Invest for Retirement

Caveat Emptor! I am in no way a financial adviser. However, I have assembled many resources based on items mentioned in the Boglehead’s Guide to Investing (2e) book. I recommend reading that book first, then going to the Bogleheads.org website and going through their wiki, then reading posts on their message board that pertain to your interests/needs, etc. It is truly remarkable how much information is there. Overwhelming at first, but stick with it or drill down into topics that interest you.

After reading the Boglehead’s book, continue on.

Financial Planning > Consider > Identify > Learn > Commit > Analyze > Read > Invest > Do more research

FINANCIAL PLANNING & DEBT PAYOFF

Before you invest make sure you have a sound financial plan. This means understanding your income and your expenses, having a plan for paying off debt and a plan for what to do with excess resources after debt is no longer an obstacle. The way to become a millionaire is not to make $1 million dollars per year. It it to have saved and invested more than you spend! Many people forget that part of the equation and struggle to understand what to do first, second, and so on. Investing up to whatever your employee matches in your 401k is the first step. Here’s a general guide below from the Boglehead’s.org wiki:

“Here is the most likely order of priority for investments versus paying off loans; it does depend on the interest rates, so these examples are based on typical rates which may not be accurate at any specific time.

Invest in 401(k) to get maximum employer match (rate may be over 100% in the first year)
Pay down credit cards (rate 10-30+%)
Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%)
Invest in Roth IRA, deductible IRA or decent 401(k) (rate 5% on Treasury bonds)
Pay down deductible mortgage or student loans (rate 4% after tax)
Invest in taxable account (rate 4% on municipal bonds)
Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)”

Source: https://www.bogleheads.org/wiki/Paying_down_loans_versus_investing

CONSIDER

Generally, these are the things you’re considering in retirement planning:

What’s your tax bracket (now and expected in retirement)?
What’s your risk tolerance?
How much do you have available to invest?
What options do you have available to invest in?
How do you allocate your investments across these options so that they are “tax efficient?”
What do you do if you “fill up” all your investment “buckets”?

Read the Bogleheads wiki and watch the Getting Started videos.

IDENTIFY YOUR OPTIONS

What you need to do now is identify:

YOUR PLAN INFO: Gather all available brochures, pamphlets, website links, etc. for whatever funds and plans are made available through your work
PLAN OPTIONS: Find out what retirement plan options (also called “containers”) are available in your plan(s)
1. Do they make available 401k, 403b, 457, etc.
2. Within each type of retirement plan how can contributions be made? (ie. pretax contributions to these, Roth, after-tax contributions, etc.)
3. If after-taxcontributions are allowed for your plan(s), do they allow for “Non-hardship in-service withdrawals?” This is CRITICALLY important to know if you reach an investing level where you can do “Mega-backdoor Roth” and https://www.bogleheads.org/forum/viewtopic.php?t=137366) contribution transfers. Find out now so that you can plan for this if you get to this point sooner rather than later.
MATCHING: Does the employer match any contributions? (probably not in 403b/457s in AL but other states do have this)
1. If so, what is the matching formula?
2. If so, you want to AT LEAST contribute up to the maximum match amount. If at all possible, in most cases, you will want to contribute up to your personal limit in the pre-tax contribution.
PROVIDERS: For whatever plans exist, who are the specific service providers you must select from (i.e. Vanguard, TIAA-CREF, Fidelity, Valic, others, etc.)?
1. Find out which providers charge service fees and how much, specifically, these fees are for each investment service.
INVESTMENT OPTIONS: For each combination of service provider and retirement plan container (i.e. Fidelity 401k or 403b, Fidelity 457, Valic 403b, Valic 457), obtain a detailed listing of each investment option (i.e. into which specific funds can you direct your contributions)?
1. Expense ratios matter!
  If available, at a minimum get expense ratios for every available fund in every combination. Also, you might want to get listing that has historic returns (1Y, 3Y, 5Y, 10Y, Life) but this is much less important because it really doesn’t matter much for index funds. [“Bogleheads” are usually only interested in fund name/ticker symbol and expense ratio and don’t look at individual returns very much, but we looked at them to be comfortable in selecting ours just to be sure we weren’t selecting an outlier on the down side or short/long term.)
2. Identify all available index funds in each combination
  (Market index, bond index, value index, international index, etc). For example, Bogleheads generally have a Three-Fund Portfolio. This means if you had Vanguard as an available provider, you might select Vanguard Total Domestic Stock Market, Vanguard Total International Stock Market, and Total Bond Market. With these 3 you would be invested in all bonds globally, all international stocks, and all domestic (U.S.) stocks.A brief summary of the Boglehead philosophy is that, long-term, the total market & bond indexes beat ALL OTHER METHODS 90%+ of the time. There is ample academic and practitioner evidence that this is true in any long-term (i.e. 20+ year period) you want to evaluate over the last 100 years. You would then select how much % to invest in each (This is your “asset allocation”).
3. Be efficient in Equities + Bonds
  There is an “Efficient Frontier” at which the expected return of a combination of equities & bond funds outperforms a 100% equities strategy, long-term (20+ years). This would be a simple way to invest in the Three-Fund Portfolio if you have all three (total market index, total bond index, total international index) of these funds available across all your investment options/buckets. We use more than 3 specific funds because of what is/isn’t available across all of ours. For example, we might take an S&P 500 fund + a Vanguard small cap value index fund + total international index fund + total bond market index fund. The S&P 500 + small cap approximates the total market. You could use other combinations of approximating total market, bond, or international as necessary).
4. Allocate Assets
  You will have different options available in each combination and each type. Your asset allocation will be over your entire investment portfolio and includes IRAs, stocks, mutual funds, possibly your real estate, etc.
TAXES: Be Tax Efficient in your Asset Allocations
1. Once you are in a Roth, it is never taxed. So, your goal is to put whatever you expect to have the highest return (at lowest cost) into the Roth. Generally, this is domestic equities (stock funds). Might also include international funds.
2. If you invest the maximum available to you (i.e. For 2019, this amount is $19K each in Roth, 401k, 457b, 403b or 403b PLUS $6000 each in IRA or Roth IRA), then your plan might also allow you to each invest up to 54K after tax in these! For high earners, this is a very important opportunity. Check your plan to see what all is available to you).
DEFERRED COMP: Do you have deferred compensation plans available ?
1. Typically available to senior managers and executives but may also be available to others.
2. Find out the following, if so: What is your plan? Who is/are the provider(s)? What are the investing options? At what income or title level can you start participating? etc.
3. Gather same info as you would for 401k / 403b / 457 plans as detailed above.

LEARN

READ! Go ahead now and get the following books and read:
1. Boglehead Guide to Investing – 2nd Edition (by Mel Lindauer, Taylor Larimore, Mel Lindauer)
2. All about Asset Allocation (by Rick Ferri)
3. Then read some more! (see below)
Bogleheads.org: Go to the Bogleheads.org site and start reading their Boglehead Wiki
Resources: Check out my collection of a lot of links and other resources based info in the Boglehead and other books.
Risk Tolerance: Take the questionnaire on risk tolerance (you & your spouse need to do this separately) : Go to https://personal.vanguard.com/us/FundsInvQuestionnaire

COMMIT

Create your Investment Policy Statement (IPS)

“An Investment Policy Statement forces you to put your investment strategy in writing and commit to a disciplined investment plan.” This is your own personal investment philosophy, what you’re going to do and when, etc. Here’s a great IPS template: http://im.morningstar.com/im/InvestPolicyWS.pdf

ANALYZE

Once you have your investment plan in place (or to help you evaluate your plan before you implement or make changes), you can also use aggregator / analyzer tools to help you understand the impact of your choices

http://PersonalCapital.com – aggregates all your financial accounts to give you a daily update and asset allocation
https://www.PortfolioVisualizer.com – evaluate different allocations and expected returns over the long term. Uses Monte Carlo simulations.
http://Morningstar.com (usually free via your library login) – See all the details on each fund, expense ratios, index benchmarks, returns, stability, etc). Also can look at the Morningstar 9-box which shows how each fund (or your entire portfolio) is positioned.