By Dr. Rikki Racela, WCI Columnist
Say whhhaaattt? Yes, you read that headline right—my financial plan involves being hung by my fingernails. Now, I know that's hard to believe. What might even be harder to believe is that this financial plan was a result of taking WCI’s Fire Your Financial Advisor course. Now, Dr. Jim Dahle doesn’t advocate for physical torture. That was thrown in there by me for a reason—a very salient reason I will explain later.
But what I hope to do in this column is go over the financial plan that my anesthesiologist wife, Meredith, and I developed through Fire Your Financial Advisor and, with our plan as an example, illustrate how it can enable you to reach your financial goals.
So here it is: Rikki and Meredith’s Written Financial Plan (and how to keep your fingernails intact).
#1 Goals
The first part of the course involves some introductory material and a focus on written financial goals. No, the goal is not to “make the most money so that you can be the richest person in the grave.” In fact, the goals portion is the first written part of the plan, and as you go through the course, Jim focuses on them to be “SMART” goals. For those who don’t know the acronym, it stands for Specific, Measurable, Achievable, Relevant, and Time-Limited. The course gives you the knowledge to write and accomplish these written goals, and they will form the first and foundational part of your written financial plan.
Goals
Here are our goals.
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- Our investments will provide an income of $100,000 per year (2020 dollars) while still growing at the rate of inflation where Meredith will be financially independent in 2030.
We will reach a net worth of $1 million by July 1, 2021.Done in November 2020- We will have a pool/patio and landscaping fund of $200,000 done on May 1, 2022. We will abandon this if we move out of New Jersey.
- We will have $300,000 in Jackson’s (my son) 529 by Sept 1, 2033.
- We will have $300,000 in Mia’s (my daughter) 529 by Sept 1, 2035.
- We will pay off our home by December 2045.
- We will have our student loans paid off by 2042.
Savings Goals
- Save 20% of our gross income for retirement.
- We will max out Rikki’s 403(b), solo 401k(), Meredith’s 401(k), and our Backdoor Roth IRAs each year.
Notice that we crossed through one of those goals because we accomplished it. For us, it’s nice to leave that accomplished goal in there with the strikethrough font, giving us a psychological win feeling, almost the same feeling when using the debt snowball method. Also, we did not accomplish No. 3, though we tried our hardest. We currently have $160,000 for the job held in a high yield savings account, which is OK. Yes, we fell short but would have fallen much shorter if it weren’t written down. As Morgan Housel writes in his book The Psychology of Money, “The most important part of every plan is planning on your plan not going according to plan.” And that’s the beauty of FYFA: the course teaches the plan to be flexible where it can be modified, changed, and rehashed dynamically as you achieve (or don’t achieve) your goals or as life circumstances warrant.
Notice that we did not make goals such as, “Retire with $30 million someday and live an awesome life.” Although it sounds like a cool goal, especially when I throw in the word “awesome,” you learn through the course that it is not a SMART goal. This may seem obvious with the sum of $30 million, but then what is a realistic, SMART number? Is it $20 million, $10 million, $5 million? And what is a realistic timeline? Ten years? Twenty years? Fifty years? The course hones in on a SMART goal where you have an appropriate Financially Independent (FI) number for the time you actually want to retire, as you read in No. 1 above. That $100,000 of investment income so my wife can be FI is a SMART goal. I myself plan to keep working (and hopefully still love neurology!) at age 65, but the course can even enable a couple to plan when one spouse wishes to be FI while the other keeps working.
More information here:
Visualizing Your Way to Wealth
#2 Insurance
The next part of the course makes mincemeat of the complex topic of insurance, where the type and amounts of insurance required are taught and reviewed in a succinct and comprehensive manner and are integrated into a written plan. We ended up with the following:
Insurance Plan
- We will have a level term life insurance ladder starting in July 2019 of:
- $1.5 million for 10 years
- $1.5 million for 15 years
- $1 million for 20 years (These amounts correspond to the decreasing need for life insurance, as we accumulate more in retirement accounts, pay down debt, and fund the kids’ 529s.)
- Rikki will have disability insurance of $12,500 from Ohio National on top of his Englewood Hospital group policy. Meredith will have $5,000 from Principal on top of her group policy at Holy Name. We will stop disability when we achieve FI.
- We will maintain homeowners/car/umbrella insurance. We will keep full collision coverage for our cars until they are worth $10,000 or less.
- We will keep a $60,000 emergency fund (three months of our fixed expenses) in a high yield savings account.
Notice that we laddered the term policies. As the course reviews, this is the most optimal way to buy the insurance that you need, because as you build wealth, you will need less insurance. Laddering allows whatever insurance you no longer need to drop off. In 10 years, we hope to have $1.5 million worth of our liabilities settled (which include the mortgage, the elimination of student loans, saving for retirement, and 529 funding). Five years after that, another $1.5 million of liabilities will have been paid down, and then five years after that, we shouldn't need the last $1 million.
FYFA taught us that in 20 years, we likely won’t need life insurance at all. Also notice that the amounts in our life and disability insurance are deliberately calculated. The course goes over in detail how to crunch these numbers.
#3 Housing Plan
The next part of the course revolves around housing. Our plan is as follows:
- We will continue to pay our current 30-year mortgage at 2.9% fixed with minimal payments, and use our extra money to invest.
- We will continue to consider geographic arbitrage to Texas or Florida and not pay more than $1 million for a house. We will rent first if we move to make sure we like our new jobs and to make sure our jobs have incomes that will reinforce the monetary benefit of geographic arbitrage. Also, we will make sure we do not sell the house in New Jersey at a loss, including the round-trip cost of selling and buying a new house. We do not believe staying in the house in New Jersey is a sunk cost fallacy; instead, we would only be moving to increase our wealth and help us achieve our financial goals faster.
Notice our absolute baller of an interest rate (we refinanced in March 2021) and that we also recognize that living in New Jersey is financially toxic where there is a real danger of not meeting financial goals while living in a HCOL area. But this is personal to us. When you develop your written plan, feel free to add your own personal flavor and thoughts. That is the beauty of Fire Your Financial Advisor. You end up with a very PERSONAL financial plan. You’ve heard it many times: personal finance is personal, and Jim’s course emphasizes that.
More information here:
Why My Credit Score Is Higher Than Jim Dahle’s
#4 Student Loan Plan
The next part of the plan regards student loans. If you thought our fixed-rate mortgage was phenomenal, take a look at this part of our plan:
- We will do minimum payments to our First Republic loans at the five-year fixed rate of 1.95%. We will invest the rest and make sure the money we would have used to pay down the loan is not just spent. We will pay off the loan in full by May 8, 2023—which will be about $27,000 according to the amortization schedule, given we will get a $2,000 credit for paying off the loan one year early.
- We will make minimum payments on Navient loans, given the low 30-year fixed rate of 2.6%, and invest the rest of the money.
There are two things that will dictate this part of the written plan. First is your comfort with debt; as you can tell, we are very comfortable keeping this debt around. The 2.6% fixed at 30 years helps. This also ties back to the overall goals of your financial plan. If you remember in our goals section, debt payoff was not a high priority. FYFA makes sure that each written segment of your written plan flows back to your overall financial goals.
More information here:
#5 Spending Plan
Ha! I avoided the dreaded “B” word of this part of the written financial plan. This part of the plan also has a spreadsheet template that you can use as part of the course, but written here is the overall gestalt for how our money will be spent.
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- We will track our spending using Personal Capital and a spreadsheet, and we will review it once a month.
- We will use credit cards as much as we can to get the cash-back bonuses but make sure that this does not tempt us to spend more. We will make sure to pay these off each month (with the exception of a 0% promotion where we keep any extra money in a high yield savings account, and then pay it off when it's due). This is because we are trying to take advantage of inflation eating the debt in real terms and the addition of the APR of high yield savings account.
- We also have a personal loan of $15,000 at 2.125% interest to a family friend, and we will only pay $500 per month.
- We will utilize our used cars until our kids come of age, and then, they can have them. If our cars die before that time or repairs cost more than the car, we will only buy used cars that are at least three years old—either a Toyota, a Honda, or another car that is known to last forever.
- We will save 20% of our gross income for retirement.
- We will put $1,200 per month into both 529s.
- We will keep a $60,000 emergency fund (three months of our fixed expenses) in a high yield savings account.
Notice that there is no mention of “we can’t afford” or “we will not spend” in this budgeting (Ah, there's the “B” word!) part of the plan. Many people have a visceral, retching feeling deep in their gut when they hear the word budgeting. But FYFA does not frame it this way. In fact, my wife and I feel more comfortable spending more.
The spending plan/budget here is GOALS focused. It is not some number that we are trying to attain, where once we attain it, we will fall into the Arrival Fallacy trap where we mistakenly think reaching that number will suddenly make us happy. It's also not a way to force us to be as frugal as possible. The spending plan part of the course is taught in a way to achieve financial goals. If you didn’t have a financial plan, that point sometimes is lost on your way to financial independence.
#6 Investing Plan
Ahh, here it is, finally, the “hung by my fingernails” part. Much of the FYFA course focuses on the investing portion of the written financial plan. This is probably the most difficult portion to teach because there are there multiple ways to invest (aka “roads to Dublin,” as Jim says) and because much of investing is emotional. Hence the visualization of physical pain.
Here are our investment policies.
- We will minimize taxes and expenses as much as possible in our investments.
- We will primarily use low-cost stock and bond index mutual funds, as well as stock index ETFs.
- We will use passive (not actively managed) investments if possible, given the lower costs.
- We will strive to achieve a 5% yearly real return, averaged over our investment lifetime.
- We will NEVER, EVER, NEVER, may God burn us in hell and Rikki gets hung by his fingernails NEVER sell our stock index funds during a bear market except to tax-loss harvest. If anything, we should buy more stocks if possible as STOCKS ARE ON SALE!!!!
- We will rebalance yearly on July 1, first by new contributions in taxable and then in tax-deferred accounts if needed.
Of course, FYFA does not mention/encourage/endorse hanging by fingernails. Obviously, I (and my wife) added this in to battle the worst enemy you will face in investing. Economist Benjamin Graham once said, “The investor's chief problem—and even his worst enemy—is likely to be himself.” Very insightful of Mr. Graham, but this begs the next question of why. I believe part of the answer lies in one of our innate survival heuristics called “salience bias.” Our brains are hardwired to recognize stimuli that stand out from a background, given the survival advantage to our ancestors. The ability to quickly pick out a stalking orange tiger amid a green dark forest background would help a human run for cover.
Such a heuristic is now maladaptive in investing. Terrance Odean and Brad Barber conducted an experiment on whether people buy stocks that grab attention in their paper, “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” They concluded, “We test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns.” In other words, Odean and Barber found that salience bias was responsible for poor investing behavior. But who says that you can’t use salience to help us invest? Hence, the hanging by fingernails!
In fact, being hung by my fingernails involves an even more personal flavor. I once had the gall to ask my 10th-grade lit teacher if, instead of reading The Scarlet Letter, I could just watch the newly released movie version starring Demi Moore. Her response: “Absolutely not and Demi Moore should be hung by her fingernails!”
Now, I cannot think of anything else more salient than the painful possibility of me being hung by fingernails. Forget about loss aversion and the pain of losses! Being hung by my fingernails is much more painful if I were to commit the cardinal investing sin of selling in a bear market. This form of visual salience has helped keep my System 1 in check during the Coronabear and 2022’s bear markets. I never thought about selling.
When you write your financial plan or if you have one already, feel free to add some personal hilarity to it.
Investing Plan by Goal
The next part of the plan outlines how to invest for each particular goal. It's not written down in our plan, but we do keep our finances together in joint accounts. The investing plan will absolutely differ if you and your spouse are keeping finances separate.
Retirement
The goal is to have $100,000 per year in income in today’s dollars within 11 years for Meredith to be financially independent at age 50. Using the 4% rule, that requires a portfolio of $2.5 million. Rikki will have to continue to work to pay off the mortgage and student debt. We currently have $550,000 in retirement accounts. This will require savings of about $100,000 per year (=(PMT(5%,11,-558000,2500000,1))= $103,000) or about $8,500 per month.
- We will save 20% of our gross income for retirement. Currently, this is about $180,000 per year which will help us achieve our goal sooner.
- We will max out retirement accounts except for Meredith’s non-governmental 457, given that her hospital has a BBB rating and can be at risk of closure or merger. This comes out to about $70,000 among Rikki’s 403(b), solo 401(k), and Roth IRA and Meredith’s 401(k) and Roth IRA.
- We will invest the rest for retirement in taxable, about $10,000 per month.
- We will keep our asset allocation 100% equities, knowing that during the bear market of 2020 we had the mindset that “stocks are on sale” and found that we have a high-risk tolerance. It will comprise 65% total US stock, 25% total International stock, and 10% small cap value. Our small cap value tilt in our portfolio will be with FISVX in our Roth IRAs, and the rest will be in tax-deferred accounts. This is to minimize taxes on an asset class that should have the highest return. We will change this asset allocation to more bonds about 10 years prior to Rikki’s retirement, at age 65, and try to keep these bond funds in tax-deferred accounts. Our asset allocation at Rikki’s retirement will be 60/40 stocks/bonds.
- Because of the way our automatic contributions are set up in retirement accounts, our monthly contributions to taxable will be 2/3 total US and 1/3 total International.
We will cash out Rikki’s low-cost Fidelity variable annuity once it hits cost basis and then invest the money in taxable.Done!”
We have a lot of verbiage here, and you can make this as short or as long as you want. For my wife and I, we found it helpful to put our thinking down on paper. Also, we kept some of the goals we have accomplished in strikethrough font, just like earlier in our plan. Also, did you notice the Excel PMT function calculation? Yes, FYFA teaches you some Excel skills as well!
Jackson’s College
We want $300,000 by the time Jackson enters college in September 2033. We will use the Virginia 529 plan and put in $1,200 monthly (=PMT(5%/12, 14*12,-3500,300000,0)= $1,200). We will invest in the Vanguard Total Stock Market fund (VTSAX) but will start making 529 contributions to all bonds when Jackson starts high school. At the end of his freshman year, we will rebalance to an 80/20 asset allocation and rebalance again by adding 20% more bonds at the end of each high school year—until he has an allocation of 20/80 stocks/bonds. We will stop contributing when Jackson has finished high school. We will first sell the stock portion if not in a bear market to pay for college. If Jackson has any money left over and is not going to grad school, we will transfer the rest to Mia.
Mia’s College
We want $300,000 by the time Mia enters college in September 2035. We will again use the Virginia 529 plan and put in $1,100 per month (=PMT(5%/12, 15*12,0,300000,0)= $1,100). Again, we will invest in VTSAX but will start making 529 contributions in all bonds when Mia starts high school. At the end of her freshman year, we will rebalance to an 80/20 asset allocation, and rebalance by adding 20% more bonds at the end of each high school year until there is an allocation of 20/80 stocks/bonds. We will stop contributing when Mia has finished high school. We will draw down stocks first to pay for college unless in a bear. If any money is left over and Mia is not going to grad school, we can give it to Jackson if he is still in grad school or let the money grow. We can then transfer the rest to our first grandchild, or take it out for our retirement if we are somehow desperate.
More information here:
Best 529 Plans: Reviews, Ratings, and Rankings
#7 Estate Plan
Can’t forget about estate planning. FYFA reviews the more formal documents that you will need, but included in my written financial plan is a basic overview:
- If anything happens to both Meredith and me, her cousins will be Jackson and Mia’s guardians and trustees.
- Our backup trustee is Meredith’s best friend.
- Our backup guardian is Rikki’s best friend.
- We will meet with an estate planning attorney for a revocable trust as soon as we become millionaires.
- The beneficiaries and secondary beneficiaries are set on all of our accounts.
If you are wondering why we chose some guardians to also be trustees while our backups are separate, well, you'll just have to take the course.
#8 Asset Protection Plan
The final part of the plan. Short, yet super important.
- We will max out retirement accounts each year.
- We will pay down the mortgage as planned and know that the house is titled owners in entirety, giving protection of the house if we are sued individually.
- We will maintain our umbrella ($4 million) and malpractice policies.
The Final Part: Change Policy and Signatures
At first, I thought this part was just cute, but psychologically signing your name makes you subconsciously accountable. I wrote in a previous column how visualizing and physically writing a plan with your John Hancock on it can make you a better investor through the neurological process of encoding. And yes, those are our signatures—I guess we fit the stereotypical doctor signatures!
It's also important to point out the three-month waiting period before making any changes to the plan. This really limits the potential for action bias to torpedo your plan. By having to wait and keep your System 1 at bay, this part of the plan will help you ride out short-term market volatility and life events to make sure you are making an informed decision. Inflation over 9%? Wait three months before modifying the plan. Bear market hitting at the same time bonds are tanking? Wait three months before modifying the plan. Global pandemic? Wait three months before modifying the plan. Sudden changes in headlines might entice you to want to take action, but this three-month waiting requirement ensures you follow Jack Bogle's sage advice, “Don't just do something, stand there.”
What the Plan Helps Us Do
As I write this article and review my plan, I am again in awe at how comprehensive a plan we wrote after taking the FYFA course. As you just read, the amount of financial literacy I obtained from taking the course is astounding, and to put that on paper in a direction to help my wife and me attain our financial goals is relieving. Finally, it provides a grounding to avoid misguided and emotional investing. To quote him yet again, Morgan Housel was recently on the NewRetirement podcast hosted by Steve Chen and said, “To me, everything I’ve learned about money, whether it’s personal finance or investing or running a business, is that it’s not a math-based field. It’s a soft social sciences-based field. It’s closer to psychology and sociology and history. What’s going to separate the good from the bad, from people who do really well and people who do really bad, is not your intelligence. It’s not your education. It’s not your IQ. It’s whether you keep control over your emotions.”
This plan helps me keep control of my emotions while investing. And it’s not just because I get hung by my fingernails for selling low in a bear market. That utterly ridiculous/comedic yet pertinently salient thought only prevents us from selling low. It is this and other thoughts integrated into a complete written plan that focuses our financial energy into what we want to accomplish in our lives. Again, to quote Housel in a recent blog post he wrote called Lifestyles, “I have no idea how to find the perfect balance between internal and external benchmarks. But I know there’s a strong social pull toward external measures—chasing a path someone else set, whether you enjoy it or not. Social media makes it 10 times more powerful. But I also know there’s a strong natural desire for internal measures—being independent, following your quirky habits, and doing what you want, when you want, with whom you want. That’s what people actually want.”
Whether it be living it up when we are old and retired, preventing mountains of student loan debt from forming when our kids graduate college, or the legacy we wish to leave when we pass, FYFA makes these financial goals attainable. And FYFA makes your written financial plan THE benchmark. Not the S&P, not the Joneses, but your goals are the internal benchmark that Housel refers to. The goals for your spouse, for your kids, for yourself. If that is not enough emotion to get you to write your own written financial plan, then I don’t know what is. You don’t have to necessarily buy FYFA to write a plan, but gosh, it did make it super easy.
What do you think? Do you have a written financial plan? Did you purchase FYFA to write one, or did you write it alone? Do you add any salient funny additions to stop you from selling low in a bear? What behavioral biases does your written financial plan help fight? Comment below!
“ We also have a personal loan of $15,000 at 2.125% interest to a family friend, and we will only pay $500 per month.”
Personally I would pay that off tomorrow when you have $160k in the bank for a pool fund. If you owed $15k to an institution sure stretch that out, but keeping a 2.125% loan to a friend in this interest rate environment isn’t doing them any favor.
Maybe I’m misreading it and you’re actually paying off a loan for a friend instead in which case stretching out the payments is appropriate financially, although with the relatively small amount of money maybe pay off rather than trying to arbitrage and earn say an extra 4% / year = $600 unless for some reason you want to continue a dependency (say encourage budgeting or whatever) Probably not my business and no need to go into it.
Also at $900k a year income (you said saving 20% = $900k income) planning on driving old cars until kids are age 18 is almost for virtue signaling purposes (Look at me, I’m frugal) rather than necessary to achieve your goals. Maybe try to replace them at 10 years old — I kept a new civic x 17 years and found at year 14 there started having a lot of little things wrong.
Having that item in your plan about your cars and also $200k for a pool fund made me suspect there’s some disagreement over spending levels that are being maybe papered over by this plan, like one spouse wants to spend a lot and says sure I’ll drive my new car for 15 more years to end the argument but doesn’t really want to. I suspect that’s why there’s also the comment about limiting a new house price to a million if you move. That’s personally what I’d investigate more of, as reads maybe like one partner signed off on it to avoid the other’s nagging.
Seems like at $900k income you should be able to have 50% go to debt repayment + investing combined. Perhaps you have a large enough mortgage that you’re already doing it.
Just my thoughts about focusing on whatever relationship issues there are first (if any so sorry for any offense but you did ask for feedback) since that’s a way bigger threat financially at $900k / year than anything else. It just made me think one partner is upset / uncomfortable with the spending and is using this signed document to try to control the other.
One thing I’ve learned about financial plans:
They always look funny to someone else. It’s actually good to hear their criticism, but don’t forget that if your financial plan were put up in print for 100,000 people to see, there would also be some criticisms of it.
It actually takes a lot of guts to publish a financial for the world to see.
“Tell me what you do with your money and I’ll tell you what you are.”
A budget/financial priorities demonstrate your values and those are pretty personal.
I agree with Greg’s first comment on the 15K loan. Maybe this wasn’t well written as I am unclear if this is a loan they owe to a friend, or that they have loaned out to a friend that owes them 15K? If it is a loan that they owe, why wouldn’t you just pay them. They have plenty of cash and income on hand to pay off their “friend”. If it is money they are owed by a friend, then why is it stated “we will only pay $500/month”.
It’s very confusing either way.
Other than that kudos to Rikki for writing up a plan. I would add to buy some Bitcoin and hold it for at least 10 years…but WCI already knows that 😉
Better to buy it now than at $70K when you were trying to get us to buy it last time. 🙂
I have been recommending it since 8K on your website. But yes, I was also recommending it at 70K. I will keep recommending it until Bitcoin is ded or I am ded.
I know. I’m just teasing you.
I hope it doesn’t die. That would be a real shame for the HODLers.
hey thanks yes more of a family friend who is a multimillionaire that we owe money to and doesn’t necessarily need the money back. As for the Bitcoin have decided not to- rather blow any extra money on a vacation 🙂
Ok…so I understand why paying it off isn’t a priority. But to me having a loan from a friend isn’t something I would like to have. That would be the first loan I would pay off no matter the amount or the level of wealth of my friend. Mixing money and friendship can be ugly. Better to keep the friend. You can never have too many of those!
Greg, you kind of hit the nail on the head! My wife is the spender, I am not. Will be hashed out in a future post! But yes this plan if you read between the lines shows 2 different money habits/beliefs.
And luckily Uncle Barry is a multimillionaire and very generous so is not so hung up on collecting that family loan. So we are not in any hurry to pay it off, especially given high inflation eating away that debt, potential for that pool to go up in price which as I write this given inflation has increased, and our comfort with debt.
Thanks for sharing your plan and all the details. It really helps others to see how a solid plan can set you on the way to success. They can even copy-paste and change the numbers!
Personally I think the most important line was “save $180k per year.” It’s hard to go wrong no matter what the rest of the plan is.
Ha I agree! that is the most important line! was easier writing it though than following it . . . 🙂
$900k a year?! You don’t have to worry about a thing, my brother. I, on the other hand, need a new job. 😆
🙂 I wish though it was $900k a year post- tax. Uncle Sam takes about $280,000 of that, and the fine state of NJ takes another $70,000. So really have $550k post tax. Not too shabby though! definitely helps to have a job that provides a lot of offense in this financial game.
This maps everything out nicely. Almost clinical (no surprise there.) I see one glaring omission, however, Long Term Care Insurance. Given you are in the medical profession, I would have hoped to read some special insights… but perhaps by omission you are saying something? Please clarify if it’s intentionally absent or anything else you can say about it. Agree with you on all the other Insurance strategies, but LTC is the one area that really concerns me. Costs can get crazy really quickly and it’s only going to get worse.
The other minor critique I have is your passive/index investing. The lack of diversification add some extra risk. Unless you really can’t sleep at night being slightly more aggressive, that should be considered in any solid plan.
As far as long term care insurance, I feel it is important for middle class and upper middle class families to have this type of coverage. However, for a family that will likely have many millions of dollars in assets, they are likely ok to self insure. That is what we are doing.
Yea, someone making $900K a year should not have a need for LTCI. They should definitely end up with enough assets to self-insure that risk. How much do you think LTC really costs?
Re LTCI …. you are likely going to be paying for one way or another
https://www.thecentersquare.com/new_york/new-payroll-taxes-would-fund-new-york-pennsylvania-long-term-care-proposals-that-mirror-washingtons/article_a5d486aa-2b03-11ed-b766-13b3ca146f2e.html
I guess that depends on whether you live in Blue America or Red America.
Think that if it makes you feel good.
“The following states are considering state-sponsored long term care programs:
Alaska, California, Colorado, Hawaii, Illinois, , Michigan, Minnesota, Missouri, New York, North Carolina, Pennsylvania, Oregon, Utah”
It’s not a crime to think about something. But I think you’re proving my point. The only red states on your list are AK, NC, and UT. I don’t know NC well, but I’ll bet you $100 this shows up in neither AK nor UT in the next decade.
Hey Brad good point but as Jim says below I was going to cashflow long term care. In today’s dollars some of the local nursing homes cost about anywhere from $5-8k per month, so anywhere from $60-$96k per person, so anywhere from $120-$192k for 2 people. It’s not really shown above, but was planning on retiring at 65 and we should have $4mil nest egg which can sustain an annual spend in today’s dollars of $160k per year, so I think we should be able to cashflow.
Also Brad I think I am being pretty diversified in terms of my asset allocation, as I pretty much invest in every publicly traded company in the world, almost 10,000 companies. And yes technically if I did add more asset classes, yes I would be lowering my risk given as you point out I would be diversifying in different asset classes other than stocks. But I am convinced that stocks give me the most bang for my buck in investing. Diversifying among Bonds, commodities, TIPS, etc yes lowers my risk, but lowers my return. You can make an argument REIT’s have equity like returns but less correlated, but I don’t NEED to add REIT’s to my asset allocation. I sleep plenty at night being 65% total US, 25% total international, and 10% small cap value. Actually, what keep me up at night is that the stock market keeps going up!!! I want to buy stocks as low as possible, and get the huge return that comes with investing when you are greedy when others are fearful.
I am not sure what you meant with being more aggressive than my 100% equity allocation? did you mean adding speculative components like Bitcoin? then yes, I would not be able to sleep at night adding more risky assets that don’t have a history of getting a good risk adjusted return. Stocks have years of history and data behind them where your 100% equities allocation will lie on the efficient frontier. When you add more speculative components, which I think that is what you mean when you say I should add more risk to my already 100% equity allocation, knocks you off that efficient frontier where yes, bitcoin can shoot up to the moon, but you have a higher chance of losing all your money in that investment. That would keep me up at night, investing in something that has a high chance of going to zero. a total market index fund has a much less chance of going to zero, and if it does, we got bigger problems.
I got the sense he meant that you should “diversify” into hedge funds or actively managed funds. Cause you know… beat the market.
LOL, no I certainly did not mean crypto! You stated “We will primarily use low-cost stock and bond index mutual funds, as well as stock index ETFs”. Again, not a big deal nor trying to start a huge debate, but… it’s been well studied that limiting to *only* index funds does come with certain risks as well. Generally I’m a fan of Bogle, but if we’re talking about true diversification there is an argument to be made for some portion being in active funds. MLPs for example can’t be held in index funds (tho there are some ETFs.) Many big index funds pay low dividends. Again, I don’t knock anyone for being conservative if it helps them sleep, as long as fully aware of what they’re doing/compromising.
If there are risks of indexing (and I’m not convinced), they certain pale in comparison to the risks of active management.
yeah dude, actively managed funds will definitely keep me up at night, especially with the evidence against active management where passive index funds will beat actively managed funds 75% of the time over 5 years, and then gets almost to 100% over the long term. the MLP’s that you mentioned I read some investors got hammered with losses due to poor management, go crazy with complex tax treatment, and there is a dearth of public knowledge of what you are actually investing in. This would be an investment I would lose sleep over. Also, I would have to waste my time away from my patients and my family in order to do research into MLP’s. Not my cup of tea.
So I can’t purport that I may not be missing something, it’s just that when I thought about my asset allocation, it is what me and wifie are comfortable investing in, what helps us sleep at night, and what will get us to achieve our goals. there are many roads to Dublin- passive indexing is mine.
You make a valid point regarding “going crazy with complex tax treatment” of some types of investment and I 100% agree with you. One can kill themselves with the burden of overcomplicating their life, so I certainly concede that is a benefit of index investing and not needing to spend lots of time financially “figuring things out”. Some people do enjoy these challenges though.
Brings up another thought I had about your retirement accounts… they seem likely to be quite sizable by the time RMDs kick in. Although you don’t specifically mention it above, I expect that you have done those calculations to look at your expected tax bracket impact from those RMDs in your upper years. Now, maybe you’re in the highest bracket now and expect to be in the highest bracket later, so it doesn’t really matter. But when setting out a plan as an example for others to follow, I think it’s worth mentioning that one conduct that exercise well before retirement, before age 50 even, while something can still be done about it. Tax situations are highly individualized so it’s tough to make broad generalizations, but people should do the homework as to what they expect their future tax bracket to be and can then adjust Roth vs Traditional accordingly, plan for Roth conversions, etc. This starts to get into Estate Planning I suppose which may not be the thrust of your article.
definitely good point and something that I did think about later but honestly when this plan was written was still not as financially savvy. I have now predicted that likely I will be in lower tax brackets in the future compared to my tax brackets now. It seems in the future I would likely have $4mil in today’s dollarsat age 65 when I retire, so that $160,000 to use per year in retirement starting at age 65 so won’t be too high of a tax bracket as compared to top tax bracket now. I have read WCI articles regarding having an RMD problem, and usually would consider that around a next egg of $5mil, but likely more around an IRA size of $14mil! https://www.whitecoatinvestor.com/dont-fear-the-reaper-rmds/
so I hope I have an RMD problem! but I do have a plan to debulk my traditional assets by doing Roth conversions starting the year after I retire at 66 up until age 70 when I take social security, but likely can still do some smaller Roth conversions up until age 72.
again, I have thought about it since after this financial plan was written, but now you got me thinking maybe I should add these RMD nuances as well.
I just don’t buy that avoiding active funds is more “conservative” when active funds have never been proven to beat index funds for any appreciable length of time (after taxes and fees). In fact, the opposite is true. It is frankly bizarre to say Rikki’s allocation is “conservative” at 100% equity.
Any compelling risk to indexing is systemic: issues with corporate governance when brokerage houses are the largest shareholders, or efficient pricing of companies when all the share are locked up in index funds, etc. If indexing ever becomes a major threat to the markets, I cannot see how being a stock picker will save you…
I said it was a minor point. I don’t need to die on this hill (especially when the hill is being painted slightly differently than my original statements.) Loved Rikki’s post, overall, it will be very useful to a lot of people. I was pointing out a few other things to think about. Like everything he describes, not all parts are for everybody. There’s owning rental property directly, for example (probably not feasible for doctors who are already super busy, but still worth consideration when thinking about different ways to earn returns and various risk factors involved.)
Some background reading (if the links are allowed to be posted here)
“The Fundamental Dangers of Index Investing”
https://seekingalpha.com/article/4373643-fundamental-dangers-of-index-investing?gclid=EAIaIQobChMI8N3Q7aKS-wIVccqUCR1bbwSPEAMYASAAEgKR5_D_BwE
“The Growing Danger of Index Funds”
https://www.nextavenue.org/index-funds-danger/
I think my initial point, perhaps stated inarticulately (which, well, I’ll own that), was not necessarily about more risk vs less risk, but that the KINDS of risk exposure should be diversified. If one thinks they know it all, and that 100% index investing cannot be beat for any reason, then by all means go for it. Me, I’m not so sure, and would like to “diversify” in some ways (and not just by asset class in my investment portfolio, but across all aspects of life.)
I cannot go along with the “stocks are on sale” idea. One only knows that in retrospect. At any time in the present, one knows what stock prices are and what they were in the past. No one knows whether or when they may go up after a fall. Maybe the decline will be a flash crash. Maybe it will be another Japan with decades until stocks recover.
Were stocks “on sale” when they were 5% down from their 2021 peak? Or was that only the beginning of a much larger drop? At the time, no one knew.
Are stocks “on sale” now? I have no idea. Ask me in 10 years and I can tell you how it worked out.
Buying because you are below your target asset allocation is good investing.
Thinking you know that stocks are “on sale” because they are lower than they were is pretending you know the future, which you do not.
They’re on sale compared to their price 9 months ago. I think that’s fair to say. But you’re right that you don’t know if they’re a good deal at this price anymore than you did 9 months ago. You just know they’re a better deal than they used to be.
very good point! this is more a psychological ploy in my financial plan. I have no idea how to value stocks or the overall stock market properly. but when I see my index funds fall I don’t want my System 1 saying, “Sell now!” I want my System 1 to say “Buy More” or at least to keep buying as per my plan. Even if I could value stocks and the stock market properly, behaviorally System 1 of your brain will urge you to sell reflexively. By making the more emotional statement of “STOCKS ON SALE” I am hoping to counteract the innate loss aversion bias of our brains and prevent me from selling, more so than if I had spent years learning how to properly stocks in the first place.
They may be less expensive, but that could be for good reasons. With inflation, the same expected nominal cash flows are worth less than they would have been in times of slower price increases. Not all companies have the ability to pass their higher costs on to customers.
Meanwhile, we may be headed into a recession. The Fed is aggressively raising interest rates to head off inflation and accepting that this could lead to a worse recession.
About the only thing one can say is that long term expected returns, 10 and 20 years out, are higher due to lower valuations. Not a basis for deciding to buy more stocks in the short term. But a drop in corporate earnings can blow away the PE by lowering E.
I have no more idea of whether stocks are a good buy than I did a year ago, 5, 10 or 20 years ago. Evidence on market timing suggests no one can do this successfully. Best not to try.
Stocks today cost what they cost. I would not base an asset allocation decision based on recent changes in stock prices.