The thought of investing for retirement used to bring only negative emotions; confusion from the conflicting information, regret that I have not invested more, fear of losing our savings, overwhelm by everything I had to learn, and distrust of most investing information because it feels more like they are trying to take my money rather than help me. On top of that, it seems like much of the information is purposely obfuscated so we have to hire someone else to take care of it. Because of this, I did very little for a long time.
I have a 401k and some 401k accounts I rolled over. I used to invest based on Dave Ramsey’s recommendations. One day I was reviewing my Mint.com account and saw that my investments were lagging the S&P 500 over 9 years. In addition, I was paying quite a bit for these investments.
Eventually, the worrying got to me and I started researching…a lot. At this point, I am by no means an expert, but I am more confident about investing for retirement. This post is a summary of what I have learned and what I think about my retirement investing.
In hindsight, I made a huge mistake in not understanding my investments and assuming the professionals were going to take care of it for me. I cost my family a lot of money and added years to our retirement date. Please learn from my mistakes.
Here are some links to information that really helped me if you don’t want to read the whole thing.
A little about me
I am not constantly worried about my investments. I want to set it and forget it. Consider this, the vast majority of investment professionals don’t beat the market. These are people who do this full time. There is no way I am going to do better than a professional, so I have defined a set of rules and principles to guide me.
Who helped me
I have gained confidence mainly from a mix of Dave Ramsey, Mr. Money Mustache, and Tony Robbins in his book Money Master The Game. Some teachings of these individuals are contradictory so I have chosen what works best for me.
Things to think about
An interesting and fun video to watch:
My random thoughts on investing:
- Investing in the market sucks, can be scary, and intimidating. I don’t want to do it, it is riskier than some investments, and it is another thing I have to learn about and pay some attention to. Over the long term, I am going to be better off and it is more accessible than other types of investments.
- My goal is to be the market not beat the market. I think of it like a fancy savings account, I put it in there and assume that I am going to get a certain percentage return. I am not trying to “win the lottery” with investing. Slow and steady and relatively confident how well I am going to do.
- I want my decisions to be based on what works well for most people and principles that have done well over time. I want to see the long-term numbers. I don’t want to make decisions based on the next hot tip or my emotions.
- I don’t want to worry about my investments and try to adjust them all of the time in an attempt to “score big”.
- I have little control over increases or decreases in my funds. This is driven by the activity in the market. I do have control of the costs of my funds. I invest in index funds to save money.
- I want to have many fund options, I like the flexibility
- I don’t leave any 401k accounts at past employers because there is an added cost to be part of a 401k rather than investing in the same funds elsewhere. Also, there are a limited number of funds in the 401k. By the way, it typically costs more to invest in funds through a 401k rather than investing in them elsewhere. Check these costs to make sure your match and tax benefits make it worth it.
- Less human involvement (fund managers) in my investments. Humans make decisions based on feelings and don’t realize it, leading them to under perform the market. Another reason I like index funds (which are more automated).
- Based on the research, I can do better than most professionals with the right principles. I don’t want to pay someone a significant amount of money in exchange for a slim chance they will beat the market.
- Periodically I will hire a fiduciary to make sure I am on track. I do not need to have someone constantly adjusting my investments.
- I want to spend extra time looking for ways to keep my investment costs low.
- I want to set it and forget it most of the time. I want a buy and hold strategy.
- Fees/expense ratios over 1% are excessive
- Sometimes there are additional fees, beyond the fund expense ratio, that you need to look for.
- I want to look at the actual return on our investments which includes the costs. Some funds show gross returns, not their net returns. Be careful of this trick.
- When doing calculations for retirement, do it in today’s dollars because you really don’t know what’s going to happen in future dollars
- I chose an index fund over an ETF because I expect to trade very rarely
- If the market crashes and I lose all of my money then I have bigger problems i.e. things like the government ending etc.
- There are things that I am more comfortable investing in, like real estate, but I am not ready to pull the trigger there.
Imagine how early you could retire if you started saving 75-90 of your paycheck. Maybe I cannot, but what can I learn from others who are doing this? If you are interested in this, consider reading about Mr. Money Mustache and Early Retirement Extreme.
Consider saving all of your raises. If you get a 2% raise then increase your 401k contribution by 2%.
How much do I need?
I worry about running out of money if I live longer than expected so I base my calculations on living forever. I also assume that the stock market and inflation will increase on average as it has in the past.
I follow the 4% rule. This means if I spend about 4% each year from my investments I should never run out of money. This equates to saving 25 times of my yearly spending. Some people may poo poo this calculation because it is not detailed enough but I believe that level of detail is a waste because they will be lost in the statistical noise of the market.
I am intimidated by this number. Sometimes I get scared that I won’t get there. That is why I set up automatic investing to keep from stressing about it and making bad decisions. Though, if I can shrink the amount I spend, then I will need to save less.
When can I retire
You can retire when you have enough money saved to sustain you until you die. For my comfort, this is 25 times my yearly spending. I regret that I have not saved more. I am going to be much older than the typical retirement age when I eventually retire. But I am now diligent in my investments because more saved is better than less and each dollar I save is a little earlier I can retire.
A seemingly small cost can significantly reduce your investment over the long term. Many advisers lead you to believe they have control of getting you a high return. They do not.
Consider this. Many advisers charge 1%. Assume you invested $100,000 and don’t contribute anything else. Also, you earn a 4% return over 30 years. The adviser would cost you $81,000. I plan on contributing much more to my retirement so my cost would be significantly more. I do not feel $81,000 (or more) is worth what the advisers offer.
Don’t be like me. For the longest time, I said “I don’t care what ii costs if they can get me a good return” to myself. I never looked at how my previous investments were doing or ignored the costs associated with buying the funds. This cost us a lot of money.
Don’t be tricked by the small percentages you see as costs for investing. Calculate the real dollars to see what it really costs.
Another less than obvious cost to watch for is the expense ratio of a fund which is also presented in a small percentage. I keep this low by using index funds. In addition, there are other possible costs besides the expense ratio that you need to check for.
Spend a lot of time understanding all of the possible costs. This is something worth really researching because some are hard to find, understand, and can cost you a ton of money in the long term.
What I want in an adviser
First of all, they have to be a fiduciary. A fiduciary is an adviser who is legally obligated to work in your best interest. If your financial adviser is not a fiduciary there may be a conflict of interest. Not all financial advisers are fiduciaries.
Second, I need to trust them, they need to be willing to teach me, and answer all of my questions. Third, their philosophy has to align with mine. Finally, I want someone willing to work with me periodically for a fee and not ongoing management.
The adviser I worked with charged hourly and this amount was higher than expected. Though, if I compare it to ongoing management fee it was much less and only occurs once every 2-3 years.
Many advisers price their services based on a percentage of investments they are managing. I did not feel I needed these services at this point in my life.
Finding an adviser
I went to napfa.org/ and picked 3 advisers and sent each of them the following questions.
- How long have you been managing wealth?
- How much in assets do you have under management?
- Tell me about the credentials of you and your immediate team.
- What percentage do you charge for a fee?
- Do you offer as-needed services for a single fee (not ongoing)?
- Are you affiliated with a broker-dealer?
- How are you paid?
- Are you paid anything above the advisory fee for any investment?
- What kinds of alternative assets do you bring that no one else can?
- Can I lose money? ( I expect yes to be the answer)
- What differentiates you from other firms?
Following receipt of the answers, we had mutual-discovery meetings either over the phone or in-person. I am looking for authenticity and someone who can relate to me. I want a feeling of comfort and trust with the adviser.
Here are the questions I ask in this meeting:
- What activities are covered under your fee?
- What types of clients do you serve?
- What types of clients do you turn away?
- What are some of your biggest challenges?
- What are some of your big wins?
- What got you into this type of work?
- What is your allocation philosophy?
- How are these allocation strategies turned into fund recommendations?
- How are these allocation decisions made? a group of people, a computer program…?
- How do you deal with clients who have differing opinions, give an example?
- How do you teach and persuade your clients if you have differing opinions?
- How do you invest your personal money?
- What are your personal financial and family goals?
- Tell me a little bit about your family.
- What range should I expect to pay?
- What happens if I choose to end this relationship, will there be fees, am I under contract, etc?
- What am I overlooking?
- How do you protect my information?
- What are some of the returns you have been able to get for your clients after costs over the long term?
Some of these questions are personal because the adviser is going to be making decisions that affect our livelihood.
I then decide if the cost is worth what they provide and compare it to what I can do myself.
From this point, I was able to decide on an adviser to work with. If I had not, I would have gone back to Nafpa.org and started over again. I felt it was important to find someone who I trusted and met all of my criteria because this could mean a whole lot of money. Also, this person may be managing our family’s money in my place if something happened to me.
There were a couple of meetings with my chosen adviser to get info about our finances and risk profile. The nice thing about my adviser is that he asked the same questions of my wife so I am not the only one making the decisions.
These are the questions I asked once he provided an allocation strategy:
- What is the basis and philosophy for the recommended allocation?
- What makes the recommended allocation better than one of the popular buy and hold strategies?
- How does the recommended allocation mitigate risk?
- How does this recommended allocation estimate what will happen in a downtime as well as the up times?
- What would be historical returns of the allocation against your preferred benchmark?
- How do you benchmark my progress?
Note: sometimes the adviser’s fees are tax deductible depending on your situation?
Following the meeting, I do a little more research like backtesting the recommended portfolio for periods of 20 years or more and compare it to the S&P 500. This makes me confident that their recommendation will be better than an allocation that I do on my own.
What funds am I going to buy and how much to put in each fund. I was using Dave Ramsey’s allocation strategy but wasn’t happy with the returns over 9 years. I like buy and hold and lazy portfolio strategies which tend to have similar increases over long periods. Heck, I would be comfortable only investing in a single fund like Vanguard S&P 500 or Vanguard Total Market for the lack of complication.
This is what Warren Buffet stated in his 2013 letter to Berkshire Hathaway shareholders regarding what is to be done with money left to his wife:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
Where to invest on your own
Here are the places I would be comfortable investing on my own:
- TD Ameritrade
- Vanguard (this is what I went with since the funds I want to use were cheaper here)
Be sure to understand the costs of buying and selling for each of these funds so you know where you would save the most. Plus, if you are leaving another fund, check if there are costs associated with it.
When I left my previous employers I rolled my 401k accounts into an IRA. This was before I knew what I know now. The company I invested with only sold their funds and it cost a percentage of my rollover to buy their funds. I am kicking myself for this, still. I threw money away. Plus the investments did not do that well compared to the market.
When I decided to go with Vanguard it was pretty straightforward but. If you do choose to move accounts, talk with the company you are moving to. They will walk you through the process of the transfer. At a high level, the steps were signing up for an account then completing paperwork to prove your identity. Then you have to go to a bank to get a medallion signature on the paperwork (call your bank first). I made the mistake of thinking a medallion signature was the same as a notary.
- Personal Capital-a free website that allows you to connect your investment accounts, tracks your investments, and estimates their future value. They will try and sell you their services. I decided against what they had to offer and I am still able to use the site.
- Personalfund.com cost calculator which analyzes each of your funds for all costs
- Money Chimp Return Calculator-calculates actual return values on a fund considering all of the fees
- Stronghold Financial/Creative Planning Portfolio Checkup-link all accounts for comprehensive analysis. I have not tried this but it caught my interest in all of my research.
- 401k Fee Checker -you may be surprised how much your 401k costs
- Fund cost analysis
- Portfolio Visualizer-back test and compare allocations
- FIRE Calc (Financial Independence Retire Early)-how much do you need to be financially independent.
- Mint– for connecting your accounts and budgeting
- Dave Ramsey’s 4 mutual funds explained
- Morningstar– investment fund detail research
- Find a fiduciary through NAPFA
- Popular allocation strategies
- Interesting Article on Lazy Portfolios
- Credit Karma-actual free credit score
- AnnualCreditReport.com– Get your credit report from the 3 main companies once a year, this is government sponsored and actually free as compared to many things you are advertised
- Dave Ramsey retirement calculator
The research shows that you can rebalance as often as quarterly or as little as yearly and there is little difference as long as you do it. There is no need to rebalance unless your funds are more than 5% away from the target.
If you want to see how you are doing then compare your funds against the S&P 500 as the benchmark.
What I didn’t go with
There were some services and advisers I considered but chose against them based on the following questions:
- Why is what they provide me better than what someone else provides or better than what I can do with a little guidance?
- Do they provide enough value to justify the cost?
If an adviser or service cannot answer the above questions convincingly then I will decline to work with them.
Many of the advisers that I interviewed offered additional financial services as part of their fees but at this point in my life, it is not worth it. Plus, I can begin working with them at later in life if need be.
I think risk in investing is more complicated then we realize. It is really two questions.
- Can you sleep at night when the market is doing cartwheels?
- Is the probability of making money high enough to balance the probability of losing money over a certain time period?
Risk is closely tied to timeframes in investing. Different lengths of time can have significantly different risks for the same investments
I am comfortable investing in a high percentage of stocks because I assume the market will increase similarly to what it has in the past for the time I will invest. Plus, I feel the probability of losing money is significantly lower than the probability of making money, and I don’t pay attention to my investments unless it is time to rebalance so the investments can do all the cartwheels they want.
I don’t like investing over the short term. Over short time frames, stock prices change based on things like luck, speculation, and random things in the market. Not real company value.
Even though most of my investing plan is based on what happened in the past, I realize there are black swan events (events we don’t think could happen until they do) that are very difficult to plan for. I try not to think about them too much but won’t be surprised by them either.
How does your 401k work
This is worth considering all of the implications. Your employer is sold a 401k program from an investing firm. Your 401k investments typically cost more than they would to make the same investment outside of the 401k. The investment firm makes money from you in this interaction.
Some bad investing strategies
I regularly encounter people who try to invest in ways that end up losing money. After talking to them for a while I realize they are making these decisions based on emotions and very little credible information. It seems like they are playing a fancy lottery or slot machine but they don’t realize it.
Here are some examples:
- Day trading
- Pulling their money out of the market when they think it is going to drop
- Buying stocks based on feel and no real research or information on the company.
- Buying things that are up. As I am writing this my employer’s stock and Bitcoin are up and I know people who are buying extra of both. This is the worst time to buy these; it is like buying a car because the dealer just raised the price.
- Investing based on what is in the news.
If you know what you are doing then you can do these things but the people I have talked to don’t.
Just a little extra
Here is an interesting video from a successful fund manager on how the economy works