26, suddenly realized I have more money than I need

[RichoRosai]

I've always lived paycheck to paycheck, working as little as possible and never buying anything, but the other day I realized that for the first time in my life I have a significant amount of money (7000 dollars) and no plans for any of it, and it bothered me that it was rotting away in a bank earning like 50 cents of interest per quarter when it could probably be doing something for my future.

I am a US citizen, I live in Japan and plan to stay here until I'm about 50, at which time I hope to go somewhere in the US or preferably Canada (not necessarily to retire for 10 or so years after that though).

I got to researching on investing, and I'm pretty well convinced that an index fund is what I should be looking at, and Vanguard seems to be the choice, but beyond that, the details are a bit overwhelming.

For what it's worth, what's important to me is not having to personally manage my investment and the ability to make regular contributions to it (including the automatic reinvestment of dividends) with as few fees or tax penalties as possible. I have no intention of taking from my investment until I retire, and absolutely no problem waiting out the hills and valleys however steep they may be.

Here's a link to what I THINK I should be doing.

https://personal.vanguard.com/us/content/Funds/FundsVanguardFundsTarget2045SummaryJSP.jsp

Regarding this link, one specific question I have is, Should I be sitting and waiting for "Price" of the "Fund" to be as low as possible before I send my 7000 dollars, or should I just do it asap?

Anyway, I would really appreciate any advice or right-direction-pointing regarding problems/pitfalls with my plan or alternate plans.

 

[Midpack]

1) ...what's important to me is not having to personally manage my investment and the ability to make regular contributions to it (including the automatic reinvestment of dividends) with as few fees or tax penalties as possible.
2) I have no intention of taking from my investment until I retire, and absolutely no problem waiting out the hills and valleys however steep they may be.
3) Should I be sitting and waiting for "Price" of the "Fund" to be as low as possible before I send my 7000 dollars, or should I just do it asap?

As you've figured out, at your age with 7000 dollars, an aggressive Target Retirement Fund is a very good choice. As you accumulate more, you might consider a few more funds to build your own asset allocation, but Target Retirement Funds are a viable lifetime choice if you really want to be completely hands off.

And it's pretty much irrelevant when you invest because of 2). The difference between the "low" and today's NAV (which could be a low for all you know) will be insignificant as compared to the value of your investment when you retire. If today's NAV is $30/share, historical returns would suggest it will be something like $400-$500 when you retire, so the difference in your annual return will most likely be in the tenths of a percent range. Whether you buy at $30 or wait for $28 won't make much difference and there's every chance you'll wait and it will go to $32 and you'll regret it. There is no certain way to pick lows or we'd all be rich.

Congratulations on starting to invest in yourself at age 26. You're ahead of most people in that regard, and it will serve you well.

 

[oma]

As you've figured out, at your age with 7000 dollars, an aggressive Target Retirement Fund is a very good choice. As you accumulate more, you might consider a few more funds to build your own asset allocation, but Target Retirement Funds are a viable lifetime choice if you really want to be completely hands off.

And it's pretty much irrelevant when you invest because of 2). The difference between the "low" and today's NAV (which could be a low for all you know) will be insignificant as compared to the value of your investment when you retire. If today's NAV is $30/share, historical returns would suggest it will be something like $400-$500 when you retire, so the difference in your annual return will most likely be in the tenths of a percent range. Whether you buy at $30 or wait for $28 won't make much difference and there's every chance you'll wait and it will go to $32 and you'll regret it. There is no certain way to pick lows or we'd all be rich.

Congratulations on starting to invest in yourself at age 26. You're ahead of most people in that regard, and it will serve you well.

Your idea of using a Vanguard index fund is very wise. I'd recommend that you start dollar-cost averaging into the fund from this point forward. If you want to take the 7000 and invest it, you can start up a money market fund account with vanguard. Put the 7000 there, and start transferring $200-300 per month into the index fund. Make sure you save enough money in an emergency fund in case you need the money. Putting money in a mutual fund doesn't give you liquidity.

 

[slazenger]

You could use a money market mutual fund first Richo. IMO, that should be your first account. As the others said, you need an emergency/all-purpose fund preferably with several thousand (7K sounds nice) and maintain that. For retirement, just start from 0 and have a certain portion of your check go into a tax-advantaged account. I'm not sure what's available in Japan for that, or if you have something from your employer.

 

[RichoRosai]

Thanks for the replies! I just sent the deposit to my bank, so I've got a good week or so to decide exactly how to use it.

Well, I'm using my US bank with a US address, so although I don't qualify for a Roth IRA since I have no US-taxed income, as far as my investment is concerned I'm just a regular US resident who doesn't make any money (if I understand it correctly). I work freelance (of course I pay Japanese income taxes but have no benefits), so my whole retirement thing is all to be done manually by me.

I will certainly consider the money market mutual fund, but my wife owns a house in Japan and we have mandatory medical insurance, so it's hard to see that as anything more than a temptation to withdraw money that I can't fathom really NEEDING + more tax burden. Sorry if I'm misunderstanding the benefits.

 

[RichoRosai]

Okay, so I've since reconsidered the proposition of at least splitting my 7000 between retirement and something else, primarily because I realized I don't particularly trust god to keep me alive until 59.5.

Is the money market mutual fund thing a good choice (as opposed to, say, the other regular (bond, balanced, stock) index funds) because I can take for myself or move the money around with ease? Or is there some other reason?

And if they are the best choice, is there some way to decide between the Federal, Prime, and Treasury?

 

[Coach]

Richo, the virtue of a money market fund is that there is virtually no risk -- you will never get out less than you put in. That means you can take your money out and do something else with it any time you like without losing. You can always take your money out of a stock fund too, but it might be at a low value when you want or need the money.

Coach

 

[RichoRosai]

Thanks!

So I guess a MMF is basically like a savings account with slightly better interest. So in my case, since I'm not particularly interested in just having my money available to me (I've always been happy doing without--for example I've never had a credit card even when one could have kept me from being homeless for a year in college (and man were those card salesmen everywhere on campus!)), if I want to split it I should get something shorter-term and/or riskier I guess (something like Vanguard LifeStrategy Income Fund VASIX maybe).

More concisely, it wouldn't bother me to see my money plummet because I'm confident won't be NEEDING it anytime soon, but if I waited and saw it go up I would be free to WANT it, and to take some of it and/or transfer it to another fund.

I think I'm getting a feel for these ideas now!

 

[Milton]

For what it's worth, what's important to me is not having to personally manage my investment and the ability to make regular contributions to it (including the automatic reinvestment of dividends) with as few fees or tax penalties as possible. I got to researching on investing, and I'm pretty well convinced that an index fund is what I should be looking at, and Vanguard seems to be the choice.

Seems like you are on the right track.

I've always lived paycheck to paycheck, working as little as possible and never buying anything.... I have no intention of taking from my investment until I retire, and absolutely no problem waiting out the hills and valleys however steep they may be.

I suggest that paying for disability insurance is a greater priority than investing the $7,000 in an index fund. If you lose your ability to work, you will find that to be one very steep hill (or valley?) to overcome.

I am a US citizen, I live in Japan and plan to stay here until I'm about 50, at which time I hope to go somewhere in the US or preferably Canada (not necessarily to retire for 10 or so years after that though).

Assuming that you can gain entry to Canada in the first place, you're going to have a pretty complicated tax situation in your old age, with investment or pension income coming from two foreign countries.

Should I be sitting and waiting for "Price" of the "Fund" to be as low as possible before I send my 7000 dollars, or should I just do it asap?

Why pay more than you have to? Certainly you should wait for the absolute low. And please tell us how you can predict that!

 

[RichoRosai]

Disability insurance? Thanks but I don't think I'll be doing that. I only make about 1000 dollars a month to begin with, I'd rather risk it, and it's hard to think of something that would outright disable me from my job (translating) AND the obvious fall-back job of teaching English, but that would still leave me in a state in which I would care.

 

[Milton]

Ah, the invulnerability of youth!

 

[RichoRosai]

The fact that I think it's a stupid idea for me has nothing to do with my age.

 

[billips1002]

With all due respect to forum member's comments, I'm a married 28 year old. I manage a fairly sophisticated and relatively large portfolio for my age.

I'm afraid you aren't getting the best advice for what to do with your money. I agree with you that disability insurance is not appropriate for you. That would only be appropriate if you had much more to lose... I would steer clear of Money Market Fund if you intend for this money to be a long-term investment. For one thing, the interest will not keep pace with inflation. Don't believe what the goivernment tells you. The real rate of inflation is much higher than 3 or 4%. In addition to that, you will pay taxes on interest from a MM account at your highest marginal tax rate... Which for you may actually be quite low and, therefore, not a problem.

If you only want to save for a rainy day, the MM account may be appropriate. But if you intend to invest this money and leave it alone for 5 years or more, I would suggest you divide your $7K between VG Total Stock Market Index Fund ($4K) and VG Total International Stock Market Index Fund ($3K) in a retail Vanguard investment account. These funds are both very low-cost, very tax efficient and they have far more potential to provide you with a substantial return over the course of 5 years or more. $3K is the minimum initial position for either of these funds (and the majority of VG's funds) for a retail account.

If you are interested in starting to save in tax sheltered accounts for your retirement, I would recommend you open both a Roth IRA and a standard issue IRA and invest your money in low-cost, low turnover investments such as Vanguard index funds.

Best wishes,
Rich

 

[RichoRosai]

Thanks.

Since the bank is taking forever to post my deposit, I actually still haven't bought anything.

I definitely won't be putting the whole thing to retirement now that I've had time to think on the likelihood of me living that long (I'm not very healthy) and the value of having money to spend as an old man vs. the chance to have something to spend in 5-10 years. I'll probably split it between the two, so thanks for the advice on the specific index funds. I've decided that I'm too stupid to figure out the tax stuff in advance, but hopefully with my 12-15k yearly income I won't fall into any of the hyper-rape margins/brackets/whatevers.