Apart from doing my taxes, my favorite thing about this time of year is the smug and self-congratulatory feeling I get from maxing out my 401(k). No doubt I am a little nutty about retirement savings, and I feel very lucky and grateful to be in a position where I (1) have a 401(k) and (2) have the ability and wherewithal to max it out.
To be sure I don’t take that luck and gratitude for granted, I take it to a bit of an extreme. I make a point to max out my 401(k) as early in the year as possible, a habit I started when I began my “real” (cough cough) career in 2007. At that time, my employer would allow contributions of up to 50% of my paycheck, so that’s what I did. My current employer does not cap contributions, so I’ve opted to contribute 100% of any bonuses and 50% of my salary.
Whaaaaa? Why do I do this?
- I’m impatient. This way I’m done with my 401(k) contributions by summer, so I can rest easy by the lake.
- I’m greedy (when it comes to savings). Contributing such a high percentage of my income forces me into a greater than 50% savings rate, a habit I (mostly) maintain even once I’m done so that I can keep barreling towards FIRE.
- I like getting a 50% raise several months into the year, every single year. Ok, it’s not a raise, exactly, but having a little more cash on hand for the rest of the year can come in handy. I don’t increase my day-to-day spending after my 401(k) contributions are done, but it’s nice to have a cushion for summer home improvement projects and travel.
- I believe in investing early. To put it eloquently, markets go up over time, so the more time your money has to go up, the more up it goes. There are different philosophies about investing lump sums at once v. dollar-cost-averaging (investing the same amount over a longer period of time to average-out market fluctuations) and there is no question both methods work well. I dollar-cost-average my non-retirement investments by automatically investing a certain amount with every paycheck (an amount that goes up once my 401(k) is done!), but for long-term retirement savings, the earlier in the better. (If in doubt, check out this calculator.)
- I can put my FU money to use guilt-free. On days when I’m feeling like I should just walk away from my job, one thought that holds me back is failing to take advantage of my great 401(k) plan. If I can max it out early in the year, that restriction evaporates into several months of potential no-strings-attached freedom.
So what’s the first thing I do when I’m done with my 401(k)? Max out my Roth IRA, which I’m pretty sure stands for I’m Really Anxious about retirement.
A few days ago I had a conversation with a fellow finance nerd-friend about asset allocation. She asked how I make my investment decisions — I pointed her to my reading list and explained my general approach that I’ve explained here. Following that conversation, I realized I am overdue for a checkup — while I have my 401(k) set to rebalance automatically, that’s not true for my brokerage account or Roth IRA. I don’t believe in following my investment performance on a regular basis, but occasional check-ins are important to make sure we’re still on track. And not lying to our friends. It was keeping me up at night (not really), so I decided this would be a good time to see if I what I said I was doing was really in fact what I was actually doing. Continue reading Asking to Assess My Asset Assumptions
I was reading an outdated New Yorker at a doctor’s office recently and came across this column about electronic trading and the rise of the new robot overlords who control our every financial move.
OK, maybe it’s not quite that dramatic, but it provided a good, nugget-sized summary of why an individual trying to time the market or trade individual stocks is almost never going to succeed based on anything other than dumb luck:
In the popular imagination, investing is about economic fundamentals. Investors scrutinize companies, weighing factors like cash flow, product lineup, and merger plans. They keep in mind general stuff like interest-rate hikes and what’s happening to the dollar. But most trading these days has nothing to do with any of these things. Instead, it’s all about what the market is going to do in the very short term—often a matter of milliseconds. Most of this trading takes place too fast for humans to be involved, so the decisions are left to computers.
Market swings are generally driven by algorithms, computers, and large-scale institutional traders (think CalPERS, the retirement system for the state of California and largest pension fund in the U.S., which manages over $300 BILLION in assets; that’s more than even Donald Trump!). As an individual, I know there’s no way I can keep up — while I might do well occasionally, on average I am never going to beat the market, which is why I focus on trying to match it instead.
The Elements of Investing: Easy Lessons for Every Investor by Burton G. Malkiel and Charles D. Ellis — oh, man, this book is the BEST. If you read only one book about investing, read this one. I came to it late and only just recently read it for the first time — and as soon as I did, I knew I’d been missing something great.
The book is modeled on Strunk & White’s Elements of Style, which might just be my favorite book of all time (nerd alert!), and is designed to be a simple, straightforward go-to guide to the basics of investing. It covers pretty much everything you need to know as a DIY investor in a clear and accessible way. It also provides advice about specific investment funds and allocations — but, unlike many other similar guides, without any ulterior motive or potential financial gain for the authors. Like my Investing 101 pielosophy, the authors recommend a strategy based on low-fee index funds and a KISS (Keep It Simple, Stupid — or, in the words of my 9th grade physics teacher, Sweetie) approach.
The book is divided into six chapters, each covering a core element of investing (including topics like saving, index funds, diversification, and avoiding common market blunders), and the new addition includes an appendix on taxes. There is so much meaty financial goodness here that I won’t even attempt to cover it in a review: cop-out, I know, but it’s more than worth it to read the book. Best of all, it’s short — everything you need to know with no baloney in one tidy little package. Enjoy!
Man, I leave town for a week and the world falls apart — I arrived back home to find Seattle socked in by dense smoke from raging wildfires and the stock market in the midst of a major “adjustment.” For those of you not familiar financial parlance, that is often translated to mean “crash.”
So what’s the first thing I did, immediately sell all my stock and run and hide to the comfort of government bonds or my mattress? Ha ha, no. I rejoiced a little inside and then did nothing.
Why? Continue reading OMG, Everybody Panic!!!