This week, we’re looking at reader questions about investing and retirement, including 529s, Roth IRAs and more.
1. When should retirement investments be low-risk?
2. Is passive investing bad?
3. 529 or Roth IRA?
4. How to invest for a down payment
5. Books to read about investing
6. Are collectibles an investment?
When do you think a person should start being safer with their retirement investments?
My belief is that any money you intend to withdraw from your retirement accounts in the next 10 years should be in something safer than the stock market, whether that’s bonds, cash or something else entirely. If you think you’re going to need it in 10 years, it shouldn’t be in stocks; if you’re confident you won’t touch it in the next 10 years, then it should be in something aggressive like stocks.
My usual suggestion for most people is to do one of two things. One option is to simply put all of your money into a target retirement fund, which effectively does this for you. The other option, if you’re choosing amongst funds yourself, is to invest aggressively until you get 10 years away from retirement, then switch your contributions to something much safer and then rebalance each year.
Let’s say you’re 10 years from retirement. For that first year, I’d contribute to something safer — a bond fund is a good choice, or half into a bond fund and half into a money market fund. At the end of that year, estimate how much you’ll need to withdraw from your retirement account (keeping things like Social Security in mind). If it’s less than what you have in the safe investment, move some from risky investments to balance it out. If it’s more than what you have in the safe investment, move the extra to something less risky. Each year, repeat this same process, but the next year you’ll want to have two years of money in the “safe” funds, then three and so on.
Under this system, when you retire, you should aim to take your withdrawals directly from the riskier investments. At the end of each year, rebalance so that you always have 10 years of withdrawals in the safer investments. If you eventually reach a point that you’re withdrawing from the safe investments, you know how long you can survive on that and you should plan accordingly by trying to live a little leaner.
I usually just encourage people to use the target retirement funds because it effectively manages all of this for you by making your investments more and more and more stable as you move into retirement and beyond.
I don’t like the idea of index funds or passive investing from a moral standpoint. If you just passively invest in all businesses, you’re not choosing to invest in the businesses that behave well. You’re investing in the businesses that behave badly too.
That’s a thoughtful point. Investing in the shares of a company that doesn’t behave ethically, in the end, benefits the people who hold shares in that company. Even if you’re not paying attention, they are. The more that people invest passively in companies that don’t behave well, the easier it is for heavy investors in questionable companies to make a profit. It is worth noting that when you invest in a little bit of everything, you’re also investing in their competitors. It’s not as if buying a stock index fund is buying just unethical companies; it’s buying ethical ones, too.
I think that a similar approach is needed from the consumer end, too. People need to spend their money at businesses that have an ethical approach that matches their values. If you spend money at a business that does things in a way you consider unethical, you’re rewarding that unethical behavior. Over time, being an ethical consumer will matter more, because if people invest passively, the impact of people not investing in questionable companies and instead investing in good companies (in terms of behavior) becomes less. If the ethical and unethical companies are getting equal amounts of investment, then what’s going to make the determination of what wins and what loses is the choices of the customer.
It’s easy to argue that “my small amount of money doesn’t matter.” The truth is, it’s the only thing that matters because it’s the only thing you can control.
I’m 36, wife is 34, and we have a 5-year-old daughter. We want to save for her future but we also don’t feel like we’re saving enough for retirement. Retirement seems right but it seems selfish. Considering either opening Roth IRAs for ourselves or a 529 for her. Thoughts?
If you do not feel that you are saving adequately for your own retirement, then you should prioritize retirement savings until you feel that it is strongly covered so that you can achieve your retirement goals before saving for your daughter’s education.
It’s easy to see why. Let’s move the clock forward 30 years and look at what life looks like for you and your daughter depending on what you choose.
If you choose to put money into her 529 and not save for your own retirement, you’re going to be on the cusp of a less stable retirement. You’re probably going to be putting it off for a few more years in the hopes that you can save a lot and make it more stable. On the other hand, your daughter will be 35 years old. She likely won’t have any student loans at this point, regardless; the only real difference in her life is that, if she made good choices in her 20s and 30s, she might be further ahead financially than she otherwise might have been. However, if she didn’t go to school, or if she chose to frivolously spend the money she didn’t have to put into college loans, she might not be much ahead of the game at all.
There’s also the worry factor. Trust me — as a child of parents who are on a pretty tight fixed income in retirement, I have a lot of worries about their financial health. I would feel a lot better about their situation if they had saved well for retirement all the way along. Your daughter will feel the same about you — you’ll cause her less worry if you’re entering into a stable retirement.
When you add all of those things together, it seems pretty clear to me that saving for a very stable retirement should take priority over saving for a child’s education. Of course, if you’re saving enough for a stable retirement and have more to save, contributing to her 529 is great. It just shouldn’t be the top priority.
[More: Best Roth IRA Accounts for 2020]
What is the best way to invest for a house down payment? We want to get a down payment as fast as possible.
It depends entirely on how far off your down payment is. What exactly is your target amount, how much do you already have saved and how much are you contributing per month? You need to know those things in order to estimate how long it will take you to have a down payment saved. If you’re looking at a down payment in less than a year, your best bet is an ordinary savings account or a money market account. The volatility of the stock market or other investments is too great to bank on it helping you over that short of a time frame.
If you’re looking at something more like two to three years, put your money in the highest interest rate CD you can until your timeframe goes down to less than a year. Keep buying 12- to-36 month CDs to maximize interest rates. Again, this is because the volatility of the stock market over a shorter timeframe is too great to bank on; you might get there faster with stocks, or you might end up having to save for quite a bit longer.
Once you get beyond three years, but your goal is still under 10 years, you might want to look at index funds of highly rated corporate bonds or municipal bonds. Those are still quite safe and rarely lose money, but they have a much better historical average annual rate of return. You’ll make more money here and the three- to 10-year timeframe means the odds of actually facing losses are low.
I’d only put this money in stocks if your timeframe is more than 10 years out, and I’d buy a very broad-based stock index fund, like the Vanguard Total Stock Market Index. With shorter timeframes than that, the stock market is rather volatile and you bear a significant risk of losing money over that timeframe.
I know nothing about investing. Tried to read The Intelligent Investor and it was way too complicated. I looked at the library and there are hundreds of books. What do you suggest for a “first” book on investing? I learn best by reading books.
The Intelligent Investor by Benjamin Graham is a great book, but it’s not really very approachable for someone wanting to learn the basics of investing today. It has a lot of good ideas in there, don’t get me wrong, but it assumes a lot of basic knowledge of the reader that most people who are seeking out an introductory guide to investing simply don’t have. So, here are a few better suggestions.
This might surprise you, but Investing for Dummies by Eric Tyson is a legitimately good book that provides a very gentle introduction to investing. The current edition is 8th edition; the 9th edition arrives late this year. The latest edition is probably the one to get, but the last few editions remain relevant.
My favorite overall books on investing are The Bogleheads Guide to Investing by Larimore, Lindauer, and LeBoeuf, and The Simple Path to Wealth by J.L. Collins. They’re both somewhat more challenging reads than the Investing for Dummies book and, in my opinion, a bit more thorough, but neither one is anything like The Intelligent Investor.
Are collectibles an investment? My younger brother likes to collect sneakers and displays them in his home in a glass case and talks about them like it’s an investment portfolio. I thought he was a kook but he sold one pair for almost $2,000 after buying it a few years ago for $400. He says it’s just like stocks.
Collectibles are absolutely an investment. They just happen to be an extremely volatile investment, with enormous price swings, and the bottom will drop out of their value if people become less interested in them culturally.
I do this in three areas, mostly leaning on the things I bought when I was much younger. I have an extensive collection of Magic: the Gathering cards, mostly from the mid-1990s when I played the game passionately. I view my collection now as something of an investment; they’re now sleeved and preserved and a few cards are professionally graded. The same thing is true of my sports card collection, mostly built in the early-2000s when I was spending money freely; I now see that as an investment, with a bunch of professionally graded cards. I also have a small collection of vintage video games from the 1980s and early 1990s in their original packaging (a mint in-the-original-box copy of Earthbound (SNES) is my most valuable item).
These items have largely held their value pretty well. I watch what they sell for on eBay and a few specific collector sites and they definitely hold up. However, they all rely on their continued cultural relevance, because without that, the market for them would dwindle significantly over time. The prices are volatile, too, particularly with the Magic: the Gathering cards, as they are sometimes reprinted.
I would not invest money I could not afford to completely lose into collectibles. If you want to invest in collectibles, treat the investment as a hobby and count it towards part of your hobby budget.
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Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.