Author Topic: Investment change after becoming a mustachian?  (Read 9314 times)

aces2

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Investment change after becoming a mustachian?
« on: December 23, 2012, 08:26:10 AM »
Well, let me start by saying I've been reading all kinds of posts (Article at random style) for a little over a month.  We are huge Dave Ramsey fans in our family, and following his principles took us to "Baby Step 7". 

So, upon arriving at the front steps of the MMM blog, we were maxing out contributions to separate Roth IRAs, saving for our son's college (11 months old) in an ESA, and throwing the rest of what we didn't spend in what we labeled as a "future-house" investment account.  All accounts, including the "future-house"-account, are invested in Class A shares (front-end load) w/ American Funds, Portfolio Series to be exact.  We are happy with investing with them, mostly because prior to shooting for Financial Independence as early as possible, we looked at all of our investments as "long-term", according to what Dave teaches.

So last Friday, I called and spoke with my "Financial Advisor" (one of Dave's ELPs) and tried explaining the idea of Early Retirement and Financial Independence.  I opened with my wife and I's financial-goals are grossly different than 6 months prior, the last time we spoke.  He didn't seem to fully understand/believe that we wanted to retire in roughly 12 years.  I'm 8 years into a 20 year plan with the Air Force, at which time I should be getting a pension at age 38.  So, naturally we want to kick it in gear and save as much as possible for the next twelve years.

I asked him about stopping all contributions to Roth accounts and even the ESA and reallocating that money to what we previously called the "future-house"-account, but now would call the "Fuck you money needed for early retirement"-account.

In the end he of course wanted us to save with Roth accounts at a minimum still, but all I could think is how I can't touch the bulk of that money until I'm 59.5 years old!  What good will that do me for the 20+ years from age 38 to 59.5?!?

We're ok with being taxed on the 4% we will pull out in the future during early retirement.  So we did it, we made the change and are now throwing roughly 55% of our after tax income into this account.

My question is simply: Did we do it right?  Are we now allowed to pile every fucking cent we can into this account and watch our sta/sh/che grow?
« Last Edit: December 23, 2012, 08:35:57 AM by aces2 »

bluecollarmusician

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Re: Investment change after becoming a mustachian?
« Reply #1 on: December 23, 2012, 09:36:50 AM »
Congrats on your decision, and thank you for your service.... ( active duty AF here too, hua.)

I think that you have chosen a great and very doable path.

Here are a couple of ideas to consider.

1. I would suggest diversifying your approach beyond just funds.  Your goal is not attaining great wealth (necesarrily) it is obtaining assets that will provide you with income that will pay your cost of living so you will be financially free, and able to do what you want.  With that being said, while long term growth of stocks is one route to growing your savings it is not the only one, and a diversified approach can help keep you on track.  Everything that you learn about investment real estate, bonds, and other high yield investments will benefit you.  The stock market has great historical returns, but getting the best results from that often means leaving the money alone for 30+ years.  If you are looking for consistent payout type investments there may some other things to consider.  One good paid off rental house could provide you with a relatively stable monthly income stream for life.  Not saying you should do this.... Just suggesting you should investigate all options.

2. Since you have the benefit of knowing more or less what your retirement pay will be, practice living on that now... Or as class as you can.... Look at an e6 at 20 years, and see if you can get your household budget in place to live comfortable inside that... If you can, then your savings/ investments will be gravy...and a cushion.  I think a military retirement is as safe as those things get...however, there is still a lot that could change in the next 15 years.  Also by doing this, you more or less would get your savings rate up to the 50% zone ... A good place to be!

3. Do some more research on your financial needs at specific points in the future... i.e. when you will likely need the money. Tax rates are likely to be higher in the future.  Roth IRA allow you to withdraw contributions at any time without penalty, just not the earnings.... So say you save 120,000 over the next 12 years in your and your wife's roth Ira's.  you could withdraw that total amount tax free at any time, with only the interest being required to be left in to stay penalty free.  And that money can grow tax free forever... It is the best deal you are likely to get in life as far as tax free income.  Your tax situation is unique with the way military pay works as well. 

I totally understand your concerns re: accessing your money in the Roth....just make certain you know all your options.    Good luck to you.... Sounds like you are taking steps in the rot direction! 

bluecollarmusician

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Re: Investment change after becoming a mustachian?
« Reply #2 on: December 23, 2012, 09:42:18 AM »
Forgive the spelling errors...my iPad is smarter than me...

Just looked up the pay situation...
If you can get your family budget between 1500-2000/ month, you will be home free.  You can live very well on that amount if you attack it right.

Good luck....

Karl

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Re: Investment change after becoming a mustachian?
« Reply #3 on: December 23, 2012, 10:02:30 AM »
As mentioned earlier, thank you for your service.

Given the low cost funds available from the Federal Govt., does it make any sense to pay a load at all (unless you want to fill in holes from that set of retirment funds)? 

aces2

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Re: Investment change after becoming a mustachian?
« Reply #4 on: December 23, 2012, 12:14:25 PM »
@ Meoates1
Thanks for the generous reply!  I love the idea of diversifying and thinking about not just amassing cash, but things that will be an extra source of income.  I hadn't really considered this to the degree I think I should have.  Maybe if we get to $150K faster than we thought we would we could look into purchasing a small property.  I don't love the idea of being a long distance landlord, but I'd sacrifice given the right situation.

We are now living on <$1700/mo and saving $1900/mo. so I think we fall right in line where we need to be...EXCEPT we live in base housing, hurumph!  Meaning, upon retirement, I will have to either already own a home (eating into the savings plan) or have more income.  All we can do is save, save, save until then.

Like I said I really appreciate the reply!

@Kari
The TSP funds are extremely low cost, the unfortunate thing is though, I'd have to wait until retirement age to withdraw, as they are a part of a 401k-like program.  So given my situation, I don't think they'd fit my needs at being able to withdraw @ age 38.

aces2

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Re: Investment change after becoming a mustachian?
« Reply #5 on: December 23, 2012, 02:13:22 PM »
What I really want to know is...

1.  Is it really just as easy as having a large investment account, that you can draw off of for your whole life, while it stays afloat w/ interest?  And (since I know that answer is yes), am I in the right type of setup to do this?

2.  Can piling >$25K/yr into this account for 12 years hurt me in any way?

aces2

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Re: Investment change after becoming a mustachian?
« Reply #6 on: December 23, 2012, 03:17:23 PM »
I must admit I've thought long and hard about switching... but I remember their promotional material that showed what they do vs. what the competition does, and it actually made great sense.  I do find comfort in that.  Also, no annual fees once our nest-egg is built, I find comfort in that as well.

Is that silly?

Another Reader

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Re: Investment change after becoming a mustachian?
« Reply #7 on: December 23, 2012, 03:51:21 PM »
Yes. it's very silly.  Paying a 4 or 5 percent load means that money and its returns are lost to you forever.  You are behind from the start.  Dave Ramsey makes money off his ELP's and they make money off of you.  You can easily duplicate the American Funds returns in no-load, low cost funds and keep the money currently wasted in the sales charge and the expense ratio.  I had American Funds in a deferred comp plan where I was a captive audience, and one of the "selling points" was that we did not pay the sales load.  That's the only time and reason to do business with them.

If you want to continue in the funds, transfer them to a Fidelity or Vanguard, if Vanguard brokerage accounts accept them.  Then compare them to similar funds that are low cost and no-load.  You will be much better off long term if you at least put new money in no-load funds.

Also, are you paying this "advisor" any money beyond the sales commissions from the funds?  If so, what services is this person providing?

And, yes, you should continue to fund the Roths, for the reasons stated by others.  The TSP funds are an excellent way to save for the second half of your retirement.  In your shoes, I would take full advantage of the TSP.

bluecollarmusician

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Re: Investment change after becoming a mustachian?
« Reply #8 on: December 23, 2012, 04:12:07 PM »
Good points made by all above re: funds.  It can all feel very complicated...and in general I agree that no load/low fee is the way to go.

In all of this info (sorry, you asked for it! :) don't lose sight of the fact the most important part of this (with your timeline) is socking away the money up front- so 4-5%of the top is a huge deal- doesn't mean it is a fail, just means you might be able to do even better.

RE: TSP money, I am going to go out on a limb and say that I do not that the TSP has much benefit for you, although the new ROTH TSP is intriguing to me for several reasons.   Since there is no match for Military, you would essentially be using it only for the tax benefits....with the majority of your compensation currently tax free you don't really need the deductions now, and you want access to the dividends/interest from these investments prior to 59 1/2

I know it is probably overwhelming-  just remember that we are strangers on the internet!  Also remember that your FP has a financial incentivel....know how he gets paid!!! I would only trust a fee only planner...and even then, I always say "anyone who knows about money,wants your's!"  There is a lot to learn.  Listen to everything, read, ask more questions... and then you can decide what is best for you and your family.

Good Job!  I say again, it is overwhelming- the idea of managing money is daunting- but knowing that doing it right will take care of you for the rest of your life makes it all very rewarding!

All the best-
Mark

bluecollarmusician

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Re: Investment change after becoming a mustachian?
« Reply #9 on: December 23, 2012, 04:18:04 PM »
Another thought about housing...
I you are in England at the moment.  When you get back to the states, I would strongly consider buying a house for rental, or to live in. The more bang you can get for your housing allowance the better.  You have to know the market, study it when you buy... if you can retire the mortgage quickly, you will be all set with your retirement pay and stash. 

One idea, consider buying where you want to end up- your renters can be paying down your mortgage while you are still working wherever BigBlue sends you.  Long distance land lording can be a real pain, I know first hand, however...with the right plans it will help you set yourself up for an awesome early FI.

All the best!

Zaga

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Re: Investment change after becoming a mustachian?
« Reply #10 on: December 23, 2012, 04:24:47 PM »
aces, I too started out with Dave Ramsey.  While he has truly excellent "getting out of debt" advice, his investing advice stinks!  We also went with an ELP to start out with, and the fees are terrible compared to where we are now!  We have since wised up, read several investing books, and gone to index funds with Fidelity.

So my advice to you is to go to the library and read a bunch of investing books until you find one that resonates with you like TMMO did for getting out of debt.  Anything by Boglehead's is a good place to start.

LowER

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Re: Investment change after becoming a mustachian?
« Reply #11 on: December 23, 2012, 09:06:10 PM »
As a former American Funds client, I can say with confidence and experience,  get out and go to Vanguard. Please do yourself a favor and delve into www.bogleheads.com. I guarantee you will  not regret the education.

aces2

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Re: Investment change after becoming a mustachian?
« Reply #12 on: December 24, 2012, 11:56:35 AM »
Ok, so, 24 hours after starting this thread, we've made the move.  We talked out the "long-term" aspect of what is now our 12 year plan and decided that American Funds front-end load probably isn't best because we aren't that "long-term" w/ our new goals.

So, the forms for the Roth-rollovers w/ Vanguard are on the dining room table printed and signed.  Going in the mail after Christmas.

ALL shares in the "Fuck you money" account w/ American Funds have been sold as of the 24th's closing price.  Unfortunately, after hanging up I realized dividends payout at the end of this month.  Fuck.  Oh well.  Stupid-tax.  We are reinvesting this cash (once a check is received) in VFIAX - Vanguard 500 Index Admiral.

My wife and I have weighed out the future investment strategy, and we really do like the idea of not HAVING to have to work if we don't want to for the full 20+ years (age 38-60).  So, at least as of now, we are not going to contribute to the Roth IRAs for 2013 and instead pile up every dime in the VFIAX.

Thanks meoates1, zaga, lower, lhamo, and another reader!

Now I just wonder if my January 2013 issued 1099-DIV will reflect this crazy set of last minute decisions, or if I will have to wait until early 2014.

Honest Abe

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Re: Investment change after becoming a mustachian?
« Reply #13 on: December 24, 2012, 12:03:47 PM »
You may still entitled to the dividend depending on she. You're required to be a shareholder of record to receive it. Not sure of the details for your specific funds but its possible.

Another Reader

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Re: Investment change after becoming a mustachian?
« Reply #14 on: December 24, 2012, 01:46:50 PM »
Two things I would consider.

First, if you want to go the passive index route, I would invest more broadly than the S&P 500.  The total market index is one way to do that.

Second, I would keep going with the Roth IRA.  As several folks have mentioned, the contributions can be withdrawn tax-free at any time.  The Roths afford you some flexibility along with tax-free growth.  If you need income, you can withdraw those contributions.  If you don't, you let the market compound for you, year after year, with no taxes to pay.

You probably are not losing anything on the dividends.  The fund price usually drops by the amount of the dividend when it's paid.  You would get a few more shares at a slightly lower price.  Just make sure the IRA's are completely rolled over and you don't end up with the dividends.

My guess is you will feel more in control of your finances and your future once you start researching and making investment decisions on your own.  It's really not that complicated.

aces2

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Re: Investment change after becoming a mustachian?
« Reply #15 on: December 24, 2012, 02:41:43 PM »
Also, are you paying this "advisor" any money beyond the sales commissions from the funds?  If so, what services is this person providing?

And, yes, you should continue to fund the Roths, for the reasons stated by others.  The TSP funds are an excellent way to save for the second half of your retirement.  In your shoes, I would take full advantage of the TSP.

I'm not paying him directly, no.  But I'm sure he's taking almost every bit of that front-end load from American Funds.

And before I take on the next subject let me open with a VERY POSITIVE COMMENT.  I really do appreciate the input, and advice.  It's fucking GREAT!  I learn a lot by doing research just like this.  And that in turn helps me teach my wife some things I bet she thought she'd never know.  AWESOME!  We are truly grateful.

Everyone seems to have the same theme regarding the Roth IRAs; keep "investing".  Which I read as "keep maxing out".  Further defined as "Keep taking $11,000 annually out of your 'fuck you money account' ".  The whole point of this blog is to sacrifice your butt off early and hard, so that you can do with your life whatever you please, because along your journey you will learn to need less while consuming less.  Which really is a double-whammy!  I really just might not be wrapping my head around this right, so please, if I am wrong, tell me again.

The way I see it is this: 
I receive a pension in 12 years time, what a perfect goal (which I believe to be key to this equation) to shoot for ER/FI.  It will be approx $2K/mo income (low-end).  We have (assuming absolutely no raise ever again, forever) roughly $23,700 that is available each year to pursue FI. 

$24K rounded * 12 years =  $288,000 available for 4%/yr withdraw rate if needed right then!  Remember we have $2K/mo to supplement that number.  4%(1K/mo.) + $2K  = $3K per month.  RETIRED.  FOREVER.  STARTING RIGHT THEN.  Not to mention all the time in the world to pursue whatever we want, I'm sure earning some sort of an income as well.


If we go the "keep maxing out the Roth IRAs"-route:
$24K rounded - $11K for Roth IRAs  = $13K/year.   $13K * 12 years = $156,000 immediately available to draw 4% on.    4%($500/mo.) + $2K = $2.5K per month.  BUT we will have roughly $150K in Roth IRAs that will sit for another 20 years if needed at age 60 and we can draw up to $150K out (principal invested) as needed to supplement the $2.5K per month income.  We could probably get by on this one, no problem, but I'd have to watch/learn a little more hardcore.


Actually after spelling out both scenarios.  I don't know which one sounds better.  I though I'd go with "option A" without a question.  But "option B" doesn't sound too awful bad.


How does inflation fit into these numbers?

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Re: Investment change after becoming a mustachian?
« Reply #16 on: December 24, 2012, 03:21:46 PM »
When you return to the states and then leave the military in 12 years, you may find that $2k a month does not go very far.  Housing will likely eat up a big chunk of that, and your overall buying power will likely be lower because of inflation.  You may need more than you think you need today to meet your FI goal. 

I think a lot depends on your income and how much of that income you can save. If you cannot afford to max out the Roths, throw money in the TSP and save in taxable accounts, then decisons about where to put money do have to be made.  Many of the posters in this forum have enough family income to fully fund all three types of accounts, so you are getting advice based on their income level, not yours. 

In your shoes, I would figure out how much I can save and invest for the next few years.  Once you know how much you can squeeze out of your income to invest, then it becomes easier to figure out where the money should be invested.  I personally like the flexibility of the Roths, and you have 12 years for the investments and their earnings to compound, tax free, before you would consider tapping them.  You would not pay tax on the contributions you withdraw to meet your income requirements at that point.  Saving and investing in taxable accounts means you will sell and pay capital gains tax on the earnings as you spend down those accounts.  You probably need to invest in both to meet your FI goal.  Once you know how much you can invest, you can allocate among the choices.

If you can increase your income or if your wife is also working, you can increase your savings.  If she is not working while you are stationed overseas, will she be working when you return to the US?  Investing most or all of her income would really help you achieve your goal.  If your total family income increases, then your TSP might be helpful.  However, if you are in a low tax bracket and you do not have enough income to fund all three types of investments, the TSP may not be useful.

Hope this helps clarify things.

James

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Re: Investment change after becoming a mustachian?
« Reply #17 on: December 24, 2012, 05:19:09 PM »
I get frustrated with a lot of the questions on this board because they leave out a very important aspect, goals.  Bravo for starting with the goal and working back from there!

I went through a similar transformation last year, resulting in moving all of my money to Vanguard into index funds.  I suggest contributing the max to Roth every year to protect that money from possible taxes in the future, you just can't predict how things will change over time with tax policy.  Worst case you will pay some penalty to access the non-principle part of those funds, but you would have first chewed through all of your non-Roth and all of your principle from the Roth accounts.  It's possible, especially if you make good income during early retirement, that your income once you pass 60 will be large enough to have a tax burden of some significant extent.  By taking income from taxable investments up to the max that you can take before taxes start, and taking the rest from your Roth, you can minimize your tax burden during later retirement.  It has a fairly large up side and a very small down side in my opinion.

aces2

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Re: Investment change after becoming a mustachian?
« Reply #18 on: December 25, 2012, 05:10:50 AM »
Ok, I probably seem like I'm sporadic w/ my decisions.  But you've talked me into staying w/ the Roth IRAs.

The way I see it, we can do both, tax-sheltered and not.  We'll probably get better at living efficiently, fine-tuning our mustachian knowledge, and also save more than we are anticipating now.

I really want to say thanks once again. 

For what it's worth, we are always listening, one ear to the ground, looking for others willing to share any knowledge.

I hope to help others on the forum the way ya'all have helped me!

TomTX

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Re: Investment change after becoming a mustachian?
« Reply #19 on: December 25, 2012, 06:06:09 AM »
This has been touched on, but I feel the need to emphasize it:

Fuck, I wouldn't be adding ANY money into funds with a load.  "Load" = "Fat profit for the adviser/broker and fund owners." I thought Dave recommended fee-based financial planners (you pay a set amount, they advise) instead of someone who skims off money by the way you invest.

If you want to put money into equities, someplace like Vanguard is a much cheaper way to do it. You can duplicate any reasonable fund out there at Vanguard.

TomTX

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Re: Investment change after becoming a mustachian?
« Reply #20 on: December 25, 2012, 06:09:45 AM »
I must admit I've thought long and hard about switching... but I remember their promotional material that showed what they do vs. what the competition does, and it actually made great sense.  I do find comfort in that.  Also, no annual fees once our nest-egg is built, I find comfort in that as well.

Is that silly?

If your load is front-end, you've already paid the penalty. There is a lot less reason to pull money out than to STOP giving them more money. I can certainly see the urge to completely get away from the ripoff artists, though.

"Front-End" = "We skim bonus profits first, you still pay ongoing costs"
"Back-End" = "We skim bonus profits when you take money out,  you still pay ongoing costs"
Vanguard = "You pay ongoing costs to run the operation"

And OF COURSE their promotional material shows them as awesome. EVERY company has promotional material with charts massaged to show how awesome they are.

I know some of these responses are 'dated' given your later actions - but a lot of other people will read this thread and learn from it.
« Last Edit: December 25, 2012, 06:16:11 AM by TomTX »

aces2

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Re: Investment change after becoming a mustachian?
« Reply #21 on: December 25, 2012, 06:19:14 AM »
Yeah, great points.  I'm happy to be making the switch all to Vanguard!

I can remember Dave saying once something along the lines of "It doesn't matter so much how you pay your fees when investing, what matters is that your investing period!"  That one worked on me good enough to set things up w/ American Funds.

Dave preaches for the masses.  Understandable.  But I'm ready to be more advanced than the average American.

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Re: Investment change after becoming a mustachian?
« Reply #22 on: December 25, 2012, 06:51:05 AM »
If at 26 you are ready to be more advanced than the average American, you have an amazing life ahead.

Do take the time to learn about asset allocation before you send all your money to the S&P 500 fund.  Look at the allocation in the American Funds you sold.  The funds were probably a pre-packaged allocation for someone of your age, but there is a reason behind the allocation between different types of stocks and bonds.  I recommend JL Collins' blog (http://jlcollinsnh.wordpress.com/) and Nords' blog (http://the-military-guide.com/) as solid, straightforward information for someone in your situation.

 

Wow, a phone plan for fifteen bucks!