I’m no expert yet in the retirement side of things, as I’ve said before. But I’ve yet to come across any convincing reason to meet with a professional financial planner. It seems to me the info is out there, if you just go looking for it.
Retirement is still a lower priority for me right now, only because I have so many other financial fires I’m still putting out in my own life. But I knew I needed to be putting at least 10% of our income toward retirement, and I didn’t want to wait ages before I did it. So I did the bare minimum of research just to figure out where to put it. This is what I’ve concluded:
- 401(k)s are not always the best option for you. If your employer offers a match, it’s a no-brainer to contribute enough to get the maximum match, but if not, it seems like setting up your own retirement fund is better.
- If you do, there are traditional IRAs and Roth IRAs. Traditional ones are good for the tax benefit you get right away (the money you put into them can be excluded from taxable income on your returns), but you will have to pay taxes on the money when you withdraw it. And I think you get penalized if you withdraw before retirement. Roths are great because even though you pay taxes on your contributions, your earnings are tax-free when you withdraw them. And I believe you can withdraw your contributions before retirement without penalty, so there’s a bit more access to that money if you need it.
- Index mutual funds are the magic words when you’re looking to invest. If you can find a target-date retirement Roth IRA made up of index mutual funds and the cost is low (see further down), that’s golden because it gives you diversity in your investments and doesn’t eat away a ton of your growth. “Index” funds are typically cheaper and perform better than “actively managed” funds over time.
- The phantom costs of retirement funds are typically called “expense ratio” or “operating expense” and are usually expressed as a percentage. The lower the percentage the better. 0.18% is very very good; 1% is not great and you can do better; 2% is terrible.
- Vanguard, founded by John Bogle, is the birthplace of low-cost index mutual funds, and they’re still right up there in terms of low cost and good performance, as far as I have read anywhere.
So there you have it. That’s why I contribute to my 401(k) enough to get the maximum match, I chose the lowest-cost options my company offers. The rest of my retirement contributions go to a Vanguard Roth IRA target-date retirement fund, and I have the withdrawals automated so I won’t be tempted to not contribute.
But recently I’ve been asked for more in-depth advice about retirement investing, and honestly, I have a very thin base of research that I base my own strategy on. So I thought I’d round up comprehensive articles from reputable sources so I (and you) could look through them and see if we can glean any consistent info from them. I divided them up into two categories: best-performing index funds and DIY portfolio creation.
Best-performing index funds
Money 70: Best mutual funds and ETFs. This article is from CNN Money, which partners with Money and Fortune magazines. It’s their picks of the 70 best funds and clearly lists both performance and expense ratio, and I was pleased that my target-date retirement fund made the cut! It also mentions this at the outset: “Indexing is the cheapest and most reliable way to earn the returns that the market offers. And in the long run, it’s likely to beat the average actively managed fund.” Please also note that actively managed funds are generally much more expensive than the index funds on the list. (There are also another type of fund called “ETFs” on the list, but I don’t know anything about them so I can’t comment on how they stack up, but it does seem like their expense ratios are sometimes even lower than index funds, so maybe something to look into more! Meanwhile, here’s Warren Buffett saying not to bother with ETFs.)
How to Pick the Best Index Funds. This article from Kiplinger is a lot more insider-y, but I can see a lot of similar advice; namely, specific shout-outs to index funds in general and Vanguard funds in particular.
Index Funds: The Key to Saving for Retirement? This PBS article offers some cautionary words about index funds, but mainly for people who want to gamble big for big returns. It says that index funds will never beat the market, as actively managed funds may do sometimes. However, it also gives this bit of insight about long-term performance: “[MIT lecturer] Kritzman measured a hypothetical stock index fund with an annualized return of 10 percent, an actively managed fund with a return of 13.5 percent and a hedge fund earning 19 percent. At the end of his calculation, he found that the index fund’s average after-expense return was 8.5 percent, compared to 8 percent for the active fund and 7.7 percent for the hedge fund.” That means even if an index fund doesn’t show as much growth, you may get to keep more of the money because of the lower cost.
Index Fund Portfolios Reign Superior. This Forbes article doesn’t beat around the bush! And the first paragraph is just as strongly worded: “Mutual fund portfolios that hold only index funds have a far greater chance for higher returns than those holding actively-managed funds. The evidence in favor of all index funds, all of the time, is irrefutable, overwhelming and important to all investors.”
DIY portfolio creation
Should I hire a financial adviser or go it alone? CNN Money again, this time with a fairly straightforward article about asset allocation and other issues having to do with retirement. I didn’t check all the links, but they direct you to useful-sounding places such as Morningstar to figure out your ideal mix of investment types.
Do It Yourself Investing. Forbes weighs in with an equally accessible article, this one with a step-by-step plan to follow to set up and maintain your investment portfolio.
Three-fund portfolio. This is a wiki on the “Bogleheads” site (a large and active group of John Bogle fans and investment enthusiasts) about a simple way to approach asset allocation.
So that’s it! I’m happy that I’ve done a bit more research and I haven’t seen anything that says I’m doing things terribly wrong, even if there’s maybe more I could do with setting up my own fund allocation and rebalancing. But at the moment and with the level of knowledge I’m at, I’m still very comfortable with my current choices after skimming all these articles.