Where and how to invest for retirement?

June 23, 2024 12:58 PM

I am trying to improve my retirement strategy. My employer based retirement fund is good and maximized, but I have a large lump sum sitting in savings. I am particularly looking for thoughts on Fidelity, Schwab, and Vanguard and how to find a financial advisor.

I have a significant amount of money sitting in savings and need to decide where to put it. I have read a decent amount about investing and spoken to my TIAA rep where I have my retirement fund but I still don’t have a good understanding of the best way to proceed.I want this money to grow towards my (hopefully early) retirement in 15 years. My credit union has money management accounts and CDs but again, I think I can do better.

Based on what I have read, I am thinking about a fund with Schwab, Vanguard, or Fidelity. I am very risk averse and do not want to play around with the market. I want something that will grow and also something that I can essentially set and forget. I am not comfortable with trading etc. on my own. I am willing to pay a fee only financial advisor but have not had luck identifying one. I have asked friends for recommendations and the one I spoke to was at a boutique form and not a good fit for me. My TIAA rep is not very helpful.

I’d welcome suggestions for how to find an advisor, thoughts on the two companies that I mentioned, and any other things I should think about in terms of strategy. Thanks!

posted by fies to Work & Money (22 answers total)

Look at XY Network for a fee only fiduciary advisor. The fiduciary part means they have to put the clients' best interest first. I also like the Money Guy Show (both in podcast and YouTube formats) for general good guidance, and they have a free deliverable called the Financial Order of Operations (aka the FOO) that may be useful to you right now. They also have a deliverable called 8 Questions to Ask Your Financial Advisor (or something similar) that is meant to help you screen potential advisors.

They are big on index fund investing, which is a set it and forget it approach that Fidelity, Vanguard, and Schwab are known for. Good luck!
posted by happy_cat at 1:07 PM on June 23 [1 favorite]

First off, I would suggest putting most all of the savings into a money market fund at your bank. Some "number of withdrawals per month" type restrictions, but not a big deal. You will get better interest rates. Then, you can find your advisor at your own pace.

If your employer "has a plan" then you are already in the market. So, all of those offer no-load mutual funds. If you are risk adverse, I would think about 40-50% in no-load bond funds, and 50-60% in no-load index funds. I would move funds from the money market to the funds in a set dollar amount every month until the MMF was empty. Of course, keep enough somewhere to be able to handle 3 months worth of living expenses and such.

Don't have a fee-based advisor, so can't off help there, (we are portfolio-based), but avoid anything specific about their recommendations that have even a sniff of commissions...
posted by Windopaene at 1:08 PM on June 23 [1 favorite]

Dollar cost average an automated amount every month into a mutual fund. Max out contributions to a Roth IRA first and then into a taxable investment account. Thats really the standard advice. Track your monthly spending so you know what you’ll spend in retirement. Then run a spreadsheet calculating when your projected yearly spending hits 4% of your net worth to get an idea of when you can realistically retirement, keep working until you feel comfortable with that scenario and your cushion. You should have a handle on that before meeting with an advisor so that you won’t be swayed by their biases if they are advising from a different lens.
posted by cakebatter at 1:12 PM on June 23 [2 favorites]

Also recommend reading “your money or your life”, “the bogleheads guide to investing” and the Mr. Money mustache blog archives as supplemental self education to an advisor.
posted by cakebatter at 1:15 PM on June 23 [2 favorites]

An advisor is great when your situation is a little complicated, but if you just want a set-it-and-forget-it investment and are risk averse, you don't really need one. I have funds at both Vanguard and Fidelity (I came into the marriage with Vanguard, my husband with Fidelity) and they are pretty much exactly the same experience as far as I can tell.

Windopaene is right, you just need to invest in some indexed funds. My friend who is a financial advisor but not my financial advisor (and told me I didn't need one) suggested the Total Stock Index, Total Bond Index, and International Bond Index at Vanguard. My investments are spread evenly across the three, they go up consistently, and are a very reassuring no-brainer option.

There are a lot of other things you CAN do, but if you just want your money to be working for you in a low-key way, it can be just that simple.
posted by gideonfrog at 1:15 PM on June 23 [8 favorites]

The simplest, and most bulletproof, solution is to do what gideonfrog's friend recommended:

The bogleheads Three-Fund Strategy.
posted by aramaic at 1:45 PM on June 23 [2 favorites]

My approach is also very set-and-forget. I agree with gideonfrog: you probably don't need a financial advisor, except perhaps to have a one-time sit-down with someone who will tell you what to do. You may have heard of index-card investing. It doesn't need to be very complicated.

Vanguard will let you buy into a fund based on your expected retirement date (within a 5-year window), and automatically rebalances the mix of assets based on how close you are to that date, ie, less risky as you approach retirement.

I'm guessing you've got a 401K with your employer. You can also get an IRA or Roth IRA on your own (Roth IRA being money you invest after taxes). You can put $7000/yr into a Roth IRA ($8000 if you're 50+ years old). I've got a Roth IRA invested in one of those Vanguard retirement-date funds, and I have it set up to automatically pull money every month out of my bank account.

If you're really risk-averse, you can get a CD right now yielding about 5%; the long-term yield on equity investment is generally expected to be 6–7%. Admittedly that 1–2% difference adds up over time.
posted by adamrice at 2:46 PM on June 23 [2 favorites]

CDs are paying well right now due to interest rates especially if you can score a promotional rate, and if you can get ones that auto roll, that is the perfect example of "not playing the market" and "set and forget". A money market account might be the other option. You could have both and let the mma build up to a certain amount and then convert that to a CD. Most CDs have a minimum buy in amount.

To be clear, an index fund is in the market, but it is not playing the market or trying to time the market, it is just trying to copy the holding of the major index it is named for. If you already have retirement funds "in the market" then you might be okay leaving that in place and keeping your money in more stable accounts.

It doesn't sound like you have special needs that would require a financial advisor. Most generic advice works for most people.
posted by soelo at 3:49 PM on June 23

Keep in mind that if you will be retiring early, you won’t be able to access your retirement accounts for awhile.

I’ve learned so much from the Money Guy podcast.

Humphrey Yang also has good walk through of the 3 fund (or 2 fund or 1 fund) portfolio method.

And yes, the Bogleheads' Guide To Investing is a classic.
posted by oceano at 4:25 PM on June 23 [1 favorite]

Just please make sure that in addition to having your money in TIAA or Vanguard (both are great custodians), in a 401k account or an IRA or a taxable account, that it's actually invested into a fund. Don't leave it sitting in cash or money-market funds inside the account.

For your stated goals/reasons, I would recommend a Target Date fund, where you choose the date according to your desired retirement, and after that it's set-and-forget.

Fund costs vary from expense ratios (ERs) of 0.02 to 2 (and higher). The ultra-low cost index funds are the Total Stock, like Gideonfrog and Adamrice mentioned, with ERs of 0.05 or so. TargetDate funds have ERs ~0.15 or so, which is really just fine. What you want to avoid in life is an advisor leaning on you to buy into a fund with ER of 1.0 (and some other hidden kickback costs to boot). It's easy to avoid -- bypass the advisor entirely.
posted by Dashy at 4:27 PM on June 23 [1 favorite]

Also, when and if you set up your purchase of shares in a fund, you will almost certainly want to check the checkbox for "reinvest dividends".

This means that any dividend payments issued by the companies in the fund will be used to increase your shares in the fund, rather than paid out to you as cash. It will still count as income (so it will show up on your taxes, as a 1099-DIV), but you don't really want to stockpile cash at this point, you want investment growth.

That little checkbox can make a big difference in the long-term value of your investment. Even if the market is flat, the yield of dividends in a Total Stock fund is typically another 1.2-1.5% every year.
posted by graphweaver at 5:36 PM on June 23 [1 favorite]

Agree with the target date recommendation. You can choose a date that's earlier than your actual plan to reduce risk (and returns). Target date 2025/30 funds should be around 50/50 stocks/bonds right now and will reduce stock exposure down to 35/65 over time.
posted by benbenson at 5:44 PM on June 23

Response by poster: Thank you all for the helpful comments. I will add that my TIAA account is in a Target Date Fund for 5 years earlier than I plan to retire.
posted by fies at 6:16 PM on June 23

If you want a very simple but reliable solution, I would suggest that you put your savings in Target Date Fund. You are allowed to invest personal money in these funds (separate from retirement accounts like IRAs or 401ks)

The benefit is that gives you a reasonable, balanced investment without minimal effort on your part.

In terms of which company's target fund to use, you would probably be OK with any of Vanguard, Fidelity or Schwab. My personal favorite is Vanguard because they are investor owned (no third party shareholders that need to make a profit) and they are consistently among the lowest in terms of expenses. (If the fund are using the same market indexes, they should have the same return so the cost will be the difference). For example, the Vanguard Target 2035 fund as a annual cost of 0.08% compared to the average rate for similar funds of 0.44%.
posted by metahawk at 7:40 PM on June 23

My understanding was that Target Date funds held outside of retirement accounts might not be the best for taxes. But I recognize some of the usernames recommending them as being people who have more expertise than I do, so maybe my sense of that is overblown? (And in any case, I should clarify, this is no concern at all for Target Date funds held inside of retirement accounts, like the one you have already.)

Here's an article warning about it, but its conclusions might be too-heavily leaning on that (one-time?) 2020 incident?
posted by nobody at 9:35 PM on June 23 [1 favorite]

I have some money at Fidelity. There is a guy assigned to be my advisor, and we talk once a year or so. He wants a lot of info about my situation in a way that seems invasive, but he hasn't suggested changing my investments even though I've suggested it might be a good idea. I think the "advising" is mostly just Fidellity covering their ass in case some idiot invests in bad investments, like anything connected to Trump, and loses his savings.
posted by SemiSalt at 4:43 AM on June 24 [1 favorite]

In general, mutual funds (including target date) create more tax expense than ETFs and target date funds in particular have income producing assets (like bonds) that also create tax expense. In a tax free account (401k, IRA) this does not matter. In a taxable regular brokerage account, you will have to pay some amount of tax annually for holding the target date fund. BUT - I think the way to think about this is that the taxes are just an incremental cost that might be offset by advantages, such as the simplicity of a target date fund. Most things that you can buy in a brokerage account are going to have some tax cost, whether during the holding period or when you sell. Also, you may have no choice but to buy income assets in a taxable account for diversification if you do not have room in non tax account. But, if you are super focused on tax efficiency, then ETFs are the way to go for taxable accounts and you should avoid income-producing stuff in your taxable account.

The Vanguard 2020 distributions were a one-time thing and I believe there is still a class action lawsuit pending about it. I don’t think (or at least I hope) that they wouldn’t do it again. I got one of those distributions and, on top of the COVID crash, it sucked.
posted by Mid at 4:46 AM on June 24

I hate to be a downer, but rule #1 of the stock market is investing takes a long time, until of course you are wealthy and then it multiplies very quickly. This hurts you, because you only have 15 years before you want to start accessing the money, which in stock market terms is not a long time.

You say 'substantial', but that means different things to different people.
Let's says it's $500k. Rule of 72 tells how long an investment will take to double in value, the interest rate you expect to return divided by 72 gives you the number of years. So 7% average stock market return will double in 72/7 = 10 years. So at most, after 15 years you will have 2.5X as much money as you have now, about 1.5 million at the highest end. And that is with all your money invested in the stock market. A strategy lowers your return, but makes it less risky. Only 50% of 500k will double in 10 years now - =$250k becomes about $625k. The other 50% invested in bonds returning 5% per year will just barely double in 15 years - to $500k, so $625k+$500k= $1250m at the high end.

BTW: 4% withdrawal rate on $1.25m = $50k per year. Is that enough to live on?
If you have less, then the total amount will of course be less. If you have more, you can be more conservative.

2nd issue: the dollar cost averaging people are recommending will also reduce the number of investible years. Dollar cost averaging is a great strategy if you don't have large money to invest, but is it a good strategy when you have money? Studies generally say 'no', because you are basically trying to time the market, which is a bad idea. But in like 10% of cases, a person loses and loses pretty big. So IMO, you should do 'mass investing' with dollar cost averaging, ie: try to invest the whole about over 2-3 years at most, and 'lightly' timing the market.


Next question: how long until your 401k is accessible? Because that's also growing over time. And probably social security too. So you just need enough to bridge your time before you can access all that.
You actually might need a financial advisor to answer these questions if you aren't comfortable with the numbers and concepts presented here.
posted by The_Vegetables at 7:21 AM on June 24

BTW: you don't need a financial advisor to assist you at buying any funds from Fidelity/Schwab/Vangguard. You just need to setup an account and write a check. That's it. You should also just pick one of the three. I personally like Vanguard the best, but they all are basically very similar.

You should also only look at appropriate target date funds, total stock market funds, and bond funds. Skip all the rest. They have a lot of funds to offer.
posted by The_Vegetables at 7:34 AM on June 24

My understanding was that Target Date funds held outside of retirement accounts might not be the best for taxes.

My understanding is that for purely international funds, which are lumped into the target date funds, there's lower tax liability. So you reduce you're tax liability by investing in an international fund and a domestic fund.

My recommendation is for the OP to invest in a target date fund, do some research, and then switch strategies once more information is known. You don't want the money sitting somewhere barely getting interest when it coudl be invested.
posted by MisantropicPainforest at 9:18 AM on June 24

No advice here on finding a financial advisor, sorry. Just one more type of investment product you might consider: Annuities. From what I understand, it's a good fit for people with a large lump sum they want to invest without tax penalties or investment caps; you get a little more gain than you would via a CD or other low-risk product, but you're protected from market down-swings. It's not a perfect fit for everyone, but hopefully you find a good financial advisor who can help you weigh the pros and cons!
posted by a.steele at 2:07 PM on June 24

Hey, fies, there's one thing you said that I'm not clear about, and I think it matters:

I want this money to grow towards my (hopefully early) retirement in 15 years.

That sounds like you'd like to do FIRE: "Financial Independence, Retire Early." Is the 15-year deadline a hard limit for your traditional retirement, or is that date a stretch goal for your hopeful early retirement?

Or, to put it another way, which of these 2 scenarios describes you?

1. You are 45 years old and you want to have enough money to retire at age 60.
2. You are 30 years old and you're already sure you could retire at age 60, but you really want to quit and live a work-free life at age 45.

Because if it's #2, then I would recommend putting all of your non-401(k) cash into a 100% stock index fund.

Here's why: You're already preparing for ordinary retirement with your TIAA retirement account, which is in a Target Date fund with stocks and bonds. The bonds are there to cushion the blow when the market turns down. But if the point of your question is what to do with extra money intended to accelerate an Early Retirement, then you don't need bonds there. In case of economic downturn, you won't be FIRE-ing anyway.
posted by Harvey Kilobit at 4:10 PM on June 24