Go Your Own Way – Retirement Accounts 101

So, now you know the main options for retirement accounts. But what do you invest in?

Determining your risk threshold is an important first step. How comfortable are you with swings in your account balance? Will you only look at it when you get your quarterly statements, or will you be online checking it weekly? Can you stomach losing 15% of your investment if it means you could possibly earn a 30% return? Or are you more comfortable with an 8% risk of loss for a 12% return?

Your risk level should also factor in your age and how far away you are from retirement. When you are young, you can take more risk with your money, because you will have more time for a downturn in the market to rebound, as painful as it is to watch (and I speak from experience, I lost at least 25% in my first 401(k) in 2008 when the banking industry imploded and it took years to recover, but 12 years later, it’s more than double what it was before the crash). When you’re 10 years or less from retirement, you can’t afford to take that risk, as you may be looking to retire before your retirement accounts have a chance to fully rebound (I know people who had just retired in 2008, and had not moved the majority of their money into safer investments, and had to go back to work as a result of the toll the banking crash took on their retirement accounts).

Managed plans, like a 401(k), will offer several options for you to choose from, in a range of risk levels. They will show you return rates for the past 1, 5 and 10 years to give you an idea of what your rate of return could be (keep in mind, past performance may not be an indicator of future returns). Each investment will also have a risk assessment. Lower risk investments tend not to lose as much when the market swings down, but also do not earn as well when the market swings up. Higher risk investments offer much higher returns, but at a much higher risk of loss.

Each individual investment has it’s own risk, but in general, the lowest risk items are cash (such as money market accounts), followed by bonds, and then stocks.

It’s a good idea to put your money into more than one investment. You can also invest some money in riskier options and some money in less risky options to get to a risk level with which you are comfortable.

If you find choosing from their options to be too intimidating or complicated, many plans will offer to invest for you, based on when you plan on retiring. If you’re in your 20s, they will take far more risk with your money (resulting in bigger swings in your balance) than if you are in your 50s. As you get closer to your intended retirement age, they will move your money (new and old) to safer investement options.

What if your job doesn’t not offer you any retirement accounts? You have a few options. Each have their upsides and downsides.

Option 1 – DIY

You can go the do it yourself route, and pick each investment you want to put your money in. You can set up accounts with brokerage firms, such as Vanguard, TD Ameritrade or Charles Schwab, and buy and sell stocks and bonds yourself. There are typically fees associated with each transaction, which vary from firm to firm. We choose to use Robinhood and Webull because they only charge fees when you sell an investment, and the fees are very low.

At Webull, you have to buy full shares. So if you want to buy a share of, say, Berkshire-Hathaway Class A stock, you’d have to fork over $327,115. That is an extreme example (it is, in fact, the most extreme example. BRK-A is the single most expensive stock you can buy). Something a little more modest like Tesla would cost you over $372 a share as of this writing. Apple is a little less expensive at $112 a share.

But if you only have a small amount of money to invest each month, you can either invest in far less expensive stocks and bonds, or you can use a service like Robinhood, which will allow you to purchase partial shares.

If you are unsure what to invest in, and don’t want to spend hours investigating companies, there are ETFs (Exchange Traded Funds). These are investments that pool together a bunch of stocks or bonds, and are traded, just like a stock or bond. These can be an easy way to diversify your investments and mitigate some risk. Some brokerage firms, such as Charles Schwabb and Vanguard, offer their own ETFs (these are often also offered at other brokerage firms or services as well).

Upsides:

• You have full control over your money. You can choose what markets and what specific companies you want to invest in.
• The fees can be low.

Downsides:

• You have full control over your money. The average investor earns below average returns. Humans are emotional and irrational. We buy high, overreact, and panic sell.

Option 2 – Financial Advisors

You could hire a financial advisor, an expert who will invest your money for you, typically for a small percentage of what your retirement accounts are worth. This is typically a far more hands off approach than investing on your own.

A financial advisor should discuss what your goals are, when you want to retire and how much risk you’re comfortable with. They can set up personal retirement plans, such as IRAs, for you. They will choose a mix of stocks, bonds and or cash accounts to diversify your investments and to reach the appropriate risk/return level for you.

Since we finally got ourselves out of debt, we set up Roth IRA accounts for each of us with a financial advisor (sadly, this is Scott’s first retirement account). We send him a chunk of money each month and he does the rest.

If you choose this option for any or all of your investing, be sure the person you select is a fiduciary financial advisor. Being a fiduciary means that they legally have to do what is in your best interest. It seems ridiculous that someone you hire to manage your money could have the legal right to go against your best interests, but for some asinine reason, unless they are a fiduciary, they do.

Upsides:

• Someone else does all the work.
• You aren’t going to panic sell all your investments when the market has a bad day. Or, your advisor will hopefully at least talk you out of it.

Downsides:

• You do not have all the control over your money. That said, if you don’t like something your investor is doing, you can always have a conversation with them. But it’s better to talk about these things at the beginning, so you’re both on the same page.
• The fees are higher than other types of investing.

Option 3 – Robo-Advisors

Robo-advisors are services that will invest your money for you without you having to pick and choose the specific stocks, bonds or ETFs. It works similar to the 401(k) plans that invest for you. You choose a risk tolerance level, and they split the money you give them into a mix of investments to achieve that risk level.

There are several options in this category, such as So-Fi, Wealthfront and Betterment (some brokerage firms, like TD Ameritrade and Charles Schwabb, also have robo-advisor options). The fees vary from service to service. Some charge a percentage of your account, some have a set monthly fee.

In this category, we use Acorns, who charges $1 a month for your account (which doesn’t sound like a lot, but when you’re just starting out, and you only have, say, $20 in your account, that’s 5% of your money, which is a really high percentage. Like, higher than a financial advisor. But as you continue to invest, it becomes increasingly smaller). Acorns offers round ups, which will round up every transaction in your bank account to the next whole dollar amount (if you spend $27.25 at the grocery store, it moves $.75 into your investment account). You can increase the round ups to 2x, 3x or 10x and/or add a weekly or monthly amount to invest as well. We started off with just doing round ups, then added another $5 a week to it, then doubled the round ups. It’s a nice way to gradually increase your investing.

Upsides:

• Someone else does all the work.
• Automatic investing every week or month.
• You probably aren’t going to panic sell all your investments when the market has a bad day. Or week. Or pandemic.
• The fees are usually very low.

Downsides:

• You do not have control over your money.
• You may not have any idea what you are invested in at all.

Whatever you choose, there are a few things to bear in mind.

• If you do not have company sponsored retirement accounts, starting a personal retirement account, like an IRA, will give you a tax advantage (see our previous boring-as-hell article for more information), so it is probably in your best interest to start one and start your investing there. Most of these plans have a limit to how much you can invest each year. You can always invest more money outside of the plan, but these plans will give you a tax break on at least a portion of your investments.
• Any investment you sell at a profit will be taxed, even if you reinvest it some place else. Any investment you have held for less than a year is subject to short-term capital gains tax, which is the same as your normal income tax rate. Investments held for over a year are subject to long-term capital gains, which ranges from 0% to 20%, depending on your income and marital status. If you live in a state that has a state capital gains tax (which is most states), those will also apply.
• Taxes will also need to be paid on any dividends that are earned from an investment, even if that money is reinvested (which is usually the default, until you get to retirement age). Dividends paid out on retirement accounts that have been owned for less than 60 days are subject to short-term capital gains taxes (so, normal income tax rates). After 60 days, the long-term capital gains rates apply.

Okay. Now that we have the two most tedious articles out of the way, hopefully we can get back to some far more entertaining shit. And by entertaining, I mean swear-filled tirades of how much stupid shit everyone (ourselves included) spends money on.

Kat