Northwest Criterion Asset Management
Joe Arns, CFA was an equity research analyst with a wealth management firm outside of Philadelphia in the fall of 2008. He was amazed to see clients jumping out of the stock market at or near the bottom, permanently destroying a good proportion of their wealth. Even though the firm "knew its clients", the tools used to assess risk preferences failed miserably.
Joe set out to build a better way to evaluate a client's risk appetite and ensure that every investor had their BEST portfolio. A small survey of investors turned into a large commissioned study of a few thousand investors, and the knowledge base from that proprietary study became the foundation of an investment platform that combines a rich dataset of human behavior with algorithms and human expertise that continually evaluates the investment landscape to ensure each investor's portfolio offers the best return potential for a level of risk that is just right for them.
BS, Economics, Wharton School at the University of Pennsylvania
Assets Under Management:
What is your investment risk tolerance? It sounds like you have the ability to assume a good deal of investment risk, but the first step in advising you on the right type of investments starts with a better understanding of your willingness to risk losing money in search of higher returns than you can earn in the bank.
Real estate investing is not limited to owning your own residence or renting one out. You also could consider investing in real estate investment trusts (REITs) through a brokerage account. REITs invest in all different types of property, not just residential real estate, and tend to provide a high level of current income. Such an investment might be appropriate for your IRA.
The answer to this question is always yes, regardless of the age or size of your portfolio. In many cases, retiring early requires either reducing monthly expenses or taking on more investment risk in an effort to generate sufficient returns. But neither seems to apply in your case. I estimate a balanced stock/bond portfolio in non-retirement accounts (roughly 50% in each) likely would generate sufficient returns to last your family roughly 25 years. By that time, your retirement accounts will likely have grown enough to last the rest of your life.
Consider the following:
- Given the recent run of stock markets globally, an investor with all of their money in stocks should only expect to earn about 5% per year after inflation. https://seekingalpha.com/article/4112580-u-s-stocks-chanting-defense-defense
- An investor in with a balanced portfolio of stocks and bonds likely will only earn 2-3% after inflation.
- You will pay taxes on withdrawals from a rollover IRA, so the returns mentioned above will be reduced at your marginal tax rate.
If you are paying 2% per year for advice, you likely either are earning next to nothing after advisory fees (if the fund is a balanced mix of bonds and stocks) or are earning far less than you should be given the risk assumed (if the fund is all in stocks).
In addition, I wonder if your current portfolio is at all appropriate for your risk tolerance given your circumstances. You can use the link below to a free tool that I've developed to gauge the right level of portfolio risk for individual investors.
You have only two options if safety is paramount. First, you have bank/credit union deposit products (e.g., money markets, CDs) backed by federal deposit insurance. Your second option is to invest in U.S. Treasury bills or bonds, either directly (which you can do at https://www.treasurydirect.gov/) or through a mutual fund.
I sense you are not satisfied with the current rate of interest offered by most money market accounts. And why would you be! Inflation is still running close to 2%, which means most of us savers are slowly losing purchasing power on the money we keep in the bank.
However, I would strongly advise against locking up your money for several years to get a slightly higher rate of interest today. The Federal Reserve is slowly raising short-term interest rates, and according to their most recent meeting minutes, short-term rates will likely be 3% or higher by the end of next year. A 3% rate on a 5-year CD looks attractive now, but in all likelihood the bank will be the real winner if you lock up your money today.
Your best bet is to search out an online money market deposit account that offers a promotional rate. Many of these accounts restrict the number of monthly transactions and the mode of withdrawals (e.g., online or ATM withdrawals only), but this shouldn't be an issue if you won't need the funds for a few years yet.
Don't consider paying off the mortgage until the tax year following your retirement unless you have sufficient funds in non-401(k)/IRA accounts. This will minimize the share of your 401(k) withdrawals that you'll have to share with governments in the form of taxes.
Once you are retired, the answer turns upon how your 401(k) assets are invested.
If you have at least $20,000 of bond investments in your 401(k), the decision to pay off the mortgage likely will be compelling in the year following retirement. At present, we expect a diversified bond portfolio to return no more than 3% or so before taxes. After taxes assessed upon withdrawal, your annual return on that portion of your 401(k) will likely be closer to 2-2.5%. If you pay off a mortgage with an interest rate of 5.75%, the savings will amount to a return of better than 4% annually even after accounting for the mortgage interest deduction. The guaranteed "return" on your mortgage payoff likely will trump the returns available in the bond portion of your 401(k).