Friday, September 20, 2013

Self Sufficiency With Retirement

Becoming more self sufficient is all the rage these days judging by the thousands of blogs of people writing about the subject. I have been expecting this trend for a long time as everything seems to go in circles. Although I am nowhere near self sufficient, I do live a much simpler lifestyle than my peers which is by choice. Part of the reason is that if I don't consume as much, I am more self sufficient and what efforts I do make to become self sufficient have all that much more impact.

This all occurs in my daily life but several years back, I began to realize that it should happen in my future life as well, namely retirement. Because I'm not a big consumer, I am thus a big saver and have put money away religiously towards retirement. It used to come out of my paycheck even before taxes and now that I'm a Child Behavioral Modification Therapist or CBMT or stay-at-home-dad, it is now coming out of my wife's paycheck. We used to give this money to a financial adviser who would take a small percentage to manage the money for the rest of our lives. Before him I used to just check the boxes of my employer's 401k sponsor and almost randomly choose funds from a list of a dozen or so. The financial adviser quickly proved that he could do a lot better than I ever was choosing from limited funds and soon my retirement was growing at a much faster pace. I was happy and content though I had a sneaking suspicion that I wasn't doing enough.

A few years ago, I decided I want to learn more about saving and funding my retirement and found several self investing online forums and from them several eye opening books. Those books quickly taught me that there is another better option out there. Why not invest for my retirement myself in better ways than what I had done pre- financial adviser. After digging into the nitty gritty of my financial adviser's performance, I found that with his fees, his firm's fees, the fund he invests in's fees, that he was no where close to matching the performance of a stock index. In other words, if I could just buy all the same funds in the same ratios as the stock index, I would be much better off. After doing some digging, I learned that there are mutual funds out there that do exactly that and because there isn't much brain power associated with doing that, their management fees are a tiny fraction of what I was paying my financial adviser.

After reading through exhausting amounts of surveys and expert reviews, I learned that over 80% of financial advisers who invest money into the stock market do flat out worse than what the stock index does in any given year. Of the 20% that do better, by the time you include their fees and the fees of the various funds they invest in, another 75% of them still don't get the return you would have gotten had you just invested in the index fund yourself. of the 5% who beat the index fund, none of them have consistently beaten them over time. To sum all this up, not investing your money yourself is the same thing as going to a casino. You may win in the short term but long term the house (or in this case Wall Street) always wins.

So I decided to take matters into my own hands. This summer I met with my financial adviser and told him that he shouldn't expect to get any more of my money. He took it professionally but had the look in his eyes that told me he knew the scam was up. The first 20% of my stocks from my former employer were cashed out and I had them rolled into a self-directed individual retirement account that I control online. Five days later when the funds were in the account, I bought a large amount of shares of a fund that mirrors the S & P 500 index. My total cost due to a volume discount is 0.06% of my account balance per year that I pay them to manage the fund. Compare this to the 0.75% of my account balance per year I gave my financial adviser plus the 4% and 1% he and his company respectively got off the top before they even bought anything with my money.

From now on, I am going to be completely self sufficient with my retirement. I've cut the string to Wall Street and financial advisers while still embracing investing as a means to increase wealth. If anyone who reads this wants to learn more about what and why I did what I did. I suggest the following book:

Boglehead's Guide to Investing


Anonymous said...

Gautam Kaul over at U of Michigan does a Finance course online with Coursera. Cuts through a lot of BS.
Sorry lunch, pots boiling over.

Ed said...

Vince - There is tons of information out there about investing but 99% of what I find doesn't tell you exactly what stocks or funds to invest in. The only tell you how to diversify, methods to use, tools to use, etc. What Jack Bogle does is tell you the few funds that automatically diversify you and keep you diversified. He also shows you how you as a person or through a financial adviser will never beat the market over time. There are just too many high fees associated with going those routes.

Eventually I plan to use Bogle's three fund portfolio which is the US total stock market index, the world total stock market index and the US total bond market index. A person could bump it out one more and also include a world total bond market index. By using three of those funds, I can't get anymore diverse because I own shares of everything. I then just grow with the market at the average 7 to 10% per year that it has done since they were created. Compound that with time and I'm set, much faster than I was with my financial adviser or using employer 401ks.

Leigh said...

Very interesting post. And good for you for doing your homework and making wiser, more informed decisions.