Lesson six: summary of learning to invest
For your workplace 401(k), you don’t get a choice. You have to use whatever 401(k) provider your employer chose. For your IRA and taxable brokerage account, you can choose!
There are the "big three" brokerages that have been around for several decades:
Vanguard
Fidelity
Charles Schwab
There are also robo-advisor brokerages that manage the investing for you:
Wealthfront (025% advisory fee, $500 minimum for automated investing)
Betterment (0.25% advisory fee or $4/month if not depositing at least $250/month, $0 minimum)
Both companies are mostly the same feature-wise. Betterment does have a higher 0.65% premium plan with access to unlimited sessions with a CFP (Certified Financial Planner). Betterment also has a $0 minimum to get started, while there is a $500 minimum for Wealthfront.
When I first started investing in index funds, I went with Wealthfront. The sign up process was simple. I answered a few questions about my goals and timeline and then it created a portfolio of low-fee ETFs. All I had to do was set up automatic, recurring contributions into the investing account and Wealthfront handled the rest.
Wealthfront was great for when I was starting out but nowadays I handle the investing myself with Fidelity. Choose what works best for you.
Reaching financial independence
Retirement is a dollar amount, not an age. You don't have to wait until you're 65 to retire.
There was this research study done, called The Trinity Study, that looked at the volatility and long term growth of the stock market. The purpose was to figure out a "safe withdrawal rate" that you could withdraw from your investment portfolio every year, and not run out of money. For a time period of up to 30 years.
It was concluded that 4% of a portfolio could be withdrawn every year, adjusting for inflation, and have an extremely low likelihood of running out of money. Thus the "4% rule" was born. It's often explained as having 25x your annual expenses saved up.
So, if you were to have $1.25 million invested, you could withdraw $50,000/year, through all the ups and downs of the stock market, and not run out of money. Having 25x your annual expenses would mean you have achieved financial independence. No longer needing to work if you didn't want to.
FAQs
What about social security? Is that even going to be around when I retire?
Social Security will still be around when millennials and younger generations retire. There are fear-mongering headlines stating that the social security trust fund will be depleted by 2035, 2036, 2037 or some other year.
That doesn't mean benefits will automatically go to 0%. It's estimated that, by then, benefits will be reduced from 100% to around 80%. The percentage will gradually decrease in subsequent years, reaching 73% by 2098.
The ssa.gov website allows people to create a free account and get a benefits estimate. Let's say your benefit estimate is $2,000/month if you claim at full retirement age (67 years old). If you're going to claim social security after 2035, then the benefit might end up being $1,400/month instead (30% less in benefits).
The social security trust fund faced an imminent chance of running empty back in 1983. With only weeks to spare, Congress did finally enact some changes to ensure the trust fund remained solvent.
I'm [insert your age]! Is it too late to start investing?
Nope! Compound interest works for everyone. It does work better with a longer time horizon. However, you can still reap the benefits of compound interest even if you are 40, 50, or whatever.
The point is to start with what you have and build a consistent habit of doing regular, recurring, automatic deposits into investments.
Financial resources
You Need A Budget (YNAB): a digital envelope budgeting tool with a loan planner, spending trends, and net worth tracker.
Capitalize: free 401(k) to IRA rollover service
Trust & Will: estate planning service
SoFi: high yield savings and checking account