Convergent Financial Group
Owner and Lead Advisor
Jeremy is the founder and lead advisor of Convergent Financial Group.
Before starting Convergent Financial Group, Jeremy was a co-owner and lead advisor of E&R Wealth Management. Over the past decade, he has worked in various sides of the financial industry, including a fee-only wealth management firm, an independent broker dealer, and an insurance company. His experience brings expertise in planning for the future, investments, insurance, taxes, and estate planning. He holds a Bachelor of Science in Civil Engineering from Clemson University.
BS, Civil Engineering, Clemson University
Assets Under Management:
This is a question that many are asking. There are actually two schools of thought on this, so I'll briefly explain both and then share what I advise my clients to do.
If you want to address the question from a purely mathematical standpoint, and your mortgage has a low fixed rate, then simple math dictates that investing for the long term will most likely win. This is because investment appreciation is out-pacing the low mortgage rates of today's market. In other words, you stand to gain more return in the market than you will pay in interest on your mortgage, so your money would be more efficiently used to invest.
The other option is paying down your mortgage debt first, which gives you a very measurable goal and avoids the risk that inevitably comes with investing. Every dollar that you put towards reducing your mortgage principal is a guaranteed rate that you don't have to pay interest on. The rationale is that by paying off your mortgage, you are significantly increasing your monthly cash flow. And many people link retirement goals to when their mortgage will be paid off. They assume that in retirement they will downsize, sell their home, and use the equity to supplement their income. In reality, most people actually decide to keep their home or downsize in square footage but NOT in their mortgage amount.
So here's what I like to remind folks of:
1. Only about 70% of the cost associated with your home is actually principal and interest. The other 30% is taxes, insurance, and upkeep. Even if you pay off your mortgage completely, you're still going to be left with that 30%. So, yes, paying off your mortgage will free up some monthly cash, but given the fixed costs of owning a home, it may not be as much as you think.
2. You can't spend the money that's tied up in your house. Once you pay off your mortgage, the only way to get access to the equity is to borrow again or sell your home. So let's say you're finally ready to tackle the remodel you've been dreaming of; chances are, you're going to end up with some sort of mortgage again. That just begs the question: what was the point of foregoing the investment appreciation to pay down your debt if you were just going to walk back into debt down the road anyway?
I do acknowledge that there is an emotional human connection to answering this question. As with many financial considerations, decisions aren't always based on math. It has been my experience that paying down a mortgage -- regardless of how the math works out -- makes people feel more secure. The emotional benefit of your mortgage decreasing right before your eyes in black and white every month has a value that can't be measured in dollars and cents. It just feels good! You get to see the numbers reflecting that you are steadily on your way to achieving your goal, and that's a win.
On the other hand, investing for the long-term is somewhat intangible. After all, even though you get to enjoy the market that brings you a steadily increasing portfolio, you also have to endure the market that's declining. In fact, that's the very nature of investing for the long haul. You may know it's the right thing to do, but it just doesn't feel as good as the steady climb towards your goal as with paying down a mortgage. It's like enduring both the incoming and outgoing tide regardless of which way you're heading. You'll eventually reach your destination, but it sure does feel better when the tide is pushing you along as opposed to moving against you.
What do I advise my clients to do? Typically, it's a bit of both. First, I say to take advantage of proven market growth and invest for the long-term. Then, when you have extra cash, whether from monthly cash flow or perhaps a bonus, allocate at least some of those dollars toward reducing your mortgage debt.
Keep in mind that there are highly individual nuances in each person's scenario, including your tax rate, your investment allocation, and the amount you're saving. Any of those can impact the way you might allocate your money. One of the advantages of working with a professional is that we have the tools and knowledge to answer this sort of question specifically and accurately just for you.
First, congratulations on being in a position to retire in your 50s. That puts you in a very small percentage of folks, especially without pension income. I am impressed.
How to achieve downside protection has been discussed by investors for decades. If you were to do a quick search, the first thing you would see would be "Why you should buy an Annuity". In full transparency, I don't recommend annuities to clients, so you will get a biased investment based approach from me, but I have to acknowledge that annuity companies do a great job of selling the idea of downside protection. Think about it, they say if you put your money with us, we will guarantee your income or give you principal protection, etc. Those "knowns or guarantees" are real enticing. Wouldn't having certainty on a future income stream or a guarantee on downside protection make you feel secure and confident. Transferring that risk to an insurance company is the opposite of investing. To invest is an expectation that the current asset will appreciate, but with an acknowledgment that there is a risk that the asset will not. The key to investing is balancing that risk with the expected return of each asset used. The story of “Why to Diversify”.
Assuming that you had the worst timing on the planet and you put all of your money in the S&P 500 Index at the height of the tech bubble, August 2000, or just prior to the Great Recession, October 2007, you would of needed to not distribute from your investments for 7 years or 5.5 years respectively. This is oversimplifying everything to make a point...therefore no dividends and reinvestments. But this does make the point that holding equities long term will work, including through the most recent financial down turns. So, how does this relate to downside protection. If we focused on the Great Recession, you could of avoided a loss in equity holdings if you had alternative cash resources to distribute from for a full 5.5 years.
You mentioned that the dividend stocks and 401K payouts were providing $67,000 of income but all you needed was $50,000. Based on that assumption your current strategy would have to be reduced by about 25% ($67K x 0.75 = $50K) to put you at the bottom level of your income needs. Each CD is enough to cover 1 year of comfortable income. Therefore, I believe that you have plenty of downside protection... in summary that is a 25% downside of current investment assets and you have 4 years of cash equivalent assets to be used in the event you need to buffer a loss greater than the 25% downside referenced.
Based on the information you provided, I believe you don't need any more cash or CD assets. I would caution you on the distribution of 401K assets. You should check to make sure you are not going to be subject to a 10% penalty for taking distributions prior to age 59.5. The key to the distribution of investment assets is managing the risk verse return profile of each asset, and managing taxes. It is about spendable money, not gross distributions. Keep thinking about protection and how you can distribute from different buckets during different market conditions.
Hope this helps and congratulations again on being in the position to retire before most of your peers.
Full disclosure, I am an investment guy, so I lean towards “buy term and invest the difference”. I started my financial career with a mutual life insurance company. They taught me from day one, that there was no better way to invest other than through life insurance vehicles. After a short period in life insurance sales, I transitioned to a wealth management firm and didn't look back.
You should go with the Roth IRA and this is why. The sales literature for a life insurance plan will focus on the protections of the index features and the tax advantages of the life insurance product. You mentioned paying tax on the Roth IRA, therefore I am assuming that you are talking about using post tax dollars to fund the Roth. The same would apply for funding a life insurance premium. So the real question is about comparing the accumulation and distribution of both investment vehicles.
The math matters when comparing these options. When considering a life insurance product, please think of the life insurance vehicle like a piece of investment real estate, but one that is mortgaged with your life. You pay down that mortgage over time, with fees of course (cost of administration and insurance) and when the mortgage is finally paid off, or you have accumulated enough equity in your policy, you are allowed to borrow back some of that equity with more fees (interest on the loan). The life insurance representative will tell you not to worry about the interest because the tax “advantages” will offset the fees. And if they are trained well, he or she will mention the death benefit will ultimately pay off the loans. You shouldn’t care about how the product ends because you will be dead anyway, right… Once you “look under the hood” the structure of the life insurance product will start to appear extremely similar to a reverse mortgage. Trying Googling "Reverse Mortgage" and see what the public thinks about that product.
Life insurance folks believe in their products, I give them that. In my opinion, life insurance is great for the beneficiary, not for the insured. Don’t misunderstand me, you should have life insurance if life insurance is needed, but it should not be used as an investment vehicle.
The Roth allows your contributions to grow tax deferred and if used properly can be distributed with out tax implications during your retirement years. It will give you more options and additional long term benefits. Of course tax laws could change, but as the current laws are written, I would place my bet on the Roth.
Hope this helps.
Congratulations on paying off your student loans. That is HUGE! Now the fun begins. All planning is specific to the individual, but I think information on basic financial planning targets could be beneficial.
- Cash (Emergency Fund) - 3 to 6 months of living expenses
- Insurance Coverage - Life and Long Term Disability
- Retirement - Maximize Employer Match
I would concentrate on building up your cash to an amount that equals 3 to 6 times your monthly living expense amount. A high-yield savings account is a perfect place for these dollars. The living expense number used for your calculation should include all spending that is not consider taxes or savings. Next, I would focus on reviewing your insurance coverage. If you have dependents, you could look at having term life insurance. Maybe start with a 20 year term policy with a death benefit of about 10 times your salary. Your employer likely provides some Disability Insurance. You should review that coverage and consider filling any gaps with supplemental Long Term Disability coverage. Don't worry about short term disability coverage. Finally, I would recommend that you contribute to your 401k a percentage that gives you the full match from your employer. Remember, the employer match is a 100% investment return.
After those targets are achieved, you should move your focus to maximizing retirement funding. I would lean toward Roth 401k contributions. If you want the option to retire before your peers, I would recommend you contribute around 15% of your gross earnings. If you are willing to extend your retirement target to age 65 or 67, then you can reduce that target to about 10%. Any remaining surplus should go towards additional cash savings for your down payment. If you plan to purchase in the next 5 years, stay in cash savings. If your time horizon on the purchase is a little longer you could invest conservatively in a brokerage account. Betterment or Wealthfront are good options to consider.
I would encourage that you work with a financial planner to develop a game plan that is specific to you. Hope this helps!
Congratulations on your approaching retirement. I am impressed, retiring at 60 puts you ahead of most of your peers.
You can absolutely manage your own investments, but should you? I will answer that in a second.... First, I want to caution you about your approaching retirement transition. You are about to enter an investment time like no other, a time where you have to make continuous decisions on how to sell assets. Generating portfolio income is extremely different than accumulating portfolio assets. It will require a different approach to how you manage your portfolio. Distributing assets is about managing volatility, generating growth and dividends, tax mitigation, withdrawal percentages, and more.
Ok, sorry about that, back to your investment question.
Investing is a lot like joining a gym. Anyone can invest and anyone can go to the gym. But in both cases, the results can differ drastically. In January, how many people will do a quick internet search to find the “best“ workout program and pay for a gym membership, but end up in April back on the couch thinking about how they should start working out again. Do you like the gym? Can you get motivated to work out when it is cold and rainy? Can you do both diet and exercise?
What if you hire a personal trainer? Someone that has a job specifically designed to help you implement your workout plan, someone that will ensure that your technics are done correctly, and someone that will be there to hold you accountable to your health and fitness goals. An investment advisor should help you with your investment goals just like a personal trainer will help you with your health and fitness goals.
I am an investment guy, therefore, advocating for people to self-manage their investments is like being a mechanic and advocating for people do to all of their own car repairs and maintenance. Not good business, but stay with me for a few more sentences…
My goal is not to convince you to work with one of my fellow industry gurus. It is to bring up the point that there is a present cost and a future value to all financial decisions. If you are asking the question about doing it yourself, maybe the answer is not to self manage your portfolio, but maybe it is time to look for another advisor. In the meantime, you can check out some hybrid choices that may make sense for you. Betterment, WealthFront, Charles Schwab (Intelligent Investor).
Good luck and congratulations again on the approaching retirement date.