Okay, You Win [needs investing help]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
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pongun
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Okay, You Win [needs investing help]

Post by pongun »

Okay, Bogleheads, you win. I tried to invest my way, and I've failed. I'm gonna lay it all out, and feel free to laugh all ya like. This initial post WILL be a novel. If this is too "personal finance" for the personal investment section, Mr. or Ms. Admin, feel free to move it with my blessing.

I have been putting away $325/month standard for more than a year (almost 2), have almost $7k in my Roth IRA and about $11k in my standard stock portfolio. I've mostly got individual stocks, and almost all of them pay dividends which I'm reinvesting automatically. My average brokerage fee total is less than $200 per year, and last year I made more than $1,500 on dividends alone. I tend to ignore capital appreciation because I almost never sell -- the "value" would only be useful if I wanted to use my margins (which I don't).

I have roughly $10k of equity in my $20k home (I paid cash for it initially, and in 2008 mortgaged it out to buy and renovate a rental property... which isn't rented to paying tenants). My mortgage is $89 per month on 6% interest (required payment), and I'm paying $150/mo so it'll be paid off in about 11 more years. I also have my other single-family residence and my 4-unit building which is going through electric company issues (some problem with the outside wiring -- my property manager is on it, but I have no idea when the issue will be straightened out). My rental property is owned free and clear, *real* value unknown, but they're currently not paying me anything. I'm losing roughly $300/mo on the pair of them with security system costs, utilities and property taxes. If I sell, I'll most likely take a huge loss, so suggesting I panic sell might not be the best idea. They're in the HOOD, so appreciation is also somewhat unlikely.

I have a student loan of about $10k, which costs me $121 a month. It's at under 3% interest, so I haven't been overpaying it.

I do have a 401k, but I see no value in it because THERE IS NO COMPANY MATCH. I see my Roth's permanent tax-free status in 40 years as being superior to paying taxes on my 401k in 40 years, and I'm currently unable to max out either of them. I haven't contributed to my 401k in years, and I have under $1k in it (around $650 when last I checked).

I work two main professions - I'm a package handler for UPS, 7 years in (small pension vested already, I could retire on a full pension in 23 years if the union doesn't screw it up), and I write freelance. My average monthly income (net) is between $2,000 and $3,000 (my max so far has been $6k/mo), while my average expenses are $1,500 to $1,700. I do eat meals out sometimes - I'm a sucker for Cici's pizza. My minimum required expenses per month for everything would be approximately $800, but I've been putting the rest into upgrading my rental properties, investing in stock and rebuilding my emergency fund. With my debts paid off, I will be able to live on around $600/month if I cook at home, which I'm slowly learning to do anyway. I may also work to lower my property taxes, since some of my properties are miscalculated (I bought my 4-plex for $9k, and they think it's worth $29k -- I would never pay that much for a house).

I have a $20 monthly gas budget to run my weedeater (I don't use a lawn mower -- too heavy and burns too much fuel). I ride a bicycle, and I allocate $20 a month to its general maintenance, which I usually keep (tire tubes are pretty cheap, and they've been lasting longer lately).

My emergency fund currently stands at $800, as I had to sack it to pay my bail, for some emergency rental property issues, for a home maintenance issue and other miscellaney (it was standing near $3,000 a month ago, and I see it back there by year's end).

I'm looking for the steadiest, most boring, most reliable tortoise of investments that will get me something I can really freakin' count on if my rental properties and pension tank. Based on past experience, I'd rather have it as an extra thing than find myself lacking when all my sexier, crazier investments blow up in my face.

So what do y'all suggest as far as something that will provide me reasonable growth and income FOREVER? I'm looking to retire within 200 years off of this ALONE, based primarily on a base $300 monthly investment. I may put in more, I sometimes do, but let's pretend $300 is what I'll be putting in for the duration. My expenses are pretty solid (I've got 5 years in my current home, and I could spend the rest of my life here). I want something that will LAST, not something I have to "manage" or any such nonsense. I have enough crap to do in my day without having to constantly worry or shift. Day trading makes me sick. So let's forget those silly thoughts (that I used to practice... a lot... until far too recently).

Any ideas, folks?

Any insights you can give on ANYTHING would be appreciable, but let's try not to diss me too much. I'm also really interested in your thoughts on investing. Yes, highly diversified, dividend-paying, low-expense ETFs are serious contenders. Do you have any other ideas, particularly specific ones? Thanks for your time and insight. Ready, BREAK!
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MossySF
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Re: Okay, You Win

Post by MossySF »

Wow, your upper work range is 200 years? :o I know the most I plan to work is until 60ish.
Topic Author
pongun
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Re: Okay, You Win

Post by pongun »

At this rate, probably. I actually meant 20, though.
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HardKnocker
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Re: Okay, You Win

Post by HardKnocker »

Why are your rental properties empty or not paying rent?

You have made your life very complicated and you need to corral your rental property situation. That will kill you. I'm sure there are many details in your situation. You have created a mess with huge problems it seems and do not appear to have the knack for being a landlord.

Make your investing plan very simple.

To invest in funds just utilize your 401k to get the max match, utilize Roth IRAs to the max, then tax efficient funds.

You only need three funds: Total Market Index, Total International Index, Total Bond Market. All low cost index funds. Invest systematically using DCA. Use an age based asset allocation. 10% of your equities in International. Age in bonds.

Keep 6-12 months of monthly expenses in an liquid emergency fund.

Simple but no guarantees. Sorry.
Last edited by HardKnocker on Thu Sep 13, 2012 8:43 am, edited 1 time in total.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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Aptenodytes
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Re: Okay, You Win

Post by Aptenodytes »

One the one hand, there's a lot going on here. But on the other hand, the picture is simple.

The simple picture is this -- you have a history of making bad investment choices, including day-trading, rental properties, and individual stocks, and you show signs that you are at risk for continuing to do so.

You are asking for advice about where to invest your Roth IRA, but as Hardknocker points out the rental properties are a much more serious problem. Getting rid of those properties should probably be a priority -- that kind of question isn't a primary focus for this discussion forum, however (though you'll get all kinds of opinions if you ask).

You apologize for the day-trading, but offer rationalizations for buying individual stocks and rental properties. Those behaviors are not compatible with the boglehead philosophy you are seeking insights from.

It may help to take a look at the introductory materials on the Wiki, and some of the books recommended there. http://www.bogleheads.org/wiki/Getting_Started
Johm221122
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Re: Okay, You Win

Post by Johm221122 »

With a pension the 401(especially with no match) is not as important because it will fill lowest tax brackets,but if for any reason you don't get pension the first withdrawals of 401 will be no tax/low tax rates. If after maxing roth i would use 401 after that(for tax diversification)try a 3 fund portfolio as mentioned
http://www.bogleheads.org/wiki/Three-fund_portfolio
Pay attention to tax placement
http://www.bogleheads.org/wiki/Principl ... _Placement
John
It would be best if we knew tax rate and 401 investments try this
http://www.bogleheads.org/forum/viewtop ... f=1&t=6212
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3CT_Paddler
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Re: Okay, You Win

Post by 3CT_Paddler »

Aptenodytes wrote: You apologize for the day-trading, but offer rationalizations for buying individual stocks and rental properties. Those behaviors are not compatible with the boglehead philosophy you are seeking insights from.
I would venture to guess that there are many Bogleheads on here who have owned rental properties at one time or another. And there are even some who buy individual stocks.

The problem it looks like to me is that the OP has too many irons in the fire. He isn't managing the rental properties very well, probably because he is already working basically two jobs, and those properties sound like they amount to a third job.

My suggestion is simplify. Focus on at most two jobs, you might be more effective in all your work. The beauty of the Boglehead philosophy is that investing doesn't require much work past the initial setup.
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HomerJ
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Re: Okay, You Win

Post by HomerJ »

Put the $300 a month in your ROTH, and use Vanguard Total Stock Market Index, Vanguard Total Bond Market Index, and Vanguard Total International Stock Market Index funds.

Say 50%/25%/25% for now.... In 10 years, switch that to 40%/40%/20%.

Then you can forget about your investments for a while, and work on your rental properties. I wouldn't sell them, but get them to generate some rent. You got them pretty cheap; seems like they could be an excellent deal for you.

You've got a solid job, and you're obviously working hard to make yourself financially independent. I'm impressed...

(Anyone else notice the "bail" emergency expense in there? Love to hear the details on that one) :)
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Aptenodytes
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Re: Okay, You Win

Post by Aptenodytes »

3CT_Paddler wrote:
Aptenodytes wrote: You apologize for the day-trading, but offer rationalizations for buying individual stocks and rental properties. Those behaviors are not compatible with the boglehead philosophy you are seeking insights from.
I would venture to guess that there are many Bogleheads on here who have owned rental properties at one time or another. And there are even some who buy individual stocks.
I agree with your point, and don't begrudge anyone some stock trading or entrepreneurialism. But the basic point remains that he is taking it too far. $200 per year in trading fees for a portfolio of about $18,000 is extreme, by our standards. And the OP acknowledges that the rental properties aren't working. If there was ever a time to drink the "simplify" kool-aid, this is it.
pingo
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Re: Okay, You Win

Post by pingo »

pongun wrote:I'm looking for the steadiest, most boring, most reliable tortoise of investments...I have enough crap to do in my day without having to constantly worry or shift...highly diversified, dividend-paying, low-expense ETFs are serious contenders.
Hold on.

Where is your Roth IRA?

What are your 401k options (that's fund names, ticker symbols and expense ratios)?

At first glance, it seems you should be in the 15% Federal Tax Bracket. Sell the assets of the taxable account into cash (if you do this in 2012 onlywhile in the 15% bracket you pay no capital gains taxes; if there are losses, claim them). Use that cash to fully fund your Roth for this year and next year and to perhaps enable a minor increase in 401k contributions.

Forget about dividends. It's total return that matters and you obtain that through rebalancing between the major asset classes in your portfolio. Through the simple act of rebalancing, capital gains and dividends are harvested for and throughout the whole portfolio.

Forget about ETFs. You knock off a layer of complexity and temptation to fiddle and market time (in my view) by moving your account to Vanguard and putting it all in a Vanguard Target Retirement Fund or LifeStrategy Fund which are the same as the 3 Fund portfolio mentioned by others, but Vanguard maintains them and rebalances them for you at cost. You can forget about your account. Just be sure the fund reflects your desired asset allocation (forget about the actual year dated in the fund name). When you can finally relax about all of your other pans on the fire, that may be a better time to worry about whether or not you want to taylor the portfolio to something different than what Vanguard has expertly structured for you benefit.
Last edited by pingo on Thu Sep 13, 2012 11:47 am, edited 1 time in total.
Easy Rhino
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Re: Okay, You Win [needs investing help]

Post by Easy Rhino »

Wait, do I count 3 single family homes and one 4-plex? And none are producing rent? I'm really curious as to where they are, because those prices just sound made-up in my San Diego math world.

Pull all your monthly retirement savings into the Roth. Forget about investing in the taxable account. heck $325 a month is $3900 a year, so if you wanted to sell any taxable investments, use those funds to make a Roth contribution to get up to the $5k max. It's not that complicated, just get a target retirement fund for now. you sound fairly youngish, so it should be fine.
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ruralavalon
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Re: Okay, You Win [needs investing help]

Post by ruralavalon »

It sounds like you are doing an excellent job of keeping your living expenses low :) . You are working hard and living below your means which are the first necessary steps.

Your problem has been that you are not putting what you save to productive use. (You know this already.)

First, read at least one of the books from the General Investing section of this reading list -- http://www.bogleheads.org/readbooks.htm . And/or read this free on-line book http://investingroadmap.wordpress.com/ .

Second, promptly start investing in broadly diversified total market type index funds (please see http://www.norstad.org/finance/total.html ) such as Vanguard Total Stock Market Index, Vanguard Total Bond Market Index, and Vanguard Total International Stock Market Index funds. Please see -- Wiki article link: Three-fund portfolio .

Third, if your "rental" properties are paying you nothing then get out of the rental business, sell the properties and invest the proceeds (see #2 above). Don't hesitate to cut your losses, it looks like this is killing you financially.

Fourth, sell the individual stocks and invest in broad based index funds (see #2 above). You can even use a taxable account if you use the total market stock funds suggested above, as they are very tax efficient. Don't put the bond fund in a taxable account. Wiki article link: Principles of Tax-Efficient Fund Placement .

Fifth, take another look at that 401k even though it has no match. Does it offer good low cost index funds? If so, consider using it instead of preferring the Roth. http://thefinancebuff.com/case-against-roth-401k.html .

Sixth, move your accounts to Vanguard for easy access to their wide selection of low cost index funds.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
pongun
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Re: Okay, You Win [needs investing help]

Post by pongun »

Okay, time to address a few things.

1. I have two single-family houses (one of which I live in -- I will NOT sell that one :p) and a 4-plex. I'm seriously considering selling one of the singles, as I only attract crap tenants who don't pay their rent. I have a tenant in it, but she stopped paying rent this month, the same as every tenant does in that area. Remember that I have a PROPERTY MANAGER, so this is NOT a third job. I spend less than an hour a week on the rentals, and that's not bad considering that the 4-plex is actively being worked on. I don't buy those properties like on the flipping shows, where all you do is put in new carpet and paint and it's ready. This place had significant structural damage from the fire, which I spent months repairing, and I also had my people go in and totally redo the plumbing, the gas lines, the electricals and the HVAC systems. Right now the final serious issue (and one that will be an issue even if I sell it because of full disclosure laws) is that I'm tussling with the power company over how to physically attach the wires on the outside -- "it's not strong enough" as the field foreman keeps bitching. I will not sell it until the place at least works, as we're talking about a HUGE difference in sale price. I've come this far, so I might as well get the project done.

Or is the Boglehead philosophy "if at first you don't succeed, sell at a loss and take whatever cash you can get?" I wouldn't expect selling at a loss to be good investment advice, especially from purportedly long-term thinkers. I've only had the 4-plex for 1.5 years, and I've only had my single rental for 4.5 years. Not every project can get accomplished in an afternoon, y'all.

2. As far as the bail goes, my ex was moochin' off me, cheatin' on me, and disrespectin' me. So we ended up pointing guns at each other Mr. and Mrs. Smith style when she wouldn't leave. The police actually sounded afraid when they came in and saw all the weapons scattered on the floor. I have a year's probation, and then I'll have a misdemeanor instead of my current felony -- all because of some impulsive decisions on my part. I don't pick the world's best investments, but I SUCK at picking women. That's a topic for another forum, though.

3. My biggest issue with bonds isn't their intrinsic nature, but the fact that so many people consider them "safer" than stocks. Even in the sense of a total stock vs. bond index, I see it the same way as lending to people (which I have also done, and actually profited handsomely off of) -- a lot of entities that borrow money don't pay it back, which is what a bond is. Our society is set up so defaults are seen as natural parts of the process, and they simply ding one's credit for a few years. But stock represents continued operation and payment from that, particularly when there are dividends. I've had some success with an international real estate ETF, and I'm seriously considering a broad domestic market dividend-bearing fund. I need income, people. Is the Boglehead philosophy to only get paid "when" you sell? I thought real wealth was possessed of owning permanently, NOT selling. Or have we forgotten the lessons of day traders (ie, it doesn't work)? Just for clarity's sake, I've never held a position less than a week, so I would not qualify as a day trader. As of this moment, my average hold length is approximately 3 years on any given position (which is probably okay for a 29-year-old such as myself).

4. I'm in the 25% tax bracket. Also, why does it make sense to use low-tax funds in a tax-free account? Isn't that kinda redundant? I've been keeping my REITs in my Roth because of their normally crazy tax status. I have a company that's been paying me 16-22% dividends for the 4 years I've had it. No tax in my Roth. Thing is, I'm working to diversify myself into something lasting that isn't based on freakin' interest rate arbitrage. I understand the concepts behind it, but I also understand its fleeting nature.

5. Some people must've not noticed that I HAVE NO COMPANY MATCH IN MY 401K, so I see no advantage to it. On top of that, it's stuck with my employer and it charges administrative fees. If you think last year's $200 on $18k was a lot, consider that this charges $60 per year on $800 -- it essentially eats capital appreciation. It's pathetic, so I don't use it. As far as fees go, my only fees to speak of are brokerage fees for purchases. This year's total fees (including one sale I made to fund a one-time event) for my brokerage account will be $40 on that $18k. Consider that I know of no method by which there won't be some kind of fee to purchase any kind of stock or fund, other than using a DRIP. Keep in mind that for the INITIAL investment, buying in takes a fee. If you know any ways I can fully escape that, I'm all ears. If you merely want to piss and moan about how I spent $200 (which I slashed from my homeowners insurance ALONE and also cut from my property taxes, as well as trimming down my utilities to that extent), I want to hear your silence. Helpful advice, if you please.

6. Why do you guys like Vanguard so much? I can understand they probably have some good stuff, but some of y'all sound like a commercial.
jay22
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Re: Okay, You Win [needs investing help]

Post by jay22 »

ruralavalon wrote:It sounds like you are doing an excellent job of keeping your living expenses low :) . You are working hard and living below your means which are the first necessary steps.

Your problem has been that you are not putting what you save to productive use. (You know this already.)

First, read at least one of the books from the General Investing section of this reading list -- http://www.bogleheads.org/readbooks.htm . And/or read this free on-line book http://investingroadmap.wordpress.com/ .

Second, promptly start investing in broadly diversified total market type index funds (please see http://www.norstad.org/finance/total.html ) such as Vanguard Total Stock Market Index, Vanguard Total Bond Market Index, and Vanguard Total International Stock Market Index funds. Please see -- Wiki article link: Three-fund portfolio .

Third, if your "rental" properties are paying you nothing then get out of the rental business, sell the properties and invest the proceeds (see #2 above). Don't hesitate to cut your losses, it looks like this is killing you financially.

Fourth, sell the individual stocks and invest in broad based index funds (see #2 above). You can even use a taxable account if you use the total market stock funds suggested above, as they are very tax efficient. Don't put the bond fund in a taxable account. Wiki article link: Principles of Tax-Efficient Fund Placement .

Fifth, take another look at that 401k even though it has no match. Does it offer good low cost index funds? If so, consider using it instead of preferring the Roth. http://thefinancebuff.com/case-against-roth-401k.html .

Sixth, move your accounts to Vanguard for easy access to their wide selection of low cost index funds.

I hope that this helps.
The links in first and second ones are incredible, thanks for posting those.
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HomerJ
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Re: Okay, You Win [needs investing help]

Post by HomerJ »

pongun wrote:6. Why do you guys like Vanguard so much? I can understand they probably have some good stuff, but some of y'all sound like a commercial.
Super cheap. As they get bigger they LOWER their costs (which makes sense, more volume, you can charge less, and still make more).

Average Expense ratio for an active stock fund is around 1%... while Vanguard Total Stock Market Index fund is 0.06%.

So if you've got $100,000 invested in an average fund, you're paying $1000 a year in expenses.... while with Vanguard you're paying $60.

Sixty. Dollars.

You keep $940... I don't know about you, but an extra $940 a year is enough to make me pay attention.
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interplanetjanet
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Re: Okay, You Win [needs investing help]

Post by interplanetjanet »

pongun wrote:Or is the Boglehead philosophy "if at first you don't succeed, sell at a loss and take whatever cash you can get?" I wouldn't expect selling at a loss to be good investment advice, especially from purportedly long-term thinkers. I've only had the 4-plex for 1.5 years, and I've only had my single rental for 4.5 years. Not every project can get accomplished in an afternoon, y'all.
Look up "anchoring". Whether you sell at a gain or a loss isn't usually as relevant as whether you can do better by doing something different with the money. What's your guess as to your cap rate on the properties?
3. My biggest issue with bonds isn't their intrinsic nature, but the fact that so many people consider them "safer" than stocks.
They are safer. The default rate on high quality bonds is quite small, and a bond "crash" is something much different than a stock crash (vastly lower losses when it has happened in history). Diversified bond funds tend to move slightly counter to stocks, making the combination of the two better than either one alone (one zigs and the other zags). Keep in mind that in the event of a water landing, your bonds can be used as a floatation device...er...what I mean to say is that if a company shrivels up and dies, bond holders have a right to repayment. Stock holders do not.
I need income, people. Is the Boglehead philosophy to only get paid "when" you sell? I thought real wealth was possessed of owning permanently, NOT selling. Or have we forgotten the lessons of day traders (ie, it doesn't work)?
Many people here buy and hold for decades. Some buy with the intention of passing on wealth (with a stepped up basis) and never selling. You make money through a combination of dividends and capital appreciation. Other than the fact that dividends are taxed more heavily there is nothing magic about them.
4. I'm in the 25% tax bracket. Also, why does it make sense to use low-tax funds in a tax-free account? Isn't that kinda redundant?
No. Low tax funds can be placed in taxable, but almost any fund will be even better in a tax-advantaged account. "Low tax" funds just lose less in taxable due to dividends and turnover. You need to look at all accounts you have and those that are available to you to build a coherent strategy. If you have enough room in your 401k or IRA, you may be able to fit everything into there.
5. Some people must've not noticed that I HAVE NO COMPANY MATCH IN MY 401K, so I see no advantage to it.
Even without a lower tax rate in retirement, a 401k will save on capital gains taxes, dividends, and will allow rebalancing with no tax consequences in many cases. I use my 401k far in excess of the match, as do many (most?) people here. I only started taxable investing once I was "maxing out" my 401k and IRA, and I think this is the correct strategy for most people.
On top of that, it's stuck with my employer and it charges administrative fees. If you think last year's $200 on $18k was a lot, consider that this charges $60 per year on $800 -- it essentially eats capital appreciation. It's pathetic, so I don't use it. As far as fees go, my only fees to speak of are brokerage fees for purchases. This year's total fees (including one sale I made to fund a one-time event) for my brokerage account will be $40 on that $18k. Consider that I know of no method by which there won't be some kind of fee to purchase any kind of stock or fund, other than using a DRIP.
You can often avoid fees completely by purchasing shares of a mutual fund directly - for example, purchasing Vanguard mutual funds at vanguard.com. The bulk of my Roth IRA and my taxable investments consist of Vanguard mutual funds purchased in this manner.

Find out what funds are offered in your 401k with what fees associated with each one and post them. You may have already gotten a net fee disclosure in the last month or so, this is probably the best source of information. You may have hidden gems even if there are some fixed charges associated with the account.
6. Why do you guys like Vanguard so much? I can understand they probably have some good stuff, but some of y'all sound like a commercial.
Lowest fees for most asset classes, they are owned by their investors, and offer a broad assortment of funds. Incentives are provided to management for continuing to lower fees.

-janet
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pongun
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Re: Okay, You Win [needs investing help]

Post by pongun »

Or I could buy Philip Morris International, not spend ANYTHING just to keep it, and make dividend income from a hundred-year-old company. So if I had $100,000, I would MAKE (when last I checked) $4,200. I understand the idea that keeping what you have is a significant battle to win, and I haven't included taxes in my proposed income from such a holding (roughly $500, if the 15% dividend rate still applies -- though it may just be 5% for such a low sum -- eh, I can look it up), but what about MAKING money from one's investments?

Why do people fixate so much on capital appreciation? What do you DO when your stuff has gone up? I need income. How will I get income when I STOP WORKING? It's like you guys know something but just don't feel like telling me. How did you all get to a position of living on your investments?

As far as Janet's post (I was writing this while your post popped up), I was comparing my 401k to my Roth, not my standard account. The Roth has all the advantages of the 401k, AND no taxes EVER. It just seems simpler. I guess when I've maxed out my Roth and have no rentals to finance, that could work.

I'm asking you all because I WANT something better to do with the money. I can't have kids, I have no interest in passing the wealth I've worked for on to deadbeats of any stripe (whether related to me or not), and I want income I can LIVE on. I'm trying to finance my life through my investments here.

As far as bonds go, I'll look into them. I've heard they pay virtually nothing and that there's currently a boom in them (I've learned to hate booms -- can I wait for the next bond bust?).
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Aptenodytes
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Re: Okay, You Win [needs investing help]

Post by Aptenodytes »

If you read the resources people have recommended you'll see all your questions addressed, more completely and systematically than is possible in brief postings here.

You titled your "post" "You Win" and suggested that you want to embrace Boglehead principles. But that declaration of victory was probably premature. I suggest a little more reading on your part will help you understand better what the approach is all about, and if it is right for you.
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interplanetjanet
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Re: Okay, You Win [needs investing help]

Post by interplanetjanet »

pongun wrote:As far as Janet's post (I was writing this while your post popped up), I was comparing my 401k to my Roth, not my standard account. The Roth has all the advantages of the 401k, AND no taxes EVER. It just seems simpler. I guess when I've maxed out my Roth and have no rentals to finance, that could work.
In the 25% bracket, you may want to use a Traditional IRA rather than a Roth if you are eligible. This will depend on the size of your pension in retirement and your expected savings, and when you expect to retire (you may find yourself withdrawing income from your IRA in a tax rate lower than 25%, which saves you money if you go with a TIRA or 401k). In the 15% bracket I would stick with a Roth.

-janet
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pongun
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Re: Okay, You Win [needs investing help]

Post by pongun »

Why would paying taxes be better than not paying taxes? I expect to be wealthier when I retire than I am today, thus making my tax bracket higher. The idea is to MAKE money, and have it make me more money. Why do people assume I'll be destitute when I retire?
ShowMeTheER
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Re: Okay, You Win [needs investing help]

Post by ShowMeTheER »

If you are interested in changing your investment style and overall financial picture, take a few weeks to read a couple of books and explore the sight.

You have a backwards picture of the majority of people on here ("living on their investments"?) and don't seem to be interested in the investing philosophy that most advocate. If, after reading, you are interested, then come on here and post a summary in a more readable format. You'll get suggestions.

As of now, you appear to have all the answers and are hoping for a magic shortcut to show up in a message board. Phil Morris might work out just fine. Or it might not.
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interplanetjanet
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Re: Okay, You Win [needs investing help]

Post by interplanetjanet »

pongun wrote:Why would paying taxes be better than not paying taxes? I expect to be wealthier when I retire than I am today, thus making my tax bracket higher. The idea is to MAKE money, and have it make me more money. Why do people assume I'll be destitute when I retire?
Your tax bracket has almost nothing to do with your wealth. It has quite a lot to do with your income, and retirees have many more options available to them there. Your current tax savings by going for a Traditional IRA or 401k are based on your marginal rate, but during retirement withdrawals may be spread out over several brackets, starting with very low ones.

-janet
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HomerJ
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Re: Okay, You Win [needs investing help]

Post by HomerJ »

pongun wrote:Or I could buy Philip Morris International, not spend ANYTHING just to keep it, and make dividend income from a hundred-year-old company. So if I had $100,000, I would MAKE (when last I checked) $4,200.
And Philip Morris stock could cut it's dividend and drop 50% in value, and then where would you be?

The idea behind buying an index is that you get to spread the risk over thousands of stocks. Total Stock Market Index also pays about 1.8% in dividends.

Perfect example: General Electric (GE) is also a 100-year old company... It had steadily increased its dividend for about 30 years before the last 2008 crash.

During the crash it dropped from a price of about 40 to 7, and cut its dividend to ZERO. It's still only at 22, about 45% below it's peak.

Total Stock Market Index Fund never stopped paying a dividend, and has almost fully recovered it's value from the crash.

Spreading your risk across multiple stocks is a better bet. If you just pick one or two stocks, you may do very very well, but you may also do very very poorly... Buying a cheap stock index fund is like hitting singles all day. No home-runs, but no strike-outs either.
jay22
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Re: Okay, You Win [needs investing help]

Post by jay22 »

HomerJ wrote:
pongun wrote:Or I could buy Philip Morris International, not spend ANYTHING just to keep it, and make dividend income from a hundred-year-old company. So if I had $100,000, I would MAKE (when last I checked) $4,200.
And Philip Morris stock could cut it's dividend and drop 50% in value, and then where would you be?

The idea behind buying an index is that you get to spread the risk over thousands of stocks. Total Stock Market Index also pays about 1.8% in dividends.

Perfect example: General Electric (GE) is also a 100-year old company... It had steadily increased its dividend for about 30 years before the last 2008 crash.

During the crash it dropped from a price of about 40 to 7, and cut its dividend to ZERO. It's still only at 22, about 45% below it's peak.

Total Stock Market Index Fund never stopped paying a dividend, and has almost fully recovered it's value from the crash.

Spreading your risk across multiple stocks is a better bet. If you just pick one or two stocks, you may do very very well, but you may also do very very poorly... Buying a cheap stock index fund is like hitting singles all day. No home-runs, but no strike-outs either.
But, if you're not looking at dividends, but just looking at increase in the stock price and are in for a long term (5+ years), then does it make sense to buy stocks of companies like GE, PM, McDonalds, etc?
mrspremise
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Re: Okay, You Win [needs investing help]

Post by mrspremise »

pongun wrote:As far as Janet's post (I was writing this while your post popped up), I was comparing my 401k to my Roth, not my standard account. The Roth has all the advantages of the 401k, AND no taxes EVER. It just seems simpler. I guess when I've maxed out my Roth and have no rentals to finance, that could work.
Actually, the 401K you contribute pre-tax dollars, so it can lower your taxable income and you can effectively investing what you would have paid in taxes. A Roth IRA comes from post-income tax dollars so you DO pay tax, but you don't pay tax on the earnings. Which one is a better strategy has to do with your income bracket and how much you expect your investments to grow.
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interplanetjanet
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Re: Okay, You Win [needs investing help]

Post by interplanetjanet »

mrspremise wrote:Actually, the 401K you contribute pre-tax dollars, so it can lower your taxable income and you can effectively investing what you would have paid in taxes. A Roth IRA comes from post-income tax dollars so you DO pay tax, but you don't pay tax on the earnings. Which one is a better strategy has to do with your income bracket and how much you expect your investments to grow.
The first point (income bracket) is correct. The second (growth rate) isn't, assuming you're comparing two investments that fit within tax-advantaged. For example:

$1k contributed to IRA or Roth IRA, 25% tax rate at both contribution and withdrawal. 10% growth:

TIRA - $1k goes in, grows to $1100, 25% tax paid on withdrawal, $825 comes out
RIRA - $1k gets taxed, $750 goes in, grows to $825, $825 comes out

1000% growth:

TIRA - $1k goes in, grows to $11k, 25% tax paid on withdrawal, $8250 comes out
RIRA - $1k gets taxed, $750 goes in, grows to $8250, $8250 comes out

Note that in this case, $1k in a TIRA and $750 in a RIRA are "worth" the same amount. You need to tax correct your figures when working out your asset allocation if you have investments that lie in different tax situations.

Edit: ok, there is the RMD issue to contend with as well. How to optimize for this is an interesting problem.

-janetut
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pongun
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Re: Okay, You Win [needs investing help]

Post by pongun »

I already have a dividend stock index that pays about 4% annually. I've just been curious about what y'all's thoughts would be on what will do well. As far as stuff goes, won't 1.8% actually lose value after inflation? I thought inflation averaged 2-4% per annum over the past 50 years, meaning that anything that pays a lower dividend is at best treading water. Hitting singles all day... Hmm.

As far as reading goes, I've been reading the link to that road map for investing. It's a long read, though. I won't be able to finish it for a couple days, and a lot of it is material I already understand. I'll work on integrating its concepts into my strategy.

Janet, when you say that I can withdraw at multiple tax rates, what do you mean? I just figured I could withdraw a portion of my dividends during my older years tax-free from my Roth, making tax planning easy. I expect to have a substantial nest egg (over $300k... that's a lot when you can live on $800 a month and expect every investment to pay income), and I want to have (inflation-adjusted) about $2,000-2,500 per month for my living expenses and fun.

As far as the fellow who suggested a 6-12 month fund, why so much? I'm not really challenging this idea (sounds fine to me), but I'm curious what thought process informs this suggestion.
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Re: Okay, You Win [needs investing help]

Post by Easy Rhino »

pongun wrote:As far as the fellow who suggested a 6-12 month fund, why so much? I'm not really challenging this idea (sounds fine to me), but I'm curious what thought process informs this suggestion.
More typical mainstream advice is for 3-6 months of income. bogleheads are a more conservative lot, so you can find folks who will recommend longer. Also note it's sually more important to base your emergency fund on your spending, not income.

A longer emergency fund would make sense if your job or health (or, ahem, incarceration status) was inherently more unstable than average. Independent contractors who routinely spend time "between jobs", need a bigger fund. People with unrealiable cars need a bigger fund, etc.
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interplanetjanet
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Re: Okay, You Win [needs investing help]

Post by interplanetjanet »

pongun wrote:Janet, when you say that I can withdraw at multiple tax rates, what do you mean? I just figured I could withdraw a portion of my dividends during my older years tax-free from my Roth, making tax planning easy. I expect to have a substantial nest egg (over $300k... that's a lot when you can live on $800 a month and expect every investment to pay income), and I want to have (inflation-adjusted) about $2,000-2,500 per month for my living expenses and fun.
"Easy" may not be optimal.

When you earn taxable income, the first dollars are taxed at a very low (or zero) rate. In general, as you get more income, your rates go up. If you have no taxable income at all then you are actually wasting your 0% bracket for the year. To get the most optimal tax situation, you generally want to fill up brackets below a certain point with income - many here who are retired right now aim for the top of the 15% bracket, for example.

I have one hand out of commission right now, typing is hard, I am sure others will chime in. Suffice it to say, I do not think that most people here expect to get anywhere near $2k/mo sustainably out of a $300k portfolio. $1k/mo, inflation adjusted, is probably closer to the mark. Combined with Social Security and your pension, $2500/mo could be very doable.

Often quoted here are "safe withdrawal rates" (SWR). Backtesting has shown that for a 25-30 year retirement, withdrawing 4% per year inflation adjusted (meaning your withdrawals increase with inflation) has a high chance of success with most retiree portfolios. Higher rates have worked well at some points in history, but failed spectacularly in others.

-janet
dbr
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Re: Okay, You Win [needs investing help]

Post by dbr »

pongun wrote:I already have a dividend stock index that pays about 4% annually.

A more accurate and complete assessment of the behavior of investments is to look at total return, of which dividend is one component. Using Rick Ferri's 30 year forecast as one example of estimating this, large cap stocks, fairly similar to dividend stock index, might be expected to return 5.5% real with a standard deviation of annual returns of +/- 19%.

http://www.portfoliosolutions.com/the-p ... t-for-2012


I've just been curious about what y'all's thoughts would be on what will do well.

One of the tenets of Boglehead investing is that it is not useful to try to predict what will do well. A fact of investing life is that things do well some of the time and not so well other times, and it is nearly impossible to know when which will happen.

As far as stuff goes, won't 1.8% actually lose value after inflation? I thought inflation averaged 2-4% per annum over the past 50 years, meaning that anything that pays a lower dividend is at best treading water. Hitting singles all day... Hmm.

Yep, a nominal return of 1.8% will be a negative real return most of the time. It is even today. That is why one cannot count on funding a lifetime of retirement from "secure" cash or short bonds. You can see that Ferri's long term estimates don't have anything that is actually negative in the long run. Still, when one examines what happens to porfolios in withdrawal over long periods of time, the surest formula for failure is to not have enough stocks. On the other hand, higher returning investments can be very volatile and uncertain and time does not necessarily wipe out the variations. One of the few actually effective remedies to this situation is the inflation indexed pension, essentially non-existent now and subject to risks of a different sort, or an inflation indexed annuity.
See above for comments about various pieces of this.
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Re: Okay, You Win [needs investing help]

Post by pingo »

I don't know what dividend fund you have, but looking at 2 Vanguard dividend funds and 1 ETF, I see that the dividend funds are winning if you look back over 5 years, but the Total US Stock Market fund is winning over the last 3 years, and they're all moving pretty similarly. However, you give up diversification and tax-efficiency by using a dividend fund.

You're fixating on the concept of deriving "income" from your investments, that is, income without touching principal/capital. Even if one is to go that route for managing a portfolio in retirement, it is not necessary for one so young who is growing the portfolio for retirement.

So, sure, income without touching capital means one only sees 1.8% dividend from a total U.S. stock fund, but that is not the only return to harvest from the fund. As well, the dividend will vary over the years, increasing and decreasing. It is not correct to believe that your money grows below the rate of inflation by only looking at the dividend of the total market fund.

(sigh)

I hope you'll not lose patience with us as we endeavor to get on the same page. We want to help, but there is a perspective issue that may make the process tricky. You have the right attitude and you are right to ask your questions based on your experience and perspective.
Last edited by pingo on Fri Sep 14, 2012 12:29 am, edited 4 times in total.
Johm221122
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Re: Okay, You Win [needs investing help]

Post by Johm221122 »

I can definitely understand your liking Roth, but a 401,when you get to withdrawal stage will provide you with opportunity to take advantage of lowest tax rates then use Roth
One or two dividend paying stocks has big event risk(anything can happen)
As far as bonds,US government bonds have never defaulted.They could loose some money ( funds)if rates rise,but they will the pay more interest :beer
John
Just ask more if you have any questions, but in end it is your choice
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RyeWhiskey
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Re: Okay, You Win [needs investing help]

Post by RyeWhiskey »

pongun wrote: I'm looking for the steadiest, most boring, most reliable tortoise of investments that will get me something I can really freakin' count on if my rental properties and pension tank. Based on past experience, I'd rather have it as an extra thing than find myself lacking when all my sexier, crazier investments blow up in my face.

So what do y'all suggest as far as something that will provide me reasonable growth and income FOREVER? I'm looking to retire within 200 years off of this ALONE, based primarily on a base $300 monthly investment. I may put in more, I sometimes do, but let's pretend $300 is what I'll be putting in for the duration. My expenses are pretty solid (I've got 5 years in my current home, and I could spend the rest of my life here). I want something that will LAST, not something I have to "manage" or any such nonsense. I have enough crap to do in my day without having to constantly worry or shift. Day trading makes me sick. So let's forget those silly thoughts (that I used to practice... a lot... until far too recently).

Any ideas, folks?

Any insights you can give on ANYTHING would be appreciable, but let's try not to diss me too much. I'm also really interested in your thoughts on investing. Yes, highly diversified, dividend-paying, low-expense ETFs are serious contenders. Do you have any other ideas, particularly specific ones? Thanks for your time and insight. Ready, BREAK!
Alright, that's one crazy situation you got there, but I think you'll be alright. Here's what I would do:
1) Get your emergency fund back up to par.
2) Max your Roth. 300 a month is 3600 a year (try for the 5k). Not bad. In 20 years you've got 72k principle without counting capital gains or dividends reinvested.
3) If you can, contribute to the 401k as well. Tax-deferred space is free money.

And as to your actual question: what should you invest in?
Vanguard Life-Strategy fund. Pick which asset allocation is best for you and forget about it. You get all three indexes in one fund and the allocation never changes. Just be sure it's in the Roth because it holds bonds as well as equity. :beer
This post was brought to you by Vanguard Total World Stock Index (VTWSX/VT).
TA_Lurker
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Re: Okay, You Win [needs investing help]

Post by TA_Lurker »

pongun wrote:Janet, when you say that I can withdraw at multiple tax rates, what do you mean? I just figured I could withdraw a portion of my dividends during my older years tax-free from my Roth, making tax planning easy. I expect to have a substantial nest egg (over $300k... that's a lot when you can live on $800 a month and expect every investment to pay income), and I want to have (inflation-adjusted) about $2,000-2,500 per month for my living expenses and fun.
Pongun, consider this:

You say you wan to EARN money. By ignoring your 401k you're LOSING a lot of money to Uncle Sam. You told us that you are paying taxes at a 25% marginal rate. If your retirement plan is to draw only $2,500 per month (inflation adjusted) you're looking at $30,000 per year. Withdrawing $30,000 per year from a 401k would only put you in the 15% marginal bracket with another $15,000 worth of wiggle room assuming you file individually. So right now you're paying 25% in taxes to later withdraw tax free when you could be paying 0% in taxes to later pay just 15%.

15% tax math:

2500/mo X 12 = 30,000/yr. $30,000 yr in gross income - $9,500 standard deduction & 1 exemption = $20,500 in taxable income, putting you at the lowish end of the 15% bracket. The 15% marginal tax bracket ends at $35,350.
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pongun
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Re: Okay, You Win [needs investing help]

Post by pongun »

Ah, so if I pay less now, I can pay less later. A fair assessment, Janet. Okay.

As far as the Vanguard fund you mentioned, RyeWhiskey (not my favorite drink, but I can deal), I will look into it. Possibly in my 401k, since I'm likely to make some sweeping changes.

I read somewhere that about 75% of the default risk of stock ownership is removed by the time you have 8 stocks, with larger numbers only removing smaller and smaller percentages. As of this moment, I have 11. Since I no longer chase sky-high dividends (I still drool a little about the 35% ones I got back in the day... like a lost love) with unsustainable business models, my likelihood of default is WAY lower.

I just don't see how you can get any kind of return without it paying you something. I mean, if I sell, I won't own it anymore. (duh) What I mean is, if I start selling stock to finance my lifestyle later on, I might run out at some point. I want something I can live on for as long as I live, no matter HOW long that is. Even if it's a thousand-year retirement.

The message I'm getting with some of you is that there's nothing that's actually going to work, which is depressing. I just want something I can live on as quickly as possible because I absolutely hate the idea of spending my entire life having to live on working. I don't see why everybody puts so much emphasis on working at some job where you build someone else's business, but so little into putting the same amount of work into building something for yourself. It's just so weird, working for no lasting benefit.

I presume the topic of "what's the freakin' point?" is another post in and of itself, though...

Hey, is there any way to retire without putting decades into it? I've already put in one decade, and it hasn't gone that well.
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Sunflower
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Re: Okay, You Win [needs investing help]

Post by Sunflower »

pongun wrote:Hey, is there any way to retire without putting decades into it? I've already put in one decade, and it hasn't gone that well.
Win the lottery. Good luck! :P
cmanion
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Re: Okay, You Win [needs investing help]

Post by cmanion »

pongun wrote:read somewhere that about 75% of the default risk of stock ownership is removed by the time you have 8 stocks, with larger numbers only removing smaller and smaller percentages. As of this moment, I have 11. Since I no longer chase sky-high dividends (I still drool a little about the 35% ones I got back in the day... like a lost love) with unsustainable business models, my likelihood of default is WAY lower.
You're playing with fire. You've already been advised that this is the wrong way to go. Any one or two, or all of those companies could face difficult times where not only the dividend is cut, but the value of the stock declines. Now what? You can't do the penguin salute and say, "I thought I'd be okay . . . ." Diversification and BROAD indexes are the best way to invest. Own the whole market, not 11 stocks.
pongun wrote:I just don't see how you can get any kind of return without it paying you something. I mean, if I sell, I won't own it anymore.
The returns aren't there right now. The best you'll get on a 70/30 Bond/stock portfolio is like 3%. The only way you're going to live on that (that is to say the dividends alone) is to save a few million? Do you have the time to do this? And as for the second part of this quote. Yes when you sell it, you don't own it anymore, but the point is to have generated a handsome return over your 20-30 years of passive investing to allow you to keep selling and funding your retirement (around 4% a year). You can't fund your retirement based solely on dividends
epilnk
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Re: Okay, You Win [needs investing help]

Post by epilnk »

HomerJ wrote: Perfect example: General Electric (GE) is also a 100-year old company... It had steadily increased its dividend for about 30 years before the last 2008 crash.

During the crash it dropped from a price of about 40 to 7, and cut its dividend to ZERO. It's still only at 22, about 45% below it's peak.

Total Stock Market Index Fund never stopped paying a dividend, and has almost fully recovered it's value from the crash.

Spreading your risk across multiple stocks is a better bet. If you just pick one or two stocks, you may do very very well, but you may also do very very poorly... Buying a cheap stock index fund is like hitting singles all day. No home-runs, but no strike-outs either.
GE was the very first thing our ML financial advisor put us into. Everybody knew that was a safe bet, one of the best of the best for stability and income. I think we bought around $45 (this was early 2001). He also selected a few other sure things plus some higher risk stocks to spice up our returns. Fortunately we wised up, ditched the advisor, and got out of GE around $35.
(Disclamer: we don't live off our investments. Though if we needed to we'd probably keep the same portfolio. Those reliable singles really add up.)
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Re: Okay, You Win [needs investing help]

Post by epilnk »

pongun wrote:Hey, is there any way to retire without putting decades into it? I've already put in one decade, and it hasn't gone that well.
I'm afraid you're asking the wrong crowd. This is the "get rich slowly" board.
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MossySF
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Re: Okay, You Win [needs investing help]

Post by MossySF »

pongun wrote:I read somewhere that about 75% of the default risk of stock ownership is removed by the time you have 8 stocks, with larger numbers only removing smaller and smaller percentages. As of this moment, I have 11. Since I no longer chase sky-high dividends (I still drool a little about the 35% ones I got back in the day... like a lost love) with unsustainable business models, my likelihood of default is WAY lower
You are mistaken. When taken as a portfolio aggregate, your default risk is the same whether you hold 1 stock or 100 stocks. What holding more stocks does is decreases the odds of default risk affecting the entire portfolio in a single event. Let's take an extreme example to demonstrate the math -- in this world, stocks have 0% growth and 50% default risk.

You hold 1 stock -- math is pretty easy. Within 2 years, the expected return is -100%
You hold 4 stocks. Guess what? Witithin 2 years, the expected return is also -100%.

So if the default rate for companies (in the category you are investing) is 2%, your expected yearly degradation due to defaults is -2% regardless of how many stocks you hold. It just depends on whether you get hit with 1 company out of 50 defaulting every year or 1 company out of 5 defaulting every 10 years.
pongun wrote:The message I'm getting with some of you is that there's nothing that's actually going to work, which is depressing. I just want something I can live on as quickly as possible because I absolutely hate the idea of spending my entire life having to live on working.
Reality check. Back 10,000 years ago, the human lifespan was 35 years. You fought against nature until nature killed you from either accidents, hunger, disease, elements or other animals fighting for their lives. Back 100 years ago, your lifespan was 50 and you still worked until you died. There was no such thing as investments, pensions, government retirement benefits. You popped out kids as fast as possible because out of the 20 that came from your loins, 15 of them died leaving you hopefully 5 who could give you some type of support while you continued to do the household chores of cooking/cleaning/looking after grandkids.

Retirement as we know it today is an unnatural state that man has been able to recently construct in more developed countries. A life of fun in the sun where your portfolio can continually throw off enough income for perpetuity is a dream that the rare few achieve. Most people have no choice but to continually spend down their portfolio when they stop working. There is no magic investment that can change this. Take your dividend example -- if a company is paying X% more than what everybody else is paying, they either have a higher default risk or investors jumping into it will drive that X% back down.
pongun wrote:I don't see why everybody puts so much emphasis on working at some job where you build someone else's business, but so little into putting the same amount of work into building something for yourself. It's just so weird, working for no lasting benefit.
And what business are you building? Investing is not a business nor does putting your money in riskier investments make it businessier.
Last edited by MossySF on Fri Sep 14, 2012 12:48 am, edited 1 time in total.
pingo
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Re: Okay, You Win [needs investing help]

Post by pingo »

pongun wrote:Ah, so if I pay less now, I can pay less later. A fair assessment, Janet. Okay.
Right! It is very likely you'll be able to pay less in taxes on those 401k contributions than you'll pay now when contributing to anything post-tax. If you have times when you can convert or use the 401k at 0% or sub-25% taxation (most likely in retirement), you've won.

Also, $6667 of gross income is taxed $1667 so that you end up with that $5000 net that you need to contribute to a post-tax account.
Whereas, $6667 of gross income can all be housed in your 401k so that you have more money invested and growing.
pongun wrote:I just don't see how you can get any kind of return without it paying you something. I mean, if I sell, I won't own it anymore. (duh) What I mean is, if I start selling stock to finance my lifestyle later on, I might run out at some point. I want something I can live on for as long as I live, no matter HOW long that is. Even if it's a thousand-year retirement.
Ten years ago Apple (AAPL) was bouncing around $10 per share and now it's $680 per share. Forty years ago Berkshire Hathaway (BRKA) was less than $20 per share and now it's almost $133,000 per share. Neither company paid dividends, rather they kept their earnings to re-invest in themselves (kind of like what you want to do), to buy more businesses and to grow. A portfolio's returns can benefit from small cap stocks, but they also tend not to pay dividends.

Let's not worry about it now. If you still think in these terms and want to invest thus when it's time to retire, you can do it at that time. There is no need to worry about that now because you don't need income so you're buying, not selling your assets. There will plenty of time to learn more in the meanwhile.

And don't worry about whether or not anything will work. We're trying to temper expectations and get the point through that risk is very real and it does materialize; it can reward and it can smart. A portfolio must be prepared with that in mind. It is all likely to work at some point in time. It's just that it doesn't all work all together all the time.

Many here invest in a few individual stocks or in other entertaining ways, but they do so with a small portion of their portfolio...an amount they can afford to lose without sacrificing their livelihood or retirement. That is how it should be if one is to take what academically speaking is an uncompensated, undiversified risk.

I know a different people who take nothing but uncompensated, undiversifed risks. Each one has done little more than lose, lose, lose, yet each is still somehow convinced that speculating works. If you'd like to read from someone from this forum who's been on that side of risk, you can look at this recent thread.

A Target or LifeStrategy fund will be totally diversified and will invest now in the ways that aren't currently working (but will later, for which you'll be glad you invested early) and harvest from those ways that are currently working to fund your future needs.
Last edited by pingo on Fri Sep 14, 2012 12:57 am, edited 3 times in total.
madbrain
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Re: Okay, You Win [needs investing help]

Post by madbrain »

pogun,
pongun wrote: I have been putting away $325/month standard for more than a year (almost 2), have almost $7k in my Roth IRA and about $11k in my standard stock portfolio. I've mostly got individual stocks, and almost all of them pay dividends which I'm reinvesting automatically. My average brokerage fee total is less than $200 per year, and last year I made more than $1,500 on dividends alone. I tend to ignore capital appreciation because I almost never sell -- the "value" would only be useful if I wanted to use my margins (which I don't).
$200/year in brokerage fees is a lot for such a small size portfolio. Assuming the $200 is spread out between your total of $18k of assets, that's about a 1% expense ratio.
To put that in perspective, I have about a $700k portfolio, mainly in index funds, and the total mutual fund expenses are $847 for the year.
I have roughly $10k of equity in my $20k home (I paid cash for it initially, and in 2008 mortgaged it out to buy and renovate a rental property... which isn't rented to paying tenants).
Very curious - what part of the country do homes sell for $20k ? Detroit ?
My mortgage is $89 per month on 6% interest (required payment), and I'm paying $150/mo so it'll be paid off in about 11 more years. I also have my other single-family residence and my 4-unit building which is going through electric company issues (some problem with the outside wiring -- my property manager is on it, but I have no idea when the issue will be straightened out). My rental property is owned free and clear, *real* value unknown, but they're currently not paying me anything. I'm losing roughly $300/mo on the pair of them with security system costs, utilities and property taxes. If I sell, I'll most likely take a huge loss, so suggesting I panic sell might not be the best idea. They're in the HOOD, so appreciation is also somewhat unlikely.
You should calculate how much holding on to these properties is actually costing you if they are vacant. Without rent, it probably makes a lot more sense to sell them, even at a loss.
I have a student loan of about $10k, which costs me $121 a month. It's at under 3% interest, so I haven't been overpaying it.
It would probably be wise to pay it off a little.
I do have a 401k, but I see no value in it because THERE IS NO COMPANY MATCH. I see my Roth's permanent tax-free status in 40 years as being superior to paying taxes on my 401k in 40 years, and I'm currently unable to max out either of them. I haven't contributed to my 401k in years, and I have under $1k in it (around $650 when last I checked).
The thing is that the 401k lets you accumulate far more money than the Roth. But look at what the expense ratio is in the funds in the plan.
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

Re: Okay, You Win [needs investing help]

Post by pongun »

As for my city, I own in the worst neighborhoods in Indianapolis, Indiana. As for my student loan, 2.85% is that significant? Seriously? I could probably blitz it in about a year if I had to, but it's SOOOOOO depressingly small. Yes, it's a guarantee, but isn't that just getting back to zero? I don't know if I can zero-out all my expenses (without living on a totally self-sufficient island -- that's more expensive than I can do right now).

To clarify, I wasn't talking about expenses on funds. I was talking about brokerage commissions for buying stock. I use TDAmeritrade, and each trade is $10. I bought about 20 times in 2011. I didn't discover the automatic DRIP option until late in the year, and I was putting a LOT in there. Well, a lot for me. You have $700k... I could SO EASILY live on basic dividends off of that. It's amazing. You say $700k like it's a week's pay or something.

I don't understand the way most people live. When people say a neighborhood is "safe" or "bad," I don't get what they're really saying or how they calculate that. So I just buy cheap. I buy cheap stocks based on things like p/e ratio and dividend payout percentage. I figure there's a reasonable chance they'll go down, but since I don't ever want to sell I don't care about that. Hell, if it pays a solid dividend (and a lot of companies do -- my litmus test is what they did 2008-2010), I can buy MORE if it goes down.

Needless to say, my assumptions and methods are very unusual. I'm a bit of a freak. Wait, $700k??? I'm still stuck on that. I mean, you could make $28k on a piddly 4% dividend. Dude, you've won. I am so jealous.

I'm gonna ask other, more specific questions on other threads. This one's going long.
madbrain
Posts: 5577
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Okay, You Win [needs investing help]

Post by madbrain »

pongun wrote:As for my city, I own in the worst neighborhoods in Indianapolis, Indiana. As for my student loan, 2.85% is that significant? Seriously?
The risk-free interest rate is currently about 0 to 1%. The interest rate on your student loan is not tax deductible. And this is a debt you can never discharge, even in bankruptcy. IMO, yes, you should pay it and be done with it.
To put that in perspective, I refinanced my mortgage at 3.375% fixed yesterday. On a tax adjusted basis in my combined federal & state tax bracket, that's only 2.2%, less than the rate on your student loan. And that's the highest interest debt that I still have.
To clarify, I wasn't talking about expenses on funds. I was talking about brokerage commissions for buying stock.
Yes, I know what you were talking about, but they are both in the same category - investment expenses.
I buy mutual funds, in my 401k, Roth, and taxable account, so I never pay any brokerage commissions.
If you reduce your investment expenses you will all have more left for yourself, that's one of the key points of the bogleheads philosophy.
You have $700k... I could SO EASILY live on basic dividends off of that. It's amazing. You say $700k like it's a week's pay or something.
No, it's 14 years of savings, 401k and IRA contributions, and the inheritance from my father's.

You live in a very low-cost area and you must be very frugal. I live in the SF bay area and in a large home. $700k wouldn't last me very long at all, sadly, less than 5 years. I have to work at least another 15 years before I retire if I want to keep my current lifestyle; probably closer to another 20 years.
I don't understand the way most people live. When people say a neighborhood is "safe" or "bad," I don't get what they're really saying or how they calculate that. So I just buy cheap. I buy cheap stocks based on things like p/e ratio and dividend payout percentage. I figure there's a reasonable chance they'll go down, but since I don't ever want to sell I don't care about that. Hell, if it pays a solid dividend (and a lot of companies do -- my litmus test is what they did 2008-2010), I can buy MORE if it goes down.

Needless to say, my assumptions and methods are very unusual. I'm a bit of a freak.
Well, often things are cheap for a reason. It sounds like you fell into the "value trap" with your cheap properties that you are not able to rent out. And you may be doing the same with your stocks, which can cut their dividends at any time if business goes bad. You may want to google "value trap".

Keep in mind also that there is no way to time the market. If it goes down 40% like in 2008, the only way you can buy more is if you had some significant cash left on the side uninvested. Cash has a negative return right now compared to inflation so you really don't want to hold too much of it. In 2008 my portfolio dropped 40%, it was hard to watch, but I sat tight, and it eventually came back up. It did take about 3 years, though.
Wait, $700k??? I'm still stuck on that. I mean, you could make $28k on a piddly 4% dividend. Dude, you've won. I am so jealous.
4% dividend is optimistic - it would be quite high. The average dividend for the S&P500 is under 2%. Don't forget inflation, also.
Part of the return of the equity part of the portfolio has to come from capital appreciation.
4% returns after inflation is attainable if you include capital appreciation.
Azok
Posts: 42
Joined: Mon Jul 16, 2012 10:37 pm

Re: Okay, You Win [needs investing help]

Post by Azok »

There are a few things I don't understand here...

How you make $30k a year and are in the 25% tax bracket.

How your home only costs $20k, and if you make 150% yearly the cost of a house where you live. And you aren't debt free.

Are we being trolled?
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

Re: Okay, You Win [needs investing help]

Post by pongun »

As for the person with the 3.375%, cool. Mine's 6%, and when I ran the numbers it didn't make sense to refi. It'll get paid off sooner or later.

San Francisco? Dude, I wouldn't live in that seismically-unstable area if someone paid ME. It's only a matter of time before that place tears itself apart, just like it did about a hundred years ago. A thousand soft-story buildings, numerous areas literally made up of piled up garbage from the great fire... that place is suffering waiting to happen. I'll take cheap land.

I know what a value trap is, and I admit I've fallen into a few of them. I tend to be overzealous and overly positive (I'm working on it). As for the cheap living conditions, I like cheap. My power bill is $24-43/month, and I'm still annoyed that I've never gotten it into the teens. I hate spending money on crap that doesn't matter, and it seems like nothing matters.

I don't make $30k. Last year I made $47.7k. I just don't use much of that for my living expenses. In perspective, until 2010 I average a gross of $16k/yr, and I was still consistently saving and investing on that. If I REALLY had to tighten the screws... hold on... I could live on $670/month total until my debts are paid off (estimated 2035). Then I'd be down to about $400 a month total. If I trimmed down my food costs a little more, stopped keeping my home at 80 degrees in the winter time and really hammered on the properties to get the taxes down (or sold all unnecessary ones), I *might* be able to get down to the $300-350/month range for all living expenses. Of course, I could probably get into the $250/mo range if I grew all my own food (I have some inexpensive land and plans to have a full subsistence garden going by 2015). Keep in mind that this does not include any health care, as I would really rather die than submit to their insane fees.

So in quick recap, last year I made roughly enough to live for 3 years. If I REALLY wanted to fully embrace the madness, I could've lived a little over 4 like that. So if I expected to live to be 100, if I could maintain my cash balance after inflation (which I'm sure you all know how to do), I could work for 14 more years and live like a cheap zealot for the rest.

I'm fatalistic and obsessively cheap when it comes to things I don't care about (which is most things, unfortunately). I can show you my balance sheet and cashflow statement spreadsheet and tax documents if you don't believe me. No trolls on my end.

Oh, I forgot the $20k house thing and still having debts. I don't focus on debt repayments as a general rule. I intentionally took on my mortgage so I could buy my first rental property, and I've been working on MAKING money through my investments. I have traditionally figured that if I can get 10-20% dividends (I get 10% on ALSK and 20% on AGNC, two of my primary stock holdings), a 3% student loan and 6% mortgage become less relevant. I forgot to discuss that in draft A of this post.
pkcrafter
Posts: 14564
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Okay, You Win [needs investing help]

Post by pkcrafter »

Pongun, you are getting lots of replies, suggestions, and help, but you don't seem to serious about pulling things together. You've been vague with important information and spoon out needed facts a bit at a time, which makes it appear you really aren't serious. Your other post on some wild "investing" get-rich or nothing scheme is another indicator that you are just amusing yourself. Maybe one in a thousand people who try some screwy make-it or break-it idea will make some gain, but the rest end up facing retirement with nothing saved. The irony of this is although you don't make a lot of money, you are a great saver and that is the key.

If you decide to take investing seriously, you will no-doubt end up with a sizable retirement account. Here is the Boglehead Philosophy:

Boglehead Philosophy
Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course

For the vast majority of investors there is no better way to invest.

http://www.bogleheads.org/wiki/Getting_Started

You can do this, but like the rest of us, you have to grind it out year after year with dogged determination.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

Re: Okay, You Win [needs investing help]

Post by pongun »

I must object to your recent statement, PKcrafter. Just today (9-14-12, if anybody cares), I purchased a few shares of my first broad market ETF (from Vanguard, nonetheless). Sporting .06% expenses and paying an embarrassingly low dividend, it's what a lot of people have been suggesting. Over the next year, a substantial part of my portfolio is going to shift from dividend-bangers (like my beloved but toxic REITs) into more stable, more broadly diversified funds with low expenses (NEVER anything over .8%, and most far lower). I haven't bought an individual stock in a few months aside from DRIPs, which carry no expense, have small tax implications (I can offset those with losses for the time being -- I checked with my accountant, and I'll happily pay the taxes on my gains if necessary) and allow me to stay the course. Overall, not too far from what many of you have been saying.

This week alone, I have set aside more than 40% of my gross income (not counting self-escrow for taxes) for mid-term savings, my short-term 2-weeks+bills savings are solid once again, everything except property taxes and property insurance are automated (that was already the case) and my time horizon is stretching out beyond 10 years (which is really hard to consider, since there are so many variables in place that WILL change during that time). Over the next few months, I am determined to build up no less than a 3-month fund, which I actually consider pretty easy. Saving comes naturally to me -- if I don't want something in particular and I get some money, I just keep it. I'm perplexed by the compulsion some people have for spending everything they make. By the end of 2014 I expect to have something on the order of a 1 to 2-year fund, depending on a few factors that are not yet set. Bare minimum barring anything REALLY bad happening, I'll have my six-month fund by spring thaw (late March in Indiana, at least by I Ain't No Fool Day).

Considering I split my income between dividends, rents, a union job and freelance writing (and I could pretty much live on any 2 of those revenue streams), I'm actually pretty solid. My base is reasonable, though I supposedly have a "low" income. It's actually $5-15k per annum more than the average for an entire household in my area (see the wiki- en.wikipedia.org/wiki/Indianapolis ), which isn't exactly downtown Podunk.

Even my worst current investments are still profitable, still paying dividends and will continue to produce actual cash that I can put somewhere more responsible as it comes in... or I can write them off. Since I see my remaining stocks, not as mere ticker symbols to be flipped but as companies that operate on a daily basis, I respect that they will have bad times. Somehow we've lived through bad times. In a few decades, I'm reasonably confident that a fair number of my "stocks" will still be operational. Some companies trading on the NYSE have operated longer than any ETF, Target or other fund, so I have yet to discount their validity in its entirety.

I even looked at a few bond ETFs today. I'm not saying I'll buy any of them, but I did check the prospecti, the expense rates, etc.

It is a VERY long road from being a maniac who craves sky-high dividends to being anywhere approaching a proper Boglehead. Dude, I once bought a vending machine intending to sell artwork out of it. I had a t-shirt business (yes, I was that guy. I made a little money). I drew a webcomic (and I don't know if I'm allowed to post a link to it here, so I'll refrain) for almost a year and a half, marketed the crap out of it. I functioned as an artist for awhile... until those annoying bills began to come in. I was doing great up to that point... And I love ellipses...

Point is, I'm a risk-taker. It's what I do. It'll probably never entirely wash out, and the world might even be worse if it did.

The reason I came to you guys was precisely BECAUSE we are so different. I believe in diversifying more than just my money -- diverse thoughts are of equal importance to me. I will probably never be anywhere near as hardcore as many of you guys are (I remember once reading that one of you didn't sleep well unless he had 5 years worth of cash in the bank), but rest assured I have read and considered EVERYTHING y'all have said. I actually do appreciate your suggestions, though I will not *blindly* follow any of them.

And... What do you need to know about my situation that I haven't made more obvious than a 10K? Ask me anything.

Oh, and the "what if" thing is INTENTIONALLY for laughs. I even specified at the beginning that it's just a chance to let your mind run wild on a topic you guys tend to take REALLY seriously. In case any impressionable people are reading this, please don't do any of the crazy stuff everyone's suggesting in my other active post. It's just a joke for grown-ups... and it's also almost midnight where I am, so you should probably be in bed. Eating broccoli and drinking milk. Once your chores and homework are done.

Relax. That might be a good tenet to add to the end of the Boglehead philosophy, which I THINK could boil down to: Set your course, place your eggs in many secure baskets, keep your wealth, stick with it, live your life with a relaxed sphincter.

I continue to welcome your suggestions, and I AM adjusting course. But remember it takes awhile to do a 180. And for the record, I have NEVER tried to time the market. I think it's open around 9 and closes around 4, but that's neither here nor there.
madbrain
Posts: 5577
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Okay, You Win [needs investing help]

Post by madbrain »

Azok wrote: Are we being trolled?
I think so ...
pingo
Posts: 2617
Joined: Sat Sep 19, 2009 8:24 pm

Re: Okay, You Win [needs investing help]

Post by pingo »

First question:

Which is better:
A. Receiving free money from your employer, never paying 25% taxes on any gross income and never paying taxes on investment earnings? Or...
B. Paying 25% taxes now, continuously paying taxes on dividends and paying capital gains taxes down the road?

Second question: how high a return must you achieve (and at great risk) in order for option B to equal or surpass option A, which is achieved with zero risk?
pongun wrote:Last year I made $47.7k.
If you have zero dental/medical deductions from an employer plan, zero deductible 401k contributions, and if you do not itemize deductions, then I believe that places you at $37,950 taxable income which is the 25% tax bracket (25% federal bracket starts at $35,351). You can plug in the numbers of your exact circumstances to be sure.

Is your 401k plan the Teamster UPS National 401k Tax Deferred Savings Plan? If so, you need to make some important changes:

1. Contribute enough by year-end (roughly $2600 based on the above assumptions) to your pre-tax 401k option to break into the 15% tax bracket for 2012. According to the plan:
[url=https://www.retirement.prudential.com/cws/teamsterups/Summary_plan_Description.pdf]Teamster UPS National 401k Tax Deferred Savings Plan[/url] (on page 4) wrote:As a Plan participant, you may elect to contribute from 1 to 35 percent of your eligible pre-tax compensation (in increments of 1 percent) to the Plan on a pre-tax basis...If you elect to also make pre-tax contributions, please note that the combination of pre- tax and Roth 401(k) contributions may not exceed 35 percent [(Source.)]
2. The 401k doesn't get you down to the 15% federal bracket for 2012, I believe you're still eligible for deductible IRA contributions by tax time in 2013 (or for re-characterizing a portion of your 2012 Roth IRA contributions) to get into that bracket. The 15% bracket should also permit selling taxable assets without paying capital gains (if necessary, but only if sold in 2012, not thereafter).

3. Try to save up to 35% of salary (or $17k, whichever is less) to the 401k — using the Roth 401k option if you prefer tax-free space beyond your Roth IRA.

4. Once you are maxing your 401k, contribute 5% in "after-tax contributions" (not the same as Roth). You pay taxes upfront (like a Roth) and earnings are tax-deferred. You can make frequent in-service rollovers of those contributions to your Roth IRA (paying a small amount of taxes on earnings), but this way you'll expand tax-free + RMD-free Roth space beyond the Roth 401k and Roth IRA :
[url=https://www.retirement.prudential.com/cws/teamsterups/Summary_plan_Description.pdf]Teamster UPS National 401k Tax Deferred Savings Plan[/url] (on pages 6 & 19) wrote:In addition to your pre-tax and/or Roth 401(k) contributions, the Plan accepts after-tax contributions of up to 5 percent of your eligible compensation...You may withdraw all or a portion of your after-tax contribution and rollover contributions plus earnings at any time...For distributions by check and for rollover distributions, the fee is $10. [(Source.)]
5. 1 through 4 are preferable to using a taxable account, but once you've exhausted the limitations of those options, a taxable account is fine for investing your savings.

Given that you'll also be receiving a pension (and presumably Social Security) I'd say the 15% percent tax bracket is a probably good enough to justify putting everything else in direct Roth savings and backdoor Roth rollovers. Some may prefer more pre-tax savings. Regardless, you reduce your dependence on risky super stocks.

As to the 401k investments options, they're all super low-cost index funds (with an additional 28 basis point custodial fee). (For those interested, 401k funds can be viewed here by clicking "I'm interested in joining the Teamster-UPS 401(k) Plan".
Last edited by pingo on Sat Sep 15, 2012 1:56 pm, edited 29 times in total.
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