So my younger son apparently thinks he has too much cash on hand and wants to talk to us about investment advice. He’s in the Navy and I believe he squirrels away the maximum they allow, but not the one where you have to spend 20 years to get the full pension. We’ll ask again when we talk to him. Generally my advice has been maximize whatever you get from your work place. Put it in a Roth IRA. Index funds are the way to go. Live within your means. Pay your credit card every month.
When I was his age or a little older, I really liked Jane Bryant Quinn’s * Making the Most of your Money. * Would love to give him something similar.
I have no idea if he should be worrying about Covid-19’s eventual effect on the stock market. I don’t understand why it hasn’t crashed yet!
Hopefully he’s putting money in the TSP, and if he’s a fairly low rank he should be putting it into the ROTH TSP (in my opinion).
I agree on the crash - as I’m sure you know it went way down, but is back up substantially.
Bogleheads is an excellent financial advice form and they have lots of articles/wikis for various situations.
I’d go with Bogleheads. And some simple principles:
Diversify. Don't put all your eggs in one basket.
Buy index funds. Don't try to time the market or otherwise outsmart either the market as a whole or other investors. Let the market work for you. Over the long term it will give you a healthy rate of return, despite short term ups and downs.
Invest for the long term. Don't worry about day-to-day or week-to-week fluctuations in the value of your portfolio. They're essentially noise. Check the value of your portfolio annually, or quarterly at most.
Pay attention to the fees charged by investment advisors and/or funds in which you invest. Fidelity and Vanguard offer a wide selection of low- or no-fee funds.
Pay attention to the tax consequences of your investments. You might want to include some tax-free municipal bonds in your portfolio. Not only are the earnings free of federal taxation, but in some states they're also free of state taxes. The savings can add up, making even relatively low-interest munis competitive with taxable corporate bonds with a nominally higher rate of return.
Keep a balance between stocks and bonds. Stocks generally produce a higher rate of return over the long term, but they're more volatile. Bonds provide a lower but steady rate of return.
Your age matters. Generally younger people should have a higher percentage of their investments in stocks because they're likely to produce the highest rate of return over the long run. As you age you become more sensitive to volatility; you don't want to have your investments drop precipitously in value just before you retire or anytime after you retire. This counsels in favor of a higher percentage in less risky bonds or other low-risk investments in your pre-retirement and retirement years.
Take full advantage of tax-advantaged retirement saving opportunities beginning at the earliest possible age and continuing over a lifetime. Componud interest is your friend; the earlier you start, the more your portfolio will grow over the long run. Earnings grow on a tax-deferred basis in IRAs (Roth or Traditional), 401(k)s, 403(b)s, SEP, SIMPLE, and Keough accounts until you withdraw the money in retirement. At that point it's taxed as ordinary income. Rother IRAs go even one better: you invest after-tax money, but not only the earnings but also all withdrawals are tax-free. The tax savings can be enormous; it's as if Uncle Same is contributing to your retirement savings.
If you have kids, conside starting a 529 education savings account for each kid. You can change the beneficiary as often s you like as long as it's a family member. As with retirement accounts, your investment grows tax-free, and withdrawals are also tax-free as long as the funds are used for qualified educational expenses which include college tuition, books, computers, other necessary supplies, and room and board, whether in a dorm or an apartment. This can be a huge boon to families with college-bound kids, with tax savings worth thousands of dollars over the course of a child's lifetime. Consider it Uncle Sam's contribution to your child's college education. And it doesn't need to be used for college. Many vocational programs also qualify.
We believe in dollar cost averaging. (Our current financial planner doesn’t, but we never fully understand the reasoning). If he is going to invest, I think it better to add slowly, especially now as the market is unsteady.
I must say, I’m impressed with my kid. Apparently he’s saving half his salary.
He’d like to buy a house sometime. I actually ended up thinking about laddering CDs for at least some of his extra cash as he should have an emergency fund that he can access. The penalties for cashing in CDs early (which would only be necessary in a serious emergency) should be minimal. He’s going to look into whether he can have a Roth IRA outside the TSP plan.
I have a friend who is working as a contractor to the DOD providing financial guidance to people in the military. She has been a broker and a fiduciary/self employed financial advisor with all the usual qualifications for many years. It’s possible that such a person is at his duty stationer is available for remote discussions.
I think she’d be amazed at his savings and desire to do more with it. (Some of the general stories she’s told of service members who have nothing but a huge truck, living beyond their means, massive credit card debt, etc. would astound you.)
That site says that the median savings rate is 13.8134% and the average savings rate is 8.2%. It also says that 0% savings rate is higher than 38.18% (meaning that 38.18% spend more than their income), and -100% savings rate is higher than 12.28% (meaning that 12.28% spend more than double their income).
Navy Federal Credit Union is likely to have decent free financial advising available for him if he’s a member. That would be another place for him to start.
Not sure CC will allow a link to the dropbox, but I printed out a copy of Dr. William Berstein’s “If You Can” for both my kids. Or you can google it and send him a link. It’s a great primer, and my kids didn’t want to hear me talk about investments but they have asked questions that let me know they read the document.
Right now for a young person I would recommend keeping your non retirement savings liquid. There really aren’t any good short term investment options right now - the stock market is risky and CD rates stink. The advice I have given my 26 year old daughter is to put her 401k into long term funds and her other savings are sitting in FDIC insured bank accounts. She was able to snag a few good rate CDs late last year, close to 3%, but those have disappeared. My hope is that when the rates rebound she can easily move money into CDs. I am following a similar strategy. Any CD that has come up for renewal recently I have put into the shortest term possible (6-7 months) and hope that at maturity rates will be better. I will keep renewing short term until the rates improve.
Of course a federal government employee can have a Roth IRA as well as a TSP and maximize both considering income limitations and the backdoor Roth technique if necessary.
The GEHA HDHP is also a way to save more. For single only coverage the premium conversion of $900 annually goes into HSA Bank ratably throughout the year. To max out, the employee can then contribute $2650 through payroll straight into a Fidelity HSA (all at once or over the year).
Note that you don’t want to reach the TSP max ($19,500 for under age 50) before year end and miss out on the 5% match.
Don’t let the TSP monies just sit in the G fund. Some sources recommend 80/20 or 87/13 for C and S funds.
Thanks for all the comments and feel free to keep them coming. I found the TSP stuff confusing - he mentioned how he had to be careful not too put too much into the TSP which seemed odd to me. I think he has them in some sort of fund that is pegged to your age. Agressive now, less agressive when you get old.
If he doesn’t mind less diversification & likes to participate in the market, consider buying a blue chip stock which pays dividends and selling covered call options to enhance yield–but will limit upside potential. Verizon would be an example of such a stock.
It seems fairly common these days for retirement savings plans (401(k) and similar plans) to offer target date investments (where the investor chooses the one with a year closest to intended retirement year) which gradually change the asset mix to be more conservative as the target year gets closer.
Target date mutual funds are also offered by many of the usual companies (Fidelity, Vanguard, Schwab, etc.) to individual investors for regular or IRA accounts.
@Madison85 hit it on the head, I think. It’s about being sure to spread the payroll deductions out so that you make contributions from the entire year’s worth of paychecks without exceeding the annual limit, to maximize the match. This can be true of other plan types as well (401k, etc). I remember watching my contributions closely.
Federal employees can learn alot about the pay and benefits by reading the document (available free for the first year, $20 in a subsequent year) at fersguide dot com.
@Madison85, it looks like even the first year has a fee now.
It is true you need to be careful and not over-contribute to keep matching coming, but he may also have things he wants to save for that are NOT retirement, so other options are great also.
