No Stress Investing: Retirement Investing Made Simple

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Don’t know where and how to invest? Planning for retirement shouldn’t keep you awake at night nor should you pay for someone else to manage your money. You can do it yourself and save yourself the commissions you would pay a financial adviser. The strategies I discuss in this post are relative to the expertise knowledge that can be found in the best selling book, “The Intelligent Investor” by Benjamin Graham coupled with my own research.

If your employer offers a 401K and/or a 401K Roth, I recommend contributing percentage needed to get match into the 401k Roth. Why a 401K Roth?  You do not know if your income tax bracket will increase or decrease by the time you retire, therefore, it is better to pay taxes now. A 401k Roth is not the same as a Roth IRA. With a Roth IRA you can withdraw your contributions any time without taxes or fees, however, earnings on your contribution cannot be withdrawn until you are 59 and half years of age.

 Unlike the Roth IRA, you cannot withdraw contributions you make to a 401K Roth. If you decide to withdraw from a 401K Roth this would be considered a hardship withdrawal which comes with a 10% tax penalty if you’re not at least 59 ½ years of age and would require you to pay income taxes on it. There is a loophole for avoiding the 10% penalty tax which is taking a loan from this account with at least 5 years to pay it back unless the loan was for a down payment on a home then you have 15 years to pay it back. However, I do not recommend taking a loan from your retirement account.

It is imperative that you max out your 401K Roth and/or Roth IRA. This means that you contribute the maximum contribution limit. As of 2020, the max limit for 401K is $19K while the Roth IRA is $6k. You can additionally open a brokerage account to invest and save more for retirement after you have maxed out your 401K Roth and Roth IRA. 

Best Roth IRA Accounts:

Get acquainted with your retirement number. This is realized by estimating your monthly fixed expenses at retirement plus buffer funds for the unexpected (e.g., home repairs, medical bills, travel, elderly parents care). You multiply your monthly expense total by 12 to get your yearly expenses total then you multiply this by the years you expect to live. Be sure to consider the possibility that you might live longer.

Let us take this following example for managing multiple 401Ks from past jobs. Sade has two old 401Ks from past jobs ($2K and $35K). What should she do with these? First, never cash them out because you will have to pay income taxes and be required to pay a 10% penalty. The wise option is to do an IRA Rollover which Sade can set up at brokerage firms like TD Ameritrade or Fidelity. This allows Sade to transfer those 401k balances into an IRA account. By doing this Sade avoids taxes and penalties. 

The simple path to a secure retirement is to invest in index funds. However, please review the fees associated with the 401k; if they are higher than .45% or your employer does not match contributions you are better off opening a Roth IRA. Plan to diversify your investment allocations at 75% stocks and 25% bonds. As you get nearer to retirement you should adjust your allocation in favor of more bonds. For example, say you are 50 years old, then your allocation should be 50% stocks and 50% bonds. In other words, re-balance your allocation of bonds based on your age as you near retirement. 

A great starter index fund is VFIAX which is from Vanguard and has a low expense ratio. Below you will find a brief yet informative guide to investing plus jargon you should become familiar with.

Investing Principles:

  • Buy what you know.
  • Buy stocks of companies in which you understand what they do.
  • Diversify your portfolio by keeping 10 – 30 stocks long term, 3 index funds and bonds. 
  • Dollar Cost Averaging: Simply divide your monthly contributions to your retirement account and/or portfolio across investments to reduce the impact of volatility on large purchases of equities.
  • Expense Ratio:  All Funds charge these fees to cover operational costs; opt for funds that have expense ratios less than .45%
  • Loads: Loads are sales commissions for the adviser that sold you the fund. Avoid funds that charge loads because the critical key to investing wisely is to keep investing expenses low. Stick with no-load index funds.

Stock Buying: 

  • Choose stocks with $10B+ market capital.
  • Low debt to equity. 
  • Long record of dividend payments (IPO of 20+ years).
  • Strong financials (double digit revenue growth). 
  • Include growth stocks in your portfolio.
  • Use Stock screeners like FinViz or Yahoo Stock Screener.

Growth Stock Screener Search tips:

  • No dividends.
  • High P/E (price per earnings) ratio relative to industry average.
  • Lower EPS relative to industry. 
  • Double digit growth rate in sales, revenue, and profit with high likelihood of increased profits.

Bonds

  • Opt for investing in municipal bonds and treasury bonds. *These are only suggestions, do your own research or talk to a financial adviser
  • Avoid bond funds because when interest rates rise the value of the bond falls. 
  • You can purchase individual bonds from treasurydirect.gov.

REITS

  • REITS offer an investing opportunity to invest in Real Estate which is another great way to diversify your portfolio. 
  • A great REIT fund is VGSLX (Vanguard Real Estate Index Fund Admiral Shares) which has a low management fee.

Index Funds

Index funds are stock, or bond portfolios made to match the performance of the market index, such as, the S&P 500. VFIAX is a great starter index fund to invest in. I truly stand by this index fund.  

4 Types of Index Funds to invest in 

  • Total US Stock (Example: VFIAX or VTSAX)
  • Total World Stock (Example: NSRIX)
  • REIT Index Fund (Example: VGSLX)
  • Income Fund (Example: Vanguard Wellesley Income Fund (VWINX))

ETFs

An ETF is an exchange traded fund that involves a collection of securities, such as stocks and tracks the underlying index.

  • Total US Stock ETF (Example: VTI)
  • Technology ETF (Example: VGT)
  • REITs ETF (Example: VNQ)

My top 7 stock picks (*I am not recommending these stocks, just my personal favorite; do your own research)

  • Paycom Software, Inc (PAYC)
  • New Oriental Education & Techno (EDU)
  • Home Depot (HD)
  • Walmart (WMT)
  • Ulta (ULTA)
  • Nike (NKE)
  • Amazon (AMZN)

When planning for retirement, consider what your financial goals are, educate yourself about health insurance and Medicare, and what you will do after you retire. Your retirement fund goal should take into consideration long term health insurance which is awfully expensive but critical in retirement as it helps cover medical costs that Medicare does not cover. If you are going to be responsible for taking care of elderly parents, you are going to have to plan for those expenses too. Also find out the average age in your family history and add 20 to 30 years to it; you should plan your retirement years considering that you might live a bit longer. 

Let us consider insurance for a moment. Never purchase Whole Life Insurance because it offers no value and is super expensive. In other words, a scam. Term life insurance is the way to go. Who should consider term life? If you have dependents like young children, you should invest in term life insurance and only pay premiums until kids are 25 years old.

You are now able to construct a stress free retirement strategy. For example, your 401K can consist of three index funds: Total US Stock (VFIAX or VTSAX), Total World Stock (NSRIX) and an income index fund (VWINX). Then you can open a Roth IRA and invest in three ETFs plus 10-30 stocks that you know will be profitable for many years and understand what the companies do.

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