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.
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.
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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