We get a lot of questions about how we invest for retirement. Paying off debt was our main focus for a long time, but once we started thinking about how compound interest works, we knew it was time to pay attention to bulking up our investments.
Right now, we believe simplicity is the key.
How We Invest:
What DJ’s Invested In:
Since I’m in the military, I am able to use the Federal Government’s version of the 401(k) plan, called the Thrift Savings Plan or TSP. There is a traditional option (investments are pre-tax) and a ROTH option (investments are post-tax).
Within the TSP, there are various funds you can put money into – there are life-cycle funds (i.e. target retirement-date funds) and standard individual index funds.
When I first started investing, I was using one of the target date funds because it adjusts it’s level of aggression over time as you approach retirement age. I eventually changed my strategy because I didn’t think the target date fund’s overall performance was as good as it could be.
I’m not maxing out my TSP contributions right now. At the moment, I invest 20% of my base pay each month. Currently, my portfolio is made up of two index funds within the ROTH version of the TSP: 80% in the C Fund and 20% in the I Fund.
The C Fund or (Common Stock Index Investment Fund) strives to match the performance of the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies.
The S Fund or (Small Cap Stock Index Investment Fund) follows the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.
Both funds are passively managed index funds so the expense ratios are extremely low. In 2017, the expense ratio for TSP accounts was somewhere around 0.033%!
What Dannie’s Invested In:
Dannie doesn’t have access to a 401(k) program at the moment so she has been putting money away in a Roth IRA (individual retirement account) at Vanguard.
She can put up to $5,500 into her account each year and the investments will grow tax-free. She just started it last year but she was able to max it out before the year ended.
To open her account she went with the Target Retirement 2055 Fund (VFFVX) because it only required a minimum of $1,000 to open. She’ll probably move those funds over to the ever-popular Total Stock Market Index Fund (VTSAX) (plus some type of bond fund) once her account reaches $10,000.
*The expense ratio for the target retirement-date fund is 0.15% but the VTSAX fund ratio is only 0.04%.
That’s it!
Hopefully, this quick explanation helps you understand how we invest a bit better. Our strategy isn’t complicated at all, but we really don’t think it needs to be. Investing is certainly a personal decision so you’ll definitely need to do your own research before you decide to put your money into any investments.
In the future, we’d also like to start investing in real estate in order to build up an additional stream of income.
How are you currently investing for retirement? We’d love to hear about your strategy!
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$tay Wealthy Friends,
— DJ