The school I am currently employed at has been putting money away for us as part of a retirement scheme. When we leave the school, we receive this money as a large lump sum. Recently, people have mentioned investing towards retirement. If a school were to give an employee $50,000 at the end of their time there, what would be the best way to invest that for the future if you were in the middle of your career (mid 30's)?
I know many of us have no idea what to do with this money. It seems wasteful to let it sit in a savings account earning .01% interest a year, but with what happened recently in the housing & stock markets makes those seem rather risky. What is a safe way to ensure that as an international teacher with no pension plan, you will be able to live comfortably when you are older?
How to invest the money you get at the end of your contract
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shadowjack
- Posts: 2140
- Joined: Sat Oct 06, 2012 9:49 am
Invest in property near a university or away from the seashore/river/- bank :-)
Honestly, part of our retirement scheme is to have a monthly revenue stream - we do have some money put aside to purchase an annuity, we have a house which will be paid off in the next decade and then generate income, and we are thinking about purchasing another property with an in-law suite we could live in, but rent the rest. That way we could generate about 4,000 a month gross income out of the property, then get another 700 to 1200 a month from annuities, plus get another 800 - 1000 a month from our government pension plans. This is all theoretical at this point - in about 15 - 20 years I will let you all know how it works out!
Honestly, part of our retirement scheme is to have a monthly revenue stream - we do have some money put aside to purchase an annuity, we have a house which will be paid off in the next decade and then generate income, and we are thinking about purchasing another property with an in-law suite we could live in, but rent the rest. That way we could generate about 4,000 a month gross income out of the property, then get another 700 to 1200 a month from annuities, plus get another 800 - 1000 a month from our government pension plans. This is all theoretical at this point - in about 15 - 20 years I will let you all know how it works out!
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Snowbeavers
- Posts: 72
- Joined: Fri Jul 17, 2009 11:56 pm
I would recommend investing in broad based index funds that follow the US and international stock market with an allocation roughly 65% stocks and equities and 35% bonds. Check out Andrew Hallam's book, "poor Teacher"
Nothing is risk free but without some risk, you will not get any return. By diversifying properly (such as index funds), you minimize risk and volatility.
Do not invest with an investment firm as these funds are actively managed, not properly diversified and most importantly, will charge upward of 2% of your returns.
Leave the funds in for 20 years, continue to add in every year and you will have a very nice nest egg by the time you are 55+
Nothing is risk free but without some risk, you will not get any return. By diversifying properly (such as index funds), you minimize risk and volatility.
Do not invest with an investment firm as these funds are actively managed, not properly diversified and most importantly, will charge upward of 2% of your returns.
Leave the funds in for 20 years, continue to add in every year and you will have a very nice nest egg by the time you are 55+
Pretty much repeating snowbeaver here: I would also like to recommend Andrew's poor teacher book. It will give you the information you need to work towards a financially secure retirement. Being from Canada, Andrew prefers vanguard products, but if you are from the US, I would suggest you go with schwab instead. Here is why, debit cards are not charged fees at any ATM in the world, schwab etf fees are slightly below vanguards, and I love their customer service.
Reply
Schwad is an investment firm, that has a variety of products including Vanguard. Vanguard is a fund company that offers Vanguard products. Vanguard funds typically has no load (no fees). If you want a debit card go to a bank, not an investment firm.
To give youa kore detailed but brief summary of the instruments that comprise investment funds: A fund is a collection of instruments, securities, and assets, much like a shopping cart or basket. The idea is that the more diverse the collection the more resistant it is to a drop or loss to any particular kind or type of security, asset or instrument. A fund is generally composed of three types of investments:
Securities: These are stocks and bonds. Stocks are shares or ownership in a company. Bonds are loans made by government entities.
Assets: Are typically real property such as land, but can also be (less common) intellectual property. You dont see these very often in the USA simply because the asset is typically owned by a company and then that company sells stock.
Instruments: This is simply cash in a less liquid form. Usually treasury certificates, or could be deposits in a high yield saving account.
The "risk" and "return" for an investor depends on the proportion or percentage of these types of investments in an individual portfolio. Stocks have generally higher returns around 8% but come with more risk. Bonds which are basically government loans pay about 4% but have less risk. The safest are instruments or "cash" which have very little risk but have returns of around 1.5%.
So someone who wanted a higher return and higher risk may construct their portfolio with:
60% Stocks
30% Bonds
10% Instruments
Someone who wanted a very safe portfolio, but with minimal returns (probabley little more then equaling inflation) may have:
50% Instruments
40% Bonds
10% Stocks
Someone with a moderate return risk portfolio, may have:
40% Bonds
30% Stock
30% Instruments
To further add complexity, stocks are usually divided into small cap, medium cap, and large cap stocks. The cap is short for capitalization, or how much cash the company has available. Large cap stocks are the GE's and Pepsi's. Medium cap stocks are the Walmarts. Small cap examples are Hertz.
Adding another layer of complexity are market/business specific groups such as "technology" stock funds which would mix large, medium and small cap stocks among the technology companies. Another common example are "International" funds which may mix international stocks and international bonds, and even instruments (currencies).
To give youa kore detailed but brief summary of the instruments that comprise investment funds: A fund is a collection of instruments, securities, and assets, much like a shopping cart or basket. The idea is that the more diverse the collection the more resistant it is to a drop or loss to any particular kind or type of security, asset or instrument. A fund is generally composed of three types of investments:
Securities: These are stocks and bonds. Stocks are shares or ownership in a company. Bonds are loans made by government entities.
Assets: Are typically real property such as land, but can also be (less common) intellectual property. You dont see these very often in the USA simply because the asset is typically owned by a company and then that company sells stock.
Instruments: This is simply cash in a less liquid form. Usually treasury certificates, or could be deposits in a high yield saving account.
The "risk" and "return" for an investor depends on the proportion or percentage of these types of investments in an individual portfolio. Stocks have generally higher returns around 8% but come with more risk. Bonds which are basically government loans pay about 4% but have less risk. The safest are instruments or "cash" which have very little risk but have returns of around 1.5%.
So someone who wanted a higher return and higher risk may construct their portfolio with:
60% Stocks
30% Bonds
10% Instruments
Someone who wanted a very safe portfolio, but with minimal returns (probabley little more then equaling inflation) may have:
50% Instruments
40% Bonds
10% Stocks
Someone with a moderate return risk portfolio, may have:
40% Bonds
30% Stock
30% Instruments
To further add complexity, stocks are usually divided into small cap, medium cap, and large cap stocks. The cap is short for capitalization, or how much cash the company has available. Large cap stocks are the GE's and Pepsi's. Medium cap stocks are the Walmarts. Small cap examples are Hertz.
Adding another layer of complexity are market/business specific groups such as "technology" stock funds which would mix large, medium and small cap stocks among the technology companies. Another common example are "International" funds which may mix international stocks and international bonds, and even instruments (currencies).
PBS Frontline
has an excellent video out called The Retirement Gamble. If you have a spare hour to watch, it could be worth your while.
http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/
http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/
I would agree with much of what people have said here but I would add that your time horizon is probably the most important factor when considering your allocation of investments. The allocations listed here seem ultraconservative to me but that may be because I am 30+ years away from retirement. If you are in your early to mid-30’s, I’d recommend close to 90% in stocks and 10% in bonds. You should make sure to diversify between domestic (US for me) and international stocks. I have a mix of about 63% domestic and 27% international and then 10% bonds. Just check out a Vanguard Target Retirement 2045 fund and you’ll see roughly that allocation. Over time, the allocation will shift more towards bonds, but will never get to the levels that psyguy lists. I wouldn't have pegged psyguy as such a conservative investor. Even if you are 10-15 years away from retirement they have 70-80% of their funds in stocks. Even during retirement, I think I’ll still have a good chunk in stocks (probably 50-60%).
More importantly than any of this is a good emergency fund. I have about $70k in various savings accounts. That way if I lost my job and had to go home I’d have enough to live off of for a year+ (probably 2 years) with no income. Also, make sure you pay off any high interest debt.
If any of this is new to you, I’d highly recommend just investing in a target date retirement fund. Lots of different companies offer them but I’d recommend Vanguard. If you’re a real expert and want to spend lots of time managing your money, good luck trading stocks. Be very wary of actively managed funds as they often gouge the buyer with huge fees that are nearly impossible to recoup in the long run. Some of these funds would have to handily beat the market for extended periods of time to make sense. Most funds just can’t do this over the long term.
More importantly than any of this is a good emergency fund. I have about $70k in various savings accounts. That way if I lost my job and had to go home I’d have enough to live off of for a year+ (probably 2 years) with no income. Also, make sure you pay off any high interest debt.
If any of this is new to you, I’d highly recommend just investing in a target date retirement fund. Lots of different companies offer them but I’d recommend Vanguard. If you’re a real expert and want to spend lots of time managing your money, good luck trading stocks. Be very wary of actively managed funds as they often gouge the buyer with huge fees that are nearly impossible to recoup in the long run. Some of these funds would have to handily beat the market for extended periods of time to make sense. Most funds just can’t do this over the long term.
What do you mean by 'actively' managed?
I have money in an American Funds account, which a lot of teachers I know also use. Is this the type of company you consider 'actively managed'. I definitely pay a small percentage when I contribute money, which I am not thrilled about, but I am not a financial expert, and I am too busy doing my day job, to inform myself in buying stock, bonds, etc.
With that being said, I am also going to get a chunk of money next year, and would prefer to diversify and NOT put this money into my American Funds account, since I already contribute a few hundred dollars a month to it.
I have money in an American Funds account, which a lot of teachers I know also use. Is this the type of company you consider 'actively managed'. I definitely pay a small percentage when I contribute money, which I am not thrilled about, but I am not a financial expert, and I am too busy doing my day job, to inform myself in buying stock, bonds, etc.
With that being said, I am also going to get a chunk of money next year, and would prefer to diversify and NOT put this money into my American Funds account, since I already contribute a few hundred dollars a month to it.
Actively managed funds, the generally refers to mutual funds which contain stocks which are bought and sold regularly by fund managers. Mutual funds charge investors higher percentages for this type of service.
In contrast ETF funds, also hold an array of stocks, but these are not actively managed, therefore the fees are much lower. Research shows that over the long haul, most ETFs outperform similar mutual funds, because higher fees eat away any slight advantage that can be gained through active management.
Really though, I think there is enough inaccurate or bad information on this thread to urge you to read John Bogle's Little Book of Common Sense Investing, or Andrew Hallam's poor Teacher. They will give you the confidence and understanding you need to move forward.
In contrast ETF funds, also hold an array of stocks, but these are not actively managed, therefore the fees are much lower. Research shows that over the long haul, most ETFs outperform similar mutual funds, because higher fees eat away any slight advantage that can be gained through active management.
Really though, I think there is enough inaccurate or bad information on this thread to urge you to read John Bogle's Little Book of Common Sense Investing, or Andrew Hallam's poor Teacher. They will give you the confidence and understanding you need to move forward.
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Snowbeavers
- Posts: 72
- Joined: Fri Jul 17, 2009 11:56 pm
[quote="christyn2"]What do you mean by 'actively' managed?
I have money in an American Funds account, which a lot of teachers I know also use. Is this the type of company you consider 'actively managed'. I definitely pay a small percentage when I contribute money, which I am not thrilled about, but I am not a financial expert, and I am too busy doing my day job, to inform myself in buying stock, bonds, etc.
With that being said, I am also going to get a chunk of money next year, and would prefer to diversify and NOT put this money into my American Funds account, since I already contribute a few hundred dollars a month to it.[/quote]
That "small percentage" might not sound like a lot but compounded over 20+ years, it will be up to 2/3 of your profit and hundreds of thousands of dollars. To illustrate, go to any free online compound calculator and put in the difference between 7% and 5% over 25 years.
Sadly, like you said, many people are too busy doing their jobs to notice this which is exactly what the fund industry wants. It is not complicated and spending a couple of hours reading one of the above books or documentary and you will understand everything you need to know.
What I would recommend is getting your money out of that fund and investing it yourself.
I have money in an American Funds account, which a lot of teachers I know also use. Is this the type of company you consider 'actively managed'. I definitely pay a small percentage when I contribute money, which I am not thrilled about, but I am not a financial expert, and I am too busy doing my day job, to inform myself in buying stock, bonds, etc.
With that being said, I am also going to get a chunk of money next year, and would prefer to diversify and NOT put this money into my American Funds account, since I already contribute a few hundred dollars a month to it.[/quote]
That "small percentage" might not sound like a lot but compounded over 20+ years, it will be up to 2/3 of your profit and hundreds of thousands of dollars. To illustrate, go to any free online compound calculator and put in the difference between 7% and 5% over 25 years.
Sadly, like you said, many people are too busy doing their jobs to notice this which is exactly what the fund industry wants. It is not complicated and spending a couple of hours reading one of the above books or documentary and you will understand everything you need to know.
What I would recommend is getting your money out of that fund and investing it yourself.
investing
I have American Funds that I bought quite a few years ago when i was self employed through the advice of a local USA financial planner. They charged 5.75% off the top going in (front loaded) & and annual fee is still being charged on the funds I have now. Not sure if they still charge that front load fee but I wouldn't be surprised. These funds are actively managed & may be right if you want someone else to do it for you.
IMHO, the way to go is to diversify investments (own a home &/or rentals, equities, bonds etc) & find NO LOAD funds with low annual operating expenses. Vanguard has these funds but you have to research & pick funds yourself & within your appetite for risk. They will provide that service for a small fee unless you have a lot of money with them and then it's free. Index funds beat the market according to research. I will be rolling over all my funds to Vanguard at some point.
There may be other companies that provide the same low fee services as Vanguard. Anone know of any?
IMHO, the way to go is to diversify investments (own a home &/or rentals, equities, bonds etc) & find NO LOAD funds with low annual operating expenses. Vanguard has these funds but you have to research & pick funds yourself & within your appetite for risk. They will provide that service for a small fee unless you have a lot of money with them and then it's free. Index funds beat the market according to research. I will be rolling over all my funds to Vanguard at some point.
There may be other companies that provide the same low fee services as Vanguard. Anone know of any?
Thanks for your advice. I have already payed a front load for moving money into American Funds, so I can not imagine taking it out of there, since that fee has already been paid for, but the question is, do I continue to contribute to that fund, and pay the fee.
I am thinking probably not. I need to get the book The poor Teacher. I have heard of it.
I am thinking probably not. I need to get the book The poor Teacher. I have heard of it.
invest-igate
American Funds are good funds, but they are front loaded and charge more to manage each year than a comparable Vanguard fund.
Towards the end of the Frontline video link below they talk about the effect of compounding on fund annual fees. If you can spare the time it will help explain how the size of annual fee effects fund growth over time.
http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/
Please note, I think it's all a gamble....!
Towards the end of the Frontline video link below they talk about the effect of compounding on fund annual fees. If you can spare the time it will help explain how the size of annual fee effects fund growth over time.
http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/
Please note, I think it's all a gamble....!
No doubt Vanguard is the way to go. You can construct a great portfolio with them through 3 ETFs/Mutual Funds...VTI (Whole US Market), VXUS (Whole non-US market), and VWITX (tax exempt bond fund). Once you figure out your asset allocation of stocks to bonds...just dump money into those funds and rebalance every so often. Super tax efficient and super diversified. Finally, I completely agree that having at least a year in cash as an emergency funds is a great goal. Up to 10,000 per year can be purchased in I bonds and the rest can be kept in cash. Cheers.