Joe has a 24-year-old friend who won a $1 million settlement. How can she use this money to set herself up for financial independence?
Jay is 52 years old and wants to retire at 59.5. He began investing in individual stocks to achieve this goal, and has had excellent returns so far. Is this a sound plan for early retirement? Or should he work until age 62 for Social Security?
Steve is 54 years old. He plans to retire at 60, which is when he can collect 67 percent of his pension. A Vanguard advisor suggested that he direct some of his 403b contributions as Roth contributions, rather than pre-tax contributions. Should he act on this suggestion?
Brit wants to know: is it possible to invest in the S&P 500 Fossil Fuel Free Index through Vanguard?
Anonymous Meryl Streep wants to invest their HSA contributions this year, but the expense ratios seem high. Can they move their HSA to a different provider? What fees are normal for HSAs?
My friend and former financial advisor, Joe Saul-Sehy, joins me on the show to answer these five questions. Enjoy!
Joe asks (at 1:50 minutes):
I have a 24-year-old friend who was awarded a $1 million settlement (net of legal fees). Her attorney and his financial advisor commission-based friend are pressuring her to decide how she wants the settlement distributed from his legal escrow account.
I think she needs an independent fiduciary financial advisor and a CPA to thoughtfully walk her through her goals in how to best handle this settlement. She could set herself up for financial freedom, but could end up with regrets if she listens to the wrong people. What should she do?
Jay (at 19:47 minutes):
I’m 52 years old. I plan to retire at 59.5, at which point I’ll have access to my 401k. I also contribute to a Roth IRA and a brokerage account.
A financial advisor determined that I need to average about 15 percent annualized returns in my brokerage account to retire at 59.5. This plan assumes that I get market returns from my 401k and Roth IRA.
I figured that I had to invest in individual stocks to reach this goal. I researched options and found Motley Fool, a company that has a track record for beating the market. I invested $50,000 in a brokerage account, following their recommendations.
The brokerage account has returned 58 percent, my 401k has returned 49 percent, and my Roth IRA has returned 38 percent. These numbers are well above what I need to average in order to retire early, and my fallback plan is to wait until I’m 62 and can claim Social Security.
Here are my questions about this plan:
- Does it make sense for me to retire early? There are only two and a half years between 59.5 and 62.
- If so, should I continue to invest in individual stocks to achieve this goal? While my returns are great, I know the financial independence movement frowns upon this practice.
- I’d like to retire to Summerlin, NV. Should I purchase a residence when I have enough saved up in my brokerage account and rent it out until I’m ready to retire? Or should I keep the money compounding in my brokerage account until I’m ready to retire?
Steve asks (at 36:46 minutes):
I met with a Vanguard representative at a retirement planning event in my workplace. He suggested that I direct some of my 403b contribution as a Roth rather than pre-tax contribution. What factors should I consider in making this decision?
Here are my details:
I’m 54 and I’ve been with my employer for 33 years. I have a defined benefit pension, and I can collect 67 percent of this pension at age 60. My 403b balance is just under $400,000. I save 40 percent of my net pay and contribute to a taxable Vanguard brokerage account and 529 accounts for one child and three grandchildren. My wife is 50, has been with the same employer for 30 years, and is also eligible for a pension. Her account balance is around $300,000.
I discovered the backdoor Roth IRA option this year, and each of us opened accounts and contributed $7,000 for 2019. We’re in the 32 percent tax bracket, which likely won’t be the case in retirement. We’ll earn less retiring before age 65 with our pensions, but I wanted to ask about the Roth contribution to make sure we aren’t missing anything.
The only debt we have are two 15-year mortgages – one on our primary home ($80,000) and one on a vacation home ($40,000). Both are in the latter half of the loan period. I switched from paying off the vacation home mortgage aggressively to investing more in the taxable brokerage account last year. However, we’ll incur college expenses in the next four years and I have considered increasing our contributions to the 529 account.
Besides increasing our savings rate and investing in a taxable brokerage account, are there other investments I should consider making?
Anonymous Meryl Streep asks (at 52:21 minutes):
I just opened an HSA. I plan to use my savings to front out of pocket expenses because I want to invest my HSA contributions this year. My employer uses an account through Health Equity for the HSA.
However, the expense ratios on my investment options are about .03 to .15 percent. There’s also an additional .03 percent fee as the funds are not supported by my employer. Is this normal? I want to avoid expenses at all costs. What are my options to move this money either now or when I leave this employment situation?
Brit asks (at 1:07:28 minutes):
I’m a millennial who is concerned about global warming. My retirement account is with Vanguard, and while I hold VFTSX (Vanguard FTSE Social Index fund), I noticed that it contains some fossil fuel assets. I found the S&P 500 Fossil Fuel Free Index, but I can’t figure out how to invest in it through Vanguard. Am I able to do this, and if so, how?
Resources Mentioned:
- Jay’s question:
- 401k Resource Guide – Plan Participants – on IRS Website
- Brit’s question:
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