Good article on the fundamentals, however "plan to retire at age 70-75" - how is this possible when every day there is a new report about how people over 50 are having a harder and harder time finding work? I guess the real insight here is that you need to find a way to make yourself employable (or self-employed) until age 75, which seems near impossible for the vast majority.
I don't have a quality data set other than I see it come up frequently in media, newsgroups, and just among people I know. I'm only 40 and hopefully have a skillset that will be valuable through my lifetime such that I will not have this problem, but I recognize that this seems to be a broad trend among many.
My hope is that (1) the pseudonymous economy makes this type of discrimination impossible, and that (2) the freelance-isation of the economy makes work more fluid, less risky to try out working with others, and less dependent on one single company trusting you
Hopefully in a generation or two from now! I think it's enough of a problem for the current generation that the "just keep your job longer" advice may not work for the majority.
Start your own business in an area in which you are talented. It is A LOT of hard work but after it is established you can "semi" retire. One thing Tomas does not mention is keeping expenses down after retirement, which is vital. To be more precise, spend less money than you take in every year.
I aim to retire in Europe, which automatically makes me need less than the 80% retirement income (vs. pre-retirement) that financial advisors suggest.
Starting your business definitely gives you independence so you don't have to depend on others. So many businesses to make... Even just traditional ones.
I'm American but already live in Scandinavia, and I've adjusted my "FIRE" calculations downward quite radically, to account for the more robust pension system here (rendering some concerns about SS moot) and, more importantly, the extreme savings on healthcare and eldercare, which easily eat up a huge amount of Americans' savings.
If I maybe need 25x my annual spending in the US to retire comfortably at a 4% Safe Withdrawal Rate without reducing my principle perpetually, I'd need half that in Europe or a developing country with LCOL and quality healthcare (like Thailand or Costa Rica).
But, also, I think the "American Retirement-Industrial Complex" just scaremongers too much. You don't actually need these amounts. My dad retired for decades on only SS. He certainly wasn't flush, but he was able to keep up his share of expenses it with a middle-class earning partner in my mom (and ten years of increasingly serious and expensive Alzheimer's treatment, besides). My grandmother lived to 102.5 without ever working a day in her life, living off the modest investments her husband had left her a quarter century before at his death and her SS. My mom is now retired on 1/3 of what financial planners recommend and she's been totally fine, covering all her bills and even traveling frequently to visit, even as her modest netegg has even grown (adopting many of the low-cost, passive-investing principle's you've laid out here, plus adjusting income-taking/spending to market performance).
A second comment... you were too kind to the AUM ("assets under management") fee model that's typically a 1% fee. Besides the enormous lifetime cost (as you showed in your variations of exponential charts), there are at least two other problems with the 1% AUM fee besides the obvious one that they can't beat a passive index.
First, it essentially captures close to 100% of the after-tax returns in the fixed income portion of the portfolio -- all the gains go to the advisor but any losses accrue to the client. Nice work if you can get it!
Second, it's rife with conflicts of interest. Consider the simple case of a $1 million client who asks his advisor if he should pay off his $300K mortgage with some of his savings. If he does so, the advisor's fee is going to shrink by 30%. That's tricky to resolve when the advisor tells you you're better off keeping the mortgage.
There, you'll see that some articles have a lock, and some others don't. The ones with a lock (~50% of the articles) are only for premium customers. LMK if you have any issue.
So, you don't have any concern right now with putting everything in say an S&P500 index fund that looks like it's at the top of a huge bubble? I am gun shy with investing because most of my investing has occurred at the tops of bubbles, which took years to claw back their worth. I've also had investment advisors who cost me money but rarely made me much. I feel very skeptical of the whole financial industry.
- I agree, it is scary. It really is at all times high. And with inflation going up, it's possible that interest rates go up and the market goes down.
- But I've been hearing we're in a bubble since 2012. So you can also be missing out.
- If you are cautious, you can do dollar-cost-averaging. Don't put it all at once. Put it little by little. How long do you want to wait? 6 months? 12 months? 18 months? 3 years? If 12 months, put 1/12th of the money every month.
- The S&P 500 is just an example. Only investing in the top US firms is hardly good diversification. Good robo-advisors give you exposure to small caps, mid caps, bonds, and foreign stocks and bonds. You can also have some crypto, etc. Diversify as much as you can.
No professional advice from me either just my personal stance: I have not seen any reason for me to get a roboadvisor compared with just an ETF following an index. Maybe taxes are mich easier in Germany than in the US...
I don't know the specifics of Germany. You might be right.
In any case, in the article I say it but it might be worth restating: ETFs are great! If you want to buy them yourself, do that! Just make sure they're cheap, as diversified as can be, and that you don't trade them too much.
One small quarrel with your point about robo advisors... They're fine as you suggest but I think a low-cost target date fund is better. It essentially does the same thing as a robo-advsior but the all-in cost is a bit less. Yes, it's true that a TD fund cannot do tax-loss harvesting and a good robo-advisor can but it is also true that for most middle-income Americans, nearly all of their wealth is in retirement accounts and tax-loss harvesting is irrelevant. Also, robo-advisors don't work for 401K plans (at least not now) and TD funds are perfectly suited for that.
With a robo-advisor, I believe the typical cost is 25 pbs plus a few more bps for the ETFs they use and the bid-ask spread -- call it 30 bps in total. Vanguard's TD fund is ~13 bps. (Fidelity's index version is even less.) Not a huge difference but as your charts showed, can add up over a lifetime.
I always point people to a low-cost TD as the best choice for 95% of us.
Your point is still valid for IRAs, not just 401ks.
There are, however, some things that roboadvisors do that might be worth their fees though.
For example, if you give them your IRA and your normal investment account to manage, they will manage your portfolio across both. So they'll put for example your stocks and emerging markets in the IRA, where the highest-growth investments won't pay taxes, while they leave the bonds in your normal investment account. This is something that's really hard to do otherwise. My guess is this might be worth the 0.25%. But I haven't done the math.
if you give them your IRA and your normal investment account to manage, they will manage your portfolio across both. So they'll put for example your stocks and emerging markets in the IRA, where the highest-growth investments won't pay taxes, while they leave the bonds in your normal investment account.
I think you have it backwards... An astute advisor -- robo or human -- should put the fixed income investments in your retirement account as they generate ordinary income at higher rates. The equity investments mostly generate tax-advantaged capital gain and dividend income so those belong in your taxable account where you benefit from a lower effective tax rate.
You might well be right. I left my company as we were developing this, so I didn't dive into the financial math of the result. This is precisely the type of reason why I use roboadvisors for this type of thing :)
What do you think about Trading 212 and their AutoInvest (in pies) feature? Too much room for rookies to make an error or solid option? They're attractive as they have by far the lowest fees currently
No los conozco! No puedo opinar... Si un día invierto en España, lo miraré.
Sólo miré a Indexa en su día, sus portfolios, sus fees, etc... cuando trabajaba en la industria. También hablé con dos de sus fundadores, a los que respeto muchísimo. Por todo ello, me dio buena impresión. Creo que han seguido creciendo en AUM, lo cual es buena señal.
Good article on the fundamentals, however "plan to retire at age 70-75" - how is this possible when every day there is a new report about how people over 50 are having a harder and harder time finding work? I guess the real insight here is that you need to find a way to make yourself employable (or self-employed) until age 75, which seems near impossible for the vast majority.
You're right. It's not something I've thought about enough. Do you have data on that unemployability? I'd love to understand it better
Another such article popped up on my feed today: https://globalnews.ca/news/8227364/canada-labour-shortage-ageism/
I don't have a quality data set other than I see it come up frequently in media, newsgroups, and just among people I know. I'm only 40 and hopefully have a skillset that will be valuable through my lifetime such that I will not have this problem, but I recognize that this seems to be a broad trend among many.
My hope is that (1) the pseudonymous economy makes this type of discrimination impossible, and that (2) the freelance-isation of the economy makes work more fluid, less risky to try out working with others, and less dependent on one single company trusting you
Hopefully in a generation or two from now! I think it's enough of a problem for the current generation that the "just keep your job longer" advice may not work for the majority.
I left the 1-job world this year and I don’t look back.
Start your own business in an area in which you are talented. It is A LOT of hard work but after it is established you can "semi" retire. One thing Tomas does not mention is keeping expenses down after retirement, which is vital. To be more precise, spend less money than you take in every year.
Both of these very good insights indeed.
I aim to retire in Europe, which automatically makes me need less than the 80% retirement income (vs. pre-retirement) that financial advisors suggest.
Starting your business definitely gives you independence so you don't have to depend on others. So many businesses to make... Even just traditional ones.
I'm American but already live in Scandinavia, and I've adjusted my "FIRE" calculations downward quite radically, to account for the more robust pension system here (rendering some concerns about SS moot) and, more importantly, the extreme savings on healthcare and eldercare, which easily eat up a huge amount of Americans' savings.
If I maybe need 25x my annual spending in the US to retire comfortably at a 4% Safe Withdrawal Rate without reducing my principle perpetually, I'd need half that in Europe or a developing country with LCOL and quality healthcare (like Thailand or Costa Rica).
But, also, I think the "American Retirement-Industrial Complex" just scaremongers too much. You don't actually need these amounts. My dad retired for decades on only SS. He certainly wasn't flush, but he was able to keep up his share of expenses it with a middle-class earning partner in my mom (and ten years of increasingly serious and expensive Alzheimer's treatment, besides). My grandmother lived to 102.5 without ever working a day in her life, living off the modest investments her husband had left her a quarter century before at his death and her SS. My mom is now retired on 1/3 of what financial planners recommend and she's been totally fine, covering all her bills and even traveling frequently to visit, even as her modest netegg has even grown (adopting many of the low-cost, passive-investing principle's you've laid out here, plus adjusting income-taking/spending to market performance).
Wholeheartedly agree. "80% of your last income" is dumb
A second comment... you were too kind to the AUM ("assets under management") fee model that's typically a 1% fee. Besides the enormous lifetime cost (as you showed in your variations of exponential charts), there are at least two other problems with the 1% AUM fee besides the obvious one that they can't beat a passive index.
First, it essentially captures close to 100% of the after-tax returns in the fixed income portion of the portfolio -- all the gains go to the advisor but any losses accrue to the client. Nice work if you can get it!
Second, it's rife with conflicts of interest. Consider the simple case of a $1 million client who asks his advisor if he should pay off his $300K mortgage with some of his savings. If he does so, the advisor's fee is going to shrink by 30%. That's tricky to resolve when the advisor tells you you're better off keeping the mortgage.
Ouch. Yes, you're right that as a %, they impact much harder the lower-returns portfolios.
And you're right again with the conflict of interest. Also why they might want to put you in a more aggressive portfolio than you might want.
where do I find the premium articles for subscribers mentioned?
Hi Tom, welcome!
You should be able to see the entire list simply by going to the home page:
https://unchartedterritories.tomaspueyo.com/
There, you'll see that some articles have a lock, and some others don't. The ones with a lock (~50% of the articles) are only for premium customers. LMK if you have any issue.
There is another reason to chose deferring taxes, you can die before retirement.
Very good point. I hadn't thought about it. Thanks!
So, you don't have any concern right now with putting everything in say an S&P500 index fund that looks like it's at the top of a huge bubble? I am gun shy with investing because most of my investing has occurred at the tops of bubbles, which took years to claw back their worth. I've also had investment advisors who cost me money but rarely made me much. I feel very skeptical of the whole financial industry.
I hear you! A few points
- I agree, it is scary. It really is at all times high. And with inflation going up, it's possible that interest rates go up and the market goes down.
- But I've been hearing we're in a bubble since 2012. So you can also be missing out.
- If you are cautious, you can do dollar-cost-averaging. Don't put it all at once. Put it little by little. How long do you want to wait? 6 months? 12 months? 18 months? 3 years? If 12 months, put 1/12th of the money every month.
- The S&P 500 is just an example. Only investing in the top US firms is hardly good diversification. Good robo-advisors give you exposure to small caps, mid caps, bonds, and foreign stocks and bonds. You can also have some crypto, etc. Diversify as much as you can.
Hope this helps
TIL Warren Buffett is actually spelled with two T at the end
No professional advice from me either just my personal stance: I have not seen any reason for me to get a roboadvisor compared with just an ETF following an index. Maybe taxes are mich easier in Germany than in the US...
I don't know the specifics of Germany. You might be right.
In any case, in the article I say it but it might be worth restating: ETFs are great! If you want to buy them yourself, do that! Just make sure they're cheap, as diversified as can be, and that you don't trade them too much.
One small quarrel with your point about robo advisors... They're fine as you suggest but I think a low-cost target date fund is better. It essentially does the same thing as a robo-advsior but the all-in cost is a bit less. Yes, it's true that a TD fund cannot do tax-loss harvesting and a good robo-advisor can but it is also true that for most middle-income Americans, nearly all of their wealth is in retirement accounts and tax-loss harvesting is irrelevant. Also, robo-advisors don't work for 401K plans (at least not now) and TD funds are perfectly suited for that.
With a robo-advisor, I believe the typical cost is 25 pbs plus a few more bps for the ETFs they use and the bid-ask spread -- call it 30 bps in total. Vanguard's TD fund is ~13 bps. (Fidelity's index version is even less.) Not a huge difference but as your charts showed, can add up over a lifetime.
I always point people to a low-cost TD as the best choice for 95% of us.
Thank you Jimmy. I think you're right.
I'm just looking at Vanguard's Retirement Funds, and at 0.12% expense ratio on average, they're really good.
https://investor.vanguard.com/mutual-funds/target-retirement/#/
For 401ks that have similar ones, they're ideal.
Your point is still valid for IRAs, not just 401ks.
There are, however, some things that roboadvisors do that might be worth their fees though.
For example, if you give them your IRA and your normal investment account to manage, they will manage your portfolio across both. So they'll put for example your stocks and emerging markets in the IRA, where the highest-growth investments won't pay taxes, while they leave the bonds in your normal investment account. This is something that's really hard to do otherwise. My guess is this might be worth the 0.25%. But I haven't done the math.
Thanks for the comment and the debate!
You say:
if you give them your IRA and your normal investment account to manage, they will manage your portfolio across both. So they'll put for example your stocks and emerging markets in the IRA, where the highest-growth investments won't pay taxes, while they leave the bonds in your normal investment account.
I think you have it backwards... An astute advisor -- robo or human -- should put the fixed income investments in your retirement account as they generate ordinary income at higher rates. The equity investments mostly generate tax-advantaged capital gain and dividend income so those belong in your taxable account where you benefit from a lower effective tax rate.
You might well be right. I left my company as we were developing this, so I didn't dive into the financial math of the result. This is precisely the type of reason why I use roboadvisors for this type of thing :)
But thanks for stating this!
What do you think about Trading 212 and their AutoInvest (in pies) feature? Too much room for rookies to make an error or solid option? They're attractive as they have by far the lowest fees currently
Hola Tomas, me gustaría saber tu opinión sobre Finizens y si lo incluirías en la lista de top robo advisors de España. Gracias!
No los conozco! No puedo opinar... Si un día invierto en España, lo miraré.
Sólo miré a Indexa en su día, sus portfolios, sus fees, etc... cuando trabajaba en la industria. También hablé con dos de sus fundadores, a los que respeto muchísimo. Por todo ello, me dio buena impresión. Creo que han seguido creciendo en AUM, lo cual es buena señal.