Mutual Fund Newbie. Can I live off of my dividends?
May 10, 2013 7:36 PM   Subscribe

Struggling to find work, young, recent grad. I have a mutual fund and need help breaking it down. Can I live off of it? Should I? What do I do with a mutual fund??

I'm in my mid-20s, architecture degree (few job prospects right now), and contemplating about going into another field. No student debt, I have about $15k in my bank account from savings.

I also have a mutual fund with TransAmerica. My mom set it up. The money (I think) came from an insurance company after a really nasty accident I had as a child. There are three funds in the account, (a) Flexible Income (~18% of the total), (b) Multi-Managed Balanced (~23% of the total), and (c) High Yield Bond (~59% of the total). The fund currently totals to about $300k and money from dividends is automatically reinvested.

The financial advisor whose name is linked with the mutual fund is unreachable and my mother says he's terrible. I don't even know if he's still practicing. I need to go about changing to a new financial advisor but I want to be more familiar with the mutual fund first and what I want to do with it before hiring someone.

Money is tight in the family and I don't have a job (my mom was laid off too). My mom just kind of ignores the mutual fund because the one time she took money out to help pay for my university she got slammed with so much in taxes that now, she just pretends it doesn't exist (she doesn't understand mutual funds, plus it's in my name...she was the custodian).

I know very little about finances and mutual funds. I attribute this partly to this mental block I've developed from my mother who thinks it's too complicated to understand.

I redeemed from the MF for the first time last month when TurboTax told me I would owe ~$3,000 in taxes...because of the mutual fund. I don't know why, but most of the dividends are not qualified dividends and are thus taxable. So I used the estimator tool from TransAmerica and redeemed $3,000 in qualified dividends to pay off my taxes. And it got me thinking...

Last year, the change in the balance from the beginning value in Jan 2012 to the end value in Dec 2012 was around $37,000. If I did get an architecture job, that's about how much I would be making in salary. Of course without a job, I'm missing some pretty significant benefits, such as health insurance and building my career. I also want to start saving for retirement...I have no idea where to start.

This might sound like a silly question, but is it a good idea to just redeem from my MF (using estimator for qualified dividends that wouldn't be taxed) to stay afloat right now? I'm feeling really lost and regretting my decision to do architecture. I'm thinking about working at the nearby supermarket as a cashier ($10/hr) to save some money on groceries. I'm also thinking about an Americorps position (pay is like $2.5/hr) just because it's related to the green, sustainable field I'm interested in. I want to know if I can afford the luxury to rethink my future career options and whether I should go in a different direction.

I've also been told that mutual funds suck. I should be putting the money somewhere else. But where? And where do I start learning about this sort of thing? I honestly have developed a mental block that it's just too big for me to comprehend. I know that's not true but I would really appreciate pointers, whether they are to online articles or books that can simply break it down for me. Thanks!
posted by anonymous to Work & Money (11 answers total) 3 users marked this as a favorite
 
Mutual funds only suck to the extent anything else sucks- if the people running it are responsible and have goals similar to yours, they are a great way to invest.

I would not have a problem living off the dividends during times of trouble. But I wouldn't rely on them. I would try to make a go of it with the degree you have. Nobody gets good jobs when they are new/green.

Perhaps you can make a rule for yourself along these lines: you can withdraw up to half of the profits for the year, but no more than that. The other half gets reinvested.

Managed cautiously, this thing is a great benefit. The more money you leave in there to grow, the quicker you can retire. Instead of working until you drop, you have a good chance at retiring early and doing what you want. But the more you pull out early, the farther out this goal becomes.
posted by gjc at 7:52 PM on May 10, 2013


A good resource for learning about investing and finance in general is The Motley Fool. Their books, especially, are pretty good. It was an MF book that first introduced me to investing in the late 1990s.

As for living off of your dividends, probably not. Most of the increase in value of your funds (the $37,000) in 2012 was probably appreciation, because the stock market had a pretty good year, and interest rates dropped (which causes bond prices to go up). Generally, for a long-term "living off the interest" scenario (retirement, typically), you want to assume a withdrawal rate of around 4% / year, or about $12,000 / year for you. While that's a nice subsidy, it's not enough to do more than barely get by on.

And 'qualified' dividends are still taxed, just at a lower rate than normal dividends and income. It's complicated. Look at your old tax returns to get an idea of how it works, and maybe go to the IRS's web site, download a 1040 and the associated schedules, and fill out some sample tax returns to better understand the ramifications.
posted by Hatashran at 7:53 PM on May 10, 2013


I am not your financial adviser but no one should have 59% of their money in a high yield bond fund. It's a niche asset class. Imagine if you could only choose two tools for your toolbox and you picked a wire crimper instead of a standard screwdriver.

The flexible income fund is less bad, but still bad. The Multi-Managed Balance fund is the most appropriate of the three as it is a diversified stock/bond fund. But one of their Asset Allocation funds might be somewhat better. In any case, seek out some informed advice.
posted by mullacc at 9:26 PM on May 10, 2013 [1 favorite]


It's not very hard. You can understand it pretty easily actually.

A basic distinction you need to understand is managed funds vs. passive funds. With managed funds, you pay higher fees for someone to "manage" the investment choices in the fund. A passive fund, such as an index fund, has very low fees because it just invests in the companies in an index, such as the S&P 500. The difference in fees might sound small (a few percent) but can actually amount to huge amounts of fees over the course of a lifetime. With managed funds there are a number of possible fees including sales charges, commissions, management fees, etc.

Investment industry types want you to believe that they can beat the market, but evidence indicates they really can't (and you'll find that they never guarantee they can, not only because they know such a guarantee is impossible but also because they are precluded by law from doing so).

Be skeptical of the investment industry. I suggest reading a book called The Big Investment Lie.

Another important concept for you to know is diversification. If you invest in one stock, that is very risky because one stock can be very volatile (up or down). A portfolio of many stocks (such as an index fund) will be less volatile because of diversification (many companies, many industries, etc.).

Right now bonds are doing poorly and stocks are doing great, but remember that past performance of a market or fund or stock or bond does not predict future performance. Don't try to outguess and outsmart the market. It's very important to remember that, because if you don't remember that, and instead believe in luck or some theory you come up with yourself about investing, you might as well just go to gamble in Las Vegas.

If you still want to use a financial advisor, use one who charges a fixed fee, not a percentage, and one who will not try to steer you towards investments for which he/she gets a commission or other such benefit.

There's more to learn, but those are some basic important concepts upon which you can build your knowledge. Personally I'm not a fan of Motley Fool. I think the simple site MoneyChimp.com is a good place for you to start.

Your mom is wrong, but she is like most people...duped by the investment industry into thinking she needs an advisor to understand investing. It's simply not true. In fact, it's rubbish and don't be fooled by it.
posted by Dansaman at 9:36 PM on May 10, 2013 [3 favorites]


I am terribly sad, because I wrote up this really long thing about what mutual funds are and how they work, and then I lost it. But... I'm bored, so I'll write it all again. On preview, I'm repeating what Dansaman said, but sometimes different people can explain things in different ways and maybe this will still be helpful.

I'll try to break it down to the essentials, and this is just my understanding, I am no investing pro, but I am sure someone else will come along and correct me if I'm wrong.

You don't have "a mutual fund". You have 3 mutual funds. The account they are held is is called a trust fund (I'm assuming, because you said your mom was the custodian, and that implies the funds were being held in trust for you).

Mutual funds pool the investors' money and purchase securities, by which I mean stocks, bonds, and so forth. I will use the TransAmerica Multi-Managed Balanced Fund as an example. It consists of a selection of different things, some of the top holdings in the fund are U.S. treasury notes ("T-notes"), stocks in Apple, Google, Johnson & Johnson, Philip Morris, and Microsoft. So when you buy one share of the Multi-Managed Balanced fund, it's sort of like being able to buy yourself some T-notes and stocks in all those different companies, but all in one transaction. It allows you to diversify your investment which makes you less vulnerable to the volatility of the market, i.e. a fancy way of saying you're more protected if individual stocks or other securities suddenly crash in value.

So the performance of the mutual fund is going to depend on which stocks (or whatever else, bonds etc) it owns. So why would a mutual fund be a 'sucky' investment, if its performance is only as good or bad as whatever its holdings are? To say "mutual funds suck" is a vast generalization. A mutual fund can be a great investment if it has good holdings that are going to perform well - this generally means as well as the market in general (the stock market has a good track record, historically), or better. But there are two other considerations with mutual funds that can make them suck more than just directly buying whatever they hold. First, they can have fees. The fees are called "loads". Your Multi-Managed Balanced fund has a front-end load, which is like a sales charge. That means every time you make an investment in that fund, you get charged that fee (which appears to be 5.5% in the case of that specific fund). Fees cut into your investment, especially when you look at how much impact they have over time on your returns. As that link indicates, you should not have to pay these fees! There are plenty of investment options that do not charge them, called "no-load' mutual funds.

Now the second consideration aside from fees/loads is the expense ratio. That is a percentage of the investment you have to pay every year to the company who runs the fund for the honor of having them manage your investment. Fair enough, all mutual funds cost money to maintain. But there is wide variation between different mutual funds and the expense ratios they charge, as Dansaman noted, the ones that are actively managed, like the Multi-Managed Balanced fund, charge a lot more. So let's compare your Multi-Managed Balanced fund to the Vanguard S&P 500 Index fund, a passively managed fund that tracks the S&P 500 index.

The Multi-Managed Balanced fund's expense ratio is 1.43%. That means every year, the fund pays itself 1.43% of the assets as administrative costs, salaries of the managers and whatnot. The Vanguard S&P Index fund, on the other hand, has an expense ratio of 0.18%. I think it's pretty easy to see that even if the performance of these two funds were exactly the same, you'd make a lot more money in the end with a fund that's only charging you 0.18% of the assets for its services. So no, mutual funds don't suck! But mutual funds with high fees and expense ratios certainly do suck!

So, my point is not, OMG, you must sell these funds immediately because they are bad. You've been holding them for years and their performance has apparently been pretty good (I see for example that the Multi-Managed Balanced fund has outperformed the S&P 500 Index over the past 5 years, although if you just look at the past 1 year, it's not doing as well). But I'm just saying you could do better. Read the Motley Fool if you like (you'll be able to tell from the articles I linked whether you like their jokey tone), read some personal finance blogs and/or books, you'll find this stuff isn't as hard as you think.
posted by treehorn+bunny at 9:51 PM on May 10, 2013 [4 favorites]


I have about $15k in my bank account from savings.

Taking money out of your mutual fund when you have this much money in a bank account which is probably earning practically no interest is not what you want to be doing. Live off what's in your bank account before you get into the mutual fund!!!

You need a fee-based financial advisor. You should learn more about all of this yourself, but the amount of money you have means it makes sense to go to a fee-based financial advisor now, you wouldn't want to to be loosing money due to this person who is linked with the mutual fund now.


The financial advisor whose name is linked with the mutual fund is unreachable and my mother says he's terrible.


That financial advisor probably got paid on commission, and may still be getting some sort of ongoing commission from your money depending on what sort of mutual fund this is.
posted by yohko at 11:47 PM on May 10, 2013 [1 favorite]


I have a mutual fund and need help breaking it down. Can I live off of it?

That depends entirely on how much money is in the account. Interest rates are crap these days, and even mutual funds aren't paying all that well. Net of fees, taxes, and inflation, it's going to be pretty tough to get more than a few points. 3% would be pretty standard, and 5% would be awesome.

So if there's a million in there, a net 3% return would be $30k. 5% would be $50k. You can live off that. But if you do, that income will pretty much never grow, because you aren't reinvesting any of it, and you're thus missing out on the power of compound interest.

Should I?

In your mid-twenties? No, you shouldn't. Essentially, if you reinvest your dividends, your financial security is ensured. You won't really need to put a penny towards retirement savings, though you probably should, just to take advantage of some of the tax breaks that go along with things like IRAs and 401k plans. They're pretty sweet.

But you're looking at three or four decades of earning potential here. Even if you earned just that $37k a year, over 40 years that's almost $1.5 million. Giving that up to live off your equity seems unwise, like taking unnecessary risks. You need to do something for the next forty years, and it'd probably be good if that something paid something, even if just enough to pay your bills every month.

Also, median pay for architects is north of $70k, so I have no idea what kind of architecture job would start south of $40k.
posted by valkyryn at 3:55 AM on May 11, 2013


I think some of the answers above missed the part where you specify that you asking about whether you should do this to "stay afloat right now."

$300,000 in savings is, in my humble opinion, vastly more than you need in retirement savings as a mid-20s recent college grad, and it would be unfortunate if the simplistic message of SAVINGS ALWAYS GOOD panics you into a penny-wise/pound foolish decision like taking a cashier's job to save on groceries. You absolutely should, IMHO, take a chunk of it to keep you on your feet until you can get your career sorted so you have a job you want to be in, with growth potential, and that will allow you to continue saving for retirement during your prime earning years "like God intended."

Having $300,000 in the bank in your mid-20s is EXACTLY WHAT IS NEEDED TO AFFORD YOU THE LUXURY OF RETHINKING YOUR CAREER OPTIONS. Seriously--that's some Dorothy's ruby slippers stuff right there; you just need to click your heels to get yourself out of your current pickle.

If life were all kittens and puppies you could sort out a smarter investment strategy but otherwise leave it alone. If you did so, you could probably comfortably at 65 even if you never ever ever contributed another dime to retirement during the rest of your working life. The $3.3M that your investments might grow to, as MoonOrb points out, is not going to be worth as much in 40 years as it is today, but it is still enough to retire at 65 and give you a retirement income equivalent to about $50,000 in today's dollars, for another 25 years post-retirement. Again, I repeat: that's assuming you never contribute another dime to retirement. How likely is the scenario where you are unable or uninterested in ever adding to your retirement savings?

Now, about clicking the heels on those ruby slippers: you need a financial advisor to educate you about your investments, how best to utilize them in the present day, talk through some assumptions about lifetime income potential, retirement expectations, etc. and use that to run some scenarios, and finally step you through the process of shifting whatever is left over into the wisest tax-advantaged investment vehicles for the long-term future. It's another example of penny-wise/pound foolish behavior save yourself a few hundred bucks for qualified, specific professional advice and support upfront in favor of relying on scattered advice from the internet when dealing with a such a sum of money.
posted by drlith at 4:56 AM on May 11, 2013 [1 favorite]


I want to know if I can afford the luxury to rethink my future career options and whether I should go in a different direction.

On the face of it, one would think that's the sort of thing having an nest egg from a childhood accident could enable. But by drawing from your fund, and not working at the same time, you are doing a double whammy on your finances. I don't think I really need to spell out how, because it's all in your question, somewhere. Absolutely take a supermarket job, if you really can't bear to work in architecture! And get a job with health insurance as soon as possible, if the supermarket job doesn't have that.

It makes me kind of sad to have to be typing this. It says a lot about the lack of social safety net in the US (that's where you are, right?) and the cost of health care that a 20-year-old with no student debt is being told not to look at a third of a million dollars as a golden ticket. But I'm right there with those people telling you to hang onto that for a real rainy day. Or rather, think about it just a little differently. With such a good start on your retirement fund, you do have the luxury of taking a low paying job for a while, if you need to, while you figure things out.
posted by BibiRose at 5:01 AM on May 11, 2013


The fund currently totals to about $300k

I missed that part.

No, under no circumstances can you afford to live off that. Switch financial planners, get with someone you trust, and let the money sit. Or do something like send yourself to grad school--even law school can be a decent option if there's no debt involved and you can get into a top-flight school. But don't spend it on living expenses. Getting that much capital is incredibly difficult for most people. It's more than at least 90% of the country has in non-housing equity.
posted by valkyryn at 6:19 AM on May 11, 2013


Seconding Vanguard. Their advisors don't work on commission.

Keep in mind that any financial advisor who isn't charging you an hourly fee is making money off of commissions, and therefore has an interest in (1) generating more commissions by getting you to do more trades, and (2) steering you towards investments that generate higher commissions for them, whether or not they are any good for you.

Vanguard at least doesn't charge commissions on any of their funds. They are motivated to make you the most money because the tiny management fees they do charge are based on the fund balances, so higher balances equals more profit. Once you hit $500K with them they start giving you free financial advice, also.
posted by overleaf at 2:10 PM on May 12, 2013


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