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Reader Case Study: What Should We Do In The Last Decade Before Retirement?

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Jane and Joe’s parrot!

Jane and her husband Joe live in the midwest with their two teenaged children and one parrot. Recently, Jane retired from her 24-year-long career as a college professor and loves the new lifestyle she’s carving out for herself. Joe works from home and the family enjoys spending a lot of time together.

Jane’s question at this juncture is whether or not she needs to return to full or part-time work at any point, or, if the couple can live on Joe’s income alone until he too retires in nine years. She’s also wondering if their asset allocation is appropriate given their ages and projected retirement timeline.

What’s a Reader Case Study?

Case Studies address financial and life dilemmas that readers of Frugalwoods send in requesting advice. Then, we (that’d be me and YOU, dear reader) read through their situation and provide advice, encouragement, insight and feedback in the comments section.

For an example, check out the last case study. Case Studies are updated by participants (at the end of the post) several months after the Case is featured. Visit this page for links to all updated Case Studies.

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There are four options for folks interested in receiving a holistic Frugalwoods financial consultation:

  1. Apply to be an on-the-blog Case Study subject here.
  2. Hire me for a private financial consultation here.
  3. Schedule an hourlong call with me here.
  4. Schedule a 30 minute call with me here.

→Not sure which option is right for you? Schedule a free 15-minute chat with me to learn more. Refer a friend to me here.

Please note that space is limited for all of the above and most especially for on-the-blog Case Studies. I do my best to accommodate everyone who applies, but there are a limited number of slots available each month.

The Goal Of Reader Case Studies

Reader Case Studies highlight a diverse range of financial situations, ages, ethnicities, locations, goals, careers, incomes, family compositions and more!

The Case Study series began in 2016 and, to date, there’ve been 98 Case Studies. I’ve featured folks with annual incomes ranging from $17k to $200k+ and net worths ranging from -$300k to $2.9M+.

I’ve featured single, married, partnered, divorced, child-filled and child-free households. I’ve featured gay, straight, queer, bisexual and polyamorous people. I’ve featured women, non-binary folks and men. I’ve featured transgender and cisgender people. I’ve had cat people and dog people. I’ve featured folks from the US, Australia, Canada, England, South Africa, Spain, Finland, the Netherlands, Germany and France. I’ve featured people with PhDs and people with high school diplomas. I’ve featured people in their early 20’s and people in their late 60’s. I’ve featured folks who live on farms and folks who live in New York City.

Reader Case Study Guidelines

I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not condemn.

There’s no room for rudeness here. The goal is to create a supportive environment where we all acknowledge we’re human, we’re flawed, but we choose to be here together, workshopping our money and our lives with positive, proactive suggestions and ideas.

And a disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises. 

I encourage everyone to do their own research to determine the best course of action for their finances. I am not a financial advisor and I am not your financial advisor.

With that I’ll let Jane, today’s Case Study subject, take it from here!

Jane’s Story

Hi Frugalwoods–thanks in advance for your advice! I’m Jane, a 50-year-old retiree/stay-at-home-parent who was fortunate to be able to leave my career as a college professor this past year. My spouse and college sweetheart, Joe, works a remote corporate job. We live a lovely Midwestern existence with our two teenagers (one in high school, one post-high school) and one parrot.

What feels most pressing right now? What brings you to submit a Case Study?

We’ve followed the basic principles of the FIRE (financial independence, retire early) movement for about a decade now. We are grateful to those who introduced us to this movement and to content creators like Frugalwoods who continually teach us to challenge societal norms regarding the definition of a “good life.” I felt confident leaving my career last year when we were approaching “Coast FI” territory and it was clear my job was making it difficult for me to be the best parent I could be to my kids, one of whom has really struggled.

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Right now, we need help figuring out a plan for the next 10 years.

At that point, we can access our retirement accounts and feel relatively confident with our ability to navigate our own finances. But before then, a main question is: when will I need to seek part- or full-time work, and how much will I need to bring in?

What’s the best part of your current lifestyle/routine?

I feel “on top of” my life for the first time. The house is clean, I have time to cook (which I LOVE) and take walks, and my stress level is greatly reduced. I’m currently planning and starting my vegetable garden; I love to garden and look forward to an ever-improving vegetable garden each year. I’m also taking on some home improvement projects I’ve always wanted to do and I’ve picked up a small amount of volunteer work.

I get to be a stay-at-home-parent to my high-school-aged son and a better support person to my 19-year-old daughter. Her stress level, level of functioning, and our relationship are markedly improved. I’m thankful that I can now give her the support she needs.

This is the first time in our marriage that my spouse’s career has been prioritized over mine, and I love watching him have this opportunity to grow. As a family unit, we spend most of our time together at home, hiking, playing games or taking advantage of free entertainment. I think we spend much more time as a unit than most families with kids this age, and for that I am grateful.

What’s the worst part of your current lifestyle/routine?

I’ve had a difficult time establishing a schedule that helps me feel productive. My spouse works from home, my 19-year-old doesn’t drive and is a homebody, so there are usually three of us in the house at all times. It sometimes feels like Groundhog Day. I was never a big spender, but because I’m not bringing in an income, I feel anxious about spending money.

Where Jane Wants to be in Ten Years:

1) Finances: 

  • Have good health insurance.
  • Maybe working a part-time job that I like, but definitely past the accrual phase of our lives.
  • My husband would like to stop working at age 60 (in 9 years) if possible. A lot will depend on our health care situation.

2) Lifestyle:

  • I want to be where my kids are, and possibly in the upper Midwest where my in-laws and husband’s family live.
  • Although we love our current house, I look forward to a smaller home. Ideally, in 3 years we will downsize to a home that we can purchase outright with the equity we have in this home.
  • Both kids out of the house with jobs and health insurance.
  • I want a simple life; a big garden, cooking most meals at home, time with family.
  • We like to travel some, but are good at using points and minimizing travel costs.

3) Career:

  • I don’t believe I will ever re-enter academia. I could seek a job that utilizes my academic expertise at some point in the future, but it could require additional training. I’m not sure I’m interested in doing that.
  • I might also be happy working a part-time job here and there, related to my cooking/gardening/home improvement interests.
  • I also have a few ideas for small businesses, but I don’t even know where to start with evaluating whether those are viable options.

Jane and Joe’s Finances

Income

Item Number of paychecks per year Gross Income Per Pay Period
 (total BEFORE all deductions)
Deductions Per Pay Period (with amounts) Net Income Per Pay Period
(total AFTER all deductions are taken out, such as healthcare, taxes, employee parking, 401k, etc.)
Joe’s salary 26 $3,200 $158 health and dental; $290 401K contributions; $708 taxes $2,044
Joe’s added income as musician (approximate) 1 $2,500 Taxes $1,500
Annual Gross total: $85,700 Annual Net total: $54,644

Mortgage Details

Item Outstanding loan balance
(total amount you still owe)
Interest Rate Loan Period and Terms Equity (amount you’ve paid off) Purchase price and year
Mortgage $174,679 2.63% 15-year fixed-rate mortgage Zestimate – owed = $250K ($425K-$175K) $325; purchased in 2017

Debts: $0

Assets

Item Amount Notes Interest/type of securities held/Stock ticker Name of bank/brokerage Expense Ratio (applies to investment accounts) Account Type
Jane’s 403b $822,488 Through the job I left; available with no penalty at age 55 if needed. 60% large cap equity index, 19% global equity index, 16% small-mid equity, 1% core bond index Voya .02%, .09%, .03%, .02% Retirement
Joe’s 403b $158,013 Rolled over from previous jobs 100% FNILX Fidelity 0% Retirement
Joe’s Roth IRA $88,137 100% FNILX Fidelity 0% Retirement
Jane’s rollover IRA from a previous job $76,243 97% FZROX; 3% SPAXX Fidelity 0% (FZROX) .1% (SPAXX) Retirement
Jane’s 457b $69,473 Through the job I left; available now with no penalty 70% Large US Caps; 15% Small-Mid US Caps; 15% Non-US Stocks Empower .01%, .01%, .05% Retirement
Savings Account $46,308 Our “cushion” or Emergency Fund 100% FDRXX Fidelity 0.34% Cash
Joe’s 401K $14,894 Current job; he will be fully vested in August, and currently puts in 5% with a 5% match Prudential Retirement
Jane’s Roth IRA $13,900 100% FZROX Fidelity 0% Retirement
Checking Account $4,249 Busey Cash
Total: $1,293,705
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Vehicles

Vehicle make, model, year Valued at Mileage Paid off?
Toyota Highlander 2010 $8,700 210,000 yes
Honda Fit 2007 $2,500 199,000 yes
Total: $11,200

Expenses

Item Amount Notes
Mortgage with Escrow (including insurance) $2,265 approaching $1K in principle per month
Groceries $700 includes household supplies
Health care costs (to get to deductible) $400
Car expenses $375 $200/mo for gas and $175 for maintenance or saving for new car
Water/Sewer/Trash $250 Avg per month. Something is wrong with our water bills; they are exorbitant. We are working to figure out why.
Electric (reduced rate b/c partially solar) & Gas $214 avg per month
Eating out $200
Son’s Sports Team $169 monthly
Solar (solar sharing through NexAmp) $155 avg per month
Travel $150  travel expenses not covered by rewards points; domestic trip this year
Clothing $120
Gifts and Holidays $100
Auto insurance (State Farm) $75 2 drivers only currently, will add one driver in June. Full coverage on both vehicles. $900/year
Cell phones (4 lines with Mint) $65 4 lines with the MVNO Mint Mobile
Haircuts $60  cut for Jane and Joe every other month, less often for kids, who wear their hair long
Entertainment $50 event tickets
sprinkler system $19 Monthly; turn on and off once per year = $236
Membership $19 botanical garden ($225)
Pet expenses $18 For the parrot
Subscription: Spotify $10 monthly
Monthly subtotal: $5,414
Annual total: $64,965

Anticipated Social Security

Item Monthly Amount Year and age you’ll begin taking SS
Joe’s anticipated Social Security $2,344 at 67, in 2038
Jane will not be eligible for SS because she did not pay in for most recent job (20 yrs) and due to the Windfall Elimination Provision (WEP) $0 Note that this is really confusing to a lot of people, but I’ve done a lot of research on it and talked to the SSA, and I am quite confident this is true. It’s unusual for university faculty not to pay into SS, but that was the case in my university system. I don’t know the exact amount, but I’d have to pay a substantial amount into SS between now and retirement age in order to not be subject to the WEP.
Annual total: $28,128

Credit Card Strategy

Card Name Rewards Type? Bank/card company
Capital One Venture (Jane) Travel Capital One
Capital One Venture (Joe) Travel Capital One

Jane’s Questions For You:

1) When I left my career, I felt confident in our goal to “coast FI”; my husband would continue to work and I would stay home for at least a year and then figure out what was next. But that one-year mark will be upon us very soon.

  • How can I figure out when I need to go back to work and how much I’d need to make?
  • To what extent will my age and employment gap be a problem as my time away from work lengthens?
  • Note that I probably can’t go back to work full-time for at least another year as my daughter needs more time and attention to get to a place where she’s thriving.

2) After completing the worksheets for this Case Study, I see some obvious places for saving money, but I’d love the readers’ ideas, too!

3) How does one begin to explore self-employment?

  • My ideas:
    • Seeking out clients for whom I could cook (I already cook dinner every night…why not cook the same for an extra family or two?)
    • Creating a website of homeschool-related content
    • Trying to do some consulting related to my academic areas of expertise and… many other ideas!

4) How do we use what we know about our financial situation to inform our choice of insurance plans?

  • My husband has a ton of options available through his employer and we went with the cheapest option that includes an HSA because I thought that’s what FIRE folks did.
  • However, I’m not sure this is the right choice as we’re not in a place to utilize the HSA as an investment vehicle and we have a really large deductible.

5) What do we do with our “cushion” of cash that we’re planning to use to supplement my spouse’s income for us to live on?

  • It’s currently not earning any interest.
  • Note that the cushion serves as our Emergency Fund, and we have two other places from which we can draw without penalty (my 457 and both of our Roth IRA’s–principal only).

6) Should our retirement accounts be moving away from equities, given our age? I realize there are many opinions on this, but I’d love to hear yours and what the hive mind thinks.

Liz Frugalwoods’ Recommendations

I’m delighted to have Jane and Joe as today’s Case Study!

Jane’s Question #1: When do I need to go back to work and how much do I need to earn?

This depends on how much Jane and Joe want/need to spend every month. At present, their monthly spending outstrips their income; but, that’s something they could change if they wanted to. If Jane would prefer not to go back to work–and to instead devote her time to her kids and potentially pursuing self-employment–all they need to do is bring their spending into alignment with Joe’s salary.

Current Annual Expenses ($64,965) – Current Annual Income ($54,644) = $10,321 deficit

Let’s take a look at Jane and Joe’s expenses to see if we can close this gap. Anytime a person wants to spend less, I encourage them to define all of their expenses as Fixed, Reduceable or Discretionary:

  • Fixed expenses are things you cannot change. Examples: your mortgage and debt payments.
  • Reduceable expenses are necessary for human survival, but you control how much you spend on them. Examples: groceries, utilities and gas for the car.
  • Discretionary expenses are things that can be eliminated entirely. Examples: travel, haircuts, eating out.

To stay within Joe’s salary, they’d need to limit their spending to a maximum of $4,553.66 per month. I categorized Jane and Joe’s expenses and came up with the below proposed plan of how they could accomplish this:

Item Amount Notes Category Proposed New Amount
Mortgage with Escrow (including insurance) $2,265 approaching $1K in principle per month Fixed $2,265
Groceries $700 includes household supplies Reduceable $600
Health care costs (to get to deductible) $400 Fixed (I assume?) $400
Car expenses $375 $200/mo for gas and $175 for maintenance or saving for new car Reduceable $275
Water/Sewer/Trash $250 Avg per month. Something is wrong with our water bills; they are exorbitant. We are working to figure out why. Reduceable $175
Electric (reduced rate b/c partially solar) & Gas $214 avg per month Reduceable $200
Eating out $200 Discretionary $50
Son’s Sports Team $169 monthly Discretionary $169
Solar (solar sharing through NexAmp) $155 avg per month Reduceable (I assume?) $100
Travel $150  travel expenses not covered by rewards points; domestic trip this year Discretionary $25
Clothing $120 Discretionary $20
Gifts and Holidays $100 Discretionary $10
Auto insurance (State Farm) $75 2 drivers only currently, will add one driver in June. Full coverage on both vehicles. $900/year Reduceable $75
Cell phones (4 lines with Mint) $65 4 lines with the MVNO Mint Mobile Fixed. Way to go on using a cheap MVNO!!!! $65
Haircuts $60 Cut for Jane and Joe every other month, less often for kids, who wear their hair long Discretionary $10
Entertainment $50 event tickets Discretionary $10
sprinkler system $19 Monthly; turn on and off once per year = $236 Fixed (I assume?) $19
Membership $19 botanical garden ($225) Discretionary $19
Pet expenses $18 For the parrot Fixed $18
Subscription: Spotify $10 monthly Discretionary $10
Monthly subtotal: $5,414 Monthly subtotal: $4,515
Annual total: $64,965 Annual total: $54,180

Luckily, Jane and Joe have relatively low Fixed expenses, which means it’s fully within their power to reduce the Reduceable and Discretionary items to fit within Joe’s take-home pay. Woohoo! Whether they want to reduce/eliminate these items is totally up to them, but it is technically possible for them to live on Joe’s salary alone–and to live well!

Additionally, Jane noted that they intend to downsize homes in ~3 years and potentially buy a smaller home outright. That would be a major game-changer since their biggest expense–by far–is their $2,265 mortgage payment.

Thus, it becomes a question of personal preference and priorities:

  1. Would Jane rather go back to work in order to maintain their current spending level?
  2. Would Jane rather reduce the family’s expenses in order to live on Joe’s salary alone and thus not need to go ever back to work?

Of course there are also plenty of in-between options–such as part-time work or partial expense reductions–that the family should also consider.

But Wait, This Budget Wouldn’t Include Any Savings!

Well, actually it does because Joe is still putting a pre-tax salary deduction into his 401k every pay period! Woohoo again! Jane and Joe have done such a tremendous job of saving and investing over the years that they’ll be perfectly fine if they just continue Joe’s 401k contributions and spend the rest of his salary. They’d essentially be doing a sort of reverse version of Coast FIRE.

Let’s take a look at the rest of their assets to ensure they’ll be ok not saving anything beyond Joe’s 401k contributions.

Asset Rundown

1) Cash: $50,557

Between their two cash accounts, the couple has $50,557 in cash. Well done! The only downside is that this is technically an overbalance of cash. What do I mean by that? Isn’t more cash always better?!? Well, yay and nay.

→The biggest downside to keeping so much money in cash is the opportunity cost.

Having this much cash only makes sense if:

  1. You intend to quit your jobs and not immediately find another;
  2. You have major expenses planned for the near-term, such as: buying a house, buying a car, a significant HOA assessment, etc.
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Outside of these two scenarios, it becomes a massive opportunity cost linked with the fact that your cash is losing value every day since it is not keeping up with inflation.

While is can feel instinctively “safe” to hold onto a lot of cash, there’s a danger to doing so. When you’re overbalanced on cash, you’re missing out on the potential investment returns you’d enjoy if your money was instead invested in, for example, the stock market.

How Much Should They Keep In Cash?

Your cash equals your emergency fund and your emergency fund is your buffer from debt:

  • An emergency fund should cover (at minimum) 3 to 6 months’ worth of your spending.
  • At Jane and Joe’s current monthly spend rate of $5,414, they should target having an emergency fund of $16,242 to $32,484.
  • If they decide to reduce their spending to live on Joe’s salary, their emergency fund can commensurately reduce to somewhere between $13,545 and $27,090.

All that being said, if they would rather keep this money in cash (and understand the risks to doing so), they can. Point here is that they don’t need to save up any more cash, which is why I’m comfortable suggesting the above budget that entails them spending all of Joe’s salary.

What To Do With This Cash

Regardless of what the couple decides about Jane remaining retired, they need to do something with this cash that’ll leverage it in some way.

→At the very, very least, they should move this cash into a high-yield savings account that’ll earn them interest. There are many accounts out there offering great interest rates right now.

For example, as of this writing, the American Express Personal Savings account earns a whopping 3.90% in interest (affiliate link). This means that in one year, their $50,557 would earn $1,972 in interest!

Depending on what they decide to do in terms of Jane’s retirement, they can also consider short to medium term investment options, such as CDs, Money Market Accounts, and Government Bonds. With all types of investments, you’re looking to maximize your return, but ensure that the time horizon works for your plans. It’s kind of like a ladder or hierarchy of options:

  1. At the most accessible end are high-yield savings accounts because you can withdraw your money at any time, in any amount and with no penalty.
  2. At the least accessible end are retirement investments because you have to be age 59.5 before you can withdraw your money without penalty.
  3. In the middle are short and medium-term investment options, which can make a lot of sense if you anticipate needing this money in, say, three years in order to buy a new car.

2) Retirement: $1,243,148

Jane and Joe have a grand total of $1.2M between their various retirement accounts, which is fantastic.

For fun, I ran a calculation through Engaging Data’s Rich, Broke or Dead calculator to see what would happen if Joe also fully retired tomorrow:

What we see here is that if Joe were to join Jane in retirement tomorrow, the couple has a 96% chance of success (in other words, of not running out of money before they die). That’s a pretty good chance of success!

This success rate is based on the variables of:

  • Joe and Jane reducing their annual spending to a maximum of $54,180.
  • Both of them retiring at age 50 and living to age 100
  • Their current asset allocation of 96% stocks and 4% cash
  • Joe beginning to take Social Security at age 67 at (an inflation-adjusted) $28,128 per year
  • Jane not receiving any Social Security
  • Neither of them working another day in their lives

In light of that, I’d say they’re in great shape! There are some caveats to this calculation, but it should give them the confidence that they have plenty of money invested for retirement and that, if they’re willing to reduce their spending, Jane doesn’t need to go back to work (and neither does Joe!).

I’ll also point out that, if they reduce their spending even further–for example when they downside and eliminate their large mortgage payment–their success rate increases to 100%:

    • They currently spend 27180 annually on their mortgage payment
    • Without that, their annual spending could dip to a meagre $27,000!!!

Here’s the chart:

But Wait, Isn’t Most of Their Money Tied Up In Retirement Accounts?!?

Well, yes and also no. Jane and Joe have a lovely medley of accounts and they’re all governed by slightly different rules.

1) Jane’s 457b: $69,473

In 457b plans, you’re allowed to withdraw money penalty-free before age 59.5, after you leave the employer who sponsors the plan. Hence, if a person plans to retire earlier than age 59.5, there’s a real advantage to having a 457b. Due to this fact, this $69k can be spent by Jane and Joe at any time, without penalty. In light of that, from here on out, they can consider this in the same category as any other non-retirement (aka taxable) investment.

Note that you do pay taxes on your withdrawals, but this is usually fine because–presumably–by the time you’re withdrawing the money, you’re retired and thus, your income and tax rate are lower.

2) Jane and Joe’s combined Roth IRAs: $102,037

According to Charles Schwab, here are the rules for withdrawing prior to age 59.5:

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Thus, Jane and Joe could withdraw the contributions they’ve made to their Roth IRAs, without penalty, at any time.

3) Jane’s IRA: $76,243

If more cash is needed, Jane can consider a backdoor Roth IRA strategy whereby you convert a traditional IRA into a Roth. This can be a very high tax event, so tread carefully.

How Would This Work?

Based on the low annual expense estimates above, this should carry them through to age 59.5, at which time they can begin withdrawing from their 401k and 403bs without penalties.

  • Let’s say they wait for Joe to retire until they’ve downsized and eliminated their mortgage payment, bringing their annual expenses to $27k.
  • They first spend down their excess $50,557 in cash (above their emergency fund, which at that point would need to be in the range of $6,750 to $13,500, which leaves $37,057), which’ll cover their expenses for 1.37 years.
  • Then, they begin spending down Jane’s $69,473 457b, which’ll cover their expenses for another 2.57 years.
  • We’re now at ~4 years, which means the couple is at least 54 (potentially older depending on when Joe retires).
  • They can now look at withdrawing their contributions to their $178,280 in IRAs.
    • And this amount will actually be a lot more since Jane should rollover her old 403b (which has $822,488 in it) into an IRA.

→I want to be clear that this is very “back of the envelope” math since we’re not taking a lot of variable factors into account. But, I hope that this points Jane and Joe in the right direction for future research if this is something they want to consider.

The Importance Of Diversifying Your Assets

Something I want to highlight is the lack of diversification in Jane and Joe’s asset portfolio.

  1. They currently have all of their investments in retirement-specific vehicles.
  2. 100% of these are invested in equities (with the exception of 1% of Jane’s 403b in bonds)

Both of these are good things to do–and to be clear, Jane and Joe have done an A+ job of selecting funds with very low expense ratios!

However, this falls under a “putting all of your eggs in one basket” investment approach. As with most things in life, diversification is a good thing. The easiest and most straightforward way for them to diversify would be to put money into a taxable investment account, which is invested in the stock market, but is not retirement-specific. With a taxable account, you’re not beholden to the rules governing retirement accounts.

In contrast to retirement vehicles (such as 401k, 403bs, IRAs, etc), taxable accounts:

  1. Have no limit on how much you can put into them
  2. Have no restrictions on when you can withdraw the money
  3. Are taxed (hence their name)
  4. Since they’re not through an employer, you can invest them in whatever you want (stock, bonds, ETFs)
  5. Do not have any required minimum distributions (RMDs), which means you can leave your money invested for as long as you want

→Since there are advantages and disadvantages to retirement and taxable accounts, it’s a good idea to have both.

They operate in different ways and thus can serve you in different ways and different situations. Forbes has this easy-to-understand article on taxable investment accounts if you’d like to learn more

When should you open a taxable investment accounts?

If you’ve already:

  1. Paid off all high-interest debt
  2. Saved up a fully-funded emergency fund (held in a checking or savings account)
  3. Maxed out all possible retirement accounts
  4. Don’t need this cash in the near future for a major purchase (such as a house)

Then… you can consider opening a taxable investment account!

I outlined above why you don’t want to keep massive amounts of cash on hand, and our last Case Study detailed short and medium-term investments to consider, such as: CDs, Treasury Bonds and Money Market Accounts. So today, let’s talk about this other, longer-term investment option: the taxable account. I can feel your enthusiasm already!!!

Where and How Do I Open A Taxable Investment Account?

Thankfully, you can do this on your own via the world wide web!

  1. Choose a brokerage:
    • This is the place through which you invest your money. For example: Fidelity, Vanguard and Charles Schwab are all brokerages.
    • If you already have accounts (such as your 401k) with a brokerage, it’ll be easiest to open a taxable investment account with them.
    • However, you want to first ensure that the brokerage you select offers low-fee funds.
  2. Choose what you want to invest your money in:
    • Things to consider when choosing what to invest in:
      • Your risk tolerance. Investing in the stock market is inherently risky. Would you be more comfortable with lower-risk, lower-reward options, such as bonds? Or higher-risk, higher-reward options, such as stocks?
      • Your age. How soon are you anticipating withdrawing a percentage this money? As discussed in this Case Study, many experts consider 4% to be a safe rate of withdrawal.
      • The fees associated with the funds you’re considering. High fees (called “expense ratios”) will eat away at your money over the years. DO NOT do that to yourself! For reference, the following three brokerages and funds are considered to be low-fee investment options:
        • Fidelity’s Total Market Index Fund (FSKAX) has an expense ratio of 0.015%
        • Charles Schwab’s Total Market Index Fund (SWTSX) has an expense ratio of 0.03%
        • Vanguard’s Total Market Index Fund (VTSAX) has an expense ratio of 0.04%
      • Wondering how to find a fund’s expense ratio? Check out the tutorial in this Case Study.
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Should I invest in individual stocks or total market index funds?

For me personally, I prefer a total market, low-fee index fund that matches my asset allocation needs and risk tolerance. The reason is that, in general, investing in a total market index fund gives you the broadest possible exposure to the stock market (as well as the lowest fees).

→In a total market index fund, you’re essentially invested in a teensy bit of every single company in the stock market, which gives you a ton of diversity.

If one company–or even one sector–tanks, your entire portfolio isn’t toast. It’s the “not putting all of your eggs in one basket” version of investing. It’s what I do, it’s what the vast majority of FIRE folks do and, best of all, it’s very, very easy to implement and maintain.

In addition to total market index funds, many folks like to have some of their portfolio in something like a total bond ETF, because bonds are a lower-risk (although also lower-reward) investment vehicle.

Is it Wise to Invest in Individual Stocks?

In my opinion, absolutely not. Why? because if that one company goes down, your investment plummets. If Apple or Amazon or Netflix or whoever has a bad quarter, you have a bad quarter. If you are instead invested across the entire stock market, companies can go bankrupt and your portfolio will still bob along with the broader stock market. Investing in an individual stock is “putting all of your eggs in one basket.”

I consider investing in individual stocks to be a hobby, not a financial strategy. If you really enjoy day trading and want to do it for fun, go right ahead! But I wouldn’t do it with money I need. In my opinion, it’s not much safer than going to a casino.

When Should You Use Your Taxable Investments?

Ideally, you will keep this money invested until you retire. When you retire, you can begin to drawdown a percentage of these funds each year to cover your living expenses. As you near retirement, you’ll want to reduce the risk exposure of these investments so that you’re buffered from any major market downturns in the run-up to your retirement. People only “lose it all” in the stock market when they sell their stocks at a loss and take a hit.

I realize this is a lot to try and cover in one post, so I highly recommend the book, The Simple Path to Wealth: Your Road Map to Financial Independence And a Rich, Free Life, by: JL Collins, for anyone interested in deepening their knowledge around investing. It’s well-written and easy to understand.

This leads us very nicely (almost like I planned it… ) into:

Jane’s Question #6: Should our retirement accounts be moving away from equities, given our age? I realize there are many opinions on this, but I’d love to hear yours and what the hive mind thinks.

Let’s begin at the very beginning

What’s An Equity?

Equities, in this context, are the same as stocks. If you own stocks/equities, you own a piece of a company. As I noted above, stocks are generally considered to be more aggressive, but more rewarding. Conversely, bonds are considered to be less aggressive, but less rewarding.

It’s like a sliding scale of risk vs. reward. You, the investor, have to decide where you want to be on this scale.

Painting with a VERY broad brush; in general:

  1. When you’re young and have many years before retirement, you want to be very aggressive in your investing. The idea being that you’ll be able to ride out the inevitable ups and downs of the stock market since it’ll be many decades before you need to withdraw any of this money.
  2. Then, as you near retirement, you want to titrate your risk/aggression to ensure that you don’t lose money if the market experiences a dip just prior to your retirement.

HOWEVER, as with all things, there are differing opinions on the wisdom of reducing risk (and consequently reward) in a portfolio as you age.

Vanguard has this nice chart, which allows you to search all of their funds according to risk level. As you’ll see, there are a number of different bonds and money market accounts one can choose from.

Similarly, Fidelity has this very helpful site outlining their various funds by risk level. It lets you look at different constructions of funds in a sample portfolio according to their risk level. As I noted above, diversification is good, which you’ll see reflected in Fidelity’s model portfolios. The most conservative portfolio they model includes a lot of bonds and their most aggressive has all stocks and no bonds. Then, there are a bunch of sample portfolios in between.

What Should Jane Do?

I’ll reiterate that diversity is a good thing. I personally am not 100% in domestic index funds because I like to play the field. I’ve got some international index funds (which you can buy right through your handy, dandy brokerage), I’ve got some bonds, I’ve got it all–even one solitary Bitcoin! The idea, here again, is to spread out the risk and not depend solely on one source or sector.

Rollover The Old 403b

Jane should also look into rolling over her old 403b into an IRA so that she can have full control over the funds she’s invested in.

Here’s how to do that:

  1. Call the brokerage (or do it online) that currently holds the 403b to ask about doing a “direct rollover” into a traditional IRA at another brokerage. Since Jane and Joe already have a lot of accounts with Fidelity, I assume that’s where she’ll want to put it.
  2. You’re likely not going to want to roll this into a Roth IRA because you’d then have to pay taxes on the full amount all in this calendar year (assuming that this 403b is not a Roth). If it is a Roth, it can only be rolled into a Roth.
  3. The new brokerage (Fidelity) will want to know what you want to invest your rollover IRA in.

I like this article explaining rollovers: Your Guide to 401(k) and IRA Rollovers.

Summary:

  1. Determine their top priority:
    • If Jane wants to remain retired, she absolutely can. The family can reduce their spending to allow them to live easily on Joe’s salary.
    • If Jane wants to return to work, she absolutely should.
  2. If Joe also wants to retire right now, he could!
    • In this instance, the family would need to reduce their spending and also research some of the retirement vehicle-to-cash conversions I outlined above.
    • This math gets even easier when they downsize and eliminate their large mortgage payment.
    • They’d also need to research what their state offers for health insurance through the Affordable Care Act. The ACA is not a boogeyman and it’s a totally fine way to get your health insurance. It is, after all, what I do for my family. The challenge is that it is governed by each state and, as such, the costs and subsidies vary wildly by state. They can research this through their state’s ACA website.
  3. Look into diversifying their investments, potentially to lower-risk, lower reward avenues, such as bonds. Also consider opening a taxable investment account to give them more flexibility.
  4. Decide what to do with their enormous cash cushion:
    • If Joe wants to retire now, they could use this to cover living expenses for awhile (and thus avoid withdrawing anything from their investments). If they go this route, they should move this money into a high-yield savings account so that they’re at least earning interest on it.
    • If they don’t intend to use this money in the near future, they should look into a more profitable option for everything above their emergency fund, such as:
      • Opening a taxable investment account
      • Opening a short-term investment vehicle, such as a CD

Ok Frugalwoods nation, what advice do you have for Jane? We’ll both reply to comments, so please feel free to ask questions!

Would you like your own Case Study to appear here on Frugalwoods? Apply to be an on-the-blog Case Study subject here. Hire me for a private financial consultation here. Schedule an hourlong or 30-minute call with me hererefer a friend to me here, or email me with questions (liz@frugalwoods.com).

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