How to retire way earlier in 10 minutes

This is the first post in a series of easy steps I’m writing for the New Year that will dramatically improve your financial security in 15 minutes or less.

Retire way earlier by boosting your retirement contributions in 10 minutes

Option #1 – Up your contribution by 2% now or in the future

Log into your 401k or other workplace retirement plan right now and boost your contribution amount by 2%. (Look for something that says ‘Change contributions’ or ‘contribution amount’.)

Screenshot of a Fidelity 401k

Opt in for future 2% increases

After upping your contribution– or even if you feel like you can’t boost your savings rate today– set up annual future increases of 2% if your plan offers an automatic increase function (many plans, including Fidelity & Vanguard, do.) Set up future annual increases of 2% per year until you get to 20% (or the max IRS contribution limit.) You’ll usually find this option in the same place where you edit your current contributions.

Consider setting the annual increase date to be just after your company’s annual raise period so that you don’t see a decrease in your take-home pay when the extra 401k contributions kick in since your pay will likely be higher then.

Option #2 – Save 20%, or max it out

Log into your employer’s retirement plan (e.g.: 401k/403b) and increase your contribution to 20%.

If you make more than ~$110,000 a year, or if you’re just an excellent saver and make less but still want to max out, divide the IRS limit– $22,500 in 2023 for those under 50, $30,000 if you’re 50+– by your salary, round up, and use that percentage. For example, if you make $140,000, $22,500 / $140,000 = 16.1%, and rounding up = 17% for the year to max out.

Get all employer matching no matter what

No matter how much you decide to contribute, definitely put in enough to get all of any employer matching your company offers. That’s free money you can’t afford to pass up.

Why boost your retirement contributions?

If you’re at all hesitant here, the first thing to remember is that this change is completely reversible. You can go in anytime– even minutes after you make the change– to your 401k and change your contribution rate back down. Lean in here and just do it for your future self. It’s not a one way door!

Tax savings and more wealth

In addition to saving thousands a year in taxes, boosting your 401k contribution from 10% to 15% per year over your working career means you will have 50% more money at retirement in your account.

Yes, that’s right, for the price of only a ~3.5% decrease in stuff-you-could-buy-that-you-didn’t-need-anyway, your income in your golden years will go up by 50%! Even a mere 2% boost from 10 to 12% ups your retirement income by 20%, so at least do that much.

I’d take this deal any day; wouldn’t you…?

Imagine future you

If you’re still not convinced that saving for your future is something you must do now, picture yourself in your 60s or 70s: grey hair– or white, if yours is already grey–, (more) wrinkles, a slower step, and someone wiser, quieter, but a little more lonely and less lively than you are now. Don’t you want that person– you— to be financially comfortable, maybe even relatively wealthy, even if it means a small sacrifice on the younger you?

Any reason NOT to do this?

There’s really only one reason to not do this, and that’s if you have high-interest debt like a credit card balance or a personal loan charging greater than 8% or so. Pay that off FIRST before increasing your 401k contributions beyond the minimum required to get all your employer matching. Read this to learn how to free up cash to pay down debt.

Should you choose Roth or regular (pre-tax) 401k contributions?

Many employers offer Roth 401k contributions, although generally employer matching will always go into the pre-tax account. If you expect to be in a lower tax bracket in retirement vs now, choose pre-tax. Otherwise, choose Roth. Generally, younger folks just starting out in their careers should do Roth, and older folks (30s-50s) in their peak earning years should do pre-tax 401k contributions.

Roth if you make less money, regular if you make more

Another rule of thumb of mine is if your tax bracket is less than 22% (i.e.: 12% in 2023), i.e.: you make about $55 K or less Single or $110,000 K or less as a Married couple– do 100% Roth contributions. If you make more than that, 100% pre-tax is probably your best bet, but you can always reach out to a financial advisor to discuss more.

There’s no bad way to save though, so just make your best guess and move on. The key thing is to save the money, not agonize other Roth vs pre-tax and what future tax rates will be.

Increase your contributions right now, before you read any further!

Log into your workplace’s retirement account, which for most people is either a 401k or 403b plan. Search your company’s benefits site if you don’t know where to go, or if you know they use Vanguard or Fidelity, head straight there and login (create an online login if you’ve never logged in before.)

Click on your 401k or 403b account if you have multiple accounts, and then look for something that says ‘contributions’ like ‘change my contributions’. Click that, and find your current contribution, usually expressed as a percentage of your base salary. Enter the new number that you decided upon above, and save your work. You should get some kind of confirmation screen.

Great work! Keep reading. You need to do one more thing while you’re logged in.

Optimize your investments with a few more button clicks

Switch both your current investments as well as your future contributions to a low-fee Target Retirement fund like those offered by Vanguard or the Fidelity Freedom funds. Choose the year closest to your 75th birthday (e.g.: if you were born in 1980, choose the 2065 fund.) You should see some option like ‘change investments’ and might have to do this once for future contributions and once for the money already invested in your account.

For bonus points, double-check your ‘beneficiaries’, or set them up if you haven’t before. You want to make sure your assets are sent to the people or charities you want to get them if something untimely happened to you.

Don’t have an employer retirement account? Use an IRA instead

If your employer doesn’t have a retirement account, or you freelance and don’t want to set up a self-employed IRA, open a Roth IRA at Vanguard instead, then set up automatic monthly deposits with this link after you’re logged in. The maximum yearly contribution in 2023 if you’re under 50 is $6,500/year, and $7,500 if you’re 50+. Max out if you can. (If you work for yourself, consider opening a small business retirement plan.)

I’m assuming a Roth is best for you since I’m predicting you’re at or under the 22% tax bracket. If your marginal rate is 24% or more and would rather save on taxes now, use the Traditional IRA instead, but ONLY if you or your spouse don’t have a 401k at work, since that generally prevents you from making pre-tax contributions to a Traditional IRA.

You’re now retiring earlier, or more luxuriously, or both!

Boom! You just secured your age 60+ retirement in the time it takes to make a cup of coffee. Pat your self on the back, take a lap and hit the showers.

Next up, make this simple change to your direct deposit and never worry about spending too much again.

If you want to retire ever earlier, read this too.

Share in the comments how much you bumped up your contribution, and whether you changed your investments or beneficiaries!

How to start investing profitably in individual stocks

So even after reading my warning, and despite all the ease, simplicity, lower risks and excellent returns of target date index funds, you still want to pick your own stocks, huh? Ok, keep reading, but don’t say I didn’t warn you!

Stock-picking Acid Test: do you have at least $100,000 in stock index funds? Have you paid off all high interest debt like credit cards? Are you on track to retire by at least 60-65? If not, go back to the basics first before you consider buying individual stocks!

I recommend keeping at least 75-90% of your portfolio in index funds such as a Vanguard Target retirement fund, and only allowing yourself to pick stocks for the other 10-25%.  That way, if you lose your shirt, you’ll still have plenty of assets to fall back on.  Alternatively, you could designate your retirement funds as index-only, and stick to taxable accounts for any stock picks.  I do this, since I don’t want to screw up my age 60 retirement accounts (401k & IRAs), but am willing to take a little more risk on my ‘early retirement’ accounts.

Also, diversification– owning several different stocks of different sizes in different industries– helps you lower your portfolio’s risk.  The right index funds give you that diversification so that you don’t have to worry about it as much when you’re picking individual stocks.

Quick start guide to picking your first stock

  • Start small (cap.) small investors have better chances beating the market than large investors when it comes to the sizes of companies they can profit from. Choosing a small cap company with a market cap between $500 million to $2 billion means you’re competing with far fewer institutional investors.
  • Learn how to read financial statements. Get your company’s latest 10-Q (quarterly report) and 10-K (annual report) and read it from cover to cover, skimming as needed.
  • Have the right attitude about valuations. The market’s prices are there to serve you, not to inform you. Every single company, which is what a stock represents, is undervalued at one price, appropriately valued at another price, and overvalued at yet another price. You’re investing in a partial ownership of a business enterprise; you’re not playing a casino game. As Ben Graham famously said, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.”
  • Understand how you can be fooled by randomness, and understand why ‘value investing‘ (<– famous Buffett essay)– broadly interpreted as trying to get more business value than the cash you give up in buying a stock– is the ONLY way to invest with a hope of beating the market.

Educate yourself

Peruse investing education websites like the Motley Fool (which unfortunately has a lot of link-baity junk too; but you can still find some good stuff on investing like this, or this.)  MoneyChimp is a great site too, with many investing (and general personal finance) calculators available.

Read superinvestor Warren Buffett’s ‘Letters to Berkshire Hathaway shareholders’ for free online (or consolidated in a much easier format in this book.)  The best book I’ve read to get a feel for the correct general investing philosophy is Roger Lowenstein’s Buffett biography.  I recommend this as a must-read for any would-be investor to learn the correct investing temperament, which is even more important than  learning how to value stocks.

Read Benjamin Graham’s classic ‘The Intelligent Investor’, or at least the chapters on ‘Mr. Market’ and the Margin of Safety concept (Chapters 8 and 20.)  Graham was Buffett’s teacher and, together with David Dodd, pioneered value investing with ‘Security Analysis’.

Peter Lynch’s One up on Wall Street and Beating the Street are also good. Philip Fisher’s Common Stocks and Uncommon Profits is excellent too, especially for the notion of ‘scuttlebut’; picking up (legal) insider tips on your own.

A less dense and very useful ‘just get started investing’ primer is the Motley Fool’s Million Dollar Portfolio book.

One word of caution: if you ever come across ‘technical analysis’, otherwise known as ‘charting’, run the other way as fast as you can!  Technical Analysis is a stock picking method akin to voodoo (and just as scientific.)  It involves looking at the past patterns in past price data (random movements in the market) for a given stock.  Supposedly, patterns like ‘head and shoulders‘ (I’m not making this up) are ‘buy’ indicators, whereas the ‘rounding top‘ pattern is something to fear.  If you think trying to divine future stock movements from random patterns in past price data sounds crazy, you’re right; don’t give this garbage any space in your brain.

Do your homework

Once you find a company you’re interested in, start looking at their financial data and business model. I use Yahoo! Finance for a quick look at financials and to track companies I’ve already bought or am considering buying in the future. Download annual reports (10-K’s) and quarterly reports (10-Q’s) from the Investor Relations section of a company’s website. Do whatever valuation techniques you like, but at a minimum compute some ratios (PE, PEG, Current, Quick, etc) and do a Discounted Cash Flow (DCF) analysis on a company’s Free Cash Flow (FCF.)  Valuation matters!

Plan to buy and hold a company… forever!

Warren Buffett is often quoted as saying his favorite holding period is forever.  What he means is that if you do a thorough job in steps 1 and 2 above, you should have found a company worth holding for a very long time.  Ideally, that great business would continue to be a profitable investment for years to come, so why wouldn’t you keep the stock?  There are some legitimate reasons to sell, maybe the business has changed, or maybe you overlooked some glaring issue at the time you purchased.  Maybe the all-star CEO has left and you’re not comfortable with her replacement.  Or, maybe you finally need the money.

Other than these reasons, plan on holding for a very long time.  Buy and hold investing forces you to do your research up front.  It also keeps you from trading too much, which incurs large costs and lowers returns dramatically.  Not only that, but the IRS tax code favors investors who hold their investment gains as long as possible (this last consideration doesn’t matter for retirement accounts that are tax-advantaged, like 401ks or IRAs.)

Track your portfolio’s performance against an appropriate benchmark index

Here’s the easiest way to do this, which is what I do to track my performance casually and easily.

Knowing your performance against a relevant benchmark. If you can’t beat the market benchmark, picking stocks is detrimental to your wealth AND a waste of your time. I recommend keeping your brokerage account that you use for individual stocks separate from the rest of your investments (i.e.: your index funds, bonds, and cash reserves.)

After you calculate your total return, calculate what your total return would’ve been if you’d made the same investments (amount and date of investment) in an index fund like the Vanguard Total Stock Market index fund (ETF ticker: VTI.)  Ideally you would like as long a time period as possible, as random fluctuations in your portfolio can make you lucky (or unlucky) in the short term.  Check your portfolio’s return against a benchmark at least every 6 months to a year.

If you can outperform the market for 3 years or more by a 1-2% each year, you’re doing very well. If you’re doing better than that, you’re crushing it compared to most investors. That might not sound like much, but it is when you can keep up that performance year over year. You might also compare the dollar gain vs the time you’re spending on it.

Conclusion

It’s very difficult to gain the knowledge, emotional attitude and discipline to be a successful stock picker. By using the resources about you’ll have a better chance than most, which still may not be enough. Stock picking can be fun, but make sure you’re giving yourself constant reality checks by measuring your entire portfolio’s performance against a major stock market index fund like the S&P 500. Use a buy and hold strategy with a long-term (5+ years) holding period. Thoroughly investigate the pros and cons of every investment before you buy. Good luck!

Final word of caution and advice

Be brutally honest with yourself: if this all sounds like too much work, or if you know that your initial excitement to do the work will lose steam in a few months, just buy broad low-fee index funds. Just ‘buying the market’ will result in huge compound returns over time, and beats the vast majority of professional money managers (because of their fees + taxes they generate from more frequent trading), not to mention all your friends.  Not only that, but target date index funds require practically ZERO work and maintenance, allowing you to ‘set it and forget it’ and get on with the rest of your life.

Here’s the easiest way to know if you are actually beating the stock market

I do NOT recommend picking individual stocks. However, if you are going to ignore my advice– I admit I do for a small portion of my portfolio– then I want you to at least think about investing in individual companies correctly. You also need to track your performance against an appropriate benchmark like the total stock market. This can actually be pretty easy with this simple trick.

Make a ‘benchmark’ account

First, keep your stock-picking account separate from your other investments in its own separate account. Next, open another brokerage account of the same type as your ‘benchmark’ account.

Use a reputable brokerage like Vanguard— not scammy garbage like Robinhood– for God’s sake. Most people do and should use taxable (non-retirement) investment accounts for both your individual stocks and benchmark accounts. This keeps you from monkeying around with your retirement money.

A tip on avoiding taxes while owning stocks

I use a portion of my Roth IRA for my individual stock investing to avoid paying dividend or capital gains taxes when I trade. This also makes it easier to compare performance since I don’t have to subtract taxes from my investing results. Keep in mind that you can’t touch your Roth earnings until you’re 59.5 if you choose to go this route. Make sure you mentally separate this money from what you actually need to retire.

Keep the money flows in and out of both accounts equal

Now, fund each of these accounts equally. If you start out with $10,000 in one, put $10,000 in the other at the same time. With the benchmark account, put all of the money into whatever the appropriate benchmark is for comparing to the types of companies you’ll be investing in. If you are going to be picking mostly US stocks, then invest your benchmark money in a broad US index like the Vanguard Total Stock Market index fund (ticker: VTSAX), or its ETF (ticker: VTI.) Make sure you automatically reinvest dividends & capital gains into your benchmark fund (another reason to use Vanguard since they let you do this.) Your two accounts will look like this at the beginning:

In your stock-picking account, start buying and selling or holding cash as you like. Over time, your benchmark account will grow with the market, and your stock-picking account will grow (or shrink!) depending on your results. Whenever you want to compare your relative performance, just look at the two balances and see which is higher.

Let’s pretend that after two years, your stock-picking account has grown to $15,000, and your benchmark to $12,000:

50% absolute gain vs 20% VTI gain means you beat the market by 1.5/1.2 = 25% over two years, before subtracting taxes.

Make sure that whenever you add or remove money from one account in the future you do the same with the other at the same time. Ideally you would also log these money moves in or out of your accounts in a spreadsheet so that you can compute fancier comparisons like your average annualized percentage returns (using the XIRR formula.)

Even if you can’t be bothered to compute annualized gains, you can at least say whether or not you’re beating the market and by how much in absolute dollars and as an absolute percentage difference.

Using less money for your benchmark

You don’t technically have to use equal dollar figures in your benchmark, although it’s the easiest way. Instead, you might do 1/10th the amount in your benchmark. E.g.: $10 K in your stocks account and only $1,000 in your benchmark fund. However, you’ll need to remember to multiply your benchmark fund by ten to compare the two balances, and doing the same math for any money that goes in our out, including for taxes.

Accounting for taxes

If you use an individual account, you should try to account for taxes. The best way to do this is to just estimate your tax burden from the investments each year when you file your taxes. Use your 1099-B and 1099-DIV forms to see how much of your capital gains and dividends are attributable to your benchmark and your stock-picking accounts, then subtract the respective tax burden from each account at tax time.

Lazy tax accounting

Of course, if you use your Roth IRA like I do, you don’t have to do this because you don’t owe taxes on that money. If you’re using a taxable account and are lazy, you can just pretend that the dividends from your benchmark fund roughly cancel out your dividends from your stock-picking fund, and just focus on subtracting any capital gains taxes you generate from selling your stocks.

Keeping yourself honest

Comparing your investment results to what you could have received from a low-fee index fund is an essential step in picking stocks so that you can tell how you’re doing vs the market.

I hope the trick above makes it easy and convenient for you to keep tabs on your performance over time. Many happy (investment) returns!

How to avoid money management companies that want to sucker you

My conservative SWAG is that ~95% of the financial ‘services’ being provided to your average investor are legalized theft, and actively doing harm to consumers as opposed to helping them retire, send their kids to college, live within their means, etc. As an (independent, commission-free) person in the financial services industry, let me be the first to tell you that you should be extremely skeptical and selective about whom you go to for investment advice, insurance, and investment services & products.

Trust no one. Except me; I’m one of the few good guys (but test me anyway just to show you’re paying attention!)

You can guess which kind are Good and which are Bad or Ugly… (For spaghetti Western nerds: you want to invest in the grave next to Arch Stanton’s, not his.)

There is really only one investment firm I recommend to keep your investments at, and that’s Vanguard, because of the unique way the company is structured.

However, there are TONS of firms I hate, and I’m happy to tell you by name whom they are. I already talked about sh***y banks, so let’s turn to financial ‘services’ firms aka money managers. The MO of all of these firms is straightforward and, in my opinion, should be criminalized because of the billions in harm they do to consumers each year:

They spend a lot on salespeople and advertising and get you to invest with them in the guise of looking out for your interests, and then…

… they sell you high-commission-generating or otherwise high-fee products that secretly steal your money without you really being aware of it. This can happen through commissions that they get but you don’t directly pay, through high expense ratio mutual funds that you pay straight from your account balance without noticing, AUM fees– 1% sounds small but eats up ~15-20% of your future wealth— or in other similar ways. They sometimes compound the evil by getting all their money up front through high ‘sales loads’ or commissions at the time of sale (vs annually in an expense ratio or annual fee, although they do that too, the bastards.)

You end up MUCH MUCH poorer because of all the fees being siphoned off, and these guys laugh all the way to the bank, with the lower-level grunts maybe not even realizing what an evil they’re perpetrating. Read the anecdote about “the customers yachts“.

The firms in the money management space that I see most frequently taking advantage of average investors are:

Ameriprise: they sell you expensive, illiquid products like cash value life insurance and non-tradable REITs and get exorbitant kick-backs– politely called ‘revenue sharing’ or just ‘commissions’– from the folks who’s high-fee products they sell you (or they cut out the middleman and sell you their own high-fee products.) When you try to get out of these products, you find you’ve already paid a huge upfront commission, might have MORE fees to pay for the privilege of taking your own money back, and/or would have to sell at a big loss in a secondary market (*cough* time shares and non-traded REITs!)

Ameriprise has paid up at least twice in multimillion-dollar class-action lawsuits, which is amazing considering how much leeway they already have to legally steal from people. But hey, when you’re greedy and shady and have investors to please, why stop at just the legal ways of separating investors from their hard-earned money?

Edward Jones: same thing as Ameriprise, but often with high-fee mutual funds that they get their kick-backs from.

Raymond James: same business model as the other two scoundrels.

I don’t see UBS, Merril Lynch, Bank of America, Wells Fargo and the other big ‘wealth management’ guys picking on the small investors as much, but avoid them too. I think they tend to fleece wealthier folks through high investment management fees, but I suspect they also use commissions too to juice their egregious takings.

Instead, either get help from a flat fee-only investment manager like me, or if you don’t need the financial advice, manage your own money with the only two investments you need instead.

How to identify the other bad guys

The above wasn’t an exhaustive list of the bad guys– like bacteria, they are too numerous to count,– so here’s a few helpful tips for deciding whether the financial person you’re dealing with is going to rip you off. (I don’t care how neatly pressed his suit is, how well it fits, how high up the office is, or how shiny his shoes are!) If the answer is ‘yes’ to any of these questions, grip your wallet tightly and run the other way:

  1. Are they recommending cash value/whole/universal/variable life insurance to you? If you ever hear the word life insurance in a sales context, unless it’s immediately preceded by the word ‘term’, you know the person is a scoundrel.
  2. Are they recommending an annuity? Annuities, like cash value life insurance, are notoriously high-fee and inflexible. AVOID!
  3. Do the mutual funds they recommend take any ‘front loads’ (upfront fees)? If so, RUN!
  4. Are they recommending any mutual funds with expense ratios > 0.5%? Don’t pay a guy in a suit to underperform the market. Get the market return using a low-fee index fund and leave those other suckers investors in the dust.
  5. Are they offering to ‘manage’ your money– taking 1+% per year of all your wealth each year– by buying and selling individual stocks or mutual funds? Very few people can beat the market, and no one that can is going to spend much time tracking you down, because they’ll be too busy making money hand-over-fist to let you in on their secrets.
  6. Are they selling any product that sounds sexy or complicated like REITs, private equity, oil and gas partnerships, some hot new industry/sector of the market, stock or IPO that you should get in on? You don’t need any of that complicating garbage. It’ll only hurt you on average with fees, taxes, and illiquidity.
  7. Are they selling timeshares, or real estate as an ‘investment’? Real estate, and timeshares specifically, have super high fees and liquidity problems. Let your personal residence be the extent of your real estate ‘portfolio’, and leave the rest of the real estate game to the pros. Real estate brokers get paid to sell you real estate, so ignore them when they tell you how wonderful it is (“it’s ALWAYS a good time to buy!”), and read my skepticism instead.

If you’ve already been suckered a bit or are just feeling like your current advisor isn’t doing enough to earn their keep (few are in the ‘traditional’ business model!), don’t feel dumb, guilty, or ashamed. Wall Street has a powerful marketing arm and plenty of brain power to separate the rest of us from our hard-earned dough. Instead, let your righteous anger fuel you to make the switch!

Don’t be one of the bad guys’ victims, and if you have been, fix the situation by getting your money away from them and out of whatever bad product it’s been put into as carefully and costlessly as you can. I can help if you need it.

Addendum: To financial service professionals employed by one of these firms

I should note too that this isn’t a dig at any particular person working at these companies. If you’re one of them, I’m sure you try to do right by your customers, but you’re ‘paid not to understand’ how bad the incentives are at your employer and how self-serving the products you’re encouraged to sell are.

Good people + bad incentive systems = bad behavior by otherwise good people. “Well, they’d just go to some other big firm that’ll rip them off in the same way!” “But I need these commissions to live. My family’s gotta eat too!”

I can’t sugar coat it: all of these are polite lies you tell yourself to feel better about hurting people because it’s good for your bottom line.

To you I make this plea: If you’re a financial services provider working at one these companies, get out of a corrupt system and make money in a more honorable way if you can. I’m happy to chat about how I decided to run my business the way I do in case you’re interested in leaving the Dark Side of personal finance.