Here at Flipping a Dollar, I talk about ways that I make money and build wealth. Once in a while, I talk about spending that hard earned eBay profits. One of the things I don’t cover much is retirement. But anyone who knows me realizes that retirement is on my mind a lot.
JL Collins has really given me a lot of food for thought in this regard. His blog is one of the main reasons for my understanding of all the ins and outs of retirement accounts. Tax-advantaged, index funds, and expense ratios. These used to be a foreign language to me.
I found Jim’s blog back in 2013 while looking at housing discussions. Buy or rent? Jim has the outlook that it’s not always a good idea to own a house. This does not jive with the mainstream, but Jim doesn’t work for the financial industry. Jim retired early. He’s not aiming for “usual.”
Jim took a lot of flak for his post, but for anyone who jumps up while yelling the word “equity,” take a step back. The point is that people make the decision to buy a house based on emotional reasons. We know we should look at the numbers and why they work/don’t work. Instead, we think about our kids in the backyard or some other aspect of the home which is just “perfect.”
We also ignore all the expenses that come along with home ownership. And that was Jim’s point. Homes are an expensive “investment” that don’t generally grow in value anymore. They need a lot of time and money to keep in good shape. You’re in one single area of the US, most likely dependent on one type of job market and weather situation (floods, earthquakes, or tornadoes). In some places renting is cheaper by a long shot and you can invest the rest.
Even if you love that home and its backyard, it does come at a cost. You might be willing to forego retiring one year earlier because of that yard, and that’s fine. It’s important that you make that decision while understanding the real costs. “Life choices are not always about the money, but you should always be clear about the financial impact of the choices you make”.
Wealth – The Risk Mitigator
I still remember my first job when I came out of college. I looked at my 401k and saw that I got a match. I wanted that. But wow, that’s a lot of money they’re taking out of the paycheck. I want that too. In the end, you can’t have your cake and eat it too. If you want to be comfortable in retirement, you have to start now. Or yesterday. Or maybe a few years ago depending on your age.
Because of Jim’s advice, my family has over 6 years of bare minimum expenses in retirement accounts. That’s not even including our equity in our house. Think about that.
If my wife and I both lost our jobs tomorrow, we would have 6 years to figure out our next steps. Without any new income.
Jim calls this kind of money FU money. You can imagine what it stands for. Having money like this lets you make decisions that aren’t based on fear. It lets you say “No, I’m not going to put up with that anymore.” It can even let you say “Maybe I should look for a job now instead of waiting for later.”
Wealth won’t solve all your problems, but it can make you sleep a lot better. I look at wealth as a form of risk mitigation. I’m not going to shoot for the moon, but I’m also not going to just go for that lowest common denominator. I want to be aggressive but have a B plan. Maybe even a C plan.
For me right now, my A plan is to keep working in my field. It’s challenging, and I do enjoy it. The B plan is to stay at home with the girls and sell like crazy on eBay. The C plan would be to use some of those retirement funds that I just mentioned. I understand where our family is financially. We know how we spend every dollar. We know how much we’re saving for retirement. We can make informed decisions.
My wife and I moved to Maryland while both starting new jobs. It’s something that a lot of people couldn’t fathom, but we had done a lot of research and felt comfortable. We did buy a home, but we knew that we can always rent it out in our market if that is what we need/want to do.
I’ve read a (free) copy of the book. There’s good jokes and information. Something my readers can appreciate: Jim’s actually funny! I don’t think I’d be able to compare retirement to a well-poured pint of beer as he manages to do.
Where to Invest
Some of the best takeaways are surrounding Vanguard. If you like investing, you’ve heard of them. Vanguard is a great company that doesn’t have a owners or shareholders to answer to. The only people Vanguard has to pay are its employees and its customers. That’s right, Vanguard’s customers are its owners. The reason Vanguard is so great at keeping their cost down is because of their use of index funds. These are funds that contains a combination of different stocks. Instead of buying one risky, individual company, you buy a bunch in one package. When you buy 500 company stocks mushed into one fund, one out of those 500 companies failing isn’t a big deal. Another one will fill its spot.
The negatives? You can’t hit the top end. You might miss out on the next Apple. That’s OK, because we’re in this for the long haul. It might not be sexy, but as Jim put it, “The failures fall away and the winners can grow endlessly.”
Vanguard wins out in expenses because they also let you do a lot of the work. You’re not giving money to finance managers, you’re taking control of it yourself. Instead of paying part of your retirement to a financial adviser (who has an 80% shot at not beating the market), you can just invest it in the market.
I feel comfortable making these decisions now after reading Jim’s stock series on his blog. If you’re not going to take a look at his book, that’s fine with me. The core of the information is still available on Jim’s website, and it is incredibly valuable information to have. At a minimum, I’d say to take a look at Jim’s blog to see what it’s about. Maybe you’ll find some new information that can help you move closer to your retirement or savings goals.
Do you have any early retirement goals? Do you invest in index funds? Do you love Vanguard?