Integrity Advisory, LLC
As a Financial Advisor at Integrity Advisory, LLC Matt Ahrens is focused on helping business professionals simplify their financial lives and find financial security as they face life's everyday challenges.
Since joining the firm in 2015 as a financial advisor, Matt has overseen the investment management and portfolio construction process for our clients. During this time, he earned the Certified Investment Management Analyst® designation which included an extensive class on portfolio design at the prestigious Wharton School of the University of Pennsylvania. Matt specializes in assisting physicians, small business owners, and young entrepreneurs who often find themselves with little time to manage their own investments.
Matt and his team help their clients track all of their investments in one centralized location and use the information to make sure they can retire when they want to and how they want to.
BS, Accounting, Washburn University
Assets Under Management:
That's a good question and it's great that you're taking your retirement seriously now. As you know the thrift savings plan works very similar to a 401(k) which it sounds like you will also have access to at your company. A couple of thoughts here for you.
1) You are certainly allowed to contribute to both the thrift savings plan and the 401(k), but you're limited to $18,500 in your personal contributions. That includes both accounts combined. If your company offers a match then certainly contribute enough to get the full match, but after that consider where to put the remaining contribution. If you work for a large company of more than 100 employees then the cost is probably fairly reasonable. If it's a small company then check out your fund expenses and compare them to the expenses in your thrift savings plan. If it's a small company and the employer isn't picking up the tab then there may be high fees and you'd be better off contributing more to the thrift savings plan.
2) By contributing to these plans then you are already taking advantage of dollar cost averaging, and I would certainly consider index funds given your age. Right now risk is your friend, and if the market drops it's to your advantage. A market drop would allow you to buy more shares at a cheaper price and that's all good news for you.
I utilize an online savings account for my 6 - 9 month emergency account. I keep a small amount at a regular bank savings account so it's accessible, but the rest is online getting around 1.5% annually. That's a great idea and I'd encourage you to do that.
If you want to invest excess cash, but don't want to lock it up until you're 59 1/2 then consider opening a Roth IRA. Someone previously mentioned a taxable account, but that should be the last bucket you fill. Contributions can be withdrawn in a Roth IRA at any time so it's important you track them. If you withdraw earnings then you get hit with a 10% early distribution, but you can always access your own contributions. Again I'd consider index funds or ETFs. If you're going to dollar cost average in then make sure the ETFs don't have transaction fees. Many custodians offer a wide list of transaction free ETFs.
Good luck to you and please let me know if I can be of help,
Matt Ahrens, CIMA®
This is a great question and something that many investors either take for granted or don't consider. In general I always have my dividends reinvesting to buy more shares of the company paying the dividend. There have been a few exceptions when managing investments for our clients and those include the following:
1. Taxable account and the investment is fully appreciated. I have some clients invested in Kohl's (Ticker: KSS). Kohl's has experienced significant price appreciation especially since the announcement about their partnership with Amazon. Some of those investments are in taxable accounts, and considering it was purchased within the last 12 months I don't want to sell the position to realize a taxable gain. In addition, the client is receiving about 6% in dividend income off their original purchase price. Rather than forfeit this nice dividend and pay the taxes I turned off the dividend reinvestment plan so the dividends will accumulate cash to buy a new position.
2. As some folks switch from wealth accumulation to income I have switched the dividend reinvestment plan off to pay income that is distributed to my clients.
3. There have been a few times where I have utilized closed end funds that I felt were in line for price appreciation, but instead of reinvesting the dividends and income I had the income paid to cash where I dollar cost averaged into an S&P 500 Index fund.
Your custodian should not be charging you to reinvest the dividends, and if that's true for you then I would generally suggest reinvesting. Reinvesting allows you to take advantage of dollar cost averaging on new shares. As you know the share price will fluctuate with time, and if the share price drops then these dividends are picking up more shares at a lower price and simply lowering your average cost.
Hopefully that helps, and good luck to you!
Matt Ahrens, CIMA®
That's a great question, and I would start by saying don't withdraw all of the funds at once. The tax impact would be significant, because it would throw you into a high tax bracket, and impact the taxability of your Social Security benefits if you're eligible and currently receiving them. That leaves you with 1) taking just your RMDs and leaving the rest in your 457 plan, or 2) taking your RMDs and rolling all or a portion to an IRA account.
It is true that most 457 plans have limited investment options so you may not have a great money market or fixed account available to you. If the government entity that you worked for was a large city or state then your fees are likely competitive. If you worked for a smaller city or county then unfortunately the plan may be expensive, and you might be better off rolling into an IRA account. If you can look at the expense ratios for your investment options they should be under 1%. If most of the investment options are over 1% (especially over 1.5%) then you are likely getting hit with high fees and may be better off in an IRA account.
I would challenge you to consider this though. Any investment options that offer guaranteed rates of return right now are offering very low guarantees. You have a $450,000 account that you haven't touched until the IRS said you had to. That sounds like you are financially secure, and while this money is important to you, it doesn't sound like its market fluctuations would significantly impact your financial security. It is this financial security that gives you the flexibility to take some risk. There's no need to go crazy and try to earn 10% a year, but a moderately conservative portfolio designed to return you 4-5% per year sounds like it could help grow your portfolio and give you some sense of peace.
I'd suggest you speak with a fee only financial advisor, and see how they would propose managing those funds. If you have target date funds in your 457 plan then even the most conservative fund should have 25-30% equity exposure which I think would be appropriate to help fight inflation and allow you to grow your assets.
Good luck to you,
Matt Ahrens, CIMA®
This is a great question, and it's awesome you're creating a game plan at 22. I wrote an article on prioritizing where you extra money should go on Investopedia here. It was written for medical professionals, but applies to everyone.
First item I would mention is your stock account. I understand the desire to play with crypto currency so you can continue that (although you may want to check out the Robinhood app for its low fees in this area). Your stocks though would be better in a Roth IRA account than in a taxable account. At 22 you have plenty of time for these assets to grow tax free, and it's much more tax efficient to keep them in the Roth than in a taxable account.
Second, given that you're at a large investment bank I would imagine the fees in your 401(k) are relatively low so I wouldn't be too concerned about maxing out your 401(k). Given your current income levels it is likely though that you'll eventually reach an income limit where you won't be able to make Roth IRA contributions. This means two things to you now. 1) If you have excess cash after maxing your 401(k) then put it in a Roth IRA instead of a Traditional IRA, and 2) doing this leaves open the possibility of a Back-Door Roth IRA down the road.
You're doing all the right things now, and go ahead and finish paying off your student debt first. You're almost there and it will help supercharge everything else.
Hope that was helpful, good luck to you!
Matt Ahrens, CIMA®
This is a great question and one I had to tackle myself last week with a client. This particular client was working with myself and another advisor, but he felt the other advisor was offering a better deal because he was told they give teachers (his wife is a teacher) special discounts. So they "managed" her 401(k) for 0.60% and they managed a taxable account for them, and he assumed they were being charged the same 0.60% for that account as well. I charge 1% as a fee-only advisor, and clients receive investment management, retirement planning, business consulting, tax planning, etc. The other advisor was "fee based" which is what you're dealing with in your question. This means they can charge a fee and also receive commission, and too often it means muddy waters lead to deceptive sales tactics.
I'm curious though when you say the investing will be done in managed funds if this means active funds or in a separately managed account. The other advisor my client was working with isn't allowed to directly manage investments, because her firm (Broker/Dealer) doesn't let her. So they always use separately managed accounts, but this just adds a layer of fees. Now he pays her fee (which happened to be 1.20% by the way) and a fee to the actual manager. The investment manager wasn't even using Institutional shares which meant there was another layer of fees built into the funds that were not necessary. When we broke it all down, the client was paying close to 1% less with me than with the other advisor.
Unfortunately I feel that this is an area where our industry gets a bad name, and sometimes rightfully so. Many investors will look at Institutional share classes and see it requires a million dollar initital investment, and automatically think they can't have access to it. However, if you work with a fee only advisor those minimums are usually waived. I'd be happy to do a quick review of the funds they proposed for you or I can share with you a fee disclosure form that you can send your potential advisor. Many other advisors have mentioned the XY Planning Network or NAPFA as organizations that use fee only financial advisors. I agree and think both are great organizations and great resources.
Good luck to you,
Matt Ahrens, CIMA®