Are you interested in early retirement or a super saver with non 401K money to invest?
Perhaps you are one of the millions of employed pilgrims in the good old U.S of A with zero investment knowledge looking to learn how to invest in under 5 minutes?
You’ve come to the right place. Here you will learn to invest in under one tweet.
Ignore the wall street blowhards. Ignore the financial advisors who want to scare you into forking over your hard earned cash for them to manage (and pilfer) in the same index funds you can select yourself for free.
Investing is only complicated if you let it be complicated. It was easy to sign up for 401K at work right? You probably did that when you first started and you rarely revisit that decision now, but you do know that is growing year on year.
The same holds true of investments outside of 401K. Whether brokerage, IRA, 401K, or HSA, these all are just buckets of your money invested in the same types of funds. You don’t need any special expertise to do this responsibly and to be able to set your investments on a path to early retirement.
If you can sign up for 401K, you can sign up other investments just as easily, and every dollar you save in addition to your 401 will get you that much closer to early retirement.
The below is the only investment guide you will ever need, and the roadmap takes less characters than one tweet. Here is how you should invest:
Simple enough right? When saving, invest in 1 fund in pretax accounts first and after tax accounts last. When retired, keep investments in 2 funds and withdraw from after tax accounts first and pretax last.
You can keep it this simple and hit FI or early retirement long before the IRS says you are bonafide enough to retire at 59. You can make it more complicated than this if you want to, but you’ll just get similar results for extra work.
Now let’s do a brief overview of each element.
Which accounts to focus on
Why should you max 401Ks first, IRAs second, and brokerage last? Simple. 401Ks reduces your taxable income (by up to $20,500 x 2 if you and your spouse both max out) and it grows tax free, so you should max here first before bothering with the other accounts.
Once you are maxed out on pretax 401k, you should consider IRAs. Too many people overcomplicate these, so I’ll give two simple rules.
- Don’t do Roths before retirement.
- Contribute to a Traditional IRA only if your taxable income is less than $129K for a two earner household (no tax benefit if your income is higher).
After maxing out 401K and IRAs, you should invest in a taxable brokerage account, which has no contribution limits, so you are free to invest as much here as you can save. The more you invest in the brokerage, the more years of your work life you can shave off since the money accessible penalty free whenever.
Wait, what about Roths?
Whether Roth 401K or Roth IRA, I recommend to avoid both because of taxes. Even those in a lower tax bracket should avoid the Roth. Why? Because in early retirement, we we are going to access our funds tax free!
If you wait and play the long game you can convert your IRAs/401K to Roths tax free in early retirement. Read more on this topic here if you want to retire tax free.
How much of a difference does it make to covert to a Roth later vs buying now? Possibly more than you think.
If you buy it before retirement you are buying it after taxes, so you would have to make something like $8000 to buy it ($2000 went to Uncle Sam, leaving you with $6,000 to buy the Roth). Let’s say you decide against the Roth right now, saving $2000 in taxes in 2022. That $2000 invested in a tax free account could be worth $30K in 30 years. That’s a year of living expenses for some retirees.
Which Investments you should choose
If you are still saving, invest 100% in one single low cost stock index fund. If you are at or near retirement, invest in two: (1) 75% in a low cost stock index fund and (2) 25% in a low cost bond index fund. The end.
You can make it more complicated than this if you want and buy 30 different index funds, but its not going to matter to your long term return potential. Tinkering around and overcomplicating this, however, could cost you. I am a big believer in less is more, and it couldn’t be more so in investing.
Which two specific funds do I choose?
There is no one specific fund you have to choose per se. Any low expense ratio Total Stock Index Fund or Total Bond Index Fund will do. Such funds are available at every major broker (Fidelity, Charles Schwab, TD Ameritrade, etc.) and can be invested inside of any your accounts: IRA, Roths, 401Ks, etc..
Total index funds will give you the average of the entire market in one fund (meaning you own a piece of every US stock and will without fail track exactly with the market without lifting a finger). Total Market Index funds are also low cost and automatically diversified. Its low risk and super simple.
- Stock Index . I mostly use Vanguard VTSAX. My separate 401K (Alight) does not have a Total stock index fund, but does have a large cap index fund, which tracks to the S&P 500. Large cap funds will yield near identical results. Undoubtedly you have similar options available. You can find equivalents to VTSAX at the following link.
- Bond Index. I use VBLTX at Vanguard. Equivalents abound. You can find them here.
If you want to read up on this more, I recommend popular blogger JLCollin’s blog or book (a Simple Path to Wealth).
If you don’t want to read up, just go with a total stock index fund that is low expense ratio similar to VTSAX, and just keep investing regularly. Don’t overcomplicate it.
What about rebalancing?
If you are still saving, you don’t need to rebalance . . . ever . Set it, automate your investments, forget it, and move on to some other worry in life.
If you are at or near retirement (within one year), now is the time to either rebalance to 75% stock/25% bond, or to sell 25% of your VTSAX and buy VBLTX. From here, you can automate your safe 4% withdrawal rate in the same way you automated investments.
The market will change throughout the year. Change is never-ending. Don’t panic at the headlines. You were built for this. Once a year if your portfolio falls out of 75/25 balance, manually rebalance it yourself.
Don’t pay 1.5% of your portfolio every year to a financial advisor to click the same button you can to rebalance. You will shave years off your retirement savings or have to work years longer until retirement if you plan to fork over your hard-earned cash to somebody else to perform minimal work on your behalf.
Accounts to withdraw from first.
The order here is based on taxes and ease of access. Brokerage accounts are taxable and accessible any time, so you want to withdraw here before you tap into IRAs/401Ks, which are harder to access before 59 1/2 and grow tax free.
With that said, one thing to keep in mind is that if you have successfully resisted lifestyle inflation, paid off your house, and your annual living expenses are below $83,350 (for a 2 earner household), then you have the potential to draw from your accounts tax free!
That includes withdrawing money from your taxable brokerage accounts “tax free.” Sounds like an oxymoron? Talk to the IRS, not me. I don’t write the tax code – I just abide by it, tax free, and you can too. Read Pay Zero Tax Secrets here for more details.
After you exhaust your brokerage account, then you can start tapping into your IRA/401Ks next, where there could be some potential tax impacts depending on whether your converted to Roths.
Roths are a bit more complicated but you can consider 2 rules here.
- Before 59 1/2: If your brokerage runs out, you can withdraw Roth basis next penalty free (or setup a SEPP IRA(link).
- After 59 1/2: now it’s the opposite. The IRS begins placing RMD limits on your IRA eventually, so it’s wiser to leave your Roth if you can, which will give you more maneuverability to minimize your tax burden as you get on in your retirement years.
That’s it. You made it to the end. Now you know the rules to invest in one tweet. Forget about the 500 pages tomes written by financial lab rats who enjoy complicated tax codes. Joining the Secret life of FI doesn’t have to be complicated.
Keep it simple. Invest regularly. Max out tax deferred accounts in 100% stock index fund first. Replicate with IRAs and brokerage next. Now relax and reap the benefits. Retire early if you want. Now live the life you want on your own terms.