If you read FAQs #1 and #2, you now know how we save money and how we cover our living expenses. In this post, I’ll explain how we invest our money as it builds up in our various plans. How we invest our money varies depending on where it’s saved. You probably remember from previous posts that we have four main savings accounts–our IRA, HSA, 403b, and 457 accounts. Because each savings account operates under a different investment platform, our investment options vary depending on our choices within the platform. Our main concerns when we invest in our accounts are 1.) investment choices and 2.) their underlying fees. Here’s how we invest our money:
Our Investments by Accounts
IRAs * IRAs are great because you, not your employer, get to choose where to invest your money. Naturally, you want to go with an excellent investment firm. After doing our research, we decided to invest our money at Vanguard because of its ownership structure and its emphasis on low-cost, index investing. Currently, we have $788k invested at Vanguard in three kinds of IRAs: traditional, Roth, and rollover.
The image below shows that we have over half our Vanguard money ($427k) invested in the Target Retirement 2025 Fund (VTTVX). We also have substantial amounts ($310k) in the Prime Money Market Fund (VMMXX), the Total Stock Market Fund (VTSAX), and the Total International Stock Market Fund (VTIAX). The money market fund serves two purposes. First, it’s where we keep our short-term money for our annual 72t distributions. Second, it’s where we deposit our 403b and 457 savings when we transfer our money to Vanguard (after separating service of course!). Going forward we plan on exchanging funds from the money market to the VTSAX and VTIAX funds. (Later in the post, I will explain why we decided to invest in these Vanguard funds.)
HSA * Because we were all in good health (and still are), we began using a high-deductible healthcare plan (HDHP) in 2012. As a result, we were able to open a health savings account to use with our HDHP. Our employer didn’t offer an HSA plan, so we had to choose an HSA provider. Initially, we used Alliant Credit Union for our HSA because their plan was more cost-effective as compared to other plans that we researched. However, in 2015 we rolled our HSA savings from Alliant to another credit union, Elements Financial. Our reason for moving our savings was simple: Elements Financial offered access to TD Ameritrade’s low-cost investment platform. In 2016, we invested $26k of our HSA savings in the Vanguard Total Stock Market ETF (VTI). What was our total cost to dramatically improve our HSA investment options? $24! Here is how our HSA savings are currently invested at TD Ameritrade:
Our 457 and 403b Annuity Wasteland
In a perfect investing world, educators would have excellent 457 and 403b plan options, but the K-12 investment world is far from perfect. Actually, it sucks big time. (You may have noticed that I don’t curse on my blog. In a previous basketball-player life, I exhausted my lifetime limit of curse words. However, this topic makes me want to curse.) Unlike IRA and HSA plans, educators are limited to their employers’ 457 and 403b offerings. If you have decent 457/403b options, consider yourself fortunate because your plan is the exception and not the rule. Why do I say this? FEES and SURRENDER CHARGES!
Another aspect I loathe about annuity products is that they often have surrender charges. This means that if you ever decide to move your money to another retirement plan, you will have to pay a fee to move “your” money. What?! Whose money is this anyway? Believe it or not, when you sign on to an annuity product, you often get a silent partner in your retirement account who has a legal claim on your money. I consider it legalized theft. We never use 457 or 403b plans that have surrender charges…NEVER. Why? Because we refuse to have our accounts skimmed when we move our money to our rollover IRAs at Vanguard.
So, what should teachers do if their 457 and 403b options are limited to annuity products? Easy, pick a plan that DOES NOT have surrender charges. Next, save your money like crazy in the plan’s short-term fixed account. Later, when you change jobs, you’ll be able to move your savings to your rollover IRA.
457 Savings * Because we use our 457 accounts to cover our living expenses, we do not invest in these accounts. Even if we wanted to invest this money, we wouldn’t because of the investment platform’s high fees. Instead, we park our 457 savings in a short-term fixed account. As of now, we have almost $90k in these accounts.
403b Savings * We invest our 403b savings just like our 457 savings. We save our money in short-term fixed accounts until we quit our jobs. In my mind, a 403b plan is a place to “park” money for future IRA rollover. Presently, we have almost $28k in our 403b plans. In October of 2016, we sent in the paperwork to roll our 403b savings to our Vanguard IRAs, but the paperwork has not been processed yet. (I emailed them today to inquire about the delay.)
Here is an aggregate view of our portfolio:
Wow, I hate having such a big cash position, but a lot of that will be invested into stocks this year. If a buying opportunity occurs in 2017, we’ll certainly be buying.
Before I dive in an talk about our preferred investments, let me first go over some investment basics. When we invest our money, there are five main concepts that we keep in mind.
- Diversification * I never want to have all my money in a few stocks or a couple of bonds. Instead, I try to mitigate my investment risk by holding a wide range of stocks and bonds. While you’ll never hear me bragging about my latest hot stock, you’ll also never hear me complaining about my latest stock loser.
- Asset Allocation * Where should I put my money? In cash, bonds, and/or stocks? Which bonds? Which stocks? I bet all those questions are making you nervous. Don’t worry because you can pick investments that take care of your asset-allocation angst.
- Low Fees * Okay, here’s where I want to curse again. You have to know how much your investments charge in fees because fees matter. The good news is that Vanguard has a number of low-cost investment options available to all investors.
- Passive Investing Approach * Maybe it’s my personality, but I am very distrustful of gurus of any sort: politicians, religious leaders, palm readers, and active mutual fund managers. When it comes to investing my money, I don’t seek a hot fund manager looking to outperform the stock market. Instead, I prefer to invest in capitalism via low-cost index funds that attempt to capture market return year after year. (This style of investing is often referred to as a “passive” approach because the investor does not actively jump in and out of the market in attempt to “outsmart the market.”) Are there fund managers out there who will outperform the market this year or over the next decade? Sure, the problem is how do I identify them. Maybe I could find a guru of gurus…but wait, how would I identify him. In perpetuum…
- KISS Strategy * A great plan is useless when it becomes too complex to execute. For that reason, I prefer a “keep-it-simple-stupid” approach that I know will yield results. In my view, Target Retirement funds and LifeStrategy funds are great KISS funds because they relieve the investor of on-going asset-allocation decisions. Target Retirement funds become less aggressive the closer the investor gets to his retirement date while LifeStrategy funds maintain a constant asset allocation. It doesn’t get any easier than that!
Here is how our investment criteria look for our three main Vanguard investments:
Our Preferred Funds
- Vanguard Index Funds * We use index funds (mainly low-cost VTSAX and VTIAX at 5 and 12 bips respectively) for investments that we plan to hold onto “forever.” These funds invest in one asset class, so they do not have an asset-allocation component. If you plan on holding an index fund forever, it would be KISS compliant. However, if you try to maintain an asset allocation among various index funds, you would be employing a non-KISS investment strategy due to the increased complexity. For those reasons, I put a “?” in the box above.
- Vanguard LifeStrategy Funds * I use the LifeStrategy Growth fund for my Roth IRA and my son’s ESA. This fund maintains an 80-20 stock-to-bond balance at a cost of 15 bips. All of the LifeStrategy funds meet our investment criteria.
- Vanguard Target Retirement Funds * Here is where my wife and I have the majority of our money. We used the Target Retirement 2025 fund (VTTVX) because it meets all of our investment criteria at a cost of 15 bips. Like the Life Strategy funds, all the Target Retirement funds meet our investment criteria.
I’m not telling you how to invest your money, but that’s how we invest ours. Because our low-cost, easy-to-use investments meet all of our investment objectives, we seldom worry about our portfolio and we always sleep well at night.
Yeah Ed, But…
Okay, I realize some of you still don’t know where to start with your investing. If so, I’ll tell you the same thing I told my niece. Begin your investment journey by saving up $1,000 to open an IRA at Vanguard (provided that you have income…check with your tax pro). You’ll need $1,000 because that’s the minimum investment for a Vanguard Target Retirement fund. Next, determine what year you think you’ll retire and buy the corresponding fund. For example, if you were born in 1990 and plan on retiring at age 65, you’d buy the Target Retirement 2055 fund (1990+65).
Okay, I’m tapping out right here. Please forward this post to any educators who might benefit from this information. Thanks for reading and I look forward to your questions and comments.
|Health Savings Account: We use Elements Financial to access commission-free, low-cost Vanguard ETFs at TD Ameritrade.