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Financial Safety
2
Financial Safety
Mitch Fincher
November 13, 2018
Things I wish I'd known about saving when I was younger.
Goal
Big Idea
You can work hard all your life, put lots of money into your savings, but still be poor in retirement if you don't invest well.
Big Idea
4% Rule
How Much Will I Need?
The Four Percent Rule is that you can withdraw up to 4% of your saved retirement fund each year and not run out of funds. So if you need $40,000 dollars a year from your savings, you will have to save one million dollars by retirement age. That's a lot of money and it doesn't just happen.
How Much To Save?
How Much Should I Save?
As a general rule you should try to save 10-15% of your salary for retirement. This percentage includes what your employer contributes.
How much should you have saved by age?
Age -- Multiple of your salary saved
30 -- 1x
40 -- 3x
50 -- 6x
60 -- 8x
67 -- 10x
Basics of Investing
Risk.
Risk
You get paid for risk. Since inflation runs about 2% a year, if you put your money in the bank in a risk-free FDIC insured account at 0.05% interest, you are losing money every year. You need to take more risk to earn more money.
Stocks and Bonds
Stocks and Bonds
Stocks
When you own a stock, you own a little piece of the company. When the company makes a profit for the year they will pay you a tiny part of that profit which is called a dividend. If a company has a million stock shares, and you own one stock, you will get one-millionth of their profits for the year. (Although some companies don't pay dividends, but let their stock price rise instead. Either way you can make money).
Stocks
Stocks are Risky
If the company does not do well, your stock value can go down. If the company goes bankrupt you can lose all the value of your stock. But with greater risk comes greater reward. The US stock market averages about 8% returns a year.
Risk
What is a Stock Fund?
Stock Funds
Stock funds are composed of other stocks. It's like a basket of stocks; when you buy a stock fund, you buy a small piece of multiple stocks.
S&P 500 by Sector
Composition
S&P 500 Members
Two Types of Stock Funds
Two Types
Managed and Unmanaged
Managed
Managed funds buy stocks based on the opinion of a highly paid stock picker. These have high fees (0.5-2%).
Managed
Unmanaged
Unmanaged
Unmanaged funds, like Index funds, buy stocks based on an list, like the 500 biggest companies in the stock market (the S&P 500 list) and have a low fee (0.03%).
Which to Buy?
Which is better?
Unmanaged funds (Index funds) will almost always beat managed funds because managed funds have a higher expense. Over the decades this 1-2% difference can amount to tens of thousand of dollars.
Corporate Bonds
Corporate Bonds
Companies borrow money from investors by selling bonds. They are like government savings bonds - you buy them now and can redeem them later with interest and sometimes with quarterly payments. While bonds earn interest and are safer than stocks, they don't typically earn as much profit as stocks.
Risk 1 - Bankruptcy
When a company goes bankrupt the bond holders get their money before stock holders.
Risk 1
Risk 2 - Inflation
The biggest risk with bonds is that inflation will rise, making your bonds worth less.
Risk 2
US Government Bonds
These are the safest bonds, but pay less interest (2-3%).
Government Bonds
Invest in ways that minimize your taxes.
Taxes
Invest in tax advantaged accounts like a company 401K or Roth account.
At the very least, invest into your 401K as much as your company matches.
HOW TO MITIGATE RISK: DIVERSIFY
Diversify
Diversify Stocks and Bonds
You should own a mix of stock index funds and bonds in case the stock market goes way down.
What percentage in stocks? One rule of thumb is to have the percentage of stocks the same as 120 minus your age.
Diversify Over Asset Classes
Diversify over Countries
You should also diversify over countries. Have some stock and bonds from other countries.
Diversify over Countries
My Recommendations
Recommendations
Put 50% in SS LG CAP INDEX State Street S&P 500® Index Securities Lending Series Fund Class GM-M (expense ratio: 0.003%)
Put 35% in BLKRK US DEBT INDEX BlackRock US Debt Index U/A (expense ratio: 0.035%)
Put 15% in SS INTL INDEX State Street International Index Securities Lending Series Fund Class GM-M (expense ratio: 0.065%)
Invest Every Paycheck
Investing money in the stock market when you think it is low, and selling when you think it is high almost never works. Instead, invest a part of every paycheck and ride out the storms.
Over Time
Summary
Save 10-15% of your salary for retirement every paycheck using a mix of stock index funds and bonds into your company's retirement plan. Your 65 year old self will thank you.