Investment Status Check - 34 Years Old

[jlenhart80]

Hello,
First time poster, long time forum stalker. . I am looking for some advice from the forum!

I am 34 years old, single male. Currently am living in Ohio, but planning on moving to Denver. I do not own a home and when I move I plan on renting either an apartment or a condo. Why rent you ask? I have home commitment issues, I guess. I dread the thought of doing house maintenance and I travel a lot for work. Bad combo, but your comments are welcome! Also, I just moved back from the US from Germany and have been a little distance from my investments in the past couple years. Here is my financial status:

Cash: $90,000
Roth IRA: $33,000 (sitting in cash)
Traditional IRA: $130,000 (sitting in cash)
401K:	$146,000 (fully invested)
Individual: $347,200 (40% invested, 60% in cash)
TOTAL Investment: $746,200

I have no debt other than a car that I just bought. I believe my auto loan is something like 27,000 over 5 years at 2.2% interest. I could of course pay it off, but maybe it is better to take the interest if I get my money working for me.

I earn around $150,000 per year. I put 4% of my salary in my 401K and my company matches that amount. In my 401K everything is invested in a large blend (VINIX). In my individual account the majority is also in a large blend (FUSVX) a small amount is in a single stock.

I want to retire early, and using a FIRE calculator (Flexible Retirement Planner), It seems totally achievable at 46, with a $65,000 annual retirement spending. I would love to give up “real work” before that if possible, although I am not one to sit around and would probably do something to stay busy. I am a simple guy and don’t try to keep up with the neighbors.

What are some recommendations getting my money to work? I have heard and read a lot about index funds. I also spoke to my financial guy at Ameritrade and he was pointing me to ETF’s. Also he mentioned the Amerivest portfolios. However, when I look at them, the performance compared to any index is really low. He did point out that they are quite conservative but are also “safer” when it comes to a downturn, which he did prove with data. They also get 1% commission from this service. I don’t know how I feel about that.

Your coaching, feedback and/or constructive criticism are welcome.

 

[Spudd]

Index funds are the way to go. You don't feel good about him taking 1%, that's for sure! When you're retired, if you have a 4% withdrawal rate from your portfolio, all of a sudden you only have a 3% withdrawal rate.

You can do index funds via mutual funds (Vanguard, Fidelity, Schwab I think are the most common choices) or ETF's at your discount broker. I'm not American so I don't know what funds to recommend to you, but look into Vanguard as a good starting point.

The "Amerivest portfolios" are probably balanced funds that would underperform a pure equity index fund in a bull market, but be safer in a downturn because they have a bond component. You can get the same effect yourself by buying a mix of equity and bond indexes without paying 1% for the privilege. Check out bogleheads 3-fund portfolio for an example of how you can do this.

 

[Walt34]

Index funds are the way to go. You don't feel good about him taking 1%, that's for sure!

+1

Consider this. You can do it yourself investing in index funds, get .9% lower returns than him, and you're still ahead.

But the far more likely outcome is that if you stick to an AA and leave it alone you'll blow him out of the water.

 

[AnIntentionalRoad]

Welcome! Looks like you're asking the right questions. Too bad you've had 400k sitting in cash, you've missed out on tremendous gains the past few years.

Good luck!

 

[heeyy_joe]

Over $200K sitting in cash at age 34. Are you mad?

 

[NgineER]

Welcome to the forum. You have a nice nest egg for someone your age, well done!g

I have no debt other than a car that I just bought. I believe my auto loan is something like 27,000 over 5 years at 2.2% interest. I could of course pay it off, but maybe it is better to take the interest if I get my money working for me.

/QUOTE]


I think your best return on investment considering your allocations would be to pay off your loan. I imagine that you are loosing money with today's inflation rates.

You probably want to DCA into index funds over the next 24 months.

 

[pb4uski]

First, at your age and with your income (assuming your job is stable), you should be fully invested or close to fully invested and are carrying way too much cash. With market indices at or near all time highs, I would suggest that you value average into no-load, low cost equity funds over 12-18 months.

So for example, let's say you want to invest the $130k in your IRA over 18 months. Invest $7k. The next month, add whatever you need to to bring the value up to $14k. The next month, add whatever you need to to bring the value up to $21k. Repeat until the $130k is fully invested. You'll end up investing more when the markets are relatively low and less when the markets are relatively high. Same idea with your Roth and the cash in your taxable account. Keep the $90k in cash as your emergency fund.

I would not pay off the car loan as I think you can beat 2.2% over time.

View a home as a place to live rather than as an investment. If you plan to be in an area for a while and your after-tax carrying costs of owning are less than your rent then it would deserve consideration. If the property appreciates then you'll come out ahead.

And read a little, do it your self at Vanguard or Fidelity and save yourself 1%.

 

[jlenhart80]

The "Amerivest portfolios" are probably balanced funds that would underperform a pure equity index fund in a bull market, but be safer in a downturn because they have a bond component. You can get the same effect yourself by buying a mix of equity and bond indexes without paying 1% for the privilege. Check out bogleheads 3-fund portfolio for an example of how you can do this.

Hi Spudd. Thanks for the reply. You are absolutely right, the Amerivest portfolios are balanced funds that doin-fact have a bond component that keeps them stable in a downturn. I will have a look at bogleheads. Thanks for the suggestion!

 

[jlenhart80]

First, at your age and with your income (assuming your job is stable), you should be fully invested or close to fully invested and are carrying way too much cash. With market indices at or near all time highs, I would suggest that you value average into no-load, low cost equity funds over 12-18 months.

So for example, let's say you want to invest the $130k in your IRA over 18 months. Invest $7k. The next month, add whatever you need to to bring the value up to $14k. The next month, add whatever you need to to bring the value up to $21k. Repeat until the $130k is fully invested. You'll end up investing more when the markets are relatively low and less when the markets are relatively high. Same idea with your Roth and the cash in your taxable account. Keep the $90k in cash as your emergency fund.

I would not pay off the car loan as I think you can beat 2.2% over time.

View a home as a place to live rather than as an investment. If you plan to be in an area for a while and your after-tax carrying costs of owning are less than your rent then it would deserve consideration. If the property appreciates then you'll come out ahead.

And read a little, do it your self at Vanguard or Fidelity and save yourself 1%.

Hi pb4uski. Thanks for the advice and example. I agree I am carrying way too much cash! I think the banks must love me, although they don't show it. I'll have to talk to them about that. Anyway, I think your suggestion makes sense. I immagine I would go for an equity fund that follows an index. No-load makes sense also. I'm still intrigued by ETF's and am going to do some more reading on them vs. mutual funds. Any words of wisdom from anyone on ETF vs. mutual funds?

 

[pb4uski]

In my view funds and ETFs are kissing cousins. Both represent the right to a proportional interest in a portfolio of assets. Both can have low fees if selected right. most of Vanguard's most popular index funds are offered in both mutual fund and ETF versions and the cost is typically the same. The only advantage that the ETFs have is they can avoid any mutual fund frequent trading restrictions, but I don't trade enough that is a concern for me.

I own both funds and ETFs. I don't know much about Ameritrade, so that and the 1% is my hesitation.

 

[jlenhart80]

In my view funds and ETFs are kissing cousins. Both represent the right to a proportional interest in a portfolio of assets. Both can have low fees if selected right. most of Vanguard's most popular index funds are offered in both mutual fund and ETF versions and the cost is typically the same. The only advantage that the ETFs have is they can avoid any mutual fund frequent trading restrictions, but I don't trade enough that is a concern for me.

I own both funds and ETFs. I don't know much about Ameritrade, so that and the 1% is my hesitation.

OK. Thanks for that. The other advantage I see, at least in Ameritrade, is that ETF's do not have trading fees. Most of the mutual funds do have some pretty significant trading fees (approx. $47). On Ameritrade ETF's are free trades. Also, ETF's, if I understand correctly, don't have a minimum purchase amount. This may have been included in your "trading restrictions" comment.

 

[pb4uski]

At Vanguard, Vanguard mutual funds have no trading fees and my first 25 brokerage trades each year are free (but I never get close to the 25 limit).

The trading restrictions refer to if you sell some funds you might be precluded from buying back into the same fund for 60 days. It rarely is a problem for me.

 

[MRG]

Fidelity doesn't charge for Blackrock or Fidelity ETFs either. You can buy their funds for $0 and many other NTF funds. So you have many options.

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[jlenhart80]

I have found a couple good commission free trade ETF's in Ameritrade. I found VTI (Vanguard Index Fund Total Stock Market) and BND (Vanguard Index fund Total Bond Market). Next I'll look for a good international ETF. I think I will split them with a heavy weighting in the total stock market and international and a low weighting on the bond market. Something like 50,30,20. Thoughts?


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[jlenhart80]

Another question for the group. Considering the goal of retiring early, do you think I should be funneling most of my money into my individual account or should I be maxing out my 401k? I of course, understand the tax benefits of maxing out the 401k, but I'm concerned about funding my Early retirement before I am qualified to draw from my 401k & Roth, traditional IRA.


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[dallas27]

Another question for the group. Considering the goal of retiring early, do you think I should be funneling most of my money into my individual account or should I be maxing out my 401k? I of course, understand the tax benefits of maxing out the 401k, but I'm concerned about funding my Early retirement before I am qualified to draw from my 401k & Roth, traditional IRA.


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I dont think the 10% penalty is really half as bad as people think when you work out your average rax rate. You save now in the highest bracket most likely, and take out a good portion in lower brackets in the future. Also, you'll be paying gains each each on the taxable. While one may be better depending on your numbers, i dont think it usually a major contrast if you actually take the time to look at the whole picture.


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[jlenhart80]

I dont think the 10% penalty is really half as bad as people think when you work out your average rax rate. You save now in the highest bracket most likely, and take out a good portion in lower brackets in the future. Also, you'll be paying gains each each on the taxable. While one may be better depending on your numbers, i dont think it usually a major contrast if you actually take the time to look at the whole picture.


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Thanks Dallas. Good point. I need to run some quick numbers and see what that might look like. May actually be for the better considering my current tax rate.

 

[haha]

We have a young guy with a lot of money. I think it takes a lot of nerve to tell him he is doing it wrong. Of course, it's easier to have a lot of nerve when it comes to someone else's money.

Jlenhart, I have no advice, but I do offer my congratulations in your excellent job so far.

Ha

 

[pb4uski]

I have found a couple good commission free trade ETF's in Ameritrade. I found VTI (Vanguard Index Fund Total Stock Market) and BND (Vanguard Index fund Total Bond Market). Next I'll look for a good international ETF. I think I will split them with a heavy weighting in the total stock market and international and a low weighting on the bond market. Something like 50,30,20. Thoughts?...

Those are two good picks, and are just the ETF versions of my go-to domestic stock and bond funds. VXUS is the ETF version of the Total International Stock fund. Your proposed weightings are in the ballpark with the weightings of the Vanguard 2030 Target Retirement fund which is about the time you want to retire. See https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/portfoliodetails?fundId=0682 for info on the target AA of their various target date funds as a starting point for deciding your AA. While Vanguard's target date funds include an allocation to international bonds, many people think that is unnecessary.

Another question for the group. Considering the goal of retiring early, do you think I should be funneling most of my money into my individual account or should I be maxing out my 401k? I of course, understand the tax benefits of maxing out the 401k, but I'm concerned about funding my Early retirement before I am qualified to draw from my 401k & Roth, traditional IRA. ...

Given that you are currently in a very high tax bracket, I would maximize tax deferred savings.

OTOH, f you want to retire at 46 you will need to have enough in taxable accounts to carry your from ER to 59 1/2 when you can draw from tax-deferred accounts without penalty unless you want to do a 72t. You also might consider also doing some post-tax 401k savings not that those can be rolled into a Roth IRA.

I suggest that you sketch out your situation using Quicken Lifetime Planner as it will project drawing from your taxable accounts first and will give you a sense of if your are saving enough in taxable and tax-free accounts to support you from ER to 59 1/2. Or if you want to get more precise about those projections you could buy ESPlanner.

 

[EastWest Gal]

You are doing very well at age 34. A couple if things caught my eye.

First, you should max out your 401K. You give away 33% to Uncle Sam of that money you don't put in the 401K. You are paying an extra $3750 in taxes by not maxing out your 401K.

Second, there is a huge inflation risk in staying in cash. It's like a pension with no COLA. Inflation rates won't be this low forever. In the 70s and 80s, there were a couple of double digit inflation years. By not investing, your money is guaranteed to be worth less and less. In the last 5 years I've been paying for college so I have put very little into my after tax portfolio. I have maxed my 401K and added catch up funds though. My after tax portfolio grew over $1M doing absolutely nothing except rebalancing and reinvesting dividends. You will need to get in the market just to stay ahead of inflation.

There is lots of good investing advice here and on Bogleheads.

I was a late starter too-started investing at age 32, with $20K. Med school and lean residency years meant we started out $40K in the hole. You are way ahead of me and many of us here. You'll do fine.


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[bad_LNIP]

OP, you have way, way way, way too much money in cash, particularly for your age. You should be almost fully invested in something, even if you intend on retiring early. I calculated roughly 400k or so in cash, which is just absurd. You are going to get eaten alive by inflation and have opportunity costs galore in the form of missed investments/opportunities.

At 3%, you are losing roughly 1k per month or 12k per year. Just because you don't see it happening doesn't mean that it isn't happening. That is a LOT of money to leave on the table. By comparison, with market returns, you should have easily an additional 30-40k per year extra coming in.

Simple ETF/Index? QQQ and SPY. or get a target retirement fund, but do something, don't just let your spending power just decay away.

 

[jlenhart80]

Those are two good picks, and are just the ETF versions of my go-to domestic stock and bond funds. VXUS is the ETF version of the Total International Stock fund. Your proposed weightings are in the ballpark with the weightings of the Vanguard 2030 Target Retirement fund which is about the time you want to retire. See https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/portfoliodetails?fundId=0682 for info on the target AA of their various target date funds as a starting point for deciding your AA. While Vanguard's target date funds include an allocation to international bonds, many people think that is unnecessary.

I did see the VXUS as I was searching. Unfortunately Ameritrade charges commission for that EFT. I did find it's close cousin, VEU as a free ETF. To the untrained eye, it seems really similar in every aspect. Expense ratio, holdings, historical charts, etc. If you think I'm off, let me know!

Given that you are currently in a very high tax bracket, I would maximize tax deferred savings.

OTOH, f you want to retire at 46 you will need to have enough in taxable accounts to carry your from ER to 59 1/2 when you can draw from tax-deferred accounts without penalty unless you want to do a 72t. You also might consider also doing some post-tax 401k savings not that those can be rolled into a Roth IRA.

I suggest that you sketch out your situation using Quicken Lifetime Planner as it will project drawing from your taxable accounts first and will give you a sense of if your are saving enough in taxable and tax-free accounts to support you from ER to 59 1/2. Or if you want to get more precise about those projections you could buy ESPlanner.

I think i'm pretty well convinced to change my strategy and maximize tax differed holdings. I have to do a little more reading on the 72t, but seems interesting. I have put some information into the online calculators and it seems the maximum distribution possible per year would be quite small (something like $7-8K). More research to do here...

 

[jlenhart80]

OP, you have way, way way, way too much money in cash, particularly for your age. You should be almost fully invested in something, even if you intend on retiring early. I calculated roughly 400k or so in cash, which is just absurd. You are going to get eaten alive by inflation and have opportunity costs galore in the form of missed investments/opportunities.

Fact!

Simple ETF/Index? QQQ and SPY. or get a target retirement fund, but do something, don't just let your spending power just decay away.

Thanks. I'll have a look at those.

 

[jlenhart80]

You are doing very well at age 34. A couple if things caught my eye.

First, you should max out your 401K. You give away 33% to Uncle Sam of that money you don't put in the 401K. You are paying an extra $3750 in taxes by not maxing out your 401K.

Thanks for attaching the numbers to your post. That really hit home when explained that way.

 

[jlenhart80]

Just want to say I appreciate the comments from everyone. Here is where I ended up so far from all of this:

401K ($146,000): Max it out each year and keep investing as I have historically had been. Investigate 72t distribuions as a possible ER solution.

Traditional IRA ($130,000) - DCA over next 10 months into VTI (50%), VEU (30%), BND (20%)

Roth IRA ($130,000) - DCA over next 10 months into VTI (50%), VEU (30%), BND (20%)

Cash ($90,000) - Keep that floating between $50-90K as emergency fund.

Car Loan ($27,000) - Pay per the 60 month schedule and use money as investment vehicle with expectation to beat 2.2% loan interest rate.

The think I still have to sort out is my individual account. Right now, most of the money that is invested is sitting in FUSVX and a small amount is sitting in a individual stock. Does it make sense to have all my accounts holding the same things? Or does it make sense to have the individual account doing something different? I want to make sure that one is working for me as it will be my primary bridge until I can access all my Roth, IRA & 401K at 59.5.