Financial planning checkup: Total net worth, goals, etc

[vb315]

10 minutes ago, GetMeOuttaThisMess said:

Read up at Vanguard, Fidelity, Schwab, etc. Lots of options but one you might find of interest involves Googling “Couch Potato Portfolio, Scott Burns”. He’s a retired Dallas Morning News personal finance columnist who I kept up with for years.

Will definitely look into this, thank you!

[GetMeOuttaThisMess]

The original portfolio was 50/50 split with one time annual rebalancing involving Vanguard S&P Index 500 fund and Vanguard Total Bond fund. Several variations since over the years.

 

[Guest UVAPAC]

1 hour ago, GetMeOuttaThisMess said:

The original portfolio was 50/50 split with one time annual rebalancing involving Vanguard S&P Index 500 fund and Vanguard Total Bond fund. Several variations since over the years.

 

Depends on your age, but anyone with 50% it bonds age 50 or younger is insane.  Warren Buffett essentially says that he doesn't understand young people investing in bonds, and that if you are investing for long term that stocks will always outperform bonds. If you are nearing retirement or in retirement, I understand a 50/50 mix much better.

[GetMeOuttaThisMess]

This was back in late 70’s/early 80’s when bonds had decent rate of returns. As noted, he made several modifications over the years. We’re talking a 40 year process here.

[Boatswain2PA]

7 hours ago, vb315 said:

When I hear investing, I immediately think stocks (I know absolutely nothing about investing). When you say "simple investing", are stocks what you're referring to?

I don't own any single stocks, too much risk that one business would tank.

Instead I own mutual funds, with investments split between S&P500 funds, small cap funds, and international stock funds. Most everything I have is with Vanguard who have very low expenses for mutual funds.  I think that's about the "simplest" investing you can do.  Furthermore, if you JUST do that with 15% of your income, you will most likely retire a multi-millionaire.

Regarding bonds - I don't own any bonds, at all, and unless the environment changes drastically I probably never will.  To me, bonds are insurance against a drop in the market, and in exchange for that insurance you don't make much money.  I don't need insurance against such a drop because I have a military pension, rental income, and cash reserves.

[Cideous]

One thing to mention I do own is an annuity.  I know financial planners dont like them, but for us they make some sense.  Mine is classified as a life ins policy and is therefore exempt from lawsuits.  Make sure to check your state, but they are a decent sock away.  Also, maturation is only 5 years which for some works better if they want to leave rat race early.

[vb315]

9 hours ago, Boatswain2PA said:

I don't own any single stocks, too much risk that one business would tank.

Instead I own mutual funds, with investments split between S&P500 funds, small cap funds, and international stock funds. Most everything I have is with Vanguard who have very low expenses for mutual funds.  I think that's about the "simplest" investing you can do.  Furthermore, if you JUST do that with 15% of your income, you will most likely retire a multi-millionaire.

Regarding bonds - I don't own any bonds, at all, and unless the environment changes drastically I probably never will.  To me, bonds are insurance against a drop in the market, and in exchange for that insurance you don't make much money.  I don't need insurance against such a drop because I have a military pension, rental income, and cash reserves.

Thanks Boatswain! When you say you own mutual funds with Vanguard, is this part of a retirement plan with your employer, or is this investing that you've done on your own? I'm just now starting to read into this, so pardon my naivety. 

[Guest UVAPAC]

10 hours ago, Boatswain2PA said:

I don't own any single stocks, too much risk that one business would tank.

Instead I own mutual funds, with investments split between S&P500 funds, small cap funds, and international stock funds. Most everything I have is with Vanguard who have very low expenses for mutual funds.  I think that's about the "simplest" investing you can do.  Furthermore, if you JUST do that with 15% of your income, you will most likely retire a multi-millionaire.

Regarding bonds - I don't own any bonds, at all, and unless the environment changes drastically I probably never will.  To me, bonds are insurance against a drop in the market, and in exchange for that insurance you don't make much money.  I don't need insurance against such a drop because I have a military pension, rental income, and cash reserves.

Boats... I am also wondering... why mutual funds as opposed to ETF's.  Similar concept, however ETF has even lesser fees.  Vanguard has some that are as low as 0.04% annual.  

[Boatswain2PA]

No apologies or pardons necessary!

At Vanguard I have a SEP-IRA, a ROTH IRA, and a ROLLOVER IRA.  I have a SEP-IRA at a bank that is also invested the same way.  There are three accounts because they have different tax laws.

A SEP-IRA can be set up by a sole-proprietorship (in my case, a 1099 contractor), and pre-tax money put in by the "business". This reduces your taxable income now, withdrawals in retirement (the original money AND the growth) will be subject to regular income tax when you withdraw it in retirement.

A ROTH IRA can be set up by an individual and is POST-TAX money.  While you have to pay tax on the money before you deposit it there, all withdrawals you take out in retirement (original money AND the growth) will be tax free.  In other words, you put in $5500 this year (and pay $2K in taxes on it, costing you $7500).  In 32 years (at 8% growth) that $7500 has turned into $88,000 that you can take out tax free.  EVERYONE should fully fund their ROTH.

A ROLLOVER IRA is an Individual Retirement Account that holds money rolled over from your 401K from a job that you left.  When you leave a job that had a 401K you have the option of leaving the money there to continue to grow, or roll into a Rollover IRA.  You should generally always roll it into a rollover IRA because most companies 401K plans are poorly managed and expensive...and you have no control over it.  With a Rollover IRA you have access to many more tools, and you can generally find funds (like Vanguard, et al) that are better and cheaper for you.

WITHIN these IRAs (AND within your company's 401K) you can buy shares of stocks in companies, or shares of mutual funds which hold stocks of companies.  Again, I don't own any individual stocks, just mutual funds which help me with diversification.

For example, I own Vanguard 500 Index Fund Admiral Shares.  This is a mutual fund that pretty much mirrors the S&P 500 index (meaning their fund is made up of the same mix of stocks that make-up the S&P500 index).  This fund has an expense ratio of 0.04%/year....so every $10,000 I have in that fund costs me $4/year.  That's ridiculously inexpensive, especially in comparison to many "actively managed funds" (like many company offered 401Ks).

So, I have mutual funds (S&P500 index funds, international mutual funds, and small cap mutual funds) located within my IRAs.  You can do the same thing inside your company-sponsored 401K (and the ROTH which you REALLY should have).

[Boatswain2PA]

26 minutes ago, UVAPAC said:

Boats... I am also wondering... why mutual funds as opposed to ETF's.  Similar concept, however ETF has even lesser fees.  Vanguard has some that are as low as 0.04% annual.  

I have both, with Vanguard their "admiral funds" (>$10,000 deposits) often have the same annual fees.  

I'm not completely sure of the difference between the ETFs and mutual funds.  They are much the same, although there appears to be a difference in how they are traded.  I read an article (that I didn't completely understand) recently explaining how the rise in ETFs may lead to a market crash because of how they are structured in comparison to mutual funds (something about how their rules require them to maintain certain stock levels with the ETFs, so if those stocks fall the ETF has to keep buying the failing stock.....or something like that, it was pretty esoteric).  

[Boatswain2PA]

3 hours ago, Cideous said:

One thing to mention I do own is an annuity.  I know financial planners dont like them, but for us they make some sense.  Mine is classified as a life ins policy and is therefore exempt from lawsuits.  Make sure to check your state, but they are a decent sock away.  Also, maturation is only 5 years which for some works better if they want to leave rat race early.

Cid - if you die tomorrow, what happens to the money in your annuity?  If it's a life insurance policy then they may pay out the life insurance, but keep the money you have invested.

I think there are some good annuities out there, but they are lost in a sea of very poor products.  I'm skeptical of anything that is classified as a life insurance policy as these usually make the broker a lot of money (at your expense).  Obviously I know nothing of your specific plan.

[GetMeOuttaThisMess]

With Roth IRA contributions only that have been deposited for five years or greater can be withdrawn w/o the 10% early withdrawal penalty. IRS subscribes to “first in, first out” policy for deposits.

 

[Boatswain2PA]

46 minutes ago, GetMeOuttaThisMess said:

With Roth IRA contributions only that have been deposited for five years or greater can be withdrawn w/o the 10% early withdrawal penalty. IRS subscribes to “first in, first out” policy for deposits.

 

True, but generally terrible idea unless necessary for true emergency?

[gbrothers98]

Several comments.

Financial planning is not everyone's cup of tea. Can an investment of time and effort in educating oneself about the specifics save $ and provide a better understanding of how goals are going to be achieved? Definitely. But not everyone wants to do that and the motivations to do so or avoid entirely can wax and wane over a career. Best recommendation is to figure out which one of these people you are early rather than later. A worthwhile quick read is Tobias The only investment guide you will ever need. At the end of that you will either want to pursue your financial education a bit further or put your financial future in some capable hands. 

Referring to a 50/50 split of stocks and bonds as an unrealistic allocation at a younger age is not considering the individual's risk tolerance, something a financial plan can clarify. I always thought I would be a near 100% stock investor based upon my knowledge of financial history....until the recession in 08-09 made 40% of my retirement funds disappear. Fortunately, financial history since has assisted in reclaiming that and more but it was a sick in the pit of stomach feeling despite knowing I had 25+ years to recoup. Just did not like watching that balance grow smaller and smaller despite continuing with contributions. My future allocations have adjusted based upon this insight.

In addition to risk tolerance, the two factors that make up the bulk of investment returns are the length of time spent saving and the amount saved regularly. For example, a 21 yr old can start with $100, save $100 a week for 46 years and have over $800k saved with a 5% annual return, a return a 50/50 stock/bond split should provide during that time span. 

As for adhering to advice from the Oracle of Omaha, while I do want to hear what successful individuals in finance have to impart to the masses, concurrently he inhabits a different stratosphere in comparison to the non-billionaires that surround his home in Nebraska. Perhaps those who live near his 11 million dollar home in CA would benefit more from his blunt advice about stock ownership as compared to other financial instruments. But likely those individuals spend much investment resources in municipal bonds since the need to maximize investment growth recedes when the nest egg moves into the 8 or 9+ figures range. Then a steady stream of income that is tax savvy is more likely the focus. I would much rather hear from the PA who practiced for 30-40 years and was able to end employment on their terms. I will report back in 2034. 

George

[GetMeOuttaThisMess]

9 hours ago, gbrothers98 said:

Several comments.

Financial planning is not everyone's cup of tea. Can an investment of time and effort in educating oneself about the specifics save $ and provide a better understanding of how goals are going to be achieved? Definitely. But not everyone wants to do that and the motivations to do so or avoid entirely can wax and wane over a career. Best recommendation is to figure out which one of these people you are early rather than later. A worthwhile quick read is Tobias The only investment guide you will ever need. At the end of that you will either want to pursue your financial education a bit further or put your financial future in some capable hands. 

Referring to a 50/50 split of stocks and bonds as an unrealistic allocation at a younger age is not considering the individual's risk tolerance, something a financial plan can clarify. I always thought I would be a near 100% stock investor based upon my knowledge of financial history....until the recession in 08-09 made 40% of my retirement funds disappear. Fortunately, financial history since has assisted in reclaiming that and more but it was a sick in the pit of stomach feeling despite knowing I had 25+ years to recoup. Just did not like watching that balance grow smaller and smaller despite continuing with contributions. My future allocations have adjusted based upon this insight.

In addition to risk tolerance, the two factors that make up the bulk of investment returns are the length of time spent saving and the amount saved regularly. For example, a 21 yr old can start with $100, save $100 a week for 46 years and have over $800k saved with a 5% annual return, a return a 50/50 stock/bond split should provide during that time span. 

As for adhering to advice from the Oracle of Omaha, while I do want to hear what successful individuals in finance have to impart to the masses, concurrently he inhabits a different stratosphere in comparison to the non-billionaires that surround his home in Nebraska. Perhaps those who live near his 11 million dollar home in CA would benefit more from his blunt advice about stock ownership as compared to other financial instruments. But likely those individuals spend much investment resources in municipal bonds since the need to maximize investment growth recedes when the nest egg moves into the 8 or 9+ figures range. Then a steady stream of income that is tax savvy is more likely the focus. I would much rather hear from the PA who practiced for 30-40 years and was able to end employment on their terms. I will report back in 2034. 

George

Maybe I can let you know in Fall 2020.

[mgriffiths]

16 hours ago, gbrothers98 said:

....until the recession in 08-09 made 40% of my retirement funds disappear. Fortunately, financial history since has assisted in reclaiming that and more...Just did not like watching that balance grow smaller and smaller despite continuing with contributions.

One thought here: as the stock market crashes and you continue to make contributions you are buying at the low - which is always the goal.  Therefore when the stock market rebounds (and so far every time there is a recession it rebounds drastically) you not only grow on what's left of your original amount, but you also grow from what was purchased at the bottom which only increases your rebound and growth.  Therefore some would argue that during a recession is when to try and make more contributions.  Something to consider during the next recession, which of course is "when" not "if." 

So many people pull out of the market during a collapse (selling low) and then buy back in when the market has already been rebounding (buying high).  It makes no sense.

Personally, I have a budget for monthly bills, safety net, etc. and then the "leftover" gets invested for retirement (of course this leftover is planned).  Therefore, it's only extra money that is lost if the stock market ever truly crashed without recovery - it would be unfortunate, but it just means I keep working.  But my opinion, if that ever truly happened we'd have a lot more to worry about than paper/electronic money - water, food,etc. would be currency (I'll go put on my tinfoil hat now).

For those thinking about retirement and doing it on their terms: Use the 4% rule (Mr. Money Mustache wrote a great article on it).  it may not be perfect but is a great place to start.  I know my family could easily live pretty well on $40,000 per year.  Using the 4% rule, I need $1,000,000 in investments to retire.  Obviously that's today's numbers, so in 10 years I would have to factor in inflation (somewhere between $1.2-1.3 million).  Then you estimate what your investment return will be, historically the market has returned around 10-12% on average.  How much do you need to save and for how long to reach your goal?  Dave Ramsey has a nice easy calculator for this.  Unfortunately I'm not at all close to the $1 million mark, but if I could develop some passive income that changes everything.  If I could generate $10k per year of passive income, all of a sudden my goal nest egg is only $750,000 that's a massive difference because I only need $30,000 from my investments.  So just different things to think about...

 

now for me to go figure out how to develop some passive income...