There are a couple of good parts about this post. The first is the HN comments, which are an unintentional fountain of hilarity. But the second is the assumptions.
50% of the US population can't afford to put even a dollar into any sort of investment security. Of the 50% of the public that does own some sort of security, most of them are in the three-figures range. This index card, without realizing it at all, has targeted itself towards the top 10% of the population: people who have jobs with 401Ks, people for whom Roth IRAs will be useful.
In other words, if you are well into being one of the richest people in the richest country in the world, here you go - save 20% of your income, and so on. And you'll be fine!
In Table 2, it says that even 15% of the lowest income decile - people making less than 90% of workers - find a way to participate in a retirement plan.
Anyone making over $60k per year could (in theory; this is a highly abstract argument at this level, of course!) save 20% of their income without dropping below the median household income of $50k; households making over $60k per year appear to constitute 32% to 40% of the population, if I read this Census Bureau chart correctly: https://www.census.gov/compendia/statab/2012/tables/12s0690....
None of which says anything about the effectiveness of 401k plans, or anything else. But if you're going to handwave about numbers it's nice to hit the right order of magnitude.
It says it has all the financial advice you could ever need, not all the advice you need right now.
Poor people: save money and pay off credit card debts.
Middle Income And Above: do that + other rules.
And saying poor people couldn't save even a dollar is nonsense. Poor people are not 100% optimal in their spending and financial matters - often quite the opposite. Furthermore, poverty is often something people grow out of (the poor skew young), and this has some good advice for doing that faster.
Stop making a useful article out to be some elitist hogwash.
> Poor people: save money and pay off credit card debts.
So, "poor people, get surplus income".
Or, equivalently, "poor people, stop being poor".
> And saying poor people couldn't save even a dollar is nonsense.
If you can reliably meet the requirements of life without charity or depletion of reserves, you arguably aren't meaningfully poor. Poor people can save sometimes, but that's mostly saving a reserve for the bad times that will come (usually fairly soon and frequently), not net savings over the long term.
No. Poor people cut out non-essentials, be more efficient, and save money. A lack of nice things now will help later.
Buy cheaper clothes, stop smoking, stop drinking, eat out less, don't have a fancy car...etc. Don't live beyond your means and consider your means what allows you to save 20%. Exactly what I'd have to do if I wanted to save more money. Stop pretending like poor people are all dizzy starving idiots that can't do a damn thing to better their condition. People tend to live up to their expectations.
I could not agree with you more had I said those words myself.
A year ago I had a great job as a sysadmin, then I got laid off. Shit happens. I got a job doing landscaping for $10 an hour til I could find something better, and when winter came I worked in a restaurant serving people in the city.
What did I do? I stopped eating out and put my cooking skills to use saving money by eating in. I cut out cable, lowered my Internet speed and got Netflix. Got more conscientious about power usage.
What did I learn? At that job I both cooked and took orders in a 24/7 setting in a large city. I saw wealthy executives and immigrant Somalians alike buy food. The one thing I took away from that is that poor people stay poor by making poor decisions. Pun. Intended. When you walk around buying lottery tickets and junk food, wearing bling bling, smoking a pack a day, and clubbing every night, of course you're going to hit a financial hurdle.
My advice? Exercise that section of your mind we call common sense. Shop smarter. Do some math. Skip the club. Stop smoking. Put that on a 4x6.
You didn't learn much at all then. To think that being poor and having a tendency to make bad decisions, is just a matter of having developed negative personal habits throughout your life is just plain naive and ignorant.
Poor people are not just personally poor, they were raised by poor parents who taught them different values, albeit seemingly dumb ones (though I know a lot of poor people who are wayyy happier than a lot of wealthy people I know following the note card). They were taken to crappy schools, if their parents took them, or made them go at all. They were fed all sorts of unhealthy food their whole lives. They're lied to relentlessly by businesses saying things are healthy, will help them, or are good decisions (always campaigns run by wealthy people taken advantage of poor people).
They have everything around them working against them, and some dumb, naive, asshat, born to the middle class, thinks (s)he was poor for a little while and it was kind of enlightening and fun, ignorant guy telling them to put money in a 401k. Will it put rims on my car, because that would make me happy? When I'm 65? Fuck that.
Try earning federal minimum wage and providing for 2-3 people. You cut the crap out early. But your car that you need to get to work still breaks down. Your SNAP (don't know what they are? you've never been poor) benefits still run out too soon. And you and your kids still get sick.
That notwithstanding, what advice would you naysayers like to see on this card for poor people? Is there anything that simply knowing is going to help them?
This card contains all the major points of advice a poor person can use about finance. Whether that is enough to save them is a completely different question. Raising it is not a valid criticism of this card.
#1 Convince all the rich people to do the last item on the card from the original article
#2 Try to get your kids to do something different than you, if you're earning $20k/year with no savings, no spouse and have kids it's probably too late for you to save anyway
It is being poor. If you want to define 'poor' or poverty as the UN defines it, then fewer people than you would suppose would be classified 'poor'.
When one loses one's source of income, one loses one's security. One is then eligible for state and federal benefits --for most intents and purposes, one has become poor --though perhaps not a destitute pauper.
Don't forget to tell them to let their babies die, those things are expensive. Parents too. Taking care of your aging folks can be expensive. Stop taking care of your parents. Any happiness you have now is because you're in the thick of a poor decision that is making you stay poor. Stop smiling, dumb shit makes you smile. Stop going to the doctor. Stop paying for vegetables, can food is cheaper. Stop the tendencies you developed by being raised by worthless, stupid poor people. Stop hanging out with your poor friends. Stop hanging out with your poor ass family. Stop being a fucking human being, open your poor, dumb fucking eyes and make a dollar.
Don't let your babies die, but really try not to have them if you can't afford them.
I never said people's poor decisions made them poor, I'm saying they can help get out of poverty by making good ones.
And if you have kids, yes, make a dollar. You brought life into this world and you have a responsibility. You can let your kids get stuck in a cycle of poverty by feeling like a victim or you can bust your ass to try and get them out of poverty. If I had a child in poverty I wouldn't be smiling, because I'd know that I brought life into this world at a disadvantage and I'd work my ass off until I did what was right. So you can keep telling poor people that they're helpless, or you can, like I do, believe they have a great perseverance and aptitude that they need to tap into and provide a better life for their children.
I'm not saying they need to do it alone; quite the opposite - we as a nation need to believe in the ability of our disadvantaged to become productive members of society and promote programs to help them get there. But we do not need to act like any nudge towards taking matters into your own hands is an implication of blame. It is not. It is a suggestion that betting your children's future on government intervention is a colossal mistake. I'll vote for legislation that enables the poor, I'll pay higher taxes and donate to 401cs and get the word out, but there is no single greater factor in the equation of your children's happiness than you yourself.
Now that sounds more sensible, and I agree completely that ultimately you can only help someone who wants to be helped.
Your earlier comments were showing that you don't understand the poverty problem at all and you don't know how to motivate people at all. The problem is not that poor people are constantly choosing to be poor, or making no choice and allowing themselves to fall into poverty, but that they are raised in poverty. Being raised poor means all sorts of things: you are taught poor values by your parents, you likely get a terrible education, you likely only have access to be friends with fellow poor people, you probably eat poorly, and worst of all your poor parents and poor friends have reinforced your entire life that these poor decisions you're making are actually good decisions.
You will never accomplish anything (or sound smart or practical at all) by slapping individuals in the face and telling them to make better decisions. They're told that these good decisions us well off people make, by their friends and by the vast majority of us well-offers, are actually making us terribly unhappy people (and in a lot of cases they're not wrong). The only way real change can happen is by addressing the cultural cycle of poverty, and by supporting, positively teaching, and motivating these people to make better decisions.
> Don't let your babies die, but really try not to have them if you can't afford them.
This is outrageous. Parenthood is one of the most (if not THE most) meaningful parts of being human. Financial issues should NOT take this away from anyone.
I don't think it's outrageous at all. I agree with you that
> Parenthood is one of the most (if not THE most) meaningful parts of being human
But we cannot ignore the fact that raising a child is extremely expensive, and children raised in poverty often have very negative outcomes. He's not saying poor people aren't allowed to have children, he's saying it's a good idea to try not to, because of the likely poor outcome of a child born in poverty.
Poor outcomes such as the child being unable to graduate from high school, or go to college. Repeating the cycle by having a baby in high school, dropping out and probably to raise a high school dropout as well. No one is saying this is always what happens, or that poor people aren't allowed to have children. We're just saying it is not a good idea to have a child unless you're financially stable enough to raise a child with a better outcome. There are obviously plenty of exceptions to the idea that a child born in poverty will have a bad outcome, but the majority outcome is negative (in terms of economic achievement, social mobility, etc).
Then you'd be amazed at what the government defines as "poor" now. Using data from the Census Bureau, the Department of Energy, and many other federal agencies, see this detailed report (tons of charts, numbers, and links to sources).
Yes, the last items are luxuries, if you're going to complain about poverty. Heck, I'm middle class and I don't have any of those three.
Let's talk about food, too. From the report:
Temporary food shortages have increased during the current recession but still remain atypical among poor households. During 2009, less than one poor household in five experienced even a single instance of “reduced food intake and disrupted eating patterns” due to a lack of financial resources.[26] Strikingly, only 4 percent of poor children experienced even a single instance of “reduced food intake and disrupted eating patterns” due to a lack of financial resources.[27]
Regrettably, most discussions of poverty in the U.S. rely on sensationalism, exaggeration, and misinformation ... an effective discussion must be based on an accurate assessment of actual living conditions and the causes of poverty.
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This is all to say, with concrete data, that people we consider "poor" tend to have the essentials and then some.
> Then you'd be amazed at what the government defines as "poor" now.
What the government defines as "poor" is irrelevant to the substance of the criticism being raised here. Words have different meanings in different contexts.
Is someone who decides to live in the wilderness poor? No steady source of income, access to medical care is remote and non-trivial. But, on the other hand, they may have a small savings account.
I think it's still being poor, given the insecurity. Even if it's a conscious and choice they made but could work out of.
As a direct example, my parents are both poor. They are retired and their total pension is about $400 a month... which they mostly spend on smoking and coffee. Oh, and they also have four TV sets (my father has an obsession).
Ok, so I can afford to supplement that income somewhat; but saying that they couldn't save is absurd.
Honestly, when it did become so evil to give honest, practical advice to the middle class?
The wealthy have been sufficiently vilified that we now have to crucify those not born into money, bu starting to do okay?
This was a very reasonable & practical post with good advice for those starting to come into money. Why is that so bad? That type of advice can't be dispensed without a holistic social program? That's total bullshit.
Get over yourself. What is total bullshit is entitled twats like you mentally rewriting the article so it's not "all the financial advice you’ll ever need" as claimed but "all the financial advice you’ll ever need if you're in the minority and an up and coming middle class wage earner who has sufficient disposable income to act on the advice".
you are wrong. I was saving money in an IRA when I had a salary of 25k. 2011 Median income was $50k. That may not be much in the SFO and ATX and LGA's that HN populates, but for the majority of the country where the majority of the population lives, that is a good salary.
I know that HN is full of tech people who think that six figures is slumming in SFO, but you are desperately out of touch with reality. If a family of five (my dad, mom, and us kids in the 80's) can set aside money money on $22k a year, then the median family at $50k can set aside money in 2013.
Well, you can have money in there...it would just be a taxable event when you do the conversion to a Roth, so you have to keep in mind that your taxable income will go up by the amount that you did not have a "basis" in.
You have food stamps, cheap oil and electricity, unemployement smaller than 10%, and if you are homeless you can move to a state that doesn't have winters capable of killing you.
People in Eastern Europe save money and 50% of Americans can't?
Budget to save before you outlay your discretionary income. You might have to redefine discretionary to include car (if public transport suffices for your job), cable, etc.
Don't lay out your budget and set aside $x for entertainment (eating out, etc). Savings will always suffer. Set aside desired savings first and then work with what's left.
Hear hear. I can't repeat this point enough. You have to force yourself to save, first. If you spend on everything else first and figure you'll save "the rest", something will always come up. If you set it aside before other categories, it will ... be set aside!
As a corollary, just writing (and following) a basic budget does wonders. I've talked to a lot of people who said it was like getting a raise. You have regular expenses, so just plan out a basic month and then follow it. Something magic happens next: by being more conscious and deliberate about your spending, you spend less on un-necessary "wants" (if it's truly a need you'll spend it no matter what).
Plus, a written budget is like looking in the mirror: it's a reflection of your priorities, good bad or indifferent. If you see you're spending $300 / month on restaurants and $0 / month saving for retirement ... well, that shows what appears to be important to you. And, if you've got two brain cells to rub together, it shows an easy place to make some adjustments. Not that I have anything against restaurants ... even $200 and $100 would be far more reasonable.
The last line of the card is for those who aren't. Otherwise, they need to grow their income, because nothing you do is going to fix the problem if you are making 15k per year.
If you fall below those limits, do you really need "financial advice?" If you're making below, say, $60k/yr -- and you're still young enough that what you do with your long-term investments can serve to multiply your returns -- then what you probably need is not financial advice, but bootstrapping advice. Starting with "go to school for STEM--or finance, if you can."
Almost all of this is excellent advice, except for one point: "save 20% of your money". That's a bare minimum, which will let you retire after about 37 years of working. Bump it to 35% and you'll retire after 25 years. Bump it to 50% and retire in 17. Bump it to two-thirds and retire in 10 years.
That's one of the most important factors in your personal finances: not how much you make off your investments, not whether you max your 401k, but how much of your income you save and how much you spend. The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".
The idea that >20% savings rates are not "realistic" is a serious mindset problem. Almost anyone on Hacker News with a paying job (i.e. not an early-stage no-funding startup) should easily be able to save much more than that. Sure, saving two-thirds of your income might be out of reach, and even the 20% advice is better than most sites that often say 5-10%, but consider carefully whether you can increase it and retire years earlier (or become effectively retired, in the sense that you no longer depend on having an income).
EDIT: "Almost anyone on Hacker News". Yes, 20% would be significantly harder on minimum wage.
Even if you're a "rich" software engineer, the advice is overstated. You need to make a lot of money (or be really lucky in the stock market) to have a 66% savings rate lead to any sort of real retirement in 10 years.
Say I make $100k gross per year. That's a very nice salary for a new grad engineer -- the kind of person who might take this ten-year-retirement advice to heart. Roughly 1/3 of that income goes to taxes, so I'm actually taking home $66k per year. If I save 66% of that, I'm saving ~$44k per year. These numbers can shift a little depending on where you live, how you save, etc., but they're not going to change by a huge amount.
Multiply that $44k by 10 years, and you're not even at half a million dollars. That's not retirement money (unless perhaps your "retirement" is to continue to live off of $20k/year indefinitely and die young from eating too much ramen).
The other half of the equation is finding investments that return a reasonable yield without betting the farm on timeframes <= 10 years. In this market, that's nearly impossible. Your choices are stocks and bonds (which are fine, but are risky on anything less than a ten-year window), or investments that don't yield anything.
"a 4% rate of return, on average from the S&P 500 index is reasonable."
Not if you're depending on using that money in the next ten years. Or if you believe in inflation.
A 4% rate of return from an index fund is long-term average behavior, not instantaneous yield. Historically, depending on when you entered the market, a ten-year outlook could have led to anything from a huge gain to a huge loss. If you're the unlucky investor who started saving 66% of your income in the stock market in 1999, you'd still be putting off your retirement today.
Also, your definition of "king" is pretty context-dependent. I can assure you that 25k will not allow you to live like royalty in San Francisco. Or, say, if you have children. It's a difficult concept to grasp when you're in your 20s, but most people do tend to reproducing by the time they're in their 30s. Oops. There goes that 25k retirement...
If you lose your nest egg in year 10 because the market takes a dump, guess what? You're not retired anymore.
It's why real-life retired people don't put their entire savings in the stock market. Retirement funds tend to have most of your money in fixed-rate securities by the time you actually quit working.
If you had enough money to live off for fifty years, the market taking a dump isn't going to wipe it out. Especially if you invested part of it before the market got high, and your total without accounting for dumps would have lasted seventy years.
I started retirement investing in 1993. I did an APY analysis where I pretended I invested every one of my retirement contributions into the S&P-500, on the day that I invested it. From then until today, that APY would have been 6.77% . That's a far cry from 11.26% .
Did you include dividends when calculating that percentage? I have not done the math, but my intuition tells me that 6.77% is a little low. 11.26% is also high for that time period--I think that figure includes the post-WWII figure (and also includes dividends).
Yes, definitely - this is all based on the "adjusted close" values from yahoo's historical data feed.
This is interesting - I've shared this multiple times in other discussions like this, and a comment like yours is always the first response, that it seems low, questioning if I included dividends. If anything it might just underscore how our collective "societal" intuition might be a bit off in terms of long term retirement performance.
I think part of it is that people tend to contribute more to retirement when times are good, since they have the extra money, and contribute less when times are bad since they're just getting by. The problem is that the market tends to be high when times are good, and low when times are bad. So this will naturally depress performance for everyone. It's impossible to contribute a consistent amount every week/month without having a cash buffer (which would depress performance anyway).
I agree that his definition of "king" is pushing it, but it's equally silly to ignore the possibility of retiring in any of the cities in the US that are cheaper than San Francisco, i.e., in any of the cities in the US that are not San Francisco and NYC. Honestly, in a middle-of-the-road city like Houston and with full ownership of a car and home, $25k net per year would actually give you a pretty comfortable life--remember that you wouldn't have to save any of that for retirement, because you're already retired. The main hitch is health insurance and/or kids.
Also, Firecalc is a good tool for running withdrawal strategies over historical data: http://www.firecalc.com/
It gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years. Obviously, though, there is no 60 year period starting in 1999 for which the data is fully known, so it has its limits and can be prone to overfitting. It does take inflation into account, by the way (by increasing your withdrawal correspondingly each year).
I don't disregard the possibility of retiring in cities other than San Francisco -- I just dispute the notion that a $25k/year "retirement" is anything but silly dreaming by 20-somethings who don't understand what choices life is going to bring their way. Want to have a family? Want to send your kid to college? Want to be ready for the day when you're old and paying for medical problems? You're not living "like a king" on $25k anymore.
"[Firecalc] gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years."
Well, again, you're not likely to accumulate a $1M portfolio in a decade on a $100k salary without a nice helping of luck. And not for nothing: that 60-year period encompasses the largest bull market(s) in US stock history. Past performance definitely does not extrapolate in this case.
4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years.
RETIRING in San Francisco would be a massive mistake. If you are retired why the hell are you living in a uber-expensive city. Location matters less when you don't have a job. Move up to Oregon.
Also if you decide to have children, that is a conscious decision you made to dump your millions down the toilet. I guess some people like kids enough to work an extra 30 years. I sure don't.
"4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years."
It's only "conservative" if you don't understand variance.
The risk isn't in the value of the average. The risk is in the variation around that average. Like I said: if you invested 66% of your net income in the stock market in 1999, you'd be a long way from retirement today.
And if you're tempted to keep arguing this point, you might want to take a moment to consider how I know this. (Hint: the reality of a great many investors trumps your theories of how the stock market works.)
Not all stocks offer dividends, and not all investors choose stocks with dividends (there are tax disadvantages to returning value via dividends rather than via appreciation of stock value.) Dividends offer a lower risk component of return, but typically in a diversified portfolio you can put some share of the portfolio in a lower-risk investment to have that lower-risk component.
So, for growth focused investors that aren't risk sensitive, dividends can be a negative feature, and for investors that are risk sensitive, they aren't essential as there are other ways to tune a portfolio around risk. This makes, at best, only a weakly positive net incentive, and more likely a negative net incentive, for firms to offer dividends.
It's not about assuming that your 60's are better than your 20's. It's assuming that having 7 dollars inflation adjusted tomorrow is worth not having 1 dollar today. Clearly, the higher your savings rate the sooner you can retire but the lower that multiple becomes.
More importantly when something bad happens you both have a cushion and a cheap lifestyle so it can last.
A good-sized retirement isn't just for fun. It's to work against inflation and maintain financial security / independence, it's to prepare for potential catastrophes, and it's also to prepare for your declining years.
Actuarial tables show if you make it to age 40 you have a very high likelihood of making it to 80 or 90. Statistics show that the last decade of your life - thanks to health care needs or assisted living necessities - is often more expensive than any other decade of your life.
That's absolutely important to plan for in your 20's and 30's when you have the time (and energy) to make a difference.
And at the same time, saving nothing in your 20s and 30s. Having all the fun in the world, and then expecting the government to take care of you when you are old is also a very serious mindset problem.
Yes, >20% is viable for Software Devs. Ask someone making minimum wage with no benefits to save more than 20% of their income and they will laugh at you.
>The idea that >20% savings rates are not "realistic" is a serious mindset problem. Almost anyone on Hacker News with a paying job (i.e. not an early-stage no-funding startup) should easily be able to save much more than that.
You know that 50% or so of HN readers are not in the US, right? Some have to do with $300-$1000 a month (or less), with the same costs for food and costlier computers, clothes etc -- oh, and 3x the price of gas. And renting some small-ish appartment.
The savings part sounds like advice from Mr. Money Mustache, there was discussion about his advice here before.
"Never borrow money" would include never having a mortgage, which would be a huge lost opportunity for many. Not to mention borrowing money to invest in oneself, start a business, etc.
A mortgage is one of the few exceptions, and even then you should carefully consider whether renting or buying makes more sense. A car, notably, is not a good exception.
Education depends heavily on return on investment; you'd want to carefully analyze how much more you'll make with that education, how long it'll take you to pay off the debt, etc. It can certainly make sense when attempting to bootstrap yourself if your alternative is no higher education at all, but if you're in a financial position where you have to borrow for tuition, you may well qualify for better options such as scholarships. If you're reasonably well off and borrowing to go to a higher-end school, that makes much less sense.
This advice seems to completely gloss over one key fact:
You have to live somewhere.
Seriously- if you didn't, buying a house would be a terrible investment! But you do, so the cost of owning a house needs to be compared to the cost of renting, instead of being discussed as a normal investment.
Not sure why this is being downvoted. If you don't get mortgage, the presumption is that you aren't going to buy a house outright, either. You're going to rent, which isn't exactly an ideal situation in the long term.
Haha yes, if you can buy a house outright, definitely do that.
Unless, of course, you can land an incredibly low interest rate on your mortgage and have something interesting to do with your capitol, like fund your business.
People frequently get themselves into serious financial trouble by borrowing money to "invest in themselves" or "start a business." On a case-by-case basis, these may actually be sound financial moves, but there are whole industries built on suckering people into making "investments" that aren't financially prudent.
It's not quite that simple. What you need is a savings rate that is far above society's average in order to be ahead by that much. For US, that's relatively easy, but for many cash-heavy economies it is not. If your country propensity to save is 90%, getting to 99% isn't all that groundbreaking.
The other thing missing is to take calculated risks for higher returns. For example, if you see housing starting to recover, picking up a distressed rental is smart. Provided you know what you are doing.
I recall a while back someone posted here about picking up semi-abandoned apps that were generating some cash flow, sprucing them up and letting the revenue drip in. Again, this works if you know what you are doing, but won't work for average Joe.
"Never borrow money" excludes Smart Debt: Debt someone else pays for you, such as Investment Property, or Big Business (not small business. This definition of Big Business is where you have a controlling interest and you can leave for 6 months and business is even better).
It depends on how quickly you wish to generate wealth. Leverage (OPM, OPT) must be used wisely, but significantly speeds up the process.
Basically the thought is that 20-25 years of living expenses will generate enough income for you to early retire on.
If you make 100k (post tax) with a 20% savings rate, you save 20k, and have living expenses of 80k. Ignoring future compound growth, for each year you work, you save 1/4 a year of living expenses.
If you go the other extreme, and have 66% savings rate, you save 66k, and have living expenses of 33k. With 33k living expenses you need 660k to retire. Each year of working you end up with 2 years of living expenses. Even ignoring the effect of investment growth before you retire, that is only 10 years of working.
Of course 20 years of savings maybe be too optimistic. The book is good and has more details.
I'll have to read the book for more but the math you explain seems incomplete. The earlier I retire, the more would be my expected number of years in retirement (assuming a given life expectancy). If in one scenario my retirement is 40 years away and I need to save for 20 more years, then in he other scenario where I retire in ten years, I need to save for fifty! That's a factor of 2.5 in this example!
Ignoring growth rates and inflation is also a huge simplification. E.g. 3% yearly growth doubles your money in about 24 years. So it may again be a factor bigger than two between the two scenarios above.
I think the idea is that if you have a large pile of money and take out a small portion of it each year to live on, due to growth the money will last indefinitely.
So if you have 25 years of living expenses and each year take out 1 year of living expenses, that is 4% of your money. If you earn ~4% a year then your account balance stays the same.
Personally I think it would be foolish to plan on retiring with only 20 years of living expenses. However some people also plan on holding a part time job at least in early retirement.
Ironic "Never borrow money" shows up here considering the start-up orientation of this site... Small business owners are a cornerstone of capitalism and our economy so we should incentivize people to take risks when they can.
What's the interest rate on the debt, and how much are you making on your investments? To a first approximation, you can treat the debt as an investment with a guaranteed rate of return. If you have debt that's not at such a ludicrously low interest rate that it makes sense to hang onto the money and invest it (rare), then your savings should be going straight into paying off that debt.
The savings rate still applies; it determines how fast you can pay off the debt. If you can reduce your spending and increase your savings rate, you'll pay off the debt that much faster, and the same principle applies once you've paid it off and started investing.
Recent college grad and young working professional here. I graduated with ~$25k in student loan debt 2 years ago and am due to pay it all off by April 2014. I struggled with burning question, as well.
The general advice I got was that if the loan interest rate is less than 6%, you're better off investing the majority of your excess cash into something like an index fund since it theoretically will give you >6% gains.
However, I hate the stress, mental overhead, and risk involved in owing somebody money, so I decided to automatically save 10% of each paycheck (set up direct deposit to funnel 10% to a separate savings/investment account) and essentially contribute as much as possible after that to student loans.
I'm happy where I currently am - almost out of debt and with a non-trivial amount saved up. The key for me was automatically moving the first 10% to savings then setting an ambitious goal each month to put toward debt. Good luck!
Good job! After years of putting around with debt, I have kept a promise to myself that I wouldn't get into debt unless it was under dire circumstances. Peace has value, in my opinion. Not having to worry about debts and payments really frees my mind (and my funds) for other things.
I'm not one for biblical citations, but "the borrower is slave to the lender" always gets to me.
Never borrow money? You've just completely eliminated car ownership for a good chunk of the middle class, and homeownership for pretty much everyone but the very rich. That's probably a defensible position, but it's definitely not normal financial advice.
If putting $7,000 away for retirement right now nets you more by retirement age than the lifetime cost of a car loan, you should take the loan.
I've owned cars since I was 17 year old, and never had to borrow money for a car till I decided to buy a brand new car years later Since then, I've decided to do the following: So you make "car payments" into your savings account every month, and after 1 - 3 years you can get a usable or very nice used car. Then continue to make car payments into your savings, and 5 years afterwards you can get a brand new car -- one that will last you for 15 years (at least). Then, in the last 5 years, do the same thing if you want to continue to drive new vehicles.
Buying brand new cars is not good financial advice either. Instant depreciation, no time for problems to blow up in someone else's face first, tiny longevity gain over buying a 2-3 year old car for drastically less.
Oh, I agree with that in general. I've just never been able to get a 2-3 year old car to be worth keeping for more than another 3-5 years (either previous owner got rid of it early because it was a lemon, or didn't take care of it [oil changes, garage kept, easy driving, etc]). Whereas a car I've owned from day one (since year 2000) has only needed minor repairs (most of which I do myself, except when the fuel pump went out far from home). Once it starts costing me more than a couple thousand a year for repairs, or becomes unreliable, it will be time to trade up. If I keep it for a couple more years, it comes out to about $1500 a year. Heck, I may keep it for 20 years. I just can't see me wanting to keep a car I bought used for 20 years though (or till the car is 20 years old even).
Human beings are not perfectly rational automatons. Sometimes they want brand new stuff.
I have a friend who is 15 years older than me and very financially savvy. He grew up in India in a poor family and his father spent all his free time repairing their ancient clunker that kept breaking down. That memory is enough that he only buys new cars.
Why would you want to retire in 10 years? Isn't that like saying you hate your work? I enjoy my work, and am working to make it more enjoyable. The idea that I would try to live like a pauper so I could retire in 10 years and not do anything seems kind of strange.
If I retired, I would just find another job or career to make stuff.
Just because you have enough savings to retire doesn't mean you have to retire; it just means you have the option to. And "retire" doesn't mean you have to stop doing interesting work, either. You could keep working an existing job that you enjoy knowing that it's completely optional for you, or you could spend 100% of your time doing work that doesn't necessarily pay (e.g. a startup, or working on random Open Source projects that tickle your fancy).
Net. Gross is uninteresting for almost all purposes other than pre-tax investments you can make; just write off taxes as a drag force and pay attention to what fraction of your net income you're saving.
The important detail about increasing your savings rate: it also means decreasing your spending rate, and you can retire as soon as your savings generates income greater than your spending rate, not greater than your overall income.
It would have to be net. Your tax situation determines the conversion from gross to net, and can vary wildly from person to person making percentage rates based on gross too variable.
While you should of course do what you can to reduce taxes, that's so complicated it warrants completely independent dialogue.
One of the recommendations is actually wrong, and in fact outright harmful.
"Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds."
Yeah, no. Mutual funds, even those by Vanguard, have high expense ratios, and there is absolutely no evidence that they outperform their equivalent index funds. Jack Bogle, founder and retired CEO of Vanguard, himself recommends index funds over mutual funds for this reason.
And, the idea of the target funds is that they become more conservative as you reach the target. The pure index funds do not. So they are basically index funds with portfolio rebalancing.
Vanguard Target funds are nothing but a collection of passively managed index funds. The ER is slightly higher than doing it a la carte, but it re-balances without having to worry about it.
it is only higher if you qualify for admiral shares in all the funds contained in the target fund. With the current case of most target funds having a 2% holding in International Bonds, you would need to have $500,000 invested to make it cheaper to buy the individual funds.
Yes, Vanguard is a lot better than others in this regard, that is true. But the fees are still higher. Automatic re-balancing is nice, but it's not like balancing a portfolio is anything to "worry about" once you figure out the basics (which you should).
There's also the fact that not everyone's 401k is offered through Vanguard. For example, if you're stuck with Fidelity like I am, then you will definitely need to avoid their mutual funds and choose their index funds instead. (With 401k, you cannot pick a fund outside of the broker that manages it.)
Scott Adams, the creator of Dilbert, has a similarly good set of advice:
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401(k) to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and you can afford it.
- Put six months’ expenses in a money market fund.
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
- If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) ( hire a fee-based financial planner, not one who charges a percentage of your portfolio.
Typically fee based advisors charge a percentage of assets under management. The is opposed to traditional brokers who charge trade commissions. There are few who aren't paid based on AUM.
I consider it to be a huge oversight that they left off building an emergency fund.
Before buying a house, buying individual securities, or maxing any retirement contributions, you need enough liquidity in your investments to get you through an illness or layoff that leaves you without income for a year.
It amazes me how otherwise intelligent peers of mine will be paying extra on mortgages, student loans, and retirement funds with less than $5k in the bank.
I said you should have enough liquidity to get you through a year-long crisis. If you're saving 20% of your income, you're probably.
However, unless you have especially nasty rates on student loans, paying them off shouldn't come before accumulating some fairly liquid savings. The same probably goes for paying extra on the principal on your mortgage and maxing out retirement plans.
That sounds wrong. An unexpected year-long unemployment isn't unheard of, but for an already-employed investing professional (i.e. not a recent entrant/re-entrant to the employment market who wouldn't be able to take this advice anyway) it's really quite rare. Certainly it's not true that most people "need" to do that, as it won't happen to them.
This sounds like the kind of failure mode better addressed by solutions like insurance instead of upfront savings.
In broad strokes, the more specialized your skill, the harder it will be to find a job that meets your salary expectations. Sometimes this will mean moving to a new city or being unemployed for over a year. Sometimes this will mean taking a pay cut, which means you'll need some cash to break a lease or otherwise see you through downsizing your lifestyle.
Also keep in mind that it's huge to have 6 months of expenses easily available while evaluating job offers. You're much more likely to settle when you have to worry about paying your mortgage next month.
Both of these replies are speaking to the social issues. Yes, people can lose their jobs, and it does happen. My point was quantitative: it happens rarely, and so addressing it with individual savings is a poor choice for the same reason that we don't pay for catastrophic health care out of savings. "Insurance" is a better social tool, as it requires far less capital be tied down.
And that insurance is readily available in the market, if the duck on my television is telling me the truth.
2008? Lots of well-established, middle-aged homeowner professionals became unemployed for long stretches. The unemployed college graduate narrative gets a lot of play in the media because it challenges assumptions (i.e. that a college degree means you're set for life) but professional middle managers got hit pretty hard also.
Think of maintaining a smaller emergency fund as a form of risk-taking. Every form of investment is a risk, so we are hardly new to risk-taking here.
For example, I keep a very low cash balance and divert most of my surplus to investments. This is partly a gamble, in that I may be forced to sell at a less than ideal time, and partly a credit-backed risk in that my credit cards provide me a buffer large enough to liquidate most of my investments.
You can get your contributions out of a Roth IRA at anytime. That gives me tens of thousands of dollars I can get to in 24-48 hours. It also helps that retirement accounts are shielded from creditors, and hence make better vehicles as emergency funds when you've done sometime like walk away from your underwater home.
Am I alone in wondering if the advice about broad index funds is no longer good?
We're still below the s&p inflation adjusted high from ~2000 -- almost 14 years later. When will the gains finally arrive?
I worry that there is some systemic problem in our economy that has leaders playing whack-a-crisis every five or ten years that erases years of gains.
I've read John Bogle and I want to believe. But a few years ago I took some money out of index funds and placed it in a rental property and so far I've seen very predicable returns with no loss in principle, and it makes me wonder if I should keep bothering with index funds at all.
We're still below the s&p inflation adjusted high from ~2000 -- almost 14 years later.
Only if you're looking at the price index. The total return index -- including dividend payouts -- peaked at 2108 in September 2000, and is now at 3027. After inflation that's a gain of 6%, for a real return of slightly under 0.5% per year... but hey, at least it's positive.
It's barely positive if you compare the two points. However, if you have investing regularly via your 401k (etc), you also bought in during the low periods. So, your gain would be much more than just minimal positive.
You should always compare your rates of return on different types of investments. The advice about index funds is (to my knowledge) primarily rooted in the fact that index funds typically outperform mutual funds, with lower management fees to boot. Not a claim that index funds are the strongest investment.
Also worth noting- can rental properties ever be included in blanket investing advice? Investing directly in property requires either a group of investors or considerable capitol- both, really. Stocks and such are popular in sweeping advice because anybody with two nickels to rub together can acquire stocks.
Rentals are much more risky, as the housing crash demonstrated. If you really want to benefit from that market, buy a REIT unless you actually enjoy the work of being a landlord.
The gains are here now, and I'm more concerned about a bubble personally. Vanguard's total stock market fund has year-to-date growth of ~17%, and their more-stable lower-growth "balanced" fund with bonds included has year-to-date growth of ~8.75%. Both of those are better than the usual estimate of 7% annual growth for retirement funds (a conservative 3% for inflation and 4% for income).
I also question the advice to max out 401K and IRA contributions. Recent events in Cyprus, Argentina, and some other places have made it quite clear that such money is far from safe. If there's a fiscal crisis and the political class is backed into a corner, they will seize your money. They'll do some sleight of hand to claim you're getting an equal value retirement annuity, but that will be a lie.
More generally it seems like all pop financial advice is based on the premise that the next 40 years will look much like the last 40 years. Historically that's been a bad bet. For example, you never hear about hedging for a deflationary crash, because that's unthinkable given recent history.
Did either Cyprus or Argentina seize any defined contribution pension funds? I was under the understanding that only defined benefit pension funds have been raided. I can't think of a single exception.
401K and IRA are defined contribution pensions. Repricing financial instruments can affect those greatly, but I would argue that those are accurate reflections of the value of the investments.
I trade in individual securities, but I put in the time to learn about the companies, the industry, and so on. Also, having taking econ, accounting, finance, and statistics in college helps.
Professional traders have been known to put in the time to learn about this stuff too. Don't fool yourself. You might make some good bets. You might make some bad ones. You're not going to systematically outperform a market as an individual investor by anything but luck (or plausibly by chasing a "hunch" based on good intuition and evidence that the professionals missed -- but don't fool yourself, that's luck too).
I have consistently outperformed the market since 2007, when I started investing (I refer to the market as the DOW).
Just because the average salary in the United States is $57,000 (random-ish number) does not mean that's what I have to settle for because it's the average. If I put in the time, work smart, work hard, and keep learning, then the expectation is that I can beat the average income. Likewise, I can beat the average market by putting in more time, more effort, more learning, than the average investor.
I tried forex for 2 years, and did poorly, so I stopped, and learned my lesson.
I bet on Ford at 1.60. I bet on Tesla at 16, and 24. (not heavily mind you, just 2.5% of my portfolio). I research the companies, the management. I not only go to the annual report, but I also read books by the founders, read about their manufacturing (are they using lean like Toyota or lean like GE?). I went after Ford based on Mullally's performance at Boeing. I went after Boeing based on the 787's promises. (It's doing very well.) I read Deming.
I lost $900 in American Airlines, and $300 in Washington Mutual. I did lose $6K on a $10K mutual fund that went south in 2007-2008. It looked like it would recover, but then wasn't following the market up. I've made a lot less money with mutual funds that with stocks.
Granted, I've been riding a pretty nice wave since the drops of fall 2007 and mid 2008, but I don't blindly pick a stock and buy in. I'm very careful where I put the money, and will do 2-4 weeks of research on a single company.
I also research their competition, and business trends in general. This means I don't watch TV, don't watch sports, and will do one movie per month with my son. Instead, I read. A lot.
I do max my 401k because of company matching, but I'm not holding my breath on returns. There's an event horizon where it's better not to match and buy securities directly, because of the 1% or so fees. (You start out with twice as much, but you get less annual yield.) You don't pay taxes till you sell, and you can sell at a time of your choosing.
I don't day-trade, I don't even month-trade. I generally invest for 7-15 years.
Finally, I invest only my own money, and that is a very strong motivator for spending the time to do it right. (Small caps do slightly better than large caps--more risk, more return. Diversify.)
I agree with this approach. Keep the number of individual stocks you invest in at a manageable level. Know why you invested in them, and go long. IMO the longer you go, the less noise in the decision-making. Ex: Ford is at >$2. Will Ford go bankrupt, or will it survive? If it will survive, then it will be worth having in 10 years, especially if dividends return. In that case, you have based your risk on just one question that you need to settle to your satisfaction. A much more difficult question is: Will Ford be higher next year than it is now?
I also agree with investing in the management.
Finally, I think investing in some individual stocks is probably a good way to stay mindful about your investments in general.
Have you outperformed on a risk-adjusted basis (ie: delivered alpha)?
Or simply beat on an outright basis?
That time period, aggressive buying of nearly anything beat the DOW-30 (as my portfolio handily beat the DOW30 as well, since I'm full risk-on at this point in my life). I know I crushed the DOW, but I'm much less convinced that I delivered alpha.
You did that over a period that was a decidedly bull market, though. Presumably sokoloff's question was intended to point out that very similar strategies (trying to pick "winners") is likely to underperform the market in bear conditions, sometimes very badly.
I knew a lot of people who thought they were hot stuff day traders back in 1998 too. Spoiler: they weren't.
I went in in August 2007, when the DOW was at 14700 or so. I watched my portfolio dip from $27K to $18K. Everyone I knew was going cash. I didn't. I trimmed the sails, turned into the wind, and learned. There's no better learning that reading everything you can about the market when the market is doing back-to-back triple-digit drops in the 8000's, with your money in the game. I sold some pigs, bought some as they were going down. The best pickings were on the floor, BK at the corner, and people had written them off. I got lucky that I was buying when everyone was scared, but I didn't buy because the stock was low, I bought because I knew the companies had customers, long term contracts, good manufacturing know-how, good management, and made products their customers wanted. At that point, I reinvested another $25K in securities, from when the DOW was around 7500, and gold was shooting up, to about 10,000. After that, it was all growth, reinvestment of dividends, etc. I pulled $10K out in December 2012 (down payment on car), and had $61K in the portfolio after. This week, not really doing anything, it's at $99K. Yes, it's a wave, but like in surfing, you gotta be in the water to catch it. I have holdings in about 60 companies. My last trade was selling $1600 of Honda stock and buying $500 of Fedex and $600 of Toro, both adding to existing positions.
I also trade individual securities. I'm not quite as thorough as you, so I typically pick companies I am familiar with on a more personal level.
I don't expect to beat the market, and I don't put much into individual securities. However, I have fun and have been making modest returns. Besides, you'll never beat the market if you never even try shrug. Of course, with the portion of my capitol that I put in, "beating the market" makes me feel good, more than it makes me money.
It literally doesn't matter. I know you've convinced yourself that you are in some way better or smarter than everyone else, but you will not beat the averages unless you happen to get lucky. Your biggest mistake is assuming the market is a numbers game that you can win if you calculate things carefully enough. If that were true, all of the quants and hedge fund managers would be making there fortunes off of stocks instead of salaries and fees.
They are making their fortunes off stocks: other people's stocks. Or maybe they don't have enough capital on their own. Also, they are probably not as careful with other people's investments as with their own.
Seems like good advice, though a great many Americans are at a disadvantage because their employer doesn't offer a 401k. Even with no employer match, a 401k allows an individual to save much more money in a tax-advantaged account ($17,500 for a 401k vs. $5500 for an IRA). If you're a W-2 employee but your employer doesn't offer a 401k then you're pretty much stuck paying higher tax rates on any savings beyond $5500/year.
With no employer match, a 401k has ZERO tax advantages. Because it merely delays when your income is taxed: after withdrawing it from the 401k. Mathematically you end up with the same capital whether your pay income taxes today and invest post-tax money, or whether you invest in a pre-tax 401k and pay taxes later.
> With no employer match, a 401k has ZERO tax advantages. Because it merely delays when your income is taxed: after withdrawing it from the 401k. Mathematically you end up with the same capital whether your pay income taxes today and invest post-tax money, or whether you invest in a pre-tax 401k and pay taxes later.
If you are paying a higher marginal income tax rate now than you will be when you retire (before considering the income from withdrawing retirement investments), you are better off with a tax deferred retirement account.
If you are paying a lower marginal income tax rate now than you will be when you retire (before considering the income from withdrawing retirement investments), you are better off without a tax-deferred retirement account.
For most people, the former is more likely than the latter.
That's not true: the capital gains you accumulate are pre-tax, so your entire investment is taxed once, upon withdrawal, as income. With up-front taxation you still end up paying additional capital gains taxes at the end of the day on your total capital gain.
There are conceivable situations where you end up paying more in taxes, if your retirement income tax rate is higher than your current income tax rate plus your capital gains rate multiplied by the ratio of capital gains to the total capital.
I've spreadsheeted it out and using a 30 year timeline and what I most would consider an extremely conservative rate of return, you end up with about 15% total advantage. This can go up to 20 to 25% if you assume more aggressive returns.
Despite that, I hate the fact that your money is locked up and there is a severe penalty if you pull it out (except in a few situations, and even then the amount you can pull is limited.)
Is it worth 15% of your money for it to be truly your money? It is to me, but that's a subjective call.
> A Roth IRA almost always makes sense, which is why they are so limited.
A Roth IRA makes sense in two circumstances:
1) You have maxed out contributions to tax-deferred retirement accounts, such that the only options for additional retirement savings are Roth IRA or regular investments with no special tax benefits (i.e., post-tax contribution and capital gains tax on withdrawals.), or
2) you expect to be at a retirement-savings-excluded income esuch that the average tax on withdrawals from your retirement savings would, if taxed as income, be greater than the taxes you pay on current-year income. (Otherwise, your better off with a tax-deferred vehicle than a Roth IRA.)
That's not how it works. You pay last-dollar taxes on the money that would otherwise go into the 401k. You pay first-dollar taxes it when you withdraw at retirement. The first-dollar taxes are lower up to the tax bracket you'd otherwise be in if you didn't contribute to the 401k, unless you have additional sources of retirement income.
Mathematically you end up with the same capital whether your pay income taxes today and invest post-tax money
No.
___
Put $100 in an IRA.
[$100]
Quadruple your money by keeping it in an index fund for a couple decades.
[$400]
Pay 25% income tax on the money.
[$300]
Spend $300 in retirement.
---
Or,
___
Earn $100.
[$100]
Pay 25% income tax on the money today.
[$75]
Quadruple your money by keeping it in an index fund for a couple decades.
[$300]
Pay 15% capital gains tax on the $225 gain.
[$266.25]
Spend $266.25 in retirement.
---
But you could also tell this story:
___
Put $100 in an IRA.
[$100]
Double your money in some garbage high-fee actively managed fund your boss's boss picked out based on the quality of strippers the investment advisor hired when he sold your company the plan. Your awful 401k offered limited investment options and the rest were even worse.
[$200]
Pay 25% income tax on the money.
[$150]
Spend $150 in retirement.
---
But lobbying your boss to get low-fee index funds into the 401k plan doesn't fit on a card. It's still the kind of thing a wise planner needs to do sometimes.
Let's try with some numbers. First, let's invest $1000 post-tax, for a number of years, where we end up doubling (getting 200%) return on investment after a number of years.. Assume tax is 25%. So you are investing $750. Your return on investment is $1500, but that get's taxed at 25%, so you actually are getting $1125. Add that to your original $750 investment, and you have a total of $1875.
Now let's do this pre-tax money (401k). $1000 invested, with 200% return, gives you $2000 profit, or $3000 with the initial investment. Now take 25% tax out of that 3000, you end up with $2250 at the end. So you get a total of $375 advantage with the 401k route.
Oh, and during retirement, you will most likely live on a reduced gross income (you aren't paying FICA, your house is paid for already, and you also [might] get social security income). Which means, with our graduated tax system, your overall tax rate is less then, for an even better tax savings (you only pay taxes on the amount of 401k that you withdraw each year).
That's not true if your tax rate changes over time, which it probably will. Specifically, when you withdraw during retirement it is likely you will not be earning much and your tax rate will be much lower than when you were working full time.
If it is the case that you are going to move money around between funds then would the 401K would provide a benefit?Because you wouldn't have to pay capital gains tax every time you switch and have made money?
That's only true if you expect to earn the same amount (or more specifically, to be at the same tax rate) while putting money in as you will while taking money out.
Seeing the comments here about people is interesting. Whether it's in the comments or in reality, most people aren't conscious they are poor.
Poverty isn't a privilege reserved to those who live under bridges, or take showers once in a while.
Driving to work and back every day, stuck in traffic, getting home exhausted and not wanting to do anything is poverty.
It's amazing how many guys I know who start working and consider it a success and start spending cash, get a car on credit, get a mortgage and what not. They actually think that having an expensive car makes them rich, yet can't even afford a part of that car breaking. It's a disaster for them.
So, if you have to slave for a pittance (or not, you're slaving anyway). If you can't afford to be ill with some weird disease and getting properly treated for it without waiting social security. If you can't afford a good life for your children. If you can't buy something (a car, a house) without a loan and it still doesn't represent a good portion of your assets..
If you can't do that, you're poor. Poor in money, and most probably poor in time, too.
I don't know how good the advise is to max out 401K and other retirement account. Some of the 401K accounts have very limited choice of investment. For example, you can't do real estate investment.
If you know what you are doing, you might want to retain the money outside and do the investment yourself on investment that are not available in a typical 401K account.
Look at the costs associated with each of your 401K investment options. Usually, most plans include at least one that is not actively managed, and their management costs tend to be significantly lower. Additionally, but avoiding actively managed funds, you also avoid the "chasing the tail" syndrome that leads to almost all active managers under-performing index funds over time. Layer in the tax benefits of 401K accounts, and I think the advice to max out 401K and other tax-shielded investments, and to look for "inexpensive, well-diversified funds" is very good advice. If followed correctly (few do, from the sounds of the replies to this article), I think you'll find that the advice is sound.
I doubt anybody could construe a general opinion that's not tailored for a specific individual's situation as financial advice, if that's what you're getting at. Maybe it's different in Oz.
You'd be surprised. Our law assumes quite a large amount of potential uneducation and general stupidity when it comes to an unsophisticated investor interpreting financial advice.
What about non-US people? U.S. index funds are off limits to us, and European ones are hard to trust, and normally require a lot of difficult paperwork to get in unless you are a citizen of a particular country, and operate off a very localized, and very small equities market (say Austrian, however healthy Austrian economy is i find it hard to bet my retirement savings on it, especially given neither my income nor my expenses have anything to do with it). And yes, fees of those funds are way higher than Vanguard's, due to their small size.
With income in 7-figure range, one can buy commercial real estate, which gives decent returns and is a good replacement for exchange-traded equities. But what about others?
So in the ideal world everyone around you is doing the same thing as the card. If that is true, then when something goes wrong there will be plenty of safeguards already in place.
It takes a special kind of hubris to social welfare benefits believing you will never need them.
> So in the ideal world everyone around you is doing the same thing as the card.
That still doesn't constitute financial advice, unless your choice to follow the card somehow influences others to follow the same card, which is unlikely at any measurable level.
I think it is representative of the political volatility of many commenters here that they have chosen to interpret the last line as referring strictly to government programs. The world used is social, which could easily apply to, say, Masonic lodges, labor unions, or even (quite liberally) employer-funded disability insurance.
Not true. Those who are wealthy and happy give to charity, and not for greedy reasons or boastful vanity. Many charities provide a very valuable social safety net, and by carefully choosing what charity you give to, you can pick the ones that are the most efficient, the most effective, and the least wasteful. And no, paying taxes don't count ... you don't have a choice, there, and you can't personally ensure the money is spent to maximum effect.
That's not true. We are social creatures. If the people start behaving a certain way that exerts a very powerful influence on those around them to adopt that behavior. (Unfortunately, this phenomenon holds for negative behaviors as well as positive ones.)
Sounds like political advice more than financial advice.
In a similar vein, I would advise people to support charities that help the less fortunate like food banks, but I wouldn't consider that financial advice.
You are right it does seem more political then financial. Advising people to support charities would be financial advice, wouldn't it? I think its pretty good advice something like "Attempt to give 1% of your income to a good cause for when things go wrong"
Social insurance is a misnomer in this context. I was referring to short- and long-term disability insurance, which will cover you for many disaster scenarios.
Seems like a no-brainer to me. The alternative is to have people panhandling on the streets. That's not pleasant -- on either side of the transaction. I'd rather live in a country where it wasn't necessary.
It's not a no-brainer to me. My brain desires more data on the economic efficacy of specific social programs, because even the broad implication that social programs reduce the number of people panhandling on the streets is not obvious to me.
The card said "support social programs." It didn't say to support any particular kind of social program. Of course you want to go find one that is more effective than doing nothing. But that people should support some sort of (effective) social program so that individuals (and their families) don't have to bear the full burden of bad fortune, or even bad decision making, seems like a clear win for everyone.
> the broad implication that social programs reduce the number of people panhandling on the streets is not obvious to me
I spent two years hanging out with pandhandlers, so I can tell you form first hand experience: there are a few people who choose that lifetyle, but the vast majority of them would give it up in an instant if they had a better alternative.
I think it's too broad, because the economic efficacy of social programs probably varies wildly, especially when we're talking about government social programs.
> economic efficacy of social programs probably varies wildly, especially when we're talking about government social programs.
As opposed to literally everyone having to figure this out on their own? Say what you will about government programs, they're going to be more consistent than what you get pushing the problem out to millions of individual actors.
>they're going to be more consistent than what you get pushing the problem out to millions of individual actors.
There are data that suggest otherwise: Walmart, not FEMA was the best at doling out aid during Katrina; on the other side of the political spectrum, the same could be arguably be said for OWS during Sandy. On the other hand, if you're going to argue that the government is consistently bad at doling out aid, you may be right, but I don't know how good the government is at providing welfare or social services. I presume it's not exceptionally good, or else private food banks, homeless shelters, and charities wouldn't have to exist.
> There are data that suggest otherwise: Walmart, not FEMA was the best at doling out aid during Katrina
This isn't what I was saying at all: I was merely saying that consistency is the wrong angle to complain about. Efficiency is a separate discussion but the one thing a large government program will be is consistent – for better or worse.
> Say what you will about government programs, they're going to be more consistent than what you get pushing the problem out to millions of individual actors.
What I'll say is that I think this is a ludicrous assumption to make, for the same reason that it would be ludicrous to assume that government food distribution or automobile production would be more consistent than pushing the problem out to millions of individual actors.
Edit: Misinterpreted what a 401(k) is. I thought it was a tax-free savings account that you can borrow against, rather than a form of pension plan. The UK does have something somewhat similar: a personal pension scheme. The rest of this comment is wrong, but I'll leave it here for giggles.
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They don't really always exist. As far as I'm aware there isn't really the British equivalent of a 401k, for example. Brits have ISAs but they're just tax free savings accounts with an interest rate generally well below inflation. Cash ISAs also come with the restriction that you can only deposit a very low amount into them per year -- this year it's £5,760. You also can't re-deposit withdrawn money without that further deposit subtracting from your annual deposit limit.
The trouble with putting large amounts of money in a savings account is that it generally comes with interest rates that (even before tax) are less than inflation. Savings accounts are great for socking away money to cover temporary shortfalls in income, but not much else.
That is one thing I don't understand, is the advice to not borrow against your 401k. Lets say you have a 3-year auto loan, that is 7% interest. If you convert that to a 401k loan at 4%, that is a savings right there.
Oh, but that money you borrowed isn't getting any investment returns in our 401k (I hear people say). But it is -- it is getting a 4% return (what you are paying back in interest). And considering that a well balanced fund is going to have some amount in a lower fixed-interest investment, that isn't much of a problem (just rebalance the fund when you take your loan out, then rebalance again as it gets paid off).
The ONLY downside I see, is that you have to pay it back all at once if you lose your job, or face a 10% penalty (plus tax) on the loan balance.
The money that you take out of the 401k is no longer protected against creditors. (Someone borrowing from a 401k seems more likely than the average 401k holder to be at risk for bankruptcy.)
Some plans do not permit net-new contributions while a loan is outstanding. Even when plans permit it, the fact that you're borrowing on Thursday might not have you in a situation to make payroll deductions on that Friday. (This is situational, of course. If you're in dire straits overall, you might still not be making contributions.)
I'd consider borrowing from a 401k to buy a house, or to pay off credit card debts that were 15% or worse and that's it, full stop. Refinancing 7% debt at 4% seems not worth it, especially if you're taking money out of equities to do it.
Ah, I see -- it is a problem borrowing from 401k if you pay it back out of your existing contributions. Makes sense -- I've just never thought of it that way. To me, it only makes sense if you are substituting it for a regular loan, and not touching the contributions overall. In other words, if you are in a good financial situation to take out a regular loan, then a 401k loan could make sense also.
That's what Wall Street wants you to do. Reality is whomever manages the funds has only one short-term goal in mind: year end bonus. It's very common for traders to move on shortly after bonuses are given out leaving "cooked" books for the next trader to deal with. The plan is always to never get caught holding the short term strategy book.
I find the typical trader archetype to be repugnant. There's so much of it that goes against technical-minded people with even the tiniest sense of ethics. If you're financially disciplined you're better off investing elsewhere.
As some one who takes great meticulous care in planning and investing regularly, both for the long term and super long term(retirement savings), I can pitch in and offer some advice here.
First advice I would give is, totally avoid using credit cards. It might sound impractical, but I've found some workarounds for it. Which is to use my debit card as a credit card. Go frugal for a few days and save some money in the savings account, then use that money as credit to yourself. The worst thing about any kind of debt/loan is the interest part. Lesser interest you pay the better, except in situation where you are making an investment with the loan(like buying a property of a home) and the value of the investment is growing faster, when the at the same time inflation is decreasing your loan's net value.
Second advice I can give you is to buy your own home and avoid paying rent. If you look at the whole thing having your own home is vastly more profitable than renting some one else's home on a long term.
Then there are a few assorted advices I would like to give, especially to people in India(My country), But I believe it applies equally to else where to. Buy gold in small quantities regularly. Gold is protected from inflation, and is the near standard of economic growth around the world. And value of growth(over long term) always grows. Once you have sufficient gold- sell it and, learn to buy real estate in city outskirts. You will see in any growing city, sooner or later outskirts merge into main city areas and then real estate prices shoot up. Take loans to do this, if and only if the loan is small and as I said before, inflation affects your loan faster than, the rate at which its value grows.
Make the mandatory 1 lac per year(if you can't make as much as you can), tax savings investments on things like endowment insurances which serve as both life insurance and long term investments.
Its good if you could rotate money by building a home which you could rent out. It will serve as a steady source of income later and after retirement.
Lastly at the risk of attracting downvotes, please don't invest in stocks and show pointless heroics if you don't understand that business. Far more people have burnt their hard savings hoping for magical miracles to happen and make them millionaire while dealing in stocks. In short if you know how to do it, do it. Else keep out for your own good.
My friend... That sounds like some really BAD advice. Gold (even Warren Buffet warns against), Real-Estate (which is extremely risky, limits your job and movement flexibility), No Credit Cards (so you plan on having no credit history?), I don't even know where to begin. That's some terrible advice.
I am NOT suggesting you buy tons of gold or hundreds of properties. That's what Warren Buffet advices against, because in problems like sub prime crisis, the more you own the more you lose. That is a totally different scenario.
But I've seen millionaires being made and money being transferred through three generations in a family, only because some one invested in properties and bought enough gold when it was cheap and easy to buy, and later find it multiply. And people there hardly do enough work except for building more wealth through rents they get.
May be controlling a lot real estate is dangerous from a super super long term perspective. But by then, your great great grand daughters bones would have turned to dust and it wouldn't bother you least bit.
Gold, real estate, and kids. Nothing really beats these investments in a true sense.
Obligatory counter-comment - this is not true in a lot of markets, notably ones where a lot of HN people probably live like SF, NY. One must take into account many variables such as rent prices, house prices, property tax, your personal tax situation (in the US), expected duration of ownership (biggest factor IMO), etc.
Correction: Don't have a credit card bill to begin with.
Let the excuses and reasons for them fly, think whatever...fact is they are not necessary. While some smaller percentage of people can be responsible, for many it just invites problems. Don't get one in the first place.
Because doing a startup is not financially advisable to most people without a financial cushion. It may be fun, it may be thrilling, and it may work out better than your wildest dreams, but good financial advice for the general public it is not.
Replace 401K with SEP or Simple 401K, and I think the rest of the advice is valid. Also, consider the true cost of working for that startup. Stock with a startup effectively is valueless, and should be considered as such. If you can't save while working with a startup, or you have no savings as a backup if (and usually when) the startup fails, then you should consider a more traditional, established company instead.
this is nothing new... this is stuff straight out of the automatic millionaire by David Bach..wanna get rich? First step is pay yourself and get out of debt... then build up some solid investments.. real estate is a good way to build assets and wealth flipping or rentals..rentals for long term obviously.
Or do what 80% of us reading hn plan on doing ...build something awesome and get bought out for 10 mill.
It's different than REIT, not necessarily universally "good".
One obvious difference is with a house you get a collateral for a huge low-cost leverage, that in some cases might be easier to settle if things go South (e.g. shortsale). Another one is rent you save/collect from someone else.
I know someone who bought a 4 plex here in Dayton for $50k in cash, and earns 500 per unit ie 2k per month or 24k per year. Paid for the investment in 2 years, and is now earning 24k per year residual and bought another property for 78k.
Renting is a good investment if you can handle sourcing tenants and outsourcing or handling maintenance issues.
Even if a financial advisor meets the fiduciary standard, he or she may still not be looking out for your best interest. I'd say become educated, and bypass the advisor altogether.
A Registered Investment Advisor (RIA) is required by FINRA to commit to a higher fiduciary standard than a broker (the more commonly used investment advisor). I think that's what he's referring to. Of course, most RIAs don't cater to anything but high-wealth individuals. Things are changing, though, as the Internet is enabling a number of RIAs to cater to those with lower levels of investment funds.
I think with good domain knowledge and basic knowledge of economics and finance your average Joe can do better than the market. There's a lot of low hanging fruit in the stock market that a small investor in particular can grab because their size allows a certain level of under-the-radar activity.
I think you're a sucker for thinking the "professional" trader/analyst/bot on the other side is some kind of deity. Incompetence is endemic in almost every profession and finance is certainly not immune. The stupidity of so many big analysts is almost hilarious sometimes, I've made big predictions that counter the prevailing wisdom of 99% of people and I'm a total amateur. Like parent said, there's always low-hanging fruit out there.
For starters: when we talk about "the market" here originally we're talking about mutual funds + etfs.
Now back to the point. When I say average Joe I was probably understating things - I'm talking about your rational, generally college educated, sentient being. When I say basic knowledge of economics, I mean knowledge or intuition of how unemployment, interest rates set by the fed, and global events can effect the economy (mostly for getting out when things are tanking and jumping in when they are on the up and up). When I say general knowledge of finance I mean more specifically trading savy - types of trading (trend, value...etc), ways to trade (short, long, margin, leverage), ..etc. And when I say domain knowledge I mean generally the domain the person works in and can pick a winner from a loser.
Now with that knowledge, the fact that a small investor can make small moves and not effect the security itself, and subtracting management fees, you mean to tell me just because a finance company puts their stamp on a mutual fund that means they'll do better than me?
My returns and the returns of folks I know that fit that characterization disagree with you.
Buy and hold, not day trade, and I think you can beat the market. You don't have management costs. And buy and hold avoids capital gains that professional stock market traders will incur. You also have to do your homework--don't buy the latest fad, and don't chase performance (that's a guaranteed train wreck waiting to happen).
And, yes, I can beat the market. My 20-year investment history shows that I consistently beat the market. And, no, I'm not a professional stock market trader. I've worked as support staff at investment banks, and I can tell you first-hand that there are many reasons not to be a "professional stock market trader". The industry is a horrible place to work, and I'm glad to be out of it.
50% of the US population can't afford to put even a dollar into any sort of investment security. Of the 50% of the public that does own some sort of security, most of them are in the three-figures range. This index card, without realizing it at all, has targeted itself towards the top 10% of the population: people who have jobs with 401Ks, people for whom Roth IRAs will be useful.
In other words, if you are well into being one of the richest people in the richest country in the world, here you go - save 20% of your income, and so on. And you'll be fine!
So I'm just curious: suppose you aren't?