18k max, right? So by putting the $18k they’ll still match the whole 5% which would put the account over the $18k that year. Or is it backwards?
Right!
Hello Jim,
First let me echo what many others have already said and thank you for all of the great information and advice provided with this blog. My older (and wiser) brother sent me here recently and I’ve thanked him many times since. Trying to allocate my 401k and traditional IRA investments always felt like guess-work at best. I never had the feeling that my money was working for me even though it was in the market. After reading through the Stock Series, the comments (which really are great to read), and many of your other posts, I feel like I have my money working for me at Vanguard in VTSAX. I’m ready for the rollercoaster.
I have what I hope are easy questions for you.
1a) My current 401k has VINIX offered which I moved 100% of my funds and future allocations into. No other Vanguard offers. Typically when I leave a company, I roll my 401k into an IRA. I will not have the 5 mil minimum (I wish) for this fund no matter how long I stay at this company. At the time of departure, would it be possible to roll the 401k into my IRA but keep it in VINIX? Or would I be forced to reallocate at that point?
This question might be better directed to Vanguard, but thought I would ask.
1b) If it’s not possible to retain in VINIX after rolling it over, would you suggest I just leave it in the 401k even after I have left? Again this isn’t what I would normally do, but given the low ER on VINIX I could easily be convinced otherwise.
2) My company also offers a stock option to match for the first 10%. I’m currently at 5%. I know and understand this is the same as trying to pick a winning stock, and I normally would not do so. However given that they provide a match, does this change anything in your eyes? If so, would you invest more or less? I don’t want to post the company name publicly, so feel free to email me if you would like to know. The stock has been steadily rising, but as you say, past performance is no indication of the future.
Thank you for your time.
Hi Nadir….
Welcome, and thanks for the kind words!
1. You really have no bad choices here, and so can do whatever you like.
VINIX, VFINX and VFIAX are all variations of Vanguard’s S&P 500 index fund and they hold exactly the same portfolio. The differences lie in ERs and in investment minimums.
–VINIX is the institutional shares version and has the lowest ER @ .04%
–VFINX is the investor shares version, has a $3000 minimum and an ER of .17%.
–VFIAX is the Admiral shares version and has an ER of .05% and a $10,000 minimum.
So your lowest cost choice is keeping it in your 401k. But that ties you to your former employer, if you care. Assuming you have at least 10k, rolling it into and IRA at Vanguard only costs an extra .01%
If you decide to roll, you might also consider switching to VTSAX (.05%) which would be my slight preference as it covers the total market. But, again, that preference is slight.
2. Here’s what I think you are saying…
If you invest in your 401k, your company provides a match (100%?) on the first 5% of your investment. So if you contributed up to the 18k limit, they would match, dollar for dollar, the first 5%, or $900.
But if you choose to invest in the company stock, they would match, dollar for dollar, the first 10%, or $1800. So, an extra $900 for the extra risk of owning the stock.
It doesn’t matter what the company is, I’d have no idea what the future holds for it. Neither does anybody else. 🙂
How long do you have to hold the stock before selling it? If for years, I don’t think I’d bother. But if you can move out of it immediately, or even after a short period, it might be worth the effort and slight risk, to do that, capture the match and move it into your index fund.
Make sense?
Good morning!
1. Completely understood. When the time comes, I’ll roll that into my existing IRA with VTSAX. I love your motto of keeping things simple.
2. The 401k plan and stock plan are separate. Unfortunately the stock plan is post tax dollars. I explained it poorly, so I grabbed the verbiage as to how the match works. Key points:
– “company” will make a contribution equal to 25% of the first 10% of pay that you contribute to the plan
– EX: if you contribute $20 per pay period (10% of your pay) to the plan, “company” will add $5 per pay period (2.5% of your pay)
– The stock you purchase and the stock “company” purchases for you are always yours.
– The stock you purchase will be available to you at the end of each quarter of the year. The stock “company” purchases for you will be available to you in January of the following year.
I hate the idea of leaving free money on the table, but after reading your blog I know better than to try to pick a winning horse. Is it worth it to keep investing, or should I be using that money for more VTSAX?
Thanks for the quick reply and advice. I really appreciate it.
I hate the idea of leaving free money on the table, too! 🙂
And 25% is no small deal.
I’d buy, capture and shift. Holding the company provided shares for a quarter should be no big deal.
Thank you Uncle Jim. Very helpful as always.
Hey Jim,
First, thanks for taking the time to write the blog and share the knowledge; I’ve found it very helpful.
Second, I would like some help in defining my financial situation.
Here are the specifics:
I am 32 years old with a wife and 2 kids.
Financials:
No debt (paid down over $125K in student loans over 3.5 years)
$330K Net Worth
$190K in 401Ks
$90K in high yield savings for a home down payment (targeting a $350K home) – This may not be the most efficient use of these funds, but I really want to be mortgage free in the next 10-15 years
$25K in Roth
$15K in 529 Savings Plan
$5K in Stocks (losers game I know, but a very small percent of my savings and I enjoy a bit of active management)
$5K in H S A
We have had a savings rate of 70% for over 3 years and we live comfortably off of $40K/year.
Here is the question:
I’m tired of working my corporate job. If I’m looking at it correctly, our current retirement savings should compound to $1mm-$1.5mm by the time we are 60. This is more than enough to cover our $40K/year expenses. Which means my wife and I can stop saving and do anything we want as long as we earn a combined $40K/year in take home pay and maintain health insurance (a feat my wife accomplished single-handedly working only 2 days a week after our 2nd kid was born so this is very doable).
We would both love to switch to part-time jobs to spend more time at home with our kids while they are still young, but it’s such a scary step to take at such a young age. She works in a high demand field, but if I walk away from the corporate world now, I may never get back to the same earnings level that I currently am.
Even if we both go part time, we would still be able to save a few thousand every year (most of this would probably go towards the 529 plans but some would flow into the Roths and help build a safety margin). So, am I completely off base with my assumptions, or can we fulfill our dream of both being mostly stay at home parents? Furthermore, if we do take this leap, what do I call myself (am I semi-retired, FI, reverse retired, or I have just accumulated enough FU money to take a different path than others)? Thanks in advance for your insights.
Welcome Wahoo-Wa…
Let me start by congratulating you on blowing out those student loans, being debt free and your 70% saving rate. Well done!
This also indicate you have the discipline, flexablity and planning skills need to make your plan work.
Next, let’s look at how your net worth might compound over the next 28 years between your current age of 32 and 60.
First I’m going to remove the 529 money as you’ll be using that for college and the HSA in case you need to spend it on medical issues. That leaves 310k.
Using this calculator: http://www.calculator.net/investment-calculator.html?ctype=endamount&ctargetamountv=1000000&cyearsv=28&cstartingprinciplev=310000&cinterestratev=8&ccontributeamountv=0&ciadditionat1=monthly&printit=0&x=66&y=13
..going to the end result tab and selecting 28 years, 310k and an 8% annual return we end with $2,674,403.
Of course, if you buy the home that pulls 90k off your nest egg and you start with 220k and ends with $1,897,963
Keep in mind this doesn’t account for inflation and there is no guarantee that 8% will be the average return over the next 28 years. Could be lower. Could be higher. But you can play with the calculator and get a feel for the range.
Of course, this assumes you’ll be invested in a stock index fund with maybe a bond index fund as described here: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
and here: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
But, on the surface, if you and your wife can pull in what you need to live on day-to-day and just let your money ride, it looks promising.
That said, there are a few things to consider.
—The impact on your career and leaving it, which you have already touched on. You’ll have to balance giving that up v. buying your time. Only you can make that call.
—Houses tend to generate far more expected and unexpected costs than renting. Your mortgage is only one. Taxes, insurance, repair, maintenance, landscaping, remodeling are a few more. In short, your housing costs are very likely to rise once you own. You might wait until after you buy and see how these shake out before you leave your career.
—College educations. You have two coming at you and what you have in the 529 won’t grow to cover this.
—I’d fund the Roths over the 529s. Check out this post: https://jlcollinsnh.com/2012/05/23/the-college-conundrum/
and the links in addendum 1 & 2.
Bottom line? You are in very good shape and can probably make this work right now. But each year you keep your career jobs and build your investments, your position gets that much stronger.
The decision is really whether the extra position of financial strength is worth the lost years.
Good luck!
Jim,
Thank you for the response. I agree it is probably best to delay the career change until post home purchase to see how it effects our yearly expenses. However, your second look at the numbers helps to solidify my resolve that this is the correct path for us.
Also, you make a good point regarding the Roth over the 529. We have favored the 529 recently because of the nice state income tax deduction (7.8% here), but once we drop to a lower tax bracket, the Roth looks like a better option.
Thanks again for the response.
Cheers!
Hi Jim,
First of all, I want to thank you whole-heartedly for everything you do on this website. The Stock Series has changed my life. I teach personal finance classes to college students and I recommend it all the time. And if you have the time, I’d love for you to talk me out of buying a house/alleviate my fears.
Here’s my situation: I’m single 28 years old female (don’t have or want kids) who makes $39K annually working in a nonprofit. There’s not much of a likelihood I’ll make more than that, and it’s comfortable enough that I am able to save and invest 45-50% of my salary. I have about $15K net worth at the moment and no debt. I live in Portland where both the rental and the housing market have gone CRAZY in the past couple years. I would like to stay in Portland.
I don’t think I’m a special snowflake who should buy a house because it’s a good “investment” at all. However, I’m becoming concerned it might be the only way to stabilize my housing costs in a city where rental vacancy is at the lowest point in the country and my rent has doubled in the past 3 years. Not only is there no limit on how much rent can rise, landlords are doing more and more crazy things – tacking on $50-80/month of pet rent, charging fees for using the wrong cookware, “hall cleaning fees” other ways of nickle and diming residents. You can also get a 30-day no-cause eviction, and they’re happening all the time. It’s scary. I’ve had a ton of friends have to crash on my couch while searching for an apartment after getting no-cause or economically evicted by raising the rent $500+ dollars with 30 days notice. My last place had black mold and our downstairs neighbors smoked like a chimney, but we never complained because we were scared of getting our rent raised more than the $150 it was going up every year. I currently pay $750 + $15 pet rent + $65 commons fees to share a 450-square-foot one bedroom. We expect that rate to increase by $200 when our lease is up in March next year.
Of people that work in my (8-person) office, this year we have collectively gotten: rent raised $200/month, $150/month, $65/month, $450/month, and a no-cause eviction.
Meanwhile, I’m in a program because I make below $45K, I qualify for a number of down payment grants and property tax abatement. Currently, I’m putting aside $100 in an account that gets matched with $300 every month towards a down payment (it maxes out at $3000, meaning I will get $9000 of match for a total of $12,000). However, I need to buy a house by January 2018 in order to use that money. (When I enrolled I decided it was worth the gamble, worst case scenario I saved $3000 in cash.) I might also qualify for some $20K “down payment grants” due to my income and would not have to pay property tax for 10 years.
The problem with this is 1) I don’t want to buy a house. I’d rather invest that money. But I live close enough in my budget that if my housing costs go up by $100, that lowers my savings rate by 7%.
2) There aren’t many houses in Portland at my income range anyway – I will only be able to afford a condo. The bottom of the market is $160K for a studio condo (which is already 4x my annual salary) of which one or two are listed each month and are often getting bought by out-of-state cash buyers to rent out (because of the rental insanity). I hope the market cools down a bit but it’s still not the midwest.
3) If I do want to buy a house, it will significantly shift my investment savings for a year and a half while I save up for a down payment. I currently make $2600 after taxes, and invest $1000 each month (roth + 401K) and save $300 in cash. I need about $1300/month to live comfortably. I’d need to slow down my retirement savings for a bigger cushion and the market is down right now! I want to buy alllllll the stocks right now.
The flip side:
1) I don’t see the Portland rental market getting better anytime soon, and a locked-in mortgage payment might be better than ever-raising rents.
2) I’m (probably irrationally) worried that Portland is the next San Francisco and if I don’t buy now, I may never be able to buy (even with enough cash saved.)
3) The stress of the uncertainty and crazy landlords is taking its toll, and dealing with a condo association I would at least have some power instead of just having to do whatever the current landlord wants us to do. Also, I would enjoy being able to put holes in the wall and painting.
So can you talk me out of this? I probably shouldn’t buy a house, but I might be willing to buy some certainty.
Hi Lillian…
Thanks for your kind words and for passing the blog along. I’m always particularly pleased when I hear from teachers who share it with their students.
Congratulations on your savings rate! That’s outstanding, especially in an expensive city.
As to your question, I’m not in the business of trying to persuade anybody of anything. And I know nothing about the Portland RE market. 🙂
That said, here are some thoughts:
—That homeownership program sounds very attractive and you were wise to sign up. No downside and you’ll have some money saved regardless.
—When you say, “I don’t want to buy a house” I’m inclined to say, “That settles it.” 🙂
—Owning houses is a hassle, especially if you really don’t want one.
—There are many more expenses than just the mortgage and some of these can be big, ugly surprises.
—While the RE market is hot in Portland now, sometimes hot markets collapse. If that were to happen as a homeowner you’ll take a hit. As a renter, the balance of power shifts into your favor. Of course, there is no way of knowing when it might collapse, if ever.
—Be very careful in buying a condo. It is critical that it is responsibly run and that the association has build a contingency fund for large repairs. Otherwise you’ll get hit with special assessments.
—Be sure too that the owners are all up to date with paying their assessments. It is a long hard process dealing with delinquent owners and all the while the building must be maintained.
—If you can, avoid buildings with absentee owners who rent. Better to have fellow owners living there and invested in the atmosphere.
—Remember too, if you get a bad neighbor, there is no landlord to whom you can complain. Only the board, and if you are the only one having the issue they’ll not be motivated to take your side.
—It really does sound like an ugly rental market.
—Here’s a collection of my posts on homeownership you might find useful: https://jlcollinsnh.com/category/real-estate-2/
All of that said, here is an idea. The vast majority of people in your position and in that market would be desperate to buy a house. That’s the common wisdom after all. You likely have a friend or two like this who are wondering how to make it work financially.
Why not offer to rent a room from them with a long-term agreement that they could show the bank when getting a mortgage?
Or, if they are considering a 2 or 3-flat, offer to be their tenant. Smart landlords, especially small ones, appreciate the value of a reliable tenant who pays the rent on time and doesn’t tear the place up. (Of course, I’m assuming you pay your rent on time and don’t tear your rental apartments up. 🙂 )
Hope this helps! Good luck and check back and let us know what you decide.
Hey Jim! I’m excited to be getting involved here because your blog has been so valuable to me. My wife and I had been ignorantly throwing away money in the form of load fees and high expense ratios for several years, and under-performing the market all the while in our actively (and poorly) managed funds. We got out of there and into VTSAX and I’m giddy about the things I’ve been learning and implementing in our finances. THANK YOU!
I just have one question as I continue to tidy up our portfolio. I searched for discussions regarding [paper] savings bonds but couldn’t find any. I have 19 savings bonds that were given to me as gifts over the years. I’ve had all of them for over 10 years by now, and their accumulative total is about $3,700. Here is the breakdown:
~$900 at a fixed rate of 4% reaching final maturity within 8 years.
~$300 at variable rates (some currently under 2%) reaching final maturity in about 15 years
~$2500 at a fixed rate of 3.5% reaching final maturity in 2035 (19 years)
I understand that the greatest advantage to holding onto these is that there is no risk involved with a fixed rate. However, with everything you’ve taught me about what to expect from VTSAX over the next 8-25 years, I have confidence that my money could perform better, and I could also consolodate/simplify my portfolio by moving it.
Since the bonds earning 4% are reaching final maturity in 8 years or less, maybe it would be advised to at least leave those alone, since 4% over 8 years doesn’t sound like too bad of a deal. But would I be crazy to cash out the other $2800-worth of longer-term bonds to invest the cash in VTSAX? Would there be any tax implications that I haven’t thought about here that would make this a poor decision?
Thanks for your thoughts, and again, thanks for THIS AWESOME BLOG!
Hi Andy…
Glad it is helping!
Wow. Saving bonds. I haven’t heard of those in years.
There are various kinds and even if I knew which you had, I don’t recall enough about them for it to help.
As I recall, when you buy a savings bond you pay some amount less than the face value and over the years it earns interest until the maturity date at which time it is worth the face value.
The real question is, do you want/need bonds in your portfolio? This post should help you sort that out: https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/
In today’s environment, your fixed rate of 4% and even 3.5% is pretty attractive. So, if you want bonds I’d keep those.
The variable rate bonds could work out nicely for you if, as many believe, interest rates will start rising at some point.
The other consideration is how big a percentage is $3700 to your net worth? The less it is, the easier it is to just hold on to them.
Hope this helps!
Hi Jay,
I found your blog through MMM whom I found through Tiny House Blog by Kent Griswold. Thanks for the great writing and the interesting, knowledgeable topics, clearly presented in such a way that even the simple minded (me) can understand.
I am clearly not your average reader, many of whom make monthly what I’ve hardly ever made annually. Yet I think of myself as quite rich and FI barring the failure of Social Security in the next 20 years.
I’ve only had a real job for about 15 years of my life, and though I loved it I got really bored and felt I’d learnt all I could. So at age 45 I resigned, sold my only ever owned house, put the Jeep in long term storage and went overseas to meet a new lover. Met on ICQ if you can believe. Still together.
Now I find myself unexpectedly about to celebrate in May, the 43rd anniversary of my 21st birthday (that’s 64 for those of you who went to public schools). Unexpected because I’m what I guess you could call a professional hedonist. I’ve always followed the party. Next sex n drugs n rock n roll session was for me. No regrets. None. I’d not give up my experiences for all the pot in Colorado.
But, the fact that I’m still here at this juncture makes me think I might want to improve my situation. I can’t rely on clever retorts and good interpersonal skills to keep myself in beans and brew money forever.
So, the assets I have are 12 acres in Northern Maine. So far north, one could pee into Canada given the right pressure. I have to content myself to sneak over looking both ways for charging moose, of course, prostates being what they are. I also have 30,000 US Dollars in Bank of America (go figure) which are highly regarded here in Malaysia.
I’m going to put a tiny house on that land and live off grid. I have 922 of those beloved USD monthly from Social Security. I didn’t work in the US of A for a real lot of years. I figure I can live on 500 of those or less in my homesteading digs. I know how to stretch the hide off those buffalo nickles. I’ve already done all the fun things I want and my bucket list fulfilled. Time for a new bucket.
I’ve got no heirs, and my brothers’ and sister’s kids are all quite well provided for. I’d like to give something to the Prep School that saved my life after a terrible public school career. I’d like to give something to things that support sustainable living, and The Richard Dawkins Foundation for Reason and Science.
I’m thinking of funding a revocable trust with the remaining 400 over the next 20 years allotted me by the benevolent Social Security Admin. by investing it with Vanguard VTSAX. I really don’t care if I lose many times over that 20 years as long as the end result has a chance of winning. I’ve always thought of buying when your fund’s value was low, was buying shares on sale.
Oh yeah, how do I know I’ve got 20 years? Easy the SSA told me. They’re not supposed to, but they did. You see, I died. Yep. Someone reported me dead. Could have been a past employer, a town where I lived, or anybody. It was reported to B of A or the SSA. Each reported to the other, neither taking credit. The effect was my B of A accounts were zeroed out, and my SS benefits stopped. It took over three months to prove I was still alive and dancing, with many many phone calls to the US of A and The Philippines (where SS is managed in South East Asia). Visits to dance in front of verifying employees of the US Embassy with passport (and other identifying cards) in hand. One of those phone calls to a worker in The Philippines let slip when I told them I was not dead resulted in the worker telling me, no you’re budgeted until you’re 84. I have wondered if they took into consideration that I smoked for 49 years until I discovered vaping.
Anyway thanks again for your blog and hope you can let me know about my idea for my next and last 20.
Cheers,
Woody
Truly sorry Jim for calling you Jay. I have a history of this problem. My email was overtaken by aliens and I had to quickly create another. Instead of my real name, I came up with a superman based jay_el kind of nick. Now everyone mistakenly calls me Jay, and I seem to have succumbed to that affliction.
Woody
Hi Woody….
First, no problem on calling me Jay. I’ve been called worse. 😉
Second, I really enjoyed reading thru your comment. Cool story, well told!
There is no need for you to set up a trust, and doing so is expensive.
Just open an account with Vanguard and select the charity of your choice as the beneficiary. The beneficiary selection trumps anything you might say in a will. So, you don’t need a will for this either.
Your challenge initially is that VTSAX requires a 10k minimum to open. Even the “investor shares” version requires 3k.
You could start with a Target Retirement fund like VTIVX, which you can open for $1000. It’s a good fund and, in fact, you could just leave it there for the duration. Or move it when the account balance is big enough.
Ordinarily that would be a taxable event, but your tax bracket is likely to be zero anyway.
But here’s another option.
Why not give the money away as you go?
You wouldn’t want to do this with a large established charity as processing small donations is costly for them and too much of your gift would get eaten up in those costs.
Instead, I’d look for local individuals or very small local charities and give to them directly. Much more impact per dollar and your money helps now instead of years from now. Plus you get the satisfaction of seeing it happen in person.
Of course, this takes some creativity. But you don’t sound like you are lacking in creativity. 🙂 😉
Jim,
I’m writing because I’m half-way through the book you recommended “How I found freedom…” Wow! This is amazing stuff! I can’t believe how helpful it is and how it falls in line with how I feel about life, but didn’t know how to articulate. Your blog is like that for me to.
I can not remember how I ran across your blog about 5 months ago, but it opened up the world of FI and investment blogs to me. There are a lot of great blogs out there, but yours is by far my favorite. I’ve often tried to explain my thoughts on money to friends or acquaintances, now I just direct them to your blog. It’s a great place to straighten people out on money! I’ve also learned a ton by reading your blog. Anyway, I’m trying to start my own blog while finishing a military career and excited about that. I’m also a huge fan of affordanything, as I’m big into real estate. I’ll be at FINCON and trying to get to Chautauqua. I thought I was quick to sign up, but I’m like 5th on the singles waiting list. Hope some people flake out. Looking forward to your next post.
Rich
Hi Rich,
How I Found Freedom… is the book that most influenced my personal approach to life and I’m glad I found it early. Here are some others: https://jlcollinsnh.com/books/
Glad it, and this blog, have been helpful to you.
If you are inclined to start a blog, go for it! Doing so has introduced me to lots of wonderful, interesting people I’d not have otherwise met.
FINCON is a blast! Be sure to find me and introduce yourself.
Don’t give up hope on the Chautauqua if you are on the waiting list. Hope to see you there as well!
I finished the book How I found Freedom,
It is a great book. It feels like something I’ve always known, but not been articulate enough to express. I love how it approaches selfishness, and talks about the traps of society and groups. Ultimately, we are accountable to ourselves, and no one else. I will read it again soon! Thanks!
Hi Rich…
Glad you liked it and thanks for reporting back that you did.
It is certainly worth reading more than once, indeed it is about time I dragged out my copy and did so.
Some have complained that they disagree with specific parts of it; perhaps not surprising as it covers a lot of ground.
But that seems to be to miss the bigger point:
From birth we are surrounded by expectations, systems and beliefs (traps) that are presented as not only normal but as the only viable option, and it is worth stepping back and calling that into question. Then decide.
Custodial Brokerage Accts for a savings vehicle for my child? Starting VTSAX real early?
Can you please give your opinion, goods and bads, etc?
Thank you!
Stay tuned, Dennis…
I have a post coming on this very subject.
Dear Mr. Collins,
I discovered your blog through Mr. Money Mustache, and have been reading like a procrastinating heroin addict ever since. Thanks to you I have invested my 20,000 in retirement cash into VTSAX at the age of 32. I had been saving with the intention to invest in a Roth IRA, but because all of my income was from overseas, I decided to take the plunge with a taxable account and get my money working for more than the 1% Ally Bank was giving me. There will always be more savings in the future. Thank you for helping me to bite the bullet.
While I am quite sold on the ease of the VTSAX-VBTLX model, I do have one nagging thought from my online research. I saw a strategy for 50% large cap and 50% small value stocks, coupled with yearly rebalancing. I was wondering if you have considered such a strategy in the past. I can see where rebalancing would help you buy low and sell high on an annual basis and can definitely see the value once I decide to add VBTLX many years from now, but what do you think about splitting the stock portion along an equity class allocation? I first found it at the bottom of this page: https://www.bogleheads.org/forum/viewtopic.php?t=40652. The only reason I am giving this any heed is that the return was almost double. Do you see any value in this? And do you know how to model it? Using Stockwars makes comparing funds easy, but this is out of my league thus far.
Thank you very much for your time, and for your blog. My future self is grateful.
Bryan
P.S. I loved the John Goodman impression.
Hi Bryan…
Glad to hear you find value in the blog and enjoyed the F-you money video clip.
As to your question, there is an endless stream of investment strategies striving to outperform the market.
Please note my policy on responding to these under:
“The investment ideas of others”
Both in this post above and here: https://jlcollinsnh.com/disclaimer/
Sir: We are avid readers of your blog and appreciate all the input you provide. Since we have seen you advising about investing in Vanguard’s VTSAX so, how would you like one to go about investing in such fund? If one has a brokerage account like TDAmeritrade, Scott Trade etc. do you recommend going through them (so all the stocks/mutual funds are centrally managed from one source), OR do you recommend that one should directly reach out to Vanguard and open it through them?
Which one is more efficient in terms of management, fees etc. Would appreciate if you can kindly advise.
I buy and hold mine directly with Vanguard.
Adding another layer of brokerage offers no benefit I can see and the likelihood of additional fees.
Thank you Sir, for your prompt input!
My pleasure!
Dear Mr. Collins,
I am devouring your content and I am excited that you have a book coming out (soon?).
I had house fever and had started saving some money towards that goal. After reading your material, though, I am more willing to buck the advice of friends and family and continue renting longer. We currently rent a loft two blocks from my work and my fiance works from home. Downtown Phoenix is thriving and not being car dependent in Phoenix is a feat in itself. I’m not sure why I was racing to shackle myself to a mortgage and a commute. It was probably the dream of a yard and garden. But my community garden plots are more than enough to manage.
I still think home ownership is in our future, but will now wait until we have kids nearly starting school. We are getting married this May and want to wait a bit to have children. That gives us a 5-8 years to save for the home. I understand that children do not require an “owned” home to thrive, so if I run the numbers on rent v. buy in 5-8 years for the area we want to raise our family, we could continue to rent.
My question for you:
Since we may or may not use the money for a home, would it be best to invest the money in VTSAX in a taxable account. If we don’t buy the home, the money stays in the fund and it grows long term for FI. If we do buy, we accept that the balance available for a down payment could fluctuate with the market and our house budget would have to adjust accordingly.
Or do you have a different recommendation for parking short to medium term savings?
Thank you in advance for your wisdom and time.
Hi Kyle…
Kudos for critically thinking about the idea of homeownership!
I seem to have created an image of being anti-house owning, but that’s not really true. I owned them for 30 years myself.
I am anti-accepting the “common wisdom” of friends and family (and the RE industry!) that it is always a great financial idea. It’s not. It is a lifestyle choice, fine if you want it and can afford it.
I like your idea of investing in VTSAX until the day you might buy a house. Doing so is likely to get you the best performance and will be especially beneficial if you decide not to buy.
Of course, doing this does carry the risk that the market could move against you and you might not have the money for the house when you want it.
So it really depends on how willing you are to wait a few extra years if needed and how likely buying the house really is.
For those who know they are going to buy in the next five years, savings accounts are the only way to go.
For those unsure and more flexible, other opportunities open up.
You could also pursue a middle road by using a stock/bond allocation, tilted however your personal assessment dictates.
You can do this with Vanguard funds you rebalance, or with Betterment: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/
Good luck!
529 vs ESA vs Custodial account for children? Thank you for all the great work!
see my reply to you above.
Hey Jim,
I’m in the process of doing a portfolio rebalance for 2016. I’m looking to see what your opinion is on having stocks or bonds in a RothIRA? I’m invested in VFORX in my RothIRA and I’m going to sell this off to buy either VBTLX or more VTSAX. My portfolio consists of 80% stocks (VTSAX, mostly in taxable account, some in tax deferred, 401k) / 20% bonds (Fidelity Bonds, all in tax deferred, 401k). So with this said, I have enough of my bond allocation for my portfolio in my tax deferred account. Should I exchange VFORX for all VTSAX, VBTLX or a combination of both?
Thanks!
Hi Kyle…
First, bonds are best held in tax advantaged accounts because of the taxable interest they pay. You’ve already done this.
Personally, I hold VTSAX in my Roth IRA because this is the last money I would withdraw and thus the money that will be invested longest. So, I want my Roth invested in stocks which perform best over the long-term.
However if, as some do, I planned to withdraws money equally from my traditional IRA and my Roth it wouldn’t matter.
Make sense?
Hey Jim,
Yep, that makes complete sense. Thanks so much!
Kyle (the motorcycle guy) 🙂
Hi,
VERY much enjoying your writing. At last, financial talk that I can understand! Thank you, thank you.
My main question is: can you help me with a plan that would allow us to retire now (age 53, both) while limiting any early withdrawals from our retirement accounts? We have a good bit in retirement but are wondering how to fund from 53 to 59 1/2? Do you think many others are in this situation?
Assets:
ESOP: 1,185,000 (will roll into an IRA)
401K: 281,000
Roth: 75,000
SEP: 4,500
Land: 60,000
Rental: 80,000
Cash: 95,000
EFT: 47,000
Debt: 0
Home value: 300,000
Income: $80,000 with bonus typically between $30k and $60k given in July of each year. ($24,000 into Roth)
Planned Retirement Budget: $50,000
I’d like to plan without SS in the event it is unavailable!
We live in TN. I am (wife) planning on leaving work within the next 6 months and did not include my income above (about $42,000).
The land has been on the market for a couple of years now (ugh…worst financial mistake ever. We pay $800 a year in taxes and homeowner’s fee). Selling that would be the easy answer. I’d be open to selling our home to get the cash and rent, travel, RV it. Husband less sure than me (we do like our house) so an alternate plan with the above means would be nice. What do you think about taking the 10% penalty on withdrawals (the last 3-4 years) in exchange for preferred lifestyle?
Thank you very much!
Hi Kay…
I would try to avoid the 10% penalties on early withdrawals for the obvious reasons.
Looking at your list, it appears you have several sources to pull from while letting your tax-advantaged accounts alone to grow:
Roth: 75,000 — You can pull your contributions out anytime tax and penalty free.
Land: 60,000
Rental: 80,000 — Not sure what this is? Rental house? Cash flow positive? But it could be sold
Cash: 95,000
EFT: 47,000 — Not sure what this is…
You would pull as you need it each month and this post might help: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Once you both stop working, you can start creating a Roth conversion ladder as described here:
https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
Of course, you and your husband will need to be on the same page before you sell your house and hit the road. 🙂
Good luck!
Thanks for the reply and the links! I will be reading them this week in earnest.
The EFT was typed incorrectly. That is Vanguard VTSAX account I’m setting up. Yes, the rental is a rental house. The land….I don’t think I can count on it; we haven’t had any luck selling it for about 4 years. If I could donate it I would but it’s in a HOA gated community. What (seriously) is the worst thing that would happen if we walked away from it? There’s a yearly $500 HOA and about $400 in taxes.
I’m a little confused about the ROTH but will read up on it. I don’t know what our original contributions were but surely can find out by calling. You are providing a very meaningful service here; thank you again.
First, I would contact the property owners adjacent to your land and offer it to them. Maybe with a discount from the current advertised price. These are the people most likely to see value in owning it, if only to control what happens next to their own property.
But the hard truth about RE that’s not selling is: It is all about the price. In the vast majority of cases, if you keep lowering the price eventually it hits whatever the true and current market value is.
There are cases where some RE is truly unsellable at any price. But, since you have assets, walking away is a problem. The HOA and tax authorities may well take legal action.
My go to for RE questions is my pal Paula: http://affordanything.com
You might post over there and see if she has any ideas for you.
Good luck.
Hello! Thank you for your great blogposts. Can you please clarify something about the 4% rule (SWR)? Does the rule assume that the principle will be left intact at the end of the 30 years, or that it will be depleted? Thanks.
Here you go, Ellen:
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
Greetings Jim,
Long time reader of the blog. Great stuff. Here’s one where I would appreciate your thoughts. We’ve decided we want more space for our growing family. We are going to sell our current house. We probably will net around $300k on the sale after expenses. I would rather not plop that into a new house. Instead, I would rather put all in VTSAX and start renting. We can get a house that would fit our needs in this market in the $2,500 a month range. Does this plan make sense?
Thanks for your time with this.
Hi Max…
That depends on what the new house would cost and what you really want to do.
This post will help you run the numbers: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
And this one might help in sorting out what you want: https://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/
Good luck!
Hi Jim,
First off, thank you so much for the advice and responding to all the questions posted! I feel there is a second layer of learning by reading the comment section.
Just to make sure I fully understand your VTSAX strategy, assuming we are going full growth mode without investing in bonds, am I correct to summarize your thoughts as below?
1. Buy VTSAX as a) we are not going to consistently find alpha in the market; b) it has the lowest fees, which in turn means higher returns for the investor; and c) Vanguard’s structure means our incentives will be aligned.
2.1) Regardless of whether the market goes, up, down, or steady- use the money saved every month to keep buying!
2.2) No point in trying to time the top and/or bottom and sell/buy my VTSAX. I would a) be lucky if I could even time it, and b) tax implications.
3. Reinvest the dividends into the funds while in growth. Once I retire, I can slowly withdraw, or better yet- live off the dividends paid.
I think the key point is being able to live a lifestyle and also have the investment discipline where I can live off just the dividends. This way, I don’t need to worry too much about whether or not the overall price of VTSAX is going up or down.
If this is the case, what are your thoughts on investing in a high yield dividend fund such as VHDYX? The fees are higher, but would the higher dividend yield (per share price) and the dividend reinvestment result in better returns? or focusing just on the F500 like VFINX?
Thank you so much!
Val
Hi Val…
Thanks for the kind words, and I agree: Some of the best information here is in the comment sections.
I think you pretty much nailed it, with perhaps these slight quibbles and additions:
2.2 You would almost certainly fail to time the market with any consistency and/or accuracy which would translate into much worse performance.
3. VTSAX pays ~2% in dividends and if you can live on that you are golden. But also likely much more conservative than you need to be. The 4% rule is a better guide and using it might save you years of work before retiring: https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
Lastly, while they are not a terrible choice, I am not a fan of dividend investing strategies: https://jlcollinsnh.com/2011/12/27/dividend-growth-investing/
Hi Jim.
I already invest in my IRA (I’m self employed) monthly to take advantage of dollar cost averaging.
However, if you’ve built up a larger amount of money in a savings account that you’d like to contribute as well, how do you decide that it’s a reasonable time to do it?
I got burnt by investing thousands in the S&P 500 index right before the 2008 depression kicked in, and had to stare at those below-initial-investment account totals for years before they even got back up to my initial investment. I’d like to avoid making that mistake again.
I know you never know if the market is going to crash or rise, but aren’t there ways of knowing when the market is “overvalued,” or “on sale,”, etc?
I’ve heard people talk about this, but don’t if there’s any validity.
Any incite appreciated.
Thanks.
-Andrew
Hi Andrew…
If you have a chunk of money you want to invest, you really have two options: Dollar Cost Averaging (DCA) and Lump Sum.
I’m not a fan of DCA for reasons discussed here: https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
It is unfortunate that your timing in 2008 was so unlucky. But it was just that: Unlucky.
And, since such collapses are very rare, it was also unlikely; and so shouldn’t color your decisions going forward.
There is a saying: “Time in the market trumps timing the market.”
Finally, while the media is filled with people who claim they can, no one can reliably call when the market is “overvalued,” or “on sale.” It is a fool’s errand.
Although if you can convince people you can, it can be very profitable in the fees and subscriptions and whatnot you can charge them. Which is why the media is filled with such people.
Of course, if they really could predict the market, they make far more money doing that than selling us their advice. 🙂
I was reminded how nerve-wrecking injecting a large sum into the market could be when I had to invest the proceed from a real estate sale earlier in the year, even though I knew intellectually trying to time the market was a fool’s errand. So I ended up making a compromise of sort with myself – splitting the new injection between VTSAX and VBTLX 50%/50%.
The other and much more important reason for taking this approach is the stock market has been looking pretty heated to me for the last 3 years, when consulting the Shiller PE Ratio for the S&P 500 (http://www.multpl.com/shiller-pe/) which has been hovering around 25 (while the median is 16). “Irrational exuberance” comes to mind.
So with the 50% VTSAX/ 50%VBTLX split, I would slowly move more into the bond index if market keeps going up for no good reason other than “momentum” or “sentiment” as financial pundits love to put it; or I’d move the other way, if there’s 10% or more correction.
Mr. Collins, I wonder what you think about this? Although it seems like market timing at first blush, since I’m trying to use Shiller PE ratio as a gauge of market value (rather than market price alone), I feel my approach somewhat defensible. Of course, would love to hear counter arguments as I could have easily overlooked something or other. Thanks as always!
Hello JLCollinsnh!
I’m so glad to have found this incredible blog! I’ve read and re-read so many of your posts. I apologize in advance if you have already answered these questions:
I read part VIII of your stock series. I have a TSP, normally you would recommend rolling over a 401k to a traditional IRA once you depart for the employer. However, with a TSP you recommend leaving it. Because I agree with this recommendation I am at a lost as to what I should do in early retirement if most of the money is tied up in the TSP. With a traditional IRA I like the recommendation of the conversion ladder but that option wouldn’t be available to me. (Unless I moved the TSP money to a traditional IRA and then slowly converted to a ROTH.) I maximize my annual TSP contributions and I wonder if my husband and I should open a ROTH IRA or if we should just do the VSTAX? After the TSP contributions I have about $2k a month I can save or invest. (He has a 401k and contributes the limit as well.)
Thank you for all you do!
Hi Wally…
Thanks for the kind words. Glad it helps!
First, you don’t have to transfer your TSP all at once into an IRA to begin building a Roth ladder.
The key to building a Roth conversion ladder is to do it slowly to minimize any tax impact.
In your case, each year you’d just roll as much as you can tax-wise from your TSP into the Roth IRA, shifting into it over time.
Until you are ready to move it into your Roth IRA, just leave it in your TSP.
If you want to keep it all in the TSP program, you could open a Roth TSP and ladder into that. Your plan administrator should be able to help you set this up.
Make sense?
Thank you for the response! I think it makes sense to invest in a ROTH IRA rather than the Roth TSP because of limitations on withdrawals. When withdrawing from the TSP, the withdrawals are proportionate. Since I maximize my traditional TSP contributions and my husband also his 401k, we’ll continue to do that and open Roth IRAs for each of us. When we retire, I’ll slowly rollover my TSP to a roth IRA. Your insight has change our financial lives! We spent the last year and a half working with a financial advisor to help us implement your suggestions and we finally realized we didn’t needed her help. As we get closer to early retirement we may hire a financial advisor in the future but with so much free resources out there, why pay? Thanks again for all you do.
Hi JLCollinsnh,
I’m a US citizen currently working and living in Vancouver, Canada. I will remain here for the foreseeable future, however I will eventually move back to the states for retirement.
I have a large sum of money in my Canadian bank account, of which I’m very eager to put towards retirement, however I need advice on what steps I should take considering my citizenship status. I recently opened an RRSP account, which is the Canadian equivalent of an IRA, however I’m hesitant to start contributing much into it. My concern is that I will be taxed twice from both the IRS and CRA when I eventually start withdrawing money out. I know foreign earned income can be deducted in the US if it was already taxed abroad, but I’m not 100% clear on this.
Another consideration I’ve made is to transfer my money to the US to invest it there, however therein lies several other concerns that I have.
1. I won’t be able to invest in any tax-free account without penalty because I’m currently not earning any income in the US.
2. The exchange rate is not in my favor right now (1 Cad to .77 USD) I would lose around 23% of every dollar that I convert. This would hurt, especially if the exchange rate levels out after transferring.
Do you have any advice on what would be the most beneficial solution to my situation? I’m hoping to find one that would provide me with the least tax burden and highest potential to build wealth towards retirement in the US.
Thank you!!
Hi Marq…
I’m afraid your question is above my pay grade. 😉
I haven’t a clue as to how such cross border investments might be handled. Hopefully one of our more experienced readers with chime in with some ideas.
You might also post this comment here: https://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
Even though the title says “European” in the comments there is discussion from all over the world.
Good luck!
Dear Mr.Collins
I stumbled upon your blog and it has really given me such great knowledge however I’m still new to personal finance and investing. However I’m ready to make leap and to begin my journey to a simple path to wealth as you would say. I’m currently in my early 30’s and I’ve always been a thrifty saver. I managed to save a little over a 160k with only 1 remaining school loan. Which i’m thinking of just paying off. The reason why I keep it, is for the tax benefits but I don’t think it really offers me any…..
I currently have this money sitting in a saving account with a major bank earning little to no interest… and it’s been this way for 5 years. I’ve always been afraid to invest but your blog has given me some knowledge and confidence. I would love to gain some advice from you as to how you would invest this money I have in savings…. I was originally thinking about purchasing a home but I think I’m better off gaining dividends through investments.
Could you provide me some guidance on how you would approach starting off?
Sincerely,
FrugalME
Welcome FrugalME…
and congratulations on your disciplined savings.
Your question is so broad it tells me you are really at the beginning of the learning curve on investing. My suggestion would to be to start at the beginning and read thru the Stock Series here and the related posts on this page: https://jlcollinsnh.com/stock-series/
Doing so will not only answer your questions, but it will give you the information you’ll need to understand why the answers are what they are.
Without this, if you invest come the next market plunge you will very likely panic and investing will have only hurt you. With it you’ll have decades of successful investing ahead.
Enjoy the journey.
Dear Mr.Collins,
I truly appreciate the kind of practical knowledge you share on this website. I’m living my 30s in Italy, got a little home (from my calculations here it is cheaper than renting), saved around 65K in European Bonds (no fees, 2,5% interest after taxes) and 35K (increasing 10K every year) in VWRL.
My question is about long term horizons. Since after winning WWII, the US economically dominated the whole world. American corporations made huge profits all around the world determining double digits returns (averaged over decades). Unfortunately (for us), this historical trend is changing and the weight of the US economy is constantly decreasing. It was around 50% of world GDP in early ’50s, while it is around 18% these days. I guess the principal factor of this trend is the sharp development of huge emerging markets such as China and India. Summarising, don’t you think that looking at extremely long time frames (next 50y or so) would be better to invest more on emerging markets than what VWRL does? In future, if the world economy will continue to shift east, VWRL will reflect these changes?
Thank you very much for your attention!
Best,
Nicola
Hi Nicola…
A little house in Italy sounds wonderful! Where are you from originally and what took you to Italy?
As investors, what we need to look at is the percent of world market cap the US represents. From the link below, which has a very cool graphic:
“The U.S. market capitalization is $19.8 trillion, or 52% of world market cap, which the brokerage says is the highest since the 1980s.”
http://www.marketwatch.com/story/heres-the-map-of-the-world-if-size-was-determined-by-market-cap-2015-08-12
I don’t feel the need to invest in the other 48% around the world for reasons I describe here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
Emerging markets may or may not dominate in the next century. But they are sure to be extremely volatile. Consider Brazil, not so long ago a rising star destined for an uninterrupted climb to greatness and now a wreck.
Fortunes are sure to be made, and lost, in emerging markets but this really doesn’t fit the Simple Path to Wealth approach I offer on this blog.
Finally, while the percent of the world economy (a different thing) controlled by the US has been declining since WWII, it is not a zero sum game. The total pie is considerably larger. A small piece of this very large pie is no bad thing.
That’s my take anyway. 😉
Hello Mr. Collins and thank you for your prompt answer. Your take makes totally sense. Even on an historical perspective, the chart on market watch shows that the UK is still pretty huge even though it used to rule the world almost one century ago, before the US. On these basis, I guess, the US might be a good entry point to world economy for the next decades as well.
PS. I’m actually Italian!! I found your blog while searching for ways to invest in Vanguard from Europe. I must say I have found much more. I actually discovered that investing is not actually about money but it’s a state of mind! A remarkable achievement of last year 🙂 I’m looking forward the next serious market plunge to test my psychological resilience!
Good to hear it has helped, Nicola…
And thanks for the very kind words!
Great point on the UK!
Hi there, i searched the site for info on stable assets as I have a bond option of Standard Stable Asset Fund II but on my 403b account there isn’t much info on it. Wondering what you thought of these vs total bond index. I dont have total bond as an option unfortunately. thanks, glad to hear about the book!
Hi dana…
I am unfamiliar with this fund, but a quick Google search turned up this:
https://www.standard.com/individual/retirement/stable-asset-fund-ii
The info is pretty clear, so give it a look.
I do note that it is an annuity product and as I’m not a fan of annuities I’d likely avoid it.
Also, they compare it to a Money Market fund which is for holding short term cash. Based on that it doesn’t sound like a good bond alternative in your portfolio.
Thanks for your reply and the link, I had found the pdf but not the other info. Glad I asked, as the Boglehead I mention was Taylor who wrote the ‘Bogleheads guide to investments’, I was going to go with his advice since he seemed sage, but now I will look into it a bit more thoroughly. I don’t have much to choose from unfortunately – only:
Standard Stable Asset Fund II
CDSIX, Calvert Short Duration Income
PSTQX Prudential Short-Term Corporate Bd Q
WSGIX Wells Fargo Shrt Duratn Gov Bnd Inst
BPLBX BlackRock Inflation Protected Bond K
DEEIX Delaware Extended Duration Bond Inst
VUSUX Vanguard Long-Term Treasury Admiral
Hi there,
First off thank you! Recently I have transferred my Roth IRA holdings to Vanguard, and I am currently researching and learning which funds I should invest in. I was in Target retirement accounts that underperform and charge high expense ratios. I also have a TSP account, for some reason I separated my savings for retirement. I am about 30 years away from retiring.
What are your thoughts on combining my TSP with the rest of my Vanguard holdings? We’re not talking about a lot of money here just about 50K total. I am not able to bring Roth money to my TSP account. Also unfortunately I am not able to fully fund one or the other, so I am thinking I should fully fund My Roth IRA before continuing to fund TSP.
Hi Jim!
I’ve read so much of your blog and you answered a question so promptly for me on a post and I appreciated it, and so much of what you offer here, so thank you!
I’m currently struggling to really figure out where my husband and I stand financially, so we can more accurately determine our FI date. Problem is, everyone’s definition of “saving” and “before/after take home”, etc all just starts to confuse me. Further more, multiple calculators out there have given me very different answers.
I’ll try not to make this too lengthy. Currently our net worth is $504K, as calculated by me. This includes a $273K house (per Zillow, but given the current market and the same floor plan house down the street selling for $320K, I believe it is a conservative estimate), and a $32K boat. I don’t include our vehicles as they are 2007 and 2003 vehicles we’ll drive into the ground and hopefully replace on the cheap. We have no plans to move anytime soon, unless we happen to get relocated for my husband’s work at which point the plan is to move somewhere with better access to less driving/smaller house/smaller mortgage. We’ll likely have to leave our current location to do so. Our mortgage is currently at $155K, and is a 15 year 3% loan.
We have $48K of student loans (thanks to me!), also on a repayment plan, fixed, at 3%. I can sheepishly admit I’m not sure how much time is left on it. It was originally through the US Dept of Ed, which I refinanced years ago to lock in the fix.
Our spending last month was $5800, but if you back out our mortgage ($1551), my stud loan pmt ($290) and daycare ($640), we’re at $3348. Not too bad, but I’d like to see some shrinkage in that, because, in all honestly, it’s not a normal month. Normal months aren’t a ton more, but we love to do home improvement projects, use our boat in the summer (we trailer it and save for gas/expenditures all year), etc. We’re frugal, but not overly so. 😉 Daycare is soon going away as I have an amazing employer who is going to let me work from home this summer, then I’ll make it work next fall with my youngest in tow. We’ll do preschool for her, but no where near the $640 price tag.
Given all that, I’m not sure how to base spending for FI. Do I include debt pay down? Not include it? Include what will still be around after FI? But how do I know since I’m not sure what spending number to base FI off of? (Now I’m getting silly and a little rhetorical, but you know what I mean!). 🙂
Okay – bigger numbers. I’m currently a part-time accountant who is salaried at $36K a year. Currently no 401k available (but will be in July), but I did contribute and max out traditional IRA for 2015. Just did it in March, and this was my first time working in 9 years since I’ve been home with kids (9, 6, 3). I’d eventually love to also save my full 18K as allowed for 401k, as my employer’s plan allows it, but unsure I can do it with our current spending. Husband makes $114K. Maxes out 401K. Recently rolled over my old 401k to Vanguard and is 100% in VTSAX. Husband has about $130K invested with a relative at astronomical (like, vomitly high) expense ratios and after making him read your stock series, I’m happy to report he’s in the process of moving them over to Vanguard as well. In total we have about $402K in investments of retirement funds, plus very little cash. We pay our credit card off in full each month and other than my student loan, very little debt (around $10K of a home equity LOC). I also have a side hustle bringing in about another $1K/mo, but it’s a little volatile and I’m starting to feel burnt out with 3 jobs, 3 kids and hoping to ditch some of it soon. Currently every dollar of that is going towards paying off the LOC, and a huge pay down coming with a tax refund and 3 paycheck month for both of us.
One caveat. We have some rentals, which I’m not even including because they are not cash flow positive. Long story short – one is a non-issue as it’s cash flow neutral, rented to family that ALWAYS pays, and nets us a benefit on taxes because of depreciation. The other is a nightmare, upside down in value and as of late, we’ve been having to dump money into it. I won’t give numbers on that, but something to consider…
I just want to have a decent idea of where we stand, what we can reasonably assume is FI for us, and work our butts off to get there. We’re both VERY ready. I have one kid starting to ask to homeschool, and a 3 year old growing up too fast. It’s all going by too quickly, and I want more time with all of them…..
Oh, and we’re both 40. 😉 I left that part out. Still getting used to the idea!
Oh – and one last comment after reading your last post, and because apparently I can’t keep this short. We also contribute $300 to our kids’ 529’s each month, have our estate planning done (but probably needs updating as was done before our 3rd) and also feel comfortable with our level of life insurance. Our emergency fund certainly needs a boost I will admit.
Please note:
Due to travels I will be unable to respond to questions until after May 22.
Please post your questions after that date and I will try to help if I can.
Ciao!
Hey Jim,
The letter from a dying father to his son. Thanks for sharing that with us. What an amazing gift to his son. Wow!
Thought you might enjoy this 🙂
http://www.bloomberg.com/news/articles/2016-04-27/be-afraid-be-very-afraid-if-you-re-investing-for-the-long-run?utm_source=pocket&utm_medium=email&utm_campaign=pockethits
Hey Mr. Collins,
I have to start off by thanking you for having such an awesome blog. I have never had a problem with saving a lot of cash, but I was so lost with where to put my hard earned dollars. Your blog was incredibly informative, easy to understand, and really shed light on investing. I absolutely loved the stock series. Since finishing the stock series, I have rolled all of my investments and extra cash into Vanguard.
I am currently 27 and plan to retire by the time I am 40. I plan to utilize the 5 step ladder and use that as part of my passive income. Prior to reading the stock series, I had a Roth IRA with Betterment. I rolled that over into vanguard into VTSAX. I realized that given my financials and current retirement goals, that it would better serve me to open a Traditional IRA with Betterment. Using the 5 step ladder, I plan to convert this into a Roth, so that I will be able to draw early on this money. So my question is, now I have a Traditional IRA and a Roth IRA. When age 40 hits, what am I do with my Roth IRA that I currently have? I can’t really draw on that at age 40 (like I can with my Traditional IRA and the 5 step ladder), can I? How do I use the 5 step ladder with my Traditional IRA since I already have a ROTH IRA? I imagine if the 2 were combined in vanguard, that I would get hit with some pretty hefty fees and penalties?
I know you are a busy man, so hopefully you will find the time to help shed light on this. If anyone else has experience or a solution to this, please share. Thanks so much. You rock!
-Jake Noack
Hi Jake…
You can withdraw your contributions (but not what they earn) tac and penalty free anytime. For rollovers, you must wait five years.
Your Roth and your IRA shouldn’t interfere with each other.
However, be sure you check what funds you hold in your Betterment account. If they are tax loss harvesting in funds you also have at Vanguard, you could be hit with wash-sale rules.
Thanks for the response Mr. Collins. I read back through my post and realize I made a mistake in my initial post.
I realized that given my financials and current retirement goals, that it would better serve me to open a Traditional IRA with Betterment. (I meant to say a Traditional IRA with Vanguard). I am a Vanguard guy all the way now.
Now that I have fixed my mistake, I have a Traditional IRA and a Roth IRA in Vanguard. When I plan to put the 5 step ladder into action, am I converting it into my current Roth IRA, or do I open a 2nd Roth IRA in Vanguard and send my Traditional IRA there? Sorry for the million questions, I hope you haven’t answered these and I simply missed it. If I have, please point me in the right direction. =) I just want to make sure I understand this all correctly.
Once again, thanks for the knowledge and help. You made understanding index funds and vanguard so easy!
You can convert into your current Roth.
The only reason to have a second, is if you want to hold a different fund in it.
Hello, Jim! (Is it weird to call you Jim, because you don’t know me?!)
First of all–thank you so much for sharing so many valuable lessons and tips. We all can grow and learn from others, and even though I only found your site a few months ago, it has already helped me so much. I am sure that you are helping guide me to a more prosperous future, and I cannot thank you enough!
Background
When I was a little kid, I was obsessed with earning and saving money. I would volunteer to do extra chores like mowing the lawn to make extra money. I baby sat. I pet sat. I worked for my mom at her retail store starting when I was 9 years old (which was a big deal bc I made over the minimum wage at the time–$4.50/hr! In contrast my allowance was $3/week). I saved hundreds, and then thousands of dollars.
When I was in high school, I worked part-time jobs, and saved as much as I could, and was able to pay my own way to travel to Europe 3 times (2 were school trips my parents couldn’t afford to send me on, and 1 was an amazing trip when I was 17 where a friend and I backpacked around Europe for 7-8 weeks in the summer). I even graduated early and worked full-time to make extra spending money until I started college to earn an engineering degree.
I moved from MN to Boston for college, and once I got there I wanted to go out with my friends, got a bit of the “keep up with the Joneses” mentality, and started to spend a lot more than I ever had. I wasn’t planning on working during the semester because my course load was so intense, but soon had to take a part-time job just to keep up with my spending. I also got a new boyfriend and we liked to go out, and buy each other fancy presents. I managed to more-or-less stay within my budget and usually was able to pay my credit card bills in full, or worst case, the following month, until my senior year.
A lot of things happened that year. There were some family issues I had to deal with. I had an anxiety attack/mental breakdown, and essentially got very depressed, and stopped showing up to classes and my job. I ended up not graduating on time.
Around this time I also had purchased a bunch of gifts on this website my mom had told me about where you overpaid (like 10x the price), and then mailed in this paperwork and got a rebate back for like 98% of what you had paid like 2-4 weeks later. I tested it out first with some very inexpensive items, and it worked well. I got kinda addicted bc it was a great shopping site for bday gifts, and it was so easy to get the rebates. But then the company went out of business and I was owed something like $3,000. Gulp. At the time I was working 20 hrs or less per week, making just $8/hr. There was a class action lawsuit and several years later I think I got a check for under $200. That was the start of my credit card debt problems.
I got through the summer on the $1,000/month my parents were still sending me, and by paying minimums on my credit cards. I took a cash advance in August to buy a 1990 Honda Accord for $3,000, move to the suburbs with my boyfriend, finish up my degree, and start looking for my first “real” job. My parents stopped sending me checks.
This was 2002. The economy had crashed after 9/11. I had been told that with my Bachelor’s in BioMedical Engineering degree, I should easily expect to be making $60k out of college. I ended up only having 4 interviews in the next 14 months; 2 of which were with folks who told me that they had no idea what a BioMedical Engineer was. So while I was still looking for a “real” job, I worked temp jobs, sold my belongings (mostly books and CDs) on Ebay and Amazon, and worked at Best Buy part-time, working the cash register. My credit card debt was climbing, as I was using cash advances to pay for everything (rent, food, gas, etc). When I eventually found a job, a year later, I had reached the point where all of my credit cards were maxed out and I wasn’t going to be able to pay next months rent. I had amassed something like $40k in debt, and took a job only making $30k/year.
The next few years I worked my butt off to try to pay down the debt–working part-time jobs on top of my regular job. Being really frugal with my spending. Negotiating for raises and promotions at work. By the time I was 27 I was in a comfortable place, paying down my debt at a rate that I thought would be sustainable, and had a plan to be debt-free by the time I was 30. I also had about $40k saved in my 401(k).
That’s when I met my ex-husband. He was smart and charming, and was a professional gambler. He invested in the stock market. He invested in friend’s businesses. He literally gambled at the casino. Other than the online investments, he dealt with all cash. Which was exciting. I had never been with someone who used cash everywhere instead of credit cards. He explained to me that his ex-wife had ruined his credit by fraudulently opening up many credit cards in his name, using his SSN, charging them up, and then not paying. Hence, they divorced, and he tried to stick to cash as much as possible.
Our relationship got very serious very quickly. He helped me pay off my debt, and enable me to quit my part-time job, which I was so grateful for. But then he needed help back. Over the next few years I loaned him money: credit card advances, personal loans, car loans, I even took out a $20k loan on my 401(k). We were in love and had an amazing wedding, and then everything changed. It turned out he had an undiagnosed mental disorder that turned him in Mr. Hyde. We separated 1.5 years later. By that point he hadn’t been paying his portion of the rent, credit cards, personal/car loans. I had recently changed careers, and I had $83k+ in credit card and loan debt in my name. I estimate my relationship with him easily cost me $150k+ if you include all of the interest and what I lost if the money had been invested…or at least $100k, just in principal.
Since we separated I have been putting as much money as possible into paying down that debt. I had taken a salary cut when I changed careers in 2011. Last fall I changed jobs and was able to negotiate a much higher salary.
Now I am 36 and live in Boston. I have returned to my childhood, frugalish ways. Assuming everything goes well, I should be 100% debt-free by the end of this year. Because of your advice, I am almost done consolidating all of my investments to Vanguard funds (still need to rollover 1 old Roth). By the end of 2016 I should have about $60k in savings:
TIRA – $40k (100% VTSAX)
401(k) – $6k (100% cheapest index fund offered by my employer)
Roth – $12k (100% International funds)
Taxable accts – $2k (cash, stocks)
I am starting to plan for next year. Because I have been used to paying down debt for so long (basically my entire adult life), I actually live on a relatively small percentage of my income. Right now I make $90,000/year. I spend about $2,250/month ($27,000/year), and that includes the interest on the debt I am still paying (about $80-100/month). My rent is going up $100/month starting in September. I think I can reduce some of my spending, maybe down to $2,000/month) but worst-case, it should stay about the same.
This is what I am thinking about doing with my money next year:
Income – $90,000 (assuming no raise or bonus, which would be unlikely not to get)
Taxes – $24,750 (worst case scenario; fed, state, medicare, ss tax)
Health Insurance – $2,000 (pre-tax, assuming my company doesn’t decide to charge more)
Living Expenses – $27,000 (worst-case; could be $24,000)
401(k) – $18,000 (maximum) + get $3,600 match from my company
TIRA – $5,500 (maximum) [need to look into this to see if I will still be eligible to deduct this money with my high income]
Taxable accts – $12,750-17,125 (depending on what I spend & my taxes)
Total investments: $36,250-40,625 (40-45% savings)
That should get my total investments up above $100k by the end of 2017.
My question is…am I being smart about where I put my money? I watched the Frontline show about 401(k) fees. My 401(k) money is going 100% into the cheapest index fund they offer…but the expense ratio is still 0.87%. I will be in a high income tax bracket (25-28%), and I’m not sure if I will qualify to deduct the TIRA investments. I am not planning on contributing to my Roth at all, given my higher tax bracket, but instead to invest that money in my taxable accounts.
What would you do?
p.s. Sorry that this is so long!
Hi Jane…
Since you’ve read the SS, you already know I don’t see the need to hold international funds.
And you know that, despite the high fees, the tax deferral of 401(k)s makes them worth doing, especially in your tax bracket.
So, keep you’ve saving rate up as high as possible and max out all your tax-advantaged accounts.
Sounds to me like you are on the right track!
Please note:
For the time-being, my schedule does not permit the time to respond to questions here.
Once I am again able to, I will post another note announcing it.
Thanks for your patience and I hope you will save your questions until then.
Best,
JL Collins
Hi Jim-
I’ve spent the last couple of days reading your blog. Wow! a wealth of info and knowledge. Thank you for sharing your insights and lessons. I feel a lot smarter than I was last week 🙂 Reading your blog I realized I had made quite a few major mistakes in the past and am already developing my action plan to reach my FI.
I have a quick generic question: let’s say I can reach my FI in 5 years by accumulating a portfolio of 25x more than my annual spending. I quit my job, the next year the market tanks and washes away, say, 40% of my investment. Does that mean at that point I have to restart the clock to rebuild my net-worth and go back to work until I can regain that 40%? Or I just stay the course and continue to apply the 4% withdrawal rule until the market recovers?
Your feedback will be greatly appreciated.
Thanks again for sharing the wonderful posts!
Tanya
Thank you for your comment/questions.
However, as noted at the beginning of this post and in the comment I left on May 22nd above, for the time being my schedule doesn’t allow for the time to respond.
I encourage you to read thru the Stock Series and related posts. The vast majority of questions asked here, have already been addressed there. Plus, you’ll gain the related knowledge that will allow you to fully appreciate the answer.
When I am again able to answer questions here, I will remove the notice in the this post and put up a comment here announcing it.
Feel free to then repost your question and I’ll do my best to help.
Best,
JL Collins
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
Hi, I’ve enjoyed reading your blog so far. I’m up to chapter 14 so far and love the easy to read/understand for mat, most of it goes over my head on other sites. I have a question I would like to start investing in the VSTAX fund and my broker is Scottrade and I have a traditional IRA with them and it will not let me buy into that fund until I “upgrade” my account which I assume means monthly fees. What brokerage company do you use? Do you know of any that don’t charge a fee to buy into this one fund? I checked with my company 401k last night they don’t offer that fund thru Vanguard but they did off 7 other funds that I switched to last night. Thanks again for any info.
Thank you for your comment/questions.
However, as noted at the beginning of this post and in the comment I left above on May 22nd, for the time being my schedule doesn’t allow for the time to respond.
I encourage you to read thru the Stock Series and related posts. The vast majority of questions asked here, have already been addressed there. Plus, you’ll gain the related knowledge that will allow you to fully appreciate the answer.
When I am again able to answer questions here, I will remove the notice in the this post and put up a comment here announcing it.
Feel free to then repost your question and I’ll do my best to help.
Best,
JL Collins
You can of course get the fund in an IRA at Vanguard.com, alternatively look for the ETF version of the fund, VTI.
Hi Mr. Collins,
First I want to thank you for all your financial wisdom you have been able to share. Just like many others, I came across your blog through MMM. I still have quite a ways to read through past posts but I’ve learned a lot in so little time. I’ve very green when it comes to investing so I apologize in advance if what I’m trying to say gets confusing.
A little background on my current situation. I’ve always been someone who has saved and wants to invest but always felt that I never had enough money to do so until the last few years. I’m 31 and I am a sales manager making around $50K a year. I’m not the best with spreadsheets so I do all of my tracking with apps like Prosper and Mint. I do my best to not over spend what I make and usually am able to minus emergencies that I can’t help. I’m currently renting at a really great rate so I’m able to save a lot there. My girlfriend and I live together and plan on getting married and she’s currently in school studying electrical engineering so I’ve been helping her pay for bills and some school. So pretty much supporting 2 people on one income. I’m pretty frugal and she knows I’m trying to save so it’s not too bad.
The only current debt I have is my student loan which is a little over $16,000 and and have paid ahead so I don’t believe I’m having to pay interest on it, but I pay around $250 a month towards it. At that rate I should be able to pay it off in 3 more years.
Right now I have a number of goals I’m trying to save for:
Wedding Ring/Wedding/Honey Moon – $150 every two weeks. I just recently opened up a Barclays Account earning 1.04% interest. I’m not sure how much either side of our families will throw in so I want to make sure I have some money for each. No maximum goal for this but she’s finishing school and has 2 years left so I figure around $7K more towards that. Mind you, not all of this money will go towards the wedding, but just in case.
20% Down payment on a house (Ideally) – I also opened up a separate Barclays Dream account and currently will be depositing $4K into it in the next 4 months (max deposit is $1K a month) and continue to deposit around $200 a month into that account. It earns 2.5% on the interest you earn if you continue to deposit for 6 months, and another 2.5% if you don’t withdraw from that account for 6 months, on top of the 1% interest on that total account.
Retirement – Currently I am investing 6% of my check (twice a month) into my 401K ,with Charles Schwab, and they also match. Should I raise the amount to 8 or 10%? I’ve seen people put away as much as 15% of their check. I have a previous 401K from another company that rolled it into an IRA automatically with Fidelity with around $2,200 in it and another 401K with Marsh that has around $2,800 in it. I was wondering what I should with this money? Should I roll them both over into my current 401K or roll one over into it and open a separate IRA or personal account with Vanguard (VTSMX). My current 401K has a couple Vanguard Indexs in them but not any stock market index funds which I want them to add in. Not even sure how I do that?
I also invested $250 to buy a Motif. They are kind of like ETF’s but you can create your own and have up to 30 different stocks in them from all kinds of different themes. Are you familiar with them? If so do you have any advice/feedback on them. Good idea or should I pull out?
Lastly I have around $10K just sitting in my checking. I want to have around $5-$7k for an emergency fund but also want to invest the rest so it’s not just sitting there not making any money. Have any advice on what I should do with it?
Thank you in advance for your feedback and wisdom. I hope to become financially free like yourself, MMM, and many others that have learned from your advice.
Thank you for your comment/questions.
However, as noted at the beginning of this post and in the comment I left above on May 22nd, for the time being my schedule doesn’t allow for the time to respond.
I encourage you to read thru the Stock Series and related posts. The vast majority of questions asked here, have already been addressed there. Plus, you’ll gain the related knowledge that will allow you to fully appreciate the answer.
When I am again able to answer questions here, I will remove the notice in the this post and put up a comment here announcing it.
Feel free to then repost your question and I’ll do my best to help.
Best,
JL Collins
Thanks Mr. Collins. I’m half way through the posts now. And I’ll repost this again once you’ve informed us you’re able to reply back. Thanks again.
https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
A reach out to the Vanguard loving community
can any one steer me in the direction of an HSA savings account that allows one’s money to be invested in Vanguard funds?
http://healthsavings.com/
Hello Mr Collins,
I got ‘redirected’ while reading an old post on Budgets are Sexy. I’m pretty new to investing and i’m trying not to pull my hair out 🙂 but i’m very grateful for the wealth of information you and other folks put out for us newbies and experts alike. I know you are a busy man so i hope you get the time to answer my question. I’ve read up on this but i’m hoping for a more personalized response.
My parents have come into about 30K and i’m looking to put that in 1, 2, or 3 places where it can make a little money until they might really need it. My mum is in her 60s and my dad is a little older. I looked into CD, the ROI is …
Would it make sense to open a vanguard account [what kind?] and just plop it all into an index fund? OR would i serve them better if i split it up 3 ways and invest in 3 different things/vehicles?
Thanks so much for your time
Hi Jim,
Thank you so much for your book, I only wish you would have come out with it a year earlier. Last year I signed up with a financial planner at a 1% fee of assets under management because I had no idea how or when I could retire. Now that I’ve read, “The Simple Path to Wealth” I know what to do, step 1; terminate the financial planner, step 2; rollover everything into Vanguard VTSAX (75%) and VBTLX (25%), step 3; stay tuff through the ups & downs and step 4; 4% withdrawal rate.
One question I do have which I didn’t see covered in the book is while in retirement how do you withdraw from tax advantaged accounts (401K, IRA) prior to age 59.5 without incurring the 10% penalty? I’ve heard it’s possible either by taking regularly scheduled withdrawals or if your assets are in a 401K it’s possible to withdraw from that if you’ve had a “separation” event (layoff,fired,quit) from the company where the 401K is administered and the separation event occurred in the year or later of your 55th birthday. Do you have any details on that or can point me in the right direction?
All the best! And thanks again for the great book!
David.
Please note:
For the time-being, as noted at the beginning of this post, my schedule does not permit the time to respond to questions here.
Once I am again able to, I will post another note announcing it.
I encourage you to read thru the Stock Series and related posts. The vast majority of questions asked here, have already been addressed there. Plus, you’ll gain the related knowledge that will allow you to fully appreciate the answer.
When I am again able to answer questions here, I will remove the notice in the this post and put up a comment here announcing it.
Feel free to then repost your question and I’ll do my best to help.
Best,
JL Collins
Hello Mr. Collins,
Thank you for all of your work on the Stock Series and in particular for putting it all together in such an enjoyable book. Re-reading the overarching concepts and finer details is important to me, so having the physical book in my hands to read on the train to work has been well worth it.
Is there an address to which I might send a bottle of something good as a small thank you? Please send me a PM if so. Cheers, and congratulations on the book launch!
Markus
Hello,
I’m a 29-year-old woman who found your blog a couple years ago and have been coming back to it as my most trusted resource ever since. Your philosophy seems to really align with mine, and your expertise clears the fog. I started out poor and having no clue what I was doing, and now I have some confidence. Your blog has greatly educated and shaped my financial future, and I can’t thank you enough for that.
I always appreciated how you responded to people’s questions, but never worked up the courage to post one myself, lest I make a fool of myself with something that may have been addressed elsewhere… =) I feel a little regret now that I see I’ve missed my chance, but I hope you are having a blast with life rather than being bogged down by blog comments!
So I just figured I’d take this opportunity to thank you instead. I’m sure you have made a difference in many people’s lives, including the hidden ones like me who never directly responded! I’ll continue spreading the word, and maybe get you some book sales 😛 Really, thank you.
Thank you, Jam…
…I very much appreciate you letting me know you’ve found value here. 🙂
Stay tuned. I hope to return to answering questions at some point…
Mr. Collins,
As a long-time reader, I can’t explain why it is at this exact moment – just prior to leaving for your summer adventure(s) – that I feel compelled to make my first post on your site. Regardless, I hope you can share some insight regarding a few matters as time permits.
First, a bit about myself. I’m 29 years old and have have neither spouse nor children. I despise the materialistic mindset that permeates our society; aside from the obligatory expenses, I have not a single cent of consumer debt. The only real financial trouble at this point in my life is something affecting many in my demographic – student loans.
While this unfortunate burden (> $300k @ 6.8 – 7.9%) is essentially mandatory for my line of work, the good part is that it enables me to do something I LOVE for as long as I damn-well please at an annual rate of at least that amount for the rest of my working life. At this point, I’m sure you (and your astute readers) can infer that I’m a physician in the portion of post-graduate training called “residency.”
Unfortunately, simply being frugal and aggressively paying down the high-interest debt is literally impossible for most on account of the unique considerations of medical training (i.e. low salary until done with residency/fellowship 3 to 7+ years after medical school). My habits and mindset will enable me to dispose of this sooner than most, but I was wondering if you might have some insight on my approach.
Without getting into too many details, I may qualify to have my burden forgiven a few years after I finish training on account of government programs which may or may not exist at that time. My unique personal circumstances – relatively high salary for level of training, low cost-of-living area – enable me to comfortably invest ~55% of post-tax dollars throughout the course of my training. Since my institution lacks 401(k)/403(b) pre-tax “buckets”, this goes into my (Vanguard) Roth IRA and taxable account. Given the general uncertainty pertaining to anything the government does, my options are essentially:
(A) Slightly lower-paying job for a few years. Save/invest at same rate. (Potentially) have all aforementioned debt forgiven tax-free.
(B) Much higher-paying job right after training. Liquidate taxable account towards loans and aggressively pay down whatever’s left while still saving/investing at comparable/slightly lesser rate.
(C) Much higher-paying job right after training. Keep taxable account. Aggressively pay down loans while saving/investing at much lesser rate.
I will undoubtedly still have a much higher saving/investing rate than my future colleagues and the (massive) jump in salary makes maxing out available pre-tax buckets a no-brainer regardless of what happens. I’m just not so sure about what to do about the balance in the event that the most desirable option – tax-free forgiveness of what will be several hundreds of thousands of dollars – ceases to be.
Ideally, the “right” answer is the one that gets me the pile of F-YOU money and FI the quickest. Unfortunately, I’m not so certain how to run the numbers given the myriad variables.
…thoughts?
PS – enjoy your time in Wisconsin!
Hello Dr. B,
Jim asked me to field this one. I’m probably in a better position to identify with your position as a physician who plays with FIRE @ http://physicianonfire.com
Without knowing a lot of specifics, it can be tough come up with the “right” answer. I will say that the prevailing thought is that if PSLF is modified or discontinued in the future, those already enrolled, which it appears you are, will most likely be grandfathered in. Physicians are making life-altering decisions based on the promise of loan forgiveness. There would be an uprising if our federal government simply said Nevermind about that loan forgiveness.
It sounds to me like you should be able to FIRE pretty quickly if you’re living on about $20,000 to $25,0000 in annual expenses. In a high-paying specialty, you could have your $500,000 to $600,000 saved up in five years with or without PSLF.
Be sure to factor in all aspects of the jobs available to you. Not just the salary and the non-profit status, but also the location, work / life balance, call frequency, future co-workers, etc…
You will have so much of your time, money, and energy devoted to becoming a physician. Find a job that allows you to continue loving what you do. The money will come along with it.
Hello PoF,
I know this is a rather career-specific topic with multiple complex variables that likely aren’t so relevant to non-physicians, so I appreciate your insight. Most of your assumptions are fairly close and I agree with much of what you’re saying.
While I don’t know what the future will bring with respect to both the government (e.g. re-imbursement rates, practice environment, PSLF status) and my personal life (e.g. spouse, children, major medical issue, etc.), I suppose it’s prudent to simply stay the course. From what I’ve read – namely, by our profession’s own James Dahle (i.e. The White Coat Investor) – doing that alone will put one far, far ahead of most in our cohort.
As a radiologist, I have several more unique considerations – both positive and negative – to ponder which are hard to elaborate upon within the confines of a comments section. At present, the most important of these being that my field is one with limited PSLF-eligible jobs. While not the sole factor, this is a major consideration since it would take one HELL of a private practice job to offset the difference between the potential balance of tax free forgiveness and the time/money which have respective taxes of their own.
While I will no doubt become more educated about the aforementioned throughout the remainder of my (formal) training, any additional insight is much appreciated.
Indeed, the fact that you have discovered jlcollinsnh, the white coat investor, my site, etc… puts you at a distinct advantage over the vast majority of current and future physicians when it comes to managing personal finance.
More and more practices are being absorbed by hospitals, most of which are non-profits, but I can’s speak to radiology specifically. You could always consider starting with a non-profit, and after your loans have been forgiven, decide if you want to stay or jump ship for a more lucrative private practice position. Most physicians leave their first job at some point.
There are a couple radiologists who frequent the WCI forum. Vagabond, MD, who just resigned from his full time radiology job @ age 50, and The Happy Philosopher, who works half time and has his own blog. You may want to check them out.
Best,
-PoF
Forgive the delayed response, as I’ve been busy with work.
Anyway, those additional references you listed had some useful insight. Perhaps I’ll find some time to send them some specialty-specific queries.
As I go through this process, I get the impression that most established practitioners seem to have a rather jaded view as to where medicine in this country is headed (in general). While I plan to do this for a very long time, it’s nice to know that some of the things I’m doing now will allow me to retire on my own terms if I “lose the fire” earlier than I anticipate.
My wife and I have devoured your website, MMM, the Elements of Investing, etc. We’ve moved all of our accounts from brokers (UBS, Wells Fargo Advisors, Merrill Lynch) to Vanguard and have fully embraced indexes. (I’m still beyond angry at the mutual funds our “friendly” brokers had us in, but I know the responsibility is mine.) I have a question for you:
I hold two individual stocks that have done very well. I purchased TJX for a total cost of $3100 in 2008. It is now worth $16200. I purchased BRKB for $4100 and it is now worth $7100. I now fully understand the problem with buying individual stocks; I just got lucky. (Maybe it was good karma from MULTIPLE 5.75% loads.) Should I sell, take the profit and put it in an index? That would protect against the individual stocks suffering a unique calamity, not a market downturn. I know Buffett has said that the correct time to hold a stock is forever. What do you think? (They are held in my Roth, so taxes aren’t really an issue.)
Please note:
For the time-being, as noted at the beginning of this post, my schedule does not permit the time to respond to questions here.
Once I am again able to, I will post another note announcing it.
I encourage you to read thru the Stock Series and related posts. The vast majority of questions asked here, have already been addressed there. Plus, you’ll gain the related knowledge that will allow you to fully appreciate the answer.
When I am again able to answer questions here, I will remove the notice in the this post and put up a comment here announcing it.
Feel free to then repost your question and I’ll do my best to help.
Best,
JL Collins
Hey JL, Just wondering if you heard of Aspiration Investments and if so, what do you think of them? They are fairly new, doesn’t sound too bad compared to some others. I don’t like that its Mutual Funds (fan of Index Funds) but I do like the pick the fee you want to pay.
Aspiration Investments “Do Well, Do Good” or Do without?
Thanks! Ally
Hi,
I’ve been reading The Simple Path to Wealth and I’m convinced. I’ve been investigating in VTSMX along with two other Vanguard funds in my Roth IRA. By chapter 22 of the book I’ve realized that I could put all of my Roth investments in VTSMX and then switch that over to VTSAX. Is there any reason why I shouldn’t do this? The other two funds consist of $3000 each and have boasted a good return. However, the cost of those are higher than the total stock market fund. My biggest concern is that investing $6000 at once into VTSMX would basically be the opposite of dollar cost averaging and the market has been at an all time high. Any suggestions or thoughts?
Hi JLCollins,
I was reading your posts about how houses are a bad investment and why to avoid debt and build f-you money, and loved them since I was thinking the same, only I didn’t have the arguments and calculations to support these ideas.
However, running the numbers on rental vs purchase in my area yields some interesting results:
* An two bedroom apartment in Bucharest costs around 40K – 80K euros depending on neighborhood, and the same apartments rent for about 300 euros a month.
* To buy one, few people afford to pay with cash, so most get a mortgage for about 20-30 years. That adds bank interest and the sum goes up to about 160%-180%, so the total price payed would be 64K – 144K over 20-30 years.
* Of course, papers cost to, so add another 2K-3K to that. Then insurance is pretty cheap here, around 100 euro per year, and anual taxes around 50 euros.
* So, over the 20-30 years, we end up with these numbers (most optimistic vs most pesimistic): 69K – 151K.
* Adding repairs (which are not very expensive here – about 200-400 euros yearly) brings us to a total cost of ownership of 73K – 163K over 20-30 years.
* Averaging this out we get 118K over 25 years, which yields a monthly average payment for ownership of 393 euros.
* Now, over 20-30 years, rental comes up to 72K – 108K which is obviously less than ownership, and with a monthly payment of 300 which is better.
So, after the average 25 year period, the renter has spent 90K and managed to save the difference of 28K which could have been invested and would grow up to (I don’t know, I’m not an economist, I’ll just make a guess) say 40K.
The owner can sell his apartment for about the same amount or better, so they would be almost even, with the owner slightly ahead. At least in theory.
In practice however, most people that I know of have smaller monthly payments (around 200-300 euros) for their mortgages, and most renters can’t afford to put aside anything, so after 25 years the renter would have nothing, while the owner has his apartment which he can sell for around 30-70K (assuming the prices go down a little). It seems in this case it would be a good investment to buy? At least in our local conditions.
Obviously, for a shorter period, like 10-15 years, renting wins, but the question is for long term, 20-30 years.
Mr. Collins,
We need your help prioritizing our financial life.
A little bit about us first. I am 33 and work as a pharmacist. My wife is 32 and is a self-employed wedding photographer. After her business expenses, we gross about $160,000 per year together. Our combined net worth is about $175,000 after her debt. That includes about 10k in cash.
We just married, so this will be our first year combining finances and filing taxes together. She was not raised in a financially responsible household. She has not saved for retirement and she hasn’t paid her taxes the last 3 years. She recently back-filed and has an outstanding debt with the IRS for $25,000. She is current on this year’s taxes. We are in the process of setting up a payment plan with the IRS (I think the rate will be ~4% on the payment plan). The payment plan will be for 5-7 years. I have considered consolidating with SoFi, but the 3 year personal loan rate would be 5.95% with them, so that doesn’t make sense if the IRS rate is really 4%. I’d rather owe SoFi than the IRS though. I want this debt gone quickly, but was unsure if we should suspend retirement saving beyond my company match since we are behind due to my wife’s lack of saving the last 10 years.
I backed off my 403(b) this last year for wedding expenses, but am back to maxing it out by putting 14.6% of my salary each paycheck. I would like to set up a vanguard solo 401(k) for my wife and max that out at least to the 18k/year moving forward. Since she is self-employed, she could potentially have her business match her contribution in addition to the 18k.
We have 2 cars that are limping along around 200k miles each. We’ve never been new car people. But the one is killing us with shop repairs, so we would like at least one new car very very soon. We are looking for something used at $12k and under. Paying cash with everything else we have going on seems tight. Would a small car loan be okay until we paid off the IRS debt?
I’m looking to go back to school for a graduate degree I can complete in 2.5 years, starting in March. I can get a 22k degree for about 7k with the reimbursement I get from my employer. I have to either front the cash in between reimbursements or take out a small school loan. The degree has the potential to eventually increase my salary by 50% (180k/yr) over the next 5 years post graduation and offer a work from anywhere situation. The salary increase wouldn’t be immediate, but there is higher overall salary potential than my current job, and at the very least more favorable work/life balance.
How would you attack what we have going on financially?
1) How to balance retirement savings while paying off debt
2) How to prioritize a new car and graduate school while managing number 1.
Thank you in advance for your time and attention.
Hey Jim,
I didn’t know another way to contact you. Hopefully you get this. I’ve always enjoyed your blog, and I met you briefly at FinCon in Charlotte (we walked back together from the bluegrass/beer party).
I appreciate your comment recently on my blog at coachcarson.com. I told you I was going to reach out to ask you some questions about Ecuador since our family will be living there next year.
Have you been to Cuenca? If so, what has your experience been like there? We have our eyes on moving there, although we have never been there. But we like that it seems to be walkable, not as busy and hectic as Quito, has an expat scene which will help with food choices, etc. I’m just trying to find out personal experiences from others to confirm our choice.
Also, have you been there long enough where you needed to get local cell phones or deal with internet? I use Republic Wireless (what else?!), but I’m considering Google Fi – if anything – or I may just get a local phone and only communicate over the computer back home. I’ll be checking in from time to time with my real estate investment business, but hopefully not more than a couple of times per week.
Thanks for your time. I look forward to staying in touch. You can email me at chad at coachcarson dot com if easier.
PM sent
Hello Mr. Collins. I have a question on how I should calculate my saving rate. Do I calculate it on my salary, or my pay after taxes or my take home paycheck? I’m currently using my salary but I think its wrong.