Accomplishing Goals: Part 7 (Self-Manage Finances)
We spent the majority of our career in education teaching at private Christian schools. While there are many benefits of teaching in private Christian schools including class size, parental involvement, better discipline, and excellent curriculum; there is also a major disadvantage which is comparative salary. In general, private school teachers are paid on average from 25 to 40 percent less than public school teachers.
Based on this lower base salary, we have always been frugal in our family finances. My wife is a budgeting genius and we both kept careful watch over our finances using budgets and spreadsheets. We were careful about costs for food, entertainment, vacations, and clothing. We did many low cost and free activities with our children when they were growing up. We both worked and we would volunteer for extra duties for additional pay. We started saving early in our marriage and began retirement savings in our early thirties. Our retirement savings was in our employer 401(k) plan and an individual IRA.
As we approached retirement, we began researching whether we should hire someone to manage our retirement funds or whether we would continue to self-manage our investments. We met with two financial planners, read The Retirement Manifesto blog, and read the book The Simple Path to Wealth.
Financial Planners
Financial planners typically charge a yearly fee based on the amount of funds they manage for you. A 1% fee is typical. So, if you have $500,000 of retirement funds that the financial planner manages, he would charge you $5,000 each year to manage the funds. The financial planner decides how to invest your money and lets you know how much you can withdraw each year. Financial planners also offer advice on tax planning, whether to do Roth conversions, and other financial decisions.
The Retirement Manifesto
The Retirement Manifesto is a blog about retirement preparation written by Fritz Gilbert. He is a proponent of the 3 Bucket Strategy for retirement planning. A Bucket Strategy is an organizational method for thinking about how to invest and withdraw retirement funds.
Bucket 1
Bucket 1 is the cash bucket. This bucket should be fully liquid, risk free and readily available. Depending on your risk tolerance, you should target to fill Bucket 1 with anywhere from 1-4 years of spending requirements not covered with other income (e.g., pension, social security, annuities). Your goal here is not to generate a high return, but rather to protect your spending requirements over the next few years.
Bucket 2
Bucket 2 is the income bucket. Investments in Bucket 2 should focus on high quality fixed income assets (bonds, long term CDs), with a smaller amount of stable dividend paying stocks. This bucket is a little riskier than Bucket 1 but still relatively safe. This bucket should contain between 5-8 years of spending requirements. Your goal here is to generate some income that can replenish Bucket 1.
Bucket 3
Bucket 3 is for long term gains in the stock market. This is money that you wouldn’t need to access for at least 10 years. This is the riskiest bucket but it is needed to make sure your funds can outpace inflation.
The idea behind the bucket approach is that you have enough cash and safer funds that you would never need to sell stocks during a downturn or crash. Bucket 1 is your safety net to help you get by a downturn. Bucket 2 is the back-up safety net if there is a longer duration downturn.
The Simple Path to Wealth
This book written by JL Collins based on his blog jlcollinsnh.com proposes that ordinary investors do not need to hire and pay a percentage fee in order to invest successfully. He proposes that investors only need two funds in their portfolio: a total stock fund and a total bond fund.
Total Stock Fund
According to Collins, most investors should have all or most of their funds invested in a total stock fund. His personal recommendation is Vanguard’s Total Stock Market Fund (VTSAX). This fund invests in every US individual stock; it has a very low expense ratio (o.04%); and it has a low investment minimum ($3,000).
Total Bond Fund
Once an investor approaches or reaches retirement, Collins suggests adding a total bond fund. The idea is that this will help reduce the amount of volatility for the investor. His personal recommendation is Vanguard’s Total Bond Market Fund (VBTLX). This fund invests in a wide variety of intermediate term bonds; it has a very low expense ratio (0.04%); and it has a low investment minimum ($3,000).
Collins leaves it up to the investor to decide what portion of their portfolio should be in each of the two funds. Generally, he would suggest between a 60/40 stock/bond portfolio on the high bond side to a 90/10 stock/bond portfolio on the low bond side.
Our Plan
We have decided to self-manage our retirement funds at least for the next few years. As we age, we realize that cognitive decline may make it more difficult to make wise financial decisions. We do have a financial planner in mind if we decide we need help in the future.
We have implemented a 3 Bucket Strategy for our financial plan. We have about four years of expenses in our Cash Bucket, nine years of expenses in our Safe Income Bucket, and greater than 10 years of expenses in our Long-Term Growth Bucket.
We have all of our retirement resources invested in two funds: VTSAX and VBTLX. We settled on a 65/35 ratio of stocks/bonds. Because we are following the principles in The Simple Path to Wealth, keeping up with our finances only takes about an hour each week.
