Investment Allocation

[Guest UVAPAC]

Hi all, 

I have two questions, and was looking for advice from other PA-C's as to how you are managing/investing your money.

1)  Aside from your retirement accounts through work, what percentage of your money is invested in stocks/bonds?  Currently I have about 50% of my money invested in stocks/bonds, and the other 50% is literally sitting in a bank account earning next to nothing.  I have done some reading which suggests that aside from 6 months savings, nearly all of the money should be invested in stocks/bonds.  It is fairly nerve-racking to dump a large sum of money into the market today given the world's instability, "trade-wars" looming, etc.  Do I need to get over this fear and take the plunge?

2)  I have started saving for my first child to go to college.  We started a 529 plan.  Initially I was having $100 put into the account bi-weekly, and I am starting to think this may be underfunded.  I was looking for advice from other parents out there as to how much you are contributing.  I was hoping to pay for the full tuition cost, but don't know if that is realistic or not.

Thanks, and as always I would love to hear thoughts on what/where you are investing your money.  

[beattie228]

Hey hey:

 

I'll take a stab at a few of your questions.

 

1.) The amount of money invested versus in a high-interest savings account (Emergency Fund or EF) is really dependent on you. Some say 3 months, others 6 and some even 12 months of expenses. The real answer is what number do you need in liquid assets that helps you sleep at night. For me that answer is 4-6 because I'm married to a PA and live in a PA friendly part of the country so I'm confident I could find a new gig and float along using my EF and not run into any real trouble. I also have short term/long term disability as my livelihood is dependent on me being of sound mind and body to earn my living.

 

2.) Percentage wise, my current savings rate is about 60%. Others may tell you this is too much/not feasible. I beg to differ. PAs are highly compensated compared to most fields so we're able to live comfortably and also put money away. After a few months, it becomes habit and you don't even miss it.

 

My goal is Financial Independence (FI) with the option to retire early (RE). There are a lot of resources about what that entails and how to go about it. I truly believe in freedom through financial independence. Freedom to work where I want for how long I want. Without having a sound investment plan, that's just not feasible.

 

3.) What/where my money is invested:

• Savings: Ally online (1.65% APR, no minimum/maximum)
• Investments: Vanguard. 
  • 401k - Vanguard 2065 Target Fund
    • Maxed at $18.5k
  • Roth IRA - VLXVX (Vanguard 2065 Target Fund)
  • Taxable - VTSAX (Vanguard Total Stock)
    • 80% Allocation
  • Taxable - VGTSX (Vanguard Total International Stock)
    • 20% Allocation

4.) Suggested readings if this is of interest to you

• JH Collins
  • https://www.amazon.com/Simple-Path-Wealth-financial-independence/dp/1533667926
  • http://jlcollinsnh.com/
• Mr Money Mustache
  • https://www.mrmoneymustache.com/
• Bogleheads Guide To Investing
  • https://www.bogleheads.org/wiki/Bogleheads'_Guide_To_Investing

 

5.) I don't have little ones so I don't have any advice about 529/college savings.

 

Be happy to chat through PMs if interested. I enjoy talking personal finance and have done a lot of reading on it.

Edited June 23, 2018 by beattie228

[mgriffiths]

1. The stock market has historically averaged around 10% return annually - if you look back at times when the world was unstable and caused major stock market drops the rebound shortly thereafter was astounding!  The people who lost money were those who panicked and took their money out of the market - or were not diversified and their single stock/bond crumbled entirely.  For example, I lost 25-30% of my investments in 2008 - 2009, but in 2010 my single year return was 27% and 2011 was 28% - and in 2017 I made 22%.  Over the last 10 years I have made an average annual return of 8% return - and that includes 2008 and the years of no growth (also includes 2018 which hasn't been great so far stock market wise).  So in short, I have made significant money from the stock market.  I am 29 and am to the point where I likely don't need to contribute any further to my retirement funds to be able to retire comfortably with a $50,000 "salary" at age 55.  Of course I'm going to continue to contribute though.

EDIT: I did not calculate inflation into the annual stock market return - it's somewhere around 7% if you do, as inflation is often around 2-3%.  Also, my investments are essentially 100% index funds.  Study after study has shown that index funds outperform actively managed funds and index funds are significantly less expensive to own - therefore it is a win-win!

Also, we do have approximately 6 months of savings that sits in a savings account, BUT we use a "high interest" savings account.  The annual return is a bit over 1.5%.  Not great, but better than the 0.1-0.5 most places offer and prevents at least some of the lost value due to inflation.

2. I'm not a parent...yet...my wife is 37 weeks pregnant this coming Saturday.  Our plan is to start immediately with $1000 monthly contribution toward college (likely using a 529 plan).  Using 7% annual return that gives us just over $435,000 in 18 years.  Hard to guess what will occur with college costs in 18 years with the massive balloon of student loan debt, but should provide significant help whatever our daughter chooses.

Edited June 22, 2018 by mgriffiths

[mgriffiths]

I will also add, that since I have been married - just over 7 years ago - my wife and I have maxed our Roth IRAs annually.  This is my first year with a 401K available to me, and starting next month (first month available) I will be putting away just over $3000 per month to max out my 401K for 2018, and plan to continue to max our Roth IRAs and my Roth 401k annually until it becomes ridiculous to continue doing so.

[GetMeOuttaThisMess]

Answer to 1) is dependent upon age.  The younger one is, assuming that risk aversion is "average" (willing to accept up's/down's in market), the greater the long term return with stocks historically.  Many reference sites will recommend 80/20 or 70/30 while young (through 40's for example), and then as you get closer to retirement the shift is more toward less risk adverse assets.  Me personally?  I've been at 60/40 splits for about a decade, all in an index fund through Vanguard (Wellington Admiral fund).  Lots of free information/planning tools at their website.  I won't address worldwide financial instability since we don't all share the same beliefs.  I applaud you on the emergency fund for 6 mos.  When one considers a report within the past year that the majority of Americans couldn't come up with $1K if their life depended on it, having that emergency fund gives some reassurance.

Answer to 2) is that I again applaud you on planning ahead.  My wife and I have had one child and we started saving a year after her birth, primarily because my dad gave her $1K on her birthday each year which we matched.  By doing so we were able to take advantage of the Texas Tomorrow Fund in it's initial configuration where tuition costs were guaranteed to be covered.  I think it cost us about $16K to purchase a four year, state university lump-sum package.  Her actual tuition cost as I recall was approximately $34K.  She still has about 16-19 hours left to use after getting her BA/BS from UT-Austin.  The estimated costs provided at UT's website for four years were dead on (~$100K).  After the lump-sum tuition purchase, we continued to put back enough each month into an education IRA until it was maxed out, as well as additional funds into a money market account to reach that estimated OOP cost through her public school and early college years.  It worked perfectly and got her out of school debt-free.

End of year, I'm going to consolidate <1 year of Federal retirement contributions into another account that I control.  I'll be past the 59 1/2 age cut-off to avoid early withdrawal penalties.

One caveat for my wife and I.  I am looking at two pension plan payments and she will have one.  In addition to those, we have our traditional and Roth IRA accounts, as well as a money market account/savings account.  I already have a retirement budget on a spreadsheet based on current annual expenses, excluding costs that won't be relevant upon retirement (retirement contributions, disability insurance premiums, etc.).  I have also analyzed what the peak time is for me to begin drawing down on the pension plans as well as social security.  It isn't difficult but it does take some time.  Our current residence is paid for and I would like to downsize and move closer to water.

Do NOT forget to factor in healthcare expenses, including long-term care insurance, for retirement.  I actually took out our LT care policies while in our late 30's/early 40's since I didn't want a catastrophic event to penalize the other family members.

 

Edited June 22, 2018 by GetMeOuttaThisMess

[gbrothers98]

The OP asks questions that are difficult to answer and what others do is not always applicable to an individual situation.

Stock and bond allocation has to take into account not only personal risk determination but also forward return expectations. While stocks have a long track record of inflation beating returns over a long time horizon, there have been plenty of instances during such a horizon that stocks were a sideways or even losing proposition. A better question to ask is what is a realistic expectation for the next 10 years when considering stock and bond returns? Can one wait out under performance in an asset for an extended period of time? How much value of an initial or ongoing investment can be lost to market gyrations in the short term? For those sure that the market will come back, there were plenty who thought the world was ending in the Great Recession, that America was swirling the financial toilet in the 70s and that the entire country was one large Dustbowl filled with vagrants and economic refugees during the Great Depression. Investments improved after these trials but staying the course during was not a given when the end of the story has not been written. So how much can you lose of that initial investment, if any? Just like gaining medical knowledge, financial knowledge is a constant study, insights shift and become more complex, what appeared straightforward has dips, valleys and other obstacles to skirt.

The OP has taken the first step which is to save, which can be a daunting effort given our consumptive culture. But savings should occur in the greater context of the overall plan with outlined goals aligned with personal considerations. For example, all well and good to provide your child with 100s of thousands for education....until your own retirement is at risk of being underfunded or little Jimmy goes to trade school at a fraction of the cost vs navigating a BS followed by an MS .... to a PhD? You may dump all of your monies into VTSAX on monday but 3 years from now when you need it for a downpayment on housing, you find the return would have been better in a ladder of bank CDs due to a market hiccup that removes 30% of value.

The answer here is to sit with spouse/partner and get up to speed if there is a lack of financial knowledge and then start applying in a stepwise fashion based upon priorities.

Good luck.

George

 

[ventana]

to many people over think this

 

if you are young and even middle age 100% into a low cost index fund - something like 98% of the actively traded funds to not even meet the market - so you can't even match the market return

 

so the expense ratio and indexing is all that matters.....  like Vanguard 500 or dow index

 

put in max amount for 401 or 403 election

 

fully fund a roth every year starting as young as possible

 

 

I have done the above and not much more and will retire a multimillionaire (guessing 2-3m) with a pension as well at age 65 (considering retiring earlier as I will have college aged kids and I think they will get a lot of aide if I am not working, or if I am working very little...... so take a few years early.....

 

 

Also, bonds stink and as long as you do not need to w/d the money you should be in stocks - indexed as above

 

429 plans - same advise and YES - they can be used towards retirement as well

the key is starting as YOUNG as you can 

 

 

[Boatswain2PA]

On 6/22/2018 at 5:13 AM, UVAPAC said:

Hi all, 

I have two questions, and was looking for advice from other PA-C's as to how you are managing/investing your money.

1)  Aside from your retirement accounts through work, what percentage of your money is invested in stocks/bonds?  Currently I have about 50% of my money invested in stocks/bonds, and the other 50% is literally sitting in a bank account earning next to nothing.  I have done some reading which suggests that aside from 6 months savings, nearly all of the money should be invested in stocks/bonds.  It is fairly nerve-racking to dump a large sum of money into the market today given the world's instability, "trade-wars" looming, etc.  Do I need to get over this fear and take the plunge?

2)  I have started saving for my first child to go to college.  We started a 529 plan.  Initially I was having $100 put into the account bi-weekly, and I am starting to think this may be underfunded.  I was looking for advice from other parents out there as to how much you are contributing.  I was hoping to pay for the full tuition cost, but don't know if that is realistic or not.

Thanks, and as always I would love to hear thoughts on what/where you are investing your money.  

1.  Depends on how old you are and what your risk tolerance is.  I have nothing in bonds as their performance in recent years have been terrible, and I think some municipal bonds are as fundamentally risky as stocks (due to municipal debt).  With savings, I think it's better to think about numbers instead of percentages (50% cash/50 % invested).  I think having 6 months of EXPENSES (not income) in savings is enough for most working people.  My wife and I personally require a full year of expenses in savings, but that's just because we are weird and need/want that security.  As we near retirement, we will probably increase that to two years of expenses.

A big fat emergency savings like this gives you a big cushion for other things.  We don't have bonds, because we don't need them.  If we enter retirement with 2 years of cash, and the market tanks, we can avoid pulling money from our IRAs until the market recovers (almost always recovers in 1.5 years).  

We also have other savings....money set aside (and adding to every month) for car replacement, vacation, and new home.

 

IF you want to transition from having a "too-large" savings account by putting it into the market, you could spread this over the next year by increasing the weekly/monthly contributions to your retirement account.  That would smooth out any "bumps" you would have if you invest a large sum at once, only to watch the market go down a few percents the next day.  No need to take a "plunge" if that (understandably) scares you.

 

2) Yeah, seems like $200/month is a little low, but depends on how old your child is, and what kind of school you want to be able to pay for.

Don't forget there are other kinds of investments, like residential/commercial/agricultural real estate.  They are not making any more ground!

 

Edited June 24, 2018 by Boatswain2PA

[Cideous]

I just went from 100% Vanguard index to 75% Vanguard and 25% bonds.  I have a real fear for this economy over the next 2 years.  Freakishly overvalued and Trump's trade war could blow it all up.

[ventana]

13 minutes ago, Cideous said:

I just went from 100% Vanguard index to 75% Vanguard and 25% bonds.  I have a real fear for this economy over the next 2 years.  Freakishly overvalued and Trump's trade war could blow it all up.

but if you don't need the money for the next 7 + years anything that goes down recovers.......

if you are closer to retirement might make sense

 

still kicking myself for selling PCLN at $300/share (bought for $5 a share) when it is now $2000 per share.... my $30000 would be $200,000 today (off a $500 investment)

[Boatswain2PA]

Trade war could blow it up....but every single other cataclysmic prediction made by the media about the Trump presidency hasn't come to fruition either.

More likely his outrageous comments will simply put him in a better negotiation position, like it did with NK and others, and we will have an overall reduction in tariff's on US exports.  

Being freed of the shackles of intense regulation imposed by the previous administration, our economy is soaring.  >4% growth, lowest unemployment in decades, lowest black unemployment EVER RECORDED.  

While I am cautious, I am also opimistic.  I don't think Trump will engage in a full trade war, just like I didn't think he would go to war with North Korea (despite the media constantly screaming "WORLD WAR III IS COMING BECAUSE OF TRUMP!").  So I think our economy is going to continue to soar.

Biggest risk I see to our economy is impeachment.  If Trump talks to Muller, good chance he will be trapped in some sort of conflicting statement leading to indictment (like Flynn).

[AbeTheBabe]

[AbeTheBabe]

Can't tell based on that. What's your age? Do you have goals of buying a home? A car? How much do you have for retirement? How old are you? Etc.

[Cideous]

4 hours ago, Boatswain2PA said:

Biggest risk I see to our economy is impeachment.  If Trump talks to Muller, good chance he will be trapped in some sort of conflicting statement leading to indictment (like Flynn).

Risk of this is small.  Republicans are going to get their asses handed to them in the house, but the Senate will remain Republican.  So any impeachment will pass in the house and go no where in the Senate...ala Bill Clinton.  Having said that, your point is well taken.  I think Muller's probe is the wild card.  If he finds hard evidence that Trump and his associates colluded with Russia then that will be it.  Even R's will send him packing.  I am anxiously awaiting his report.  Me and another 360 million other Americans.

[Boatswain2PA]

Zero chance they find any kind of criminal collusion.  Very good chance that, if the President talks to Muller, there will be some kind of inconsistency that could be considered lying and then charges brought (ignoring the question of whether a sitting President could be charged). 

Yes, the "blue wave" has diminished, I think the Senate is in safe Republican control.  That will also greatly help the economy continue to grow.  We will see about the House.  If the Dems take it we will have absolute gridlock for 2 years...and that ain't so bad for our economy either.

 

Edited June 24, 2018 by Boatswain2PA

[mgriffiths]

15 hours ago, AbeTheBabe said:

Interesting graphic - good read.

I've been looking into starting an HSA.  My wife had one through her job and we fully funded it the last two years, but she just recently resigned as the school year ended (she is/was a teacher) and our daughter is due in 3 weeks.  Unfortunately my job doesn't offer one. They do offer a FSA but I hate the idea of an FSA since I would lose the money at the end of the year if not used.

- How do I know whether I have a High-Deductible health plan which allows me to get a private HSA?

- Anybody have an recommendations of where to start when looking for private HSA?

[GetMeOuttaThisMess]

HSA plans by definition are high deductible.  Ask Dr. Google or a local independent insurance agent.

[Boatswain2PA]

You can use both an HSA AND an FSA, and if you have access to both then you should use them.

Regarding an HSA:  I don't think there are "HSA plans"....with the HSA being a "part" of the insurance plan, but rather IF you have a health insurance plan that meets the IRS's definition of "high deductible health care plan" (deductible of $1350 for individual, or $2700 for family), then you qualify for being able to open a HSA.

Money you put into a HSA is PRE-TAX like your 401K, but also gives tax-free GROWTH like a ROTH, so for tax purposes really is the best kind of investment tool offered.  There are some investment HSAs, like at Optum bank, that offer index funds, etc.  

If you have a high-deductible health care plan AND your employee offers an FSA, then you can take advantage of both.  Max out your investment HSA ($6900/family) and don't touch that money until retirement....and contribute to your FSA for whatever money you think you will use for this year.  That way you have tax free investment and growth in the HSA, and your healthcare expenses are tax free this year.

Then, when you are in retirement you will have more money for healthcare expenses in your HSA, and if for some reason you have the unique problem of having too much, you can withdraw from the HSA like it was a 401K (pay taxes on it without penalty after 65).

 

[mgriffiths]

5 minutes ago, Boatswain2PA said:

You can use both an HSA AND an FSA, and if you have access to both then you should use them.

Regarding an HSA:  I don't think there are "HSA plans"....with the HSA being a "part" of the insurance plan, but rather IF you have a health insurance plan that meets the IRS's definition of "high deductible health care plan" (deductible of $1350 for individual, or $2700 for family), then you qualify for being able to open a HSA.

 Money you put into a HSA is PRE-TAX like your 401K, but also gives tax-free GROWTH like a ROTH, so for tax purposes really is the best kind of investment tool offered.  There are some investment HSAs, like at Optum bank, that offer index funds, etc.  

If you have a high-deductible health care plan AND your employee offers an FSA, then you can take advantage of both.  Max out your investment HSA ($6900/family) and don't touch that money until retirement....and contribute to your FSA for whatever money you think you will use for this year.  That way you have tax free investment and growth in the HSA, and your healthcare expenses are tax free this year.

Then, when you are in retirement you will have more money for healthcare expenses in your HSA, and if for some reason you have the unique problem of having too much, you can withdraw from the HSA like it was a 401K (pay taxes on it without penalty after 65).

 

Definitely do plan to use both in the future, but more focused on the HSA right now.  Probably should have used the FSA this year since my wife is pregnant and we have had and will have medical expenses - but live and learn...

I am almost positive I have a high deductible plan based on that definition but will confirm - thank you!

Also didn't know you could withdraw after 65 if felt necessary - EVEN BETTER!

Obviously more research to be done here.

[Boatswain2PA]

16 hours ago, AbeTheBabe said:

This is pretty good, but misses paying off your mortgage.  

[GetMeOuttaThisMess]

For clarification purposes, my health insurer is Aetna however my HSA is managed by a secondary fiduciary entity.  You can independently purchase a high deductible policy with built in HSA.

[AbeTheBabe]

11 hours ago, Boatswain2PA said:

This is pretty good, but misses paying off your mortgage.  

It's actually there on the bottom right. Also depends on your interest rate. With low rates (like mine at 4.25%) I'm just going to pay over 30 years and any extra cash can go towards trying to max out my 401K and eventually an IRA.

[AbeTheBabe]

12 hours ago, mgriffiths said:

Interesting graphic - good read.

I've been looking into starting an HSA.  My wife had one through her job and we fully funded it the last two years, but she just recently resigned as the school year ended (she is/was a teacher) and our daughter is due in 3 weeks.  Unfortunately my job doesn't offer one. They do offer a FSA but I hate the idea of an FSA since I would lose the money at the end of the year if not used.

- How do I know whether I have a High-Deductible health plan which allows me to get a private HSA?

- Anybody have an recommendations of where to start when looking for private HSA?

Hey griffiths,

I have my private HSA through Optum which is pretty good and plays nice with a lot of insurance companies.

Here is how to determine if you have a HDHP: https://www.healthcare.gov/glossary/high-deductible-health-plan/

[Guest UVAPAC]

Market really taking a pounding over the last 10-14 days, looks like it's going to take another hit today.  I guess I just have to decide when to man up, and toss some of this money sitting in a saving's account into the market.  If only I had a crystal ball!

[beattie228]

In order to time the market, you have to be right on two separate occasions: the time you decided to hop in as well as the time you decide to leave. As you might imagine, that is nearly impossible and almost every professional trader gets this wrong. Do what makes you feel comfortable, but logic says to dollar cost average by investing a certain amount every two weeks regardless of what the markets are doing. You have to set up an allocation percentage based on what makes you comfortable and stick with that allocation.

 

The market is volatile at all times. The nature of that beast is it goes up and down but overall, it historically goes up over the long run. Helps me to remind myself it's a long marathon and not a short sprint. Makes no difference if the Dow drops 250 points on some Wednesday in 2018 when I don't plan to use that money for decades. Jump on in, water's warm.