Author Topic: Stubble is coming in, looking for advice  (Read 4946 times)

Dyk

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Stubble is coming in, looking for advice
« on: July 11, 2014, 08:25:07 AM »
I have been around about 2 months.  It's been awesome, I am the only income for a household of 7, so we had already been doing a lot of things to minimize expenditures, out of necessity.  But, I also compared myself to everyone else, and thus thought I was doing 'good'.  Being here has been the face-punch I need to take things to the next level.  Thank you everyone!

So, the savings have started, (Sometime I will detail these more in another post, we are at $500/month and rising!), it's time to invest!  I have read most of the posts here, and with jcollins, and the Mad Fientist.  I have come up with the following plan and just want feedback if I am going in the right direction.  (I haven't given all the details, not sure if they are needed, I am trying to keep it simple, but ask if something is missing.)

Age: 43, thinking of retiring in 15 years (started late, with kids, but better late than never!)  Projected/current = 38% savings rate
HSA:  Health plan at work is not eligible  :(
401k:  No matching at work, and lowest fund fee is 1.1%  (Which is killing me!  It's a Vanguard fund that John Hancock adds a 1% fee to, because of ?all the value they add? ... wow, feel like I am picking up soap.  But after reading the Mad Fientist, I made a spreadsheet and determined that it would take 20 years before a taxable account at Vanguard would finally beat the 401k ... so 401k it is.  Someday I will roll it into an IRA)

I am going to invest in this order, seems straightforward, unless I missed something?
- IRA (standard) at Vanguard (Pre-tax, low fees) - $5,500
- 401k (Pre-tax, higher fees, painful [soap], but still good) - $17,500
- 3rd tier - will worry about this once I get here.  Current projections show it will take some work.

What do I invest in?  All VTI? 
- I don't fully understand ETF and what that means for me . . . is it the right choice?
- My gut tells me with my late start to forget bonds during this 15 year period, stay all stocks and go for the gains.  I understand this is normally the opposite of someone in that age range .... but I feel like I am 'all in' for going for FI.  If the market happens to be down at year 15, I will adjust.  (I never thought I could bike, and work up a sweat in work shirt and yet wear it 3 times before washing, adjusting is WAY easier than we make it!)

Along the way I will pay attention to tax-gain/loss harvesting, and simply ride it out.

Let me know if I am on the right path, if so, I can set it up and then get up in my attic.  I need more insulation!

Thank you!!!

Hugerat

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Re: Stubble is coming in, looking for advice
« Reply #1 on: July 11, 2014, 09:29:40 AM »
Your plan sounds pretty good. Fully funding the IRA is sensible since you will achieve much lower fees than that awful 1.1% John Hancock is charging you. OUCH! ETFs are like mutual funds in that you get a diversified basket of investments meant to track a specific index. They are quite cheap to run, so the expenses will usually be a little lower than the fees on index mutual funds (.05% vs .17% for VTI vs. Vanguard's investor class mutual fund equivalent). They also trade throughout the trading day on an ordinary exchange rather than the once daily liquidity of a mutual fund. The thing you need to watch out for though is trading fees. Many brokers will charge you commissions to trade ETFs. If you go with a Vanguard brokerage account they will allow you to trade their own ETFs free of commissions. As a general rule, you should seek to never pay a commission to buy an ETF or no-load mutual fund.

The only investment strategy suggestion I would make is to not neglect bonds, foreign stocks, or other asset classes in favor of all US stock. It may be true that stocks offer greater potential returns, it is not always the case, even over some very long periods. Maintaining better diversification and periodically rebalancing can improve long term returns and reduce volatility.

Say, for example, you set your target allocation at 70% stock, 20% bond, and 10% REIT. Over time returns might swing your allocation to 74/18/8. By rebalancing back to your original target allocation you've just bought low and sold high like a savvy investor! If the stock market takes a nasty turn the following year, you've already captured some of the previous gains and reduced your exposure to losses slightly. Rebalancing doesn't usually need to occur more than once a year. It's not fool-proof, but it can help.

ltt

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Re: Stubble is coming in, looking for advice
« Reply #2 on: July 11, 2014, 10:40:11 AM »
Before doing any investing, with a family of 7, do you have an emergency fund set up??

Dyk

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Re: Stubble is coming in, looking for advice
« Reply #3 on: July 11, 2014, 11:00:07 AM »
Hugerat:
Thank you for your suggestions.  I think I will allocate & balance, I think I am just anxious due to starting later :).

ltt:
Yes, about 6+ months of expenses.  Anyone want to comment on the level of emergency fund they have?  I understand it relates a lot to one's comfort level ....
(My gut is thinking that 3 months will keep me happy.)

Northerly

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Re: Stubble is coming in, looking for advice
« Reply #4 on: July 11, 2014, 11:11:05 AM »
Regarding the emergency fund: your investments (if somewhat liquid) are your emergency fund. As is a credit card with a high limit. Since a large emergency is unlikely to happen, and the invested money is very likely to gain interest, the math is really bad for holding an emergency fund in cash or bonds.

Dyk

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Re: Stubble is coming in, looking for advice
« Reply #5 on: July 11, 2014, 11:21:52 AM »
Northerly:

That is a great point.
IRA - How liquid is that?  I guess I know I can sell quickly, but then I pay taxes (15% in my case), and then the 10% penalty, correct?
401k - If I remember right I can take a loan, where I pay myself interest.  However, there is the opportunity cost, and I think I repay the loan with after tax dollars, correct?

I do have 50% equity in my home, so I am guessing that the ~4% (current) interest would be my best bet for an emergency?
(I gave up credit cards years ago.  I didn't have amazing debt, but just wasn't smart with them at the time.  Sometime soon I may add one for the travel incentive, but need to get the basics running smooth first.)

With these 3 possibilities in mind, 'How low do I go' on the emergency fund?  (Again I know it is a personal preference issue, I am just looking for opinions)
Thanks!

Northerly

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Re: Stubble is coming in, looking for advice
« Reply #6 on: July 11, 2014, 11:33:26 AM »
I don't know the details on the IRA and 401k withdrawals, but it sounds like a Home Equity Line of Credit may be the way to go in your case.

In my case, I don't really keep any cash (savings accounts) around, but have about $30,000 of credit card capacity should something happen to which I need to respond quickly. MMM has an article somewhere "Springy Debt vs. Cash Cushion" which outlines his mindset, which is similar.

As you wisely imply, if credit cards are a bad fit for you, best not. But you sound as if your mindset is totally different from your earlier years!

4alpacas

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Re: Stubble is coming in, looking for advice
« Reply #7 on: July 11, 2014, 12:20:59 PM »
Your post didn't mention a spouse.  If you have one, your spouse can also contribute $5500 to an IRA. 

PloddingInsight

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Re: Stubble is coming in, looking for advice
« Reply #8 on: July 11, 2014, 12:32:14 PM »
Your post didn't mention a spouse.  If you have one, your spouse can also contribute $5500 to an IRA.
+1 You should definitely look into this.  Your spouse can open an IRA for an additional $5500 regardless of whether she has any income.

Another thing to look into:  My 401k has a regular list o' funds... but it also has an "independent brokerage" option.  I use that.  It's $75/year and $25 per trade, but through the brokerage I have access to the entire stock market... which means I can buy Vanguard ETFs instead of using the crumby 401k funds.  I make the fees back and then some by avoiding the list o' funds.

Also, if you are new to investing, go to your local library for a copy of The Bogleheads Guide to Investing.  It's a great resource.


Dyk

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Re: Stubble is coming in, looking for advice
« Reply #9 on: July 11, 2014, 12:46:57 PM »
Wooo Hooo!!!  More Vanguard!  (Without John Hancock stupid tax on top)

First, Northerly:  Thanks for the reference to the MMM article.  I re-read it and it helped me out.  My mindset has changed, but I am going to prove it for a while first.  I think I will reduce my emergency fund to 3 months now and re-evaluate again later.

4alpacas & PloddingInsight:  I do have a spouse!  And she stays home to take care of our 5 daughters.  I live with 6 women, a dream come true!  But I digress, for some reason I thought only someone with income could contribute to a IRA.  But after you asked this I checked the IRS site:
Quote
Spousal IRAs
If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions canít be more than the taxable compensation reported on your joint return. It doesnít matter which spouse earned the compensation.
So .... I am assuming I simply setup an IRA in her name at Vanguard and then fund it?

Wow, thanks, you guys rock.

(My last name and nickname is 'Dyk' if this confused or offended anyone . . . it's just what everyone has called me, always)

Northerly

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Re: Stubble is coming in, looking for advice
« Reply #10 on: July 11, 2014, 03:12:55 PM »
Delightfully offensive and vulgar! Man I wish I had your surname...Oh the possibilities!

SDREMNGR

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Re: Stubble is coming in, looking for advice
« Reply #11 on: July 12, 2014, 07:59:25 AM »
Is it dike or dick. Either way,  fun to say.

Dyk

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  • Location: Grand Haven, MI
  • Starting late, w/ a family, but get out of the way
Re: Stubble is coming in, looking for advice
« Reply #12 on: July 12, 2014, 07:50:52 PM »
It is pronounced dike.

Where I live there is a large population of Dutch people, so most people are familiar with the name and know how to pronounce it.  However, if you leave West Michigan, people aren't sure how to say it.  This can lead to some funny results.  I ran a race with a friend in Chicago.  His name is Karl and we call him Krazy Karl.  So he wrote his name 'Krazy' on his shirt (I guess it's common to do this, so the spectators can cheer you on.)  I then wrote my name 'Dyk' on my shirt, not really thinking, and after all that is what everyone calls me.  That is what my wife calls me.

So we proceeded to run the race while we heard time and time again, 'Go crazy dick!'  I was laughing the entire race! 

PloddingInsight

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Re: Stubble is coming in, looking for advice
« Reply #13 on: July 14, 2014, 05:14:32 AM »
Is it dike or dick. Either way,  fun to say.

If you are Dick Van Dyke, you get both!