05 Sep Our Investing Buckets, 401k, Pension, ROTH, Cash Value Life Insurance, H.S.A.

Our first steps into investing were in the form of 401k investments with very little, actually no effort whatsoever.  I initially had a 401k at atmy big box retailer job that I contributed to for about a year along with the match, but when I left there, I didn’t fully understand it and cashed it out taking the penalty and paying taxes on it.  My wife’s 401k was the only investing we were involved in up until 2014 when we put money in our ROTH IRA for the first time.

The 401k was a pretty simple situation, we were in a Vanguard or Fidelity (I can’t remember the brand) target retirement date fund and we put in 6% of my wife’s income.  The employer matched 100% of the first 3% and 50% of the next 3% and we let it ride.  During that time span from 2010-2016 my wife earned as little as $34,000 and as high as $48,000.  With market gains and growth in 2019 when she exited her employer, we rolled the 401k over to a traditional IRA and I believe it was approximately $32,000 in total value at the time we rolled it over.  Sadly, with the roll over to our advisor’s platform we took a 5% hit up front to allow access to our financial advisor’s direct management and oversight of it as a piece of our portfolio.  Approximately ninety days after my wife exited her employment to stay home with our newborn son, we received a letter from her former employer about a pension she was entitled to.  I must say I reviewed her compensation package, but we completely missed and had no idea she had any kind of pension.  While my memory regarding the details of the letter are a bit fuzzy, I recall there being a lump sum option that could be cashed out or rolled to a qualified retirement account and the amount was approximately $8,500.  The alternative was you leave it in the hands of the employer and their pension managers, and you could expect something like $28 a month in income at the age of seventy and each year thereafter that you are alive.

This decision was pretty simple to review with a compounding calculator and thirty-five years of time in the market invested we concluded it could be worth roughly $200-$250 a month while remaining in our control (our advisors control) and we rolled it over immediately to the same traditional IRA that held the 401k rollover.  Let’s not forget about that 5% front loaded fee however, to get that money under the watchful eye of our advisor.  These two rolled accounts would end up being the dollars invested that were written about in my post “a tale of two recessions,” where I moved them to cash very close to the market peak pre-Covid19 and then was able to buy back into the market at its lowest drop day in late March.

At this point we’ve reached 2014 and we were debt free and had decided to start investing outside of the 401k.  To this day it perplexes me that it took us this long to get started investing with everything we knew but between the Dave Ramsey debt payoff first strategy, and our change from house to house increasing our mortgage payment significantly we just took our sweet time I suppose.  We landed on the ROTH IRA for a few of the most common reasons.  We liked that you never paid tax on the growth as long as you took it out at the qualified retirement age of 59 ½, it simply provided peace of mind.  I still don’t know if the math actually made sense at that point based on what we were earning, but the peace of mind was worth it to us alone.  We knew we’d need to increase our investing at some point as well above and beyond filling ROTHs and those other options were likely to be pre-tax so we may as well take advantage of the ROTH to have a mixed approach.

With that we paid the 5% fee up front to the advisor and our ROTH money was dumped into some mutual funds that matched our high-risk tolerance.  I would log in periodically to see how my funds were performing however it was never very clear.  The firm’s online platform didn’t give you an individual rate of return to know exactly how your money was performing, it only showed total gains and losses.  This always bothered me, but I’d periodically ask my advisor what percent rate of return I was getting, and he’d give me a number that came with an explanation to defend whatever it was.  If it was lower, it was a combination of the market being down some and it was to be expected because of my risk tolerance.  If the number was high it was because of great decision making, my risk tolerance and the market climbing.  Either way we were filling ROTH IRAs, maxing a 401k match option and still needed to save more to get to the 15-20% savings rate that normal people aim to achieve and with each passing year that we didn’t increase our savings rate we were forcing ourselves to play catch up later on due to the dreaded “cost of waiting.”

We reviewed our annual plan in late 2015 to see where we stood, and received this fifty plus page document loaded with charts, data, and supporting documentation of our funds etc.  The only page that mattered to me at the time would show our net worth, total nest egg, savings rate, and the age at which we were 100% on track for retirement.  At this time it was something like seventy-eight years old.  Let that sink in for a moment.  We were twenty-nine years old making over $120k, maxing out ROTH IRAs for two years and utilizing the 401k and we had to keep pace for forty more years to be able to retire on our current lifestyle.  That never seemed right to me, so we knew we needed to drive that number down, way down.

We talked with the advisor in depth and decided to go the route of cash value life insurance, I don’t remember every reason I decided to bail on one of Dave Ramsey’s biggest rules, but I lay out some more detail in a future post about firing our financial planner.  It was probably a combination of the tax-free retirement dollars paired with the ability to borrow against it during our life time if we needed to and pay ourselves back.  It may have been the small amount of $200 a month that we were entering into, either way we bought the policy and watched it closely.  I was very skeptical of the policy because of Dave Ramsey’s absolute hatred toward them, so I kept the illustration document at the ready and ensured my contributions matched or exceeded the projected illustrations.  Fortunately, I did indeed have one of the best versions of these policies you can have and while it lost money for the first four years, it actually outperformed the illustrations provided in the contract.

In late 2017 our family switched to my employer’s health care plan which was a high deductible policy and we had access to an H.S.A.  We put very little into it, maybe $75 a pay period or something along those lines and we used it for various things like chiropractor visits and things of that nature.  We had no idea the power of this account, and sadly I’d had access to it as an individual from 2008-2010, and then again from 2013 until 2020 and either didn’t fund it at all or funded it just enough to cover the small medical expenses I had.  Some of you may be screaming at your computer right now, but you have a financial advisor, how on earth were you not directed to fully fund this incredibly powerful tool?  I know, it’s an incredible waste of an opportunity and the story is about to get a little bit or a lot worse.

We were eligible to put around $6,000 a year into our H.S.A as we now qualified as a family and when we sat down with our advisor to review our updated investing strategy for our growing income and the coming year, this wasn’t even considered as part of the plan.  He knew we had a high deductible plan and he knew we had an H.S.A. that had an investment piece, and instead we were directed to another cash value life insurance policy.  By this time I had seen the $200 a month policy perform better than illustrated and this time I was hesitant because the first policy felt like debt more than an asset.

With any other investing I did, I could pause at any moment and the investment would grow based on its current value whether I contributed another dollar or not.  With the cash value, you pay, or the policy pays itself with the cash inside of it which eventually will run out, or you can surrender and take the current cash value.  What pushed me over the edge to move forward with a new cash value policy was a book by Nelson Nash called Becoming Your Own Banker which explains how you can utilize a cash value policy and its lending feature to build wealth.  It was an audio book I had to rewind and listen to parts for a second or third time, but in the end, we decided to forge ahead with another policy for $400 a month bringing my total monthly cash value savings to $600 a month.  Oof.

This brings us to the H.S.A. and then in a future post I’ll break down our first rental property purchase which happened in 2017, but the rental is too long of a story to break down here.  We were still underfunding this amazing tool however in 2016 we had a sizable one-time bonus from my employer that was about $42,000 in cash which created a sizable tax event.  When tax prep was happening in 2017, we decided to fund the H.S.A to reduce our tax burden.  We had found BiggerPockets before becoming landlords which set me down the path of the FIRE community so I knew I could seek out the likes of MMM or the White Coat Investor to get the down and dirty on an H.S.A.

It didn’t take long for me to realize that error I’d made in not funding this thing sooner.  We took swift action and opened a different H.S.A. that had better Index Fund Options and rolled the money over and immediately began planning to max it out.  The money went in and $1,000 stayed in cash while the rest went into 90% S&P 500 Fund and the other 10% went into a total bond market index fund.  We stopped using the H.S.A. to pay for medical costs immediately and switched to cash for medical expenses to allow it to grow.  We maxed it out for roughly sixteen to eighteen months until my wife returned to traditional work and her company provides a traditional health care plan for the entire family for less than half the cost of our premiums with my company for a high deductible plan.  While I wish we could still contribute to an H.S.A., the premium cut well outweighs the benefit of the H.S.A.   We repurposed both the health care premium savings and the H.S.A. contribution to a pre-tax 401k contribution to keep our savings rate the same and our tax situation consistent.

In 2019 my employer finally added a 401k with match program which is huge as I’ve always been the primary and higher earner in our family, and the 401k came with a 4% match 100% vested as long as you were employed for at least a year.  I was eleven years in, so I was well cleared of that hurdle and got on the plan the day it was available.  We have a ROTH option for our 401k, so we use that option for the amount up to the match and the money is invested in two funds currently.  About 80% of the funds are in a target date 2065 fund from Vanguard, once I truly took control of my investment management, I directed all future 401k dollars to go into total stock market index fund by Vanguard that was available in the fund.  At some point I’ll add a bond fund but at the time of this writing, stocks are my only interest and I’ll add a bond fund when I think it makes sense.  As I mentioned above, we had a health care plan change and we ended up directing an additional 7% of my income into a pre-tax portion of my 401k to repurpose the health care savings and H.S.A deduction.  This is literally in progress as I write this in the middle of 2020, and my next pay period is the first time that transaction takes place!

Here lies the beginning of our investing plan and surely there’s some foreshadowing in here for some future posts about real estate, firing our financial planner, and our overall total savings, net worth, and savings rate.  There is a lot to unpack and we’ll get it there, I started this site to document our journey and have a capsule that we could draw on for knowledge whenever we needed it.  I wish I had started sooner to have the most accurate information possible, but as they say the best time to plant a tree was thirty years ago, the next best time is today.