While ambling along the path to near-retirement and dealing with all of the indecisions of late, another facet of personal finance emerges to dog me.
Where should I put my money for retirement?
Having paid off cars, a paid-off house, and no credit card debt, we’ve been in a healthy surplus for a while now.
Originally, I thought I’d simply open up a Vanguard ETF (exchange-traded fund) and drop all that extra coin into VTSAX. I got it all set up and it was pretty easy to do it all online. I even put in some seed money here and there over the past several months. Here’s the part I’m fumbling with: The market is on an absolute rocket ride.
If I keep putting my stash into the market, will I be doing the no-no of buying high, when I should be buying low? Yep. I’m that guy. The one waiting and waiting for the next market correction, so I can infuse my account with bargain stocks. This whole situation brings to mind the Tesla short-sellers.
Speculators hoping for (Blank) to fail big have instead been stuck with a major losing bet, as Tesla stock recently became the highest trading stock in U.S. auto-making history. D’oh. I don’t want to be a Tesla short-seller, to be clear…
Should I Leave My Money in a Savings Account?
No. That was easy, wasn’t it? Sad thing is, that’s where my money (our money) is currently sitting. Idling away while I try to figure out the optimal place it can generate revenue. Savings accounts (and checking accounts) won’t generate any material interest whatsoever. You’ll be lucky to find a bank offering a meager 1%. Though rates are steadily climbing of late thanks to our friend, Inflation…
With inflation hovering around 2.0% (Update 8/18/22: 8.0%!!!), You’re losing money. And that’s assuming you set up a savings account at Capital One or some other rare bird banking operation. The thing is this: most banks aren’t even coming close to 0.1% interest.
Right now, I’m losing money by letting our money sit dormant in our checking account. Dang.
Some financial experts (self-proclaimed) argue that you should keep 3 to 6 months of expenses in a savings or checking account for emergency purposes. My take is this: If you own a home and you have your act together financially, consider a home equity line of credit instead for your emergency fund.
The interest is low and the amount available to use (generally) is equivalent to most households’ 6 months of expense. If you’re not a homeowner, consider opening one or two zero-interest credit cards to get you by until the emergency passes.
Again, this assumes you’re disciplined with credit cards and commit to paying off the balance and avoiding an “interest avalanche”.
7 Places to Put Your Money for Retirement
Since I can’t just sit on a pile of cash and let it waste away in a checking account, I need some options. Investment options. Here are the choices I’ve been contemplating:
- Vanguard ETF (VTSAX). Pros: The U.S. Stock Market has had a historically solid return of 9%. Includes dividend gains that automatically get reinvested. Cons: Taxed on capital gains. The market is unpredictable and has been at its all-time high for several weeks now.
- Real Estate Rentals. Pros: Good returns if you know what you’re doing (anywhere from 12% on up to 20%, generally, for residential rentals). The tax treatment is very good with write-offs reducing to the pain of maintenance costs and repairs (e.g., the break-in at one of our rental houses a few weeks back), and, throw-in the tax magic of depreciation. Cons: There aren’t any good deals anymore. The seller’s market reigns. But we can hope for another bubble, right?
- IRAs: Look for a ROTH IRA first, but the traditional IRA is also a wise choice. Just be sure to target your investments towards index funds and avoid exotic, high admin fee mutual funds.
- Bonds. Look again to Vanguard for the best bond instruments that bundle various short and long-term investments. I like to target 5-10% of my total invested dollars in bonds. We use the BND ETF today for all of our bond investments.
- Dividend Investing. Pros: You can have all sorts of fun researching companies and lock in on equities with solid dividend returns. There is some decent money to be made here, again, if you know what you’re doing (I do NOT). Cons: It’s still the stock market, and what goes up, must come down. That said, if you know what you’re doing, you can make hay in just about any market condition (bear or bull).
- Debt Pay Down (Hedging your bets). We still have a healthy chunk of student loans, but they’re sitting nicely at a 2% interest rate. Nevertheless, the monthly payments require cash flow we would love to have in early retirement. The same could be said about a few of our rental mortgages, but I prefer to keep those debts owned by the bank. Pros: Cash flow freed up, making up for lost income in early retirement. Cons: Hard to stomach putting money towards 2% interest loans when there are 10% opportunities out there. Somewhere…
- One can also consider investing through the best FOREX broker in the USA to make a profit in stock markets!
Editor’s Note: If you’re wondering “Is it better to keep money in the bank or at home?” You should slap yourself back to reality and keep your dollars safely in the bank. The FDIC insures savings ever since the Great Depression. Don’t let the bed bugs devour the cash under your mattress.
I could always invest in a lawn decoration company. No risk there…
Preparing for the Early Retirement Income Gap Years
This is where the “rubber meets the road” for early retirement types like (a-hem) me. Assuming you’ve squirreled away a sizable stash in your 401k, you could figure on living off those dollars plus social security and any IRA funds as well. That’s fine and dandy for when you reach age 59.5, but what about when you retire early at, say, age 49.5?
Who knows if I’ll drag this thing out until I reach 49.5, but to keep the exercise simple, we’ve got a 10-year gap of income to fill. This is why I prefer the strategy of having a few rentals to generate income (short-term Airbnb included). But that only provides so much income if you’re a small-time landlord like me.
Also, and fortunately, Mrs. Cubert is 10 years younger and has no desire to stop working now. (She’s not subjected to corporate monkey-business like me.)
The bottom line is we could afford a $60K per year annual expense, but with no cash leftover for discretionary “fun money” or saving for the kiddos’ tuition. Part of my hesitation to walk away from my corporate gig is that:
A.) I want some flexibility or buffer to plan big fun trips (maybe an overseas vacation every other year?) or a major home remodeling project or two.
B.) I don’t want to have my kids strapped with a pile of debt after college. They’ll have some skin in the game, but we want to help mitigate the burden.
Preparing for these gap years (anywhere from 5 years to 20 or more) is the most crucial exercise, even for super-saver frugal types like us. Say you’ve been able to set aside half a million dollars by age 40, or $250K by age 30 in a 401k…
Great! You’ve solved most of your senior-citizen-stage needs (assuming you’ve lived a healthy lifestyle). But it’s the gap between ages 50 and 60, or between ages 40 and 60 (or 30 and 60 if you’re a diehard early retiree) that requires some serious planning and contingency.
Exhibit: You need $120K to fuel $15K per year during a 10-year early retirement, assuming the vehicle is a Vanguard S&P 500 taxable fund.
A Middle-Class Lifestyle Income Assumption
Going out on a seriously long and perilous limb, I’ll argue that you should aim to live off an income in your gap years that equates to the income associated with baseline happiness. That’s a bit controversial since $75,000 to $95,000 a year is highly subjective and has cost-of-living implications.
Having the flexibility to do what you want in retirement requires some cash. That’s the reality check. You don’t need money to avoid boredom, but you might want to join your friends on the slow boat to Hawaii or some cloud forest hiking in Costa Rica. Life is short. The world is big and amazing.
So there it is. Gap year calculations require me to fill about $20K more of my income per year. Sigh. First-world problems!
I’ll likely continue to put my money into the Vanguard ETF as our primary gap-year income generator. But today, I’m holding my powder until that big market correction happens. Any day now…
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ask 100 people about asset allocation and you might get 100 different answers. some will even include dogma like “this is the only and best way.” those people are dildonic. wanna know what we have at ages 51 and 56 and 1.5 jobs? here it is: about 50% individual stocks (mostly growth), 20% index funds in a 401k, 15% cash and equivalents split between 1.6% ally savings and a larger chunk in the 401k stable value fund (>2% yield last year), and 15% fixed income. our fixed income vehicle of choice has been a couple of preferred stock ETF’s that yield 6% or more. we’ve been collecting and reinvesting the income from these the past 3 years while bond yields have shrunk. can the value of these ETF’s drop? yes. for now we’re content to just collect the yield and it’s always an option to sell with a few keystrokes and no commissions.
i’m not claiming it’s the right way but it’s our way right now. for my money rebalancing is key when times are good. if the market has a large correction we’ll turn off reinvestment on those fixed income vehicles and buy equities instead. we’re in a decent position in that 30% of the overall pie is in roth and taxable accounts which we “could” access without penalty. i’m looking forward to following what you decide to do.
Thank you for having me learn a new word today. Dildonic is certainly a new word for me.
Really appreciate your sharing the “cocktail” that’s worked for you, Freddy! I may yet venture into individual dividend stocks, and certainly, peruse some fixed-income ETFs.
Or crazier, look into a second Airbnb??
That gap is exactly what we’re focusing on figuring out right now too. It looks likely that we’ll hit full FI in late-40s, and then need that 10-year bridge IF we stop working. We also have a chunk of cash from downsizing our home, but we’re holding that until we make our long-term housing decision. If the market did take a big dive we’d put it in and then figure out housing on the other side, but for now we’re okay holding it. We’ve also got a rental but have had a horrible time with the last tenant so it has us re-evaluating our desire to hold it long-term. That’s our next biggest choice ahead!
I look forward to following how you navigate this – it’s always helpful to see other examples.
I’m building a two-phase retirement income plan inspired by Tanja Hester (Phase 1 fills the gap, phase 2 is “traditional retirement”). It helps me visualize if we have “enough” since some of the accounts will be coasting for more years and we have multiple levels of spending changes along the way – pension kicks in $X at 53, access to qualified plans at 59.5, SSI at 70 (bonus/health care money in our plan).
We’re lucky to have access to a 457b plan so we put some phase 1 money in there and have a taxable brokerage but we’ll need to build a cash/cd/bond bucket at some point to help weather any downturns in the next 10ish years. I’m also working on plans for a real estate investment that will provide some recurring income without spending down the asset and could provide nearly 50% of our annual spending for the first 15 years.
We’re basing our 45-59 gap period spending on our current baseline of happiness (current spending) plus 10%. I think that we’ll probably save enough to exceed that spending and my estimates are based on extremely conservative growth so I’m not not worried about our ability to spend a little extra on something fun. Or we’ll have to earn a little money with a temp job for travel or splurge.
Thanks for sharing your strategy, Thomas! There is something to the “happiness and income” equation that I’m clearly not alone on, with respect to the early retirement gap years…
If you have kids yet to go to college, if you’re not already, I’d suggest maxing out your retirement accounts while you can because retirement wealth doesn’t count against financial aid at almost any college. Stocks sitting in taxable accounts do. You can play with online college calculators to see how different assumptions affect the amount of aid your kids are likely to get– moving things around can make some pretty substantial differences. That doesn’t tell you what to actually invest in, but it’s something to add to your equation.
Great advice, Nicole and Maggie!
I’ve been putting most of our nickels into IRAs and 401ks for our future needs, but could be doing more with my wife’s solo 401k. I’ll be revisiting our approach here based on your comment. Thank you!
Our household is still 60/40 real estate to paper assets. I hear you that good deals are gone but just the easy ones — there are always deals (in business, paper and real estate). It is an issue of how much do you want to look.
Our main metric right now on moves to make isn’t financial return but enjoyment. Even though we are in that retirement gap — left our jobs too young to tap retirement accounts — we’re still more focused on how to allocate our time and have not fussed too much about allocating our money.
I am risk averse and conservative with money anyway so I feel like my default would be to not let the accounts get too low. However, if we’re not actively focused on how we’re using our time, we may squander it. We can always make back the money, but not the time.
So we’re traveling a lot even though that means spending more and doing less consulting. I am confident it will even out later and all work out.
Hi Caroline! I think you’re spot-on. Given some time and energy (and commitment) I could find something of value in the real estate markets. Heck, I stumbled upon the Airbnb so with a little work, finding a gem shouldn’t be too diffucult…
Love that you guys a more atuned to contentment than financial levers. Being able to dictate how you spend your time is a forgotten art here in the States.
I’d ditch the student loans at this point, regardless of interest rate. My goal would be to have the lowest fixed expenses possible before stepping away from work.
Hey Angela! I’m beginning to come around on that. I’d been ignoring this loan for several years while it’s been in a graduated payment plan. That meant that its effective interest was actually much higher than 2% all along. D’OH!!! So I’ve fixed that problem, putting it back to a standard plan. The monthly payment is higher, and with cash flow index as my guide, you can bet I’ll be pursuing pay off more aggressively.
Why wouldn’t you pay of the student loan and then use that cash flow to get that 10% opportunities you mentioned?
I always like to err on the side of caution so paying down debt would be my number one, while also maxing out retirement accounts if possible
I agree with you, Robyn. See my reply to Angela. This loan will get a lot more attention now. And besides, this is the same logic I applied to paying off our mortgage!