Retirement Philosophy: Where To Put Your Money

Rule 1 of 3 for Retirement Investing:

  1. Put your money where it averages the greatest returns long term (10+ years)
  2. Treat retirement accounts as insurance for not having money when you’re old
  3. Passive indexing and rebalance periodically

Where To Put Your Money?

In general, you should put your money in order of where you get the highest Annual Percentage Rate (APR) available to you.  If your options are to earn 1% interest at one bank or 1.5% interest at another bank. Take the 1.5% interest!  Here’s a list of some opportunities available to most people.  Depending on your situation, you may have other opportunities to put your money.

What You Can Do With Your Money:
Investment Sample APR
 S&P 500 Index Fund 10%
 US Bonds  5%
 Savings Account 1.5%
 5 Year CD  2.45%
 Pay Credit Card Balance  15-20%
 Pay Mortgage Loan  3.75%
 Student Loan  2.875%
 100 Hands of BlackJack  -5%

You may have heard that the S&P 500 on average returns about 10%.  So I use this as a barometer for what is a good investment, because I can always invest my money there for 10% on average.

Credit card debt that you are paying interest on is accruing interest at about 15-20%. If you have money and you “invest” it in paying off your credit card, you are effectively getting a “guaranteed” 15-20% return on your investment.  That’s a great return on you money, so that’s where you should put your money towards!

Now if you have a low interest loan such as a 2.875% student loan like I do, then paying off this loan with my available money is ONLY returning a 2.875% return.  When I can get 10% on the S&P 500, that seems like it’s not worth paying more than the minimum.

Why Mention Long Term?

It’s for retirement and i’m assuming you have a decade or more to go.  If you’re getting closer to actually needing to start withdrawing from your retirement accounts, then you should move a percentage of your money to a less volatile investment like Bonds.

Asset Allocation

If you can’t handle the swings of putting all your money into the S&P 500, then you can split your money into Stocks and Bonds.  Splitting up your portfolio for risk tolerance and performance is called Asset Allocation.   A pretty safe and conservative portfolio might have 20% Stocks and 80% Bonds.  If you have lots of time before you retire, you’ll be able to handle the swings of the stock market better and you can invest more heavily in stocks rather than bonds.  I personally am currently invested in about 80% Stocks and 20% Bonds.  Read more on Asset Allocation and Risks.

Fees and Expense Ratios

Another factor in maximizing your APR is fees, also called expense ratios.  Owning an ETF or Mutual Fund, which is what you want to own in your portfolio generally have a fee.  A low cost S&P 500 index fund VOO by Vanguard has a fee of 0.04%. The fund SNPBX by State Farm that also tracks the S&P 500 will have identical performance, but charge you a 1.36%!

If you invest $10,000 in the S&P 500 and it averages 10% a year for 30 years the difference is astonishing!

VOO Value: \$10000 * e^{(0.1 - 0.0004) * 30} = \$198459

SNPBX Value: \$10000 * e^{(0.1 - 0.0136) * 30} = \$133564

These 2 funds essentially do the same thing which is track the S&P 500, but VOO will pay out a whole lot more! Here’s a couple things to take away

  • It’s astonishing how much $10k invested at 10% can turn into in 30 years! That’s compound interest for ya!
  • It’s equally astonishing how much of a ripe off SNPBX is. Over 30 years, State Farm will have sucked out $64,895 from your $10k investment.
  • Expense Ratios matter! 1% sounds small, but it get HUGH with compound interest.

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