Advanced Personal Finance

How’s that for a thrilling title?  Anyway, that’s what I’m going to write about. 

I quit a job recently and rolled over my 401(k) into an IRA.  I’d been hesitating on how to invest the money, so for the past couple of weeks, it was in a money market.  I wanted to do a reallocation of everything related to retirement savings but I wasn’t sure if different types of accounts (Roth and Traditional IRAs) should have different asset allocations.  Just a couple of days ago, I finally decided and invested the money.

Asset allocation - different accounts get different treatment?

So on the question of whether a Roth IRA gets a different asset allocation than a Traditional IRA, I came to conclusion that for my time horizon and risk tolerance (medium-long and high, respectively), they can be the same.  As I get closer to retirement, I imagine they’ll diverge, since you’re supposed to tap Roth funds last.

Here’s the allocation I settled on:

50% US stock index

40% Internation stock index

10% Bond index

Specifics of my investment

I had planned on using USAA mutual funds as my investment vehicle, but I ran into a couple of reasons not to.  First, they don’t offer a true bond index fund or an international index fund.  Second, I have a lump sum to invest, so ETFs really make more sense.  I won’t be trading, so commission fees aren’t an issue for me, nor will I be adding additional money.  With an ETF, I take a one-time commission hit, then it’s done.  More importantly for me, though, is that ETFs deliver what I’m looking for (boring, vanilla index funds) with super low expenses - even lower than an index mutual fund charges.

Specifically, I chose the following ETFs for my mix (numbers in parentheses are expenses):

50% Vanguard total market (0.07%)

40% Vanguard FTSE index (0.25%)

10% Vanguard bond index (0.11%)

So now Vanguard has a very substantial portion of my retirement money.  It’s still held through a brokerage account at USAA, incidentally.

Anybody out there have any thoughts/opinions about my allocation or use of ETFs?

Share This

By one sensible measure, yes they did.

Adjusted for inflation, the S&P 500 is right where it started nine years ago.

Today the WSJ reported something I’ve been trying to wrap my head around for some time.  I’ve wondered on this blog before about what is the best hedge against inflation.  I’ve asked personal finance authors, asked myself, done research, read tons of articles.  Nobody ever had a satisfactory answer for me.  The closest I ever got was “stocks will outpace inflation.”

Well I guess not over the last nine years.  Here a link to a telling graph courtesy the WSJ.

From the article:

Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn’t held up for stocks bought in the late 1990s or 2000.

That just happens to be the timeframe I’ve been investing.  Awesome.  T-bonds returned 4.7% adjusted for inflation over that time period for crying out loud!

To be sure, unless you bought this month in 1999 and didn’t add to your holdings, you’ve done better than this.  That’s why people like dollar cost averaging so much - it forces you to buy during down markets.  But analysis like this is disheartening.  Inflation’s a killer (and the government’s inflation numbers haven’t even been bad during this time period).

Share This

In a mostly overlooked bit of news, the US Treasury published its required ‘health of Social Security and Medicare’ reports and the results, predictably, are not good.  Before you move on, thinking this doesn’t affect you because you don’t use Social Security and/or Medicare, consider the implication - higher taxes.

According to the reports, Medicare is in far worse shape than Social Security, contrary to popular belief.  This year, Medicare’s hospital insurance will begin paying out more in benefits than it takes in through taxes.  I won’t recite all the dates and prognostications since they’re subject to assumptions and incite a lot of emotion all around.  But this one fact can no longer be denied - Medicare is now spending more than it takes in.

In the short run, this will be largely ignored.  Medium and long term, however, it can mean only one thing - higher taxes, reduced benefits or both.  So if you think too much comes out of your paycheck in the form of taxes, you ain’t seen nothin’ yet.

These kind of macroeconomic issues are why I believe taxes will only increase in the future.  For me, that belief affects how I invest and through what vehicle (e.g. an emphasis on Roths).

Share This

Times are bad and getting worse.  Consumer confidence is in the toilet.  Inflation is rising, as is unemployment.  A recession is likely either already in progress or is imminent.  Home values continue to decline.  Yet among all this, there’s one thing going up - the price of college.  And there is a time for stopping the funding of college funds.

Across the US, millions of parents are having to make hard decisions about funding their children’s education and competing household financial priorities.  I know.  My wife and I are two of them.

Several months ago we made the decision to move to a lower cost of living area and have my wife stay home with our two children.  It’s a decision we didn’t take lightly.  It was fraught with financial decisions.  One of the topics we had to tackle was whether, and how much, to continue funding of our kids’ college funds.

Even with a lower mortgage payment and work-related expenses (not the least of which is daycare!), the loss of a paycheck made for a hard look at our budget.  Ultimately, we decided to continue funding retirement accounts and our small monthly contribution to a taxable account.  Meanwhile, we made the decision to cut in half our contributions to the college funds.  It wasn’t as easy a decision as it sounds, though.

It’s a decision that lots of people are having to make.  And there is definitely a time to lower or stop the contributions to college funds.  I won’t enumerate them because to do so would be presumptuous and because the situations where doing so is prudent are likely obvious to everyone.

I was struck, though, by this article on CNN/Money.  The article itself is kind of the opposite of what I’m writing about here.  It’s an encouragement to start saving for college early and often - standard stuff.  But some of the passages seemed ridiculous to me (emphasis mine):

“New [529 college savings] accounts this year are down about 20%, according to T. Rowe Price, while existing customers are contributing 10% less to 529s [that’s us - our plan is with T. Rowe Price].

“It certainly appears as though it is the economy that’s impacting consumers,” says T. Rowe Price’s Tom Kazmierczak. “It’s very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage,” he says. “It really can be the wrong thing to do particularly if you’ve got younger children at home.”

Financial advisor Thomas Henske of Lenox Advisors recommends that clients who can afford it tuck away $10,000-$12,000 annually in an investment account for each child beginning at birth.”

Oh, ok.  Save $10,000-$12,000 per year per child from age 0 for college.  Ok.  No problem.  Is this guy for real?!?  Seriously, if you save that kind of money for retirement you have to be in the top 10% of savers in the US.

And this guy Kazmierczak.  Dude - news flash - paying the mortgage allows the kids to have a home to live in.  I can’t think of another person who would choose college funds over paying the mortgage. “It’s very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage.”  Damn right it’s easy, because that’s not even a decision.  That’s automatic.

I’m an educated guy.  I value education highly.  But from a personal finance standpoint, saving for college is fairly far down the list.  It’s well below paying the mortgage.  There is most definitely a time to stop putting money into the college fund. 

For many people, that time is now.

Share This

I’ve written a couple of times now how I changed jobs and rolled my 401(k) into existing IRAs.  Right now the great majority of that money is sitting in a money market fund collecting 2% or whatever it is.  But having it there has created, if not a true problem, an annoyance.

My rolled-over 401(k) assets are sitting around for two reasons:

1. I haven’t decided what my asset allocation should be
2. With all the market volatility, I haven’t pulled the trigger.

I have to sheepishly admit that the real reason is more the second than the first.  See, like any reasonable person, I’d hate to invest a great deal of money (six figures, which is a great deal to me) just to watch it immediately lose 3% of its value as has been occasionally happening lately.  Yep, I’m trying to time the market in a manner of speaking.  I could dollar cost average, but as FMF recently wrote, that may not be the greatest move either.

So what’s the problem?

Most days, I log on to USAA and take a look at my bank accounts to make sure everything’s cool.  There’s a section for my mutual funds, which consist of our emergency fund and these IRAs.  Well, some of the IRAs are fully invested.  So on those -3% days, I get to see my retirement assets drop thousands of dollars at a pop.  That’s not a good feeling.

But it’s also a pretty good problem to have, I guess.

Share This