2017 Prudent Investing

FAQ #3: How Do You Invest Your Money?

Merida, Mexico in December of 2016

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:

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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.)

Our Vanguard IRA Investments

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 HSA Investments

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! 

Most 457 and 403b plans use annuity products as the basis of the investment platform.  I hate annuity products because they are loaded with fees.  Without going into great detail on this boring subject, you should know that most educators pay through the nose for their 457 and 403b investments.  For example, one of my 403b providers offered an index fund similar to the VTSAX that we currently have a Vanguard.  The total cost to invest in their fund was 1.35% (or 135 basis points…aka, “bips”) while Vanguard charges .05% (or 5 basis points) for basically the same fund.  Would you pay $27 for something you could get for $1?  Yeah, me neither.  Do you understand the math?  Here it is:  135 bips / 5 bips = 27 to 1 ratio.

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.

Our 457 Investments Savings

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.)

Our 403b Investments Savings

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.

Investing Overview

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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…
  5. 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:

Three Types of Vanguard Funds That We Use
Investment Attributes
Asset Allocation
Low Fees
Target Retirement
Investment Attributes
Passive Approach
KISS Strategy
Target Retirement
* = Constant, unchanging allocation
** = Allocation becomes less aggressive as it nears the fund's retirement date.

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.

FAQ #4:  How Did You Earn Such High Teaching Salaries?

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This Post Has 28 Comments

  1. Hey Ed,

    Once again a kick butt post and a must read in my opinion for educators and pre-service teachers.

    So specifically in this post, you talked about how the 457 and 403b plan options for K-12 suck. Should one shop around for teaching jobs based on the fees and surrender charges? You advise that if only annuity products are the option to pick the plan with no surrender charges. Do most schools seem to offer plenty of options in terms of fees, surrender charges, etc? Maybe in a dream world I could contribute to my own 403b and 457 accounts via Vanguard though that’s in a really ideal situation!

    If I have a summer job for example, would I throw this money into an IRA separate from when I’d teach?

    Finally, if you ever decided to write an e-book about this for teachers I’d buy it in a heartbeat solely to support your blog and how helpful you’ve been.

    1. Jonathan,
      Thanks for the encouragement and kind words; they made my day. K-12 457 and 403b plans are unpredictable and vary from district to district. Some states make their state-approved plans available to all school districts. (I believe Wisconsin has a state plan that K-12 teachers can use.) Here in Georgia any district can add the Peach State Reserve, but that’s easier said than done. I tried getting it added in Echols, but it fell through. Some districts do offer decent, low-cost plans, but do not expect there to be a good choice in every district. As a general rule, I recommend using a plan without surrender charges, hardcore savings, and separation of service. Trying to get a good investment alternative at your school is HARD work with lots of frustrating committee meetings. I’ll never participate in that again.

      As for your IRA, you can always use your side-hustle jobs to fund one at Vanguard. BTW, Vanguard is not very common in the 403b world, and I’ve never heard of a Vanguard 457. When I finish my e-book, I’ll have a buyer…thank you for your support. I’m glad you’re deriving some value from my posts. Ed

  2. Ed,

    Great blog, very inspirational. My question is why so much in money market prime? I recently set up a 3% CD at Andrews federal credit union, there are blogs that describe howto. This CD is NCUA insured and has a generous early withdrawal penalty.

    1. Geoff,
      Great question…ugh, too much cash. There are a couple of reasons. First, we have $90k in 457 that we’ll tap up to age 60; that money is in an annuity product, so it limited due to fees. If I were to roll this money to a credit union, it would lose its 457 status, so I can’t do that. (Remember the 457’s lack of 10% penalties for pre-59.5 withdrawals?)

      Second, we have $87k of money market money in our big IRAs because we’re taking 72t distributions from them. We’ll be getting that money over the course of the next seven years, so it’s more of a short-term money source. The money in our big IRAs can’t be rolled out, or we’d violate the 72t distribution rules and get hit with a massive tax penalty.

      Third, we have about $120k in IRAs and 403b accounts that is in the process of getting invested. I’ll be moving our investments from cash to stock index funds over the next 12 months. This is long overdue, but our hands were tied while our money was “stuck” in our 403b / 457 accounts. All in all, I was not thrilled to see that we had 29% of our money in cash. Thanks for the question.

  3. Hi Ed,

    Thanks again for an informative article!

    As I may have mentioned I am going to take a year off to do some traveling with the family. During this time I will not be receiving any benefits or salary from my district.

    With the election of our new president I expect to have to pay over $1500 per month in healthcare starting in Sept 2017.

    Is there an advantage to moving some of our after tax investments to an HSA?

    Can you suggest any other tips you might have to best use this opportunity with my family?

    Thank you!

  4. Hi Ed,
    Great post, thanks for providing real numbers with real strategy! Quick question. You have US and international bonds of roughly 15% assets. But you also have almost half of your assets in one of two Target Date funds. I would guess that the 2025 fund is fairly heavy in bonds as well since it is targetting only 7 years out.

    Why did you choose to hold bonds both in bond funds in addition to those in the target date fund? I would think KISS would have you just hold your bonds inside of the target date fund and VTSAX and cash outside of it. I’m sure you’ve thought of it, so I’d love to understand the strategy you used in setting it up this way. The best i have thought of is that you simply want to be heavier in bonds than the target date would allow, but …?


    1. Hello Dave,
      Our bond allocation is mostly in our Target Retirement 2025 fund (with a much smaller amount in a LifeStrategy Growth fund). When I started with the fund around 2005 (?) I knew it was a solid choice because of its self-regulating asset-allocation aspect. I haven’t been disappointed with the fund, but my investment philosophy has changed since then. I think I’ll eventually go the 100% stock route because our pensions and social security will serve as our “bond component.” (However, I plan on keeping a cash position to cover our 72t distributions for at least five years.) I have not bought any bond funds outside of the T.R. 2025 fund, but I have bought some stock index funds in an attempt to increase return.

      Going forward I’ll probably convert some of the T.R. 2025 fund to the VTSAX and VTIAX. Since we don’t plan on increasing our lifestyle, we feel okay taking on the added stock risk. My biggest disappoint when I looked over our asset allocation was our cash position…it’s too high. Thanks for the question. Ed

      1. Thanks for the response. I see my mistake… I was thinking (for no reason – your writeup was clear) that the Target Date fund was in addition to the aggregate view that included bonds. In reality, your aggregate view simply included the Target Date fund as a subset. In reading the post again, it all does make sense 🙂

        I’m sold on the 100% stock route as well. Given your pensions, social security, and proven ability to keep your expenses low, it does seem to make up for the stability benefits that are the reason for a bond allocation. You are right that your cash position is too high, but it is only too high in a single snapshot of time. You have a good plan for much of the cash on an ongoing basis so no reason for disappointment 🙂

        Thanks again,

      2. I’m thinking along the same lines. Although I’m still 14 years out, my current philosophy is to stay 100% stocks. With two pensions and social security and a paid off house, I think they all kind of take on a bond like role.

  5. I have a self directed 403b with Aspire Financial. Do you have any experience/knowledge with Aspire? I don’t see anything in the fine print that I can find about a separation fee. I do see an annual maintenance fee of $40 and administration fee of 0.15%. I see a transfer out fee of $75, distribution fee of $75 (for the first transfer and $10 after). They have Vanguard Target date retirement funds as an option within the 403b. Would obviously rather be going directly through Vanguard but I have to imagine the other options at my district (i.e. AXA, Lincoln Financial, etc) have higher fees. I am thinking of putting more money into 457b. Part of this is due to fear of losing my job (I have been teaching for 10 years in IL where the budget is an absolute disaster…and I am a PE teacher so not exactly a high need STEM area) and being able to access that money without 10% penalty that 403b carries if I could not find another gig. Any downside to 457b as compared to 403b?

    1. OswegoTim,
      I used Aspire Financial in my last job because, like you, I was able to figure out the fee structure. I didn’t really invest in the platform because I knew we’d be moving on in 12 months. However, their fees did not put me off…after all, you could be in a Target Retirement fund for .30% plus the $40 admin fee. No bad at all especially when compared to annuities WITH surrender charges. As for the 457 vs 403b, we always fund our 457 first because it’s our future emergency fund (but only after we quit). Our 457 accounts provide us with an important financial buffer. We only save money in our 457 account since we plan on tapping the funds within 5-7 years. Good luck and thanks for the question. Ed

  6. Great article and I love the nuts-and-bolts discussion. My head hurts a little, but I can’t wait for the next post.

    1. Budrow,
      It often hurts a little to write money posts. I’ll be honest…they’re kinda boring to write. However, many readers have never come across some of these out-of-the-box ideas, so fate has left it up to me to put these ideas on cyber-paper. I have gotten a lot of messages thanking me for my posts; that keeps me going. Not sure about my next post yet, but it’s coming.

  7. What is the difference between keeping your money in a 403(b) account (we have Vanguard funds) and keeping it in a Vanguard IRA? We are teachers who will be retiring in 4 years at age 66. We will get about $80,000 each plus our pensions. We can roll it into our existing 403(b) at retirement or I think start an IRA.

    1. The biggest difference is the underlying fees associated with your 403b plan. I do not know what your fees our, but let me give you an example. My 403b plan also offers Vanguard funds that I’d like to use. For example, they have the LifeStrategy funds which would be ideal for me. However, the annuity plan charges 1.25% on top of the Vanguard fee of .15%. So, a great Vanguard fund suddenly has an expense ratio of 1.40%…not acceptable. Such is the 403b world. You must always assume the worst when investing in 403b accounts.

      If I had to choose between rolling to a 403b or opening a new IRA, I’d do the latter because I can control my investment costs. Plus, I would not be limited to the funds within the 403b platform. Good luck going forward and enjoy your retirement! Ed

  8. Hello,

    Thanks for the helpful info on HSA. I’m interested in opening a HSA account at Elements Financial for investment purpose. I wanted to invest in mutual fund instead of ETF, such as VFINX or VTSMX, but since it has a minimum of $3000 investment and I haven’t met that threshold for my HSA, I assume I cannot do so. Hence I’m considering the Vanguard Total Stock Market ETF (VTI), in which you’re currently investing per Elements Financial. Could you please tell me if they allow auto reinvestment for VTI? And if not, how much is the fee for each manual dividend reinvestment? (I’m not familiar with the ETF investing and like the mutual funds for such auto-reinvestment reason.) Thanks so much in advance for your time and help. I appreciate it.

    1. P.S. In addition to the $25 per trade fee you wrote, I found out Elements Financial charges additional $4 monthly if there’s no minimum balance of $2500 in the savings.

      1. Yes, that’s why we have $2,500 sitting idly in HSA cash at Elements Financial. I guess if we ever did have medical expenses we could pull from there first.

    2. Hello Jessica,
      You can gradually add money to the HSA at Elements Financial, and then you can invest the money at TD Ameritrade later. We had built up a balance of about $26k before we made any investments in our HSA. Prior to that all of our HSA money was parked in cash. The cost to send the money to the investment platform is $24, so I’d advise against monthly investments. Instead, I’d build up a substantial balance before I invested the money…it all depends on your fee pain threshold (mine is very low). This is the first time I’ve used EFTs, and so far, so good. There is no fee for automatic reinvestment of dividends and capital gains. (At least, I don’t think so…I’ll check my statements for you.) Thanks for the question. Ed

      1. Hello Ed,

        Thanks so much for kindly replying. I really appreciate your help. Since I posted my last comment, I’m told by TD Ameritrade that they will waive the required minimum investment amount to invest in a particular fund if I’m investing for HSA per Elements Financial. Hope this information is true. If so, this would cause no concern if I were to sell and the balance falls below the minimum required.

        Thanks so much for kindly checking whether there’s a fee for automatic reinvestment of dividends/capital gains for ETFs.

        Are you familiar with Saturna Capital? If so, any thoughts on it? Saturna charges $14.95 per trade, and requires only a minimum of only $100 in HSA account. There is an inactivity fee of $25 per year if account is inactive per calendar year, though. (Investing in Vanguard is additional $10, but currently no additional fees for Fidelity funds.)

        1. We use Saturna and have been very happy with them. We move over all of the HSA money in one lump sum and invest it with one trade for $14.95. After that, there are no monthly fees and that one trade/year also means that there are no inactivity fees either. They do have dividend reinvestment, and although we don’t use it yet, if memory serves it is $1/trade for the reinvestment.

          1. Hi Dave, thank you very much for kindly answering my questions. It’s helpful. I appreciate it.

  9. Hi! I found this really useful thank you so much! I work in New Jersey and my district offers 2 mutual funds companies. Oppenheimer and Foresters Financial Services. I went with Oppenheimer. I plan to retire from this same school district in 20 years. How should I invest my money into my 403b??

    1. Hello Jessica,
      I have no idea what mutual fund options your Oppenheimer plan offers, nor do I know their underlying fees and expenses. So, I cannot in good faith give you any recommendations. Here’s what I would do: If I weren’t going to save more than $5,500 a year, I’d put money in my traditional IRA (target retirement fund) at Vanguard first. That’s just my two cents; I’m not a financial advisor.

  10. In California I think they have to list ALL the providers. I do not know if all districts have acces to all providers. We can do Vanguard but we have to self enroll and the 403B plan charge s $15 per fund you invest in.( custodial mutual fund account NOT an annuity)
    For 457s in my district you cannot enroll in Vanguard directly but you can go through CAlSTRS pension 2 system and they have a couple if Vanguard index funds listed. So far I have not discovered any nasty underlying fees.

    1. Cindy,
      If you have access to Vanguard in your 403b/457 plans, you are fortunate. It also sounds like you can get to Vanguard at minimal cost. The last step is to kick it into hardcore savings mode! Thanks for posting.

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