To keep things simple, our retirement plan is modeled after an investment policy statement (IPS). The intent of an IPS is usually to provide written guidance for your investment manager on how to manage your investments. Since I am acting as a DIY investment manager, our IPS serves as the written plan of our investment goals and long term strategies to meet those goals.
I am a firm believer in indexing rather than trying to play the market. One major reason I have a written retirement plan is to invest for the long-term. This helps give me the discipline to avoid panic during downturns while not becoming greedy when things are going well. Several studies show that most investors tend to buy high and sell low and that they frequently do worse than the funds they invest in. A few years ago, Fidelity did an internal review of which clients tended to perform the best and they found that their best investing group was dead people or people who forgot they had an account. To do better than the market, well disciplined investors still have to find actively managed funds that perform better than the market. Not a simple task, given that less than a third of actively managed investment funds beat the market over several years. So long story short, you have to be very disciplined and at least a little bit lucky to beat a simple total market index fund.
Any time I consider making a change to our investments, I get with my beautiful and amazing wife (who edited this article) and we evaluate the change to ensure it aligns with our strategies, goals, and overall objectives outlined in our IPS. We also review our IPS every year, when I write our annual report and update any goals or strategies as needed.
Our Retirement Plan
1. Investment Philosophy:
2. Investment Objectives:
These are our main objectives for our retirement investment program.
- Objective 1: To retire no later than the age of 65.
- Objective 2: To have an annual income in retirement from our investments of at least $60,000 after taxes and in 2014 dollars.
- Objective 3: To minimize tax liabilities.
3. Risk Tolerance:
Our ability to tolerate the uncertainties, complexities and volatility inherent in the investment markets has been considered in the development of this investment program. The main factors that have influenced our current risk tolerance and asset allocation are: age (~35 years until retirement), present financial condition (stable), specific non-retirement financial goals (college savings and paying our house off early), income (somewhat variable), and past investment experience (minimal).
4. Asset Allocation:
We aim to maintain overall 100% stock allocation. We will adjust this allocation with age and expect to match stock/bond glide path of target date funds no later than age 35-40. Our assets should be diversified across major asset classes including domestic equity, international equity, and bonds (once on target glide path).
5. Funds & Accounts:
We will use low cost index funds that provide maximum diversification across asset classes. We will assume only market risk as much as possible and shelter tax-inefficient funds in tax-advantaged accounts to reduce tax drag.
6. Current Target Allocation
In the spirit of keeping things simple, we have modeled our asset allocation using a "three-fund portfolio". The percentages are based on Morningstar Instant X-Ray for the following target date funds: AAMTX, TRRNX, VFFVX, TLLIX, FUSEX as of December 2014. However, our exact target allocation percentages are not as important as maintaining the target allocation.
- 69.2% - Vanguard Total Stock ETF (VTI)
- 30.8% - Vanguard Total International Stock ETF (VXUS)
- 0% - Vanguard Total Bond Market ETF (BND)
7. Account Preferences:
New monies should be invested using the following hierarchy:
Max out employer matching contributions.
Contribute to HSA (if available).
Contribute to Roth account. If everything else is equal, contribute to personal accounts over employer accounts where we have less control.
Note: Due to Social Security Torpedo, we plan to not contribute any additional funds to Traditional accounts beyond what we have already invested in them unless tax code changes.
8. Other considerations:
We plan to invest our new contributions wherever necessary to keep to our target asset allocation. If needed, we will rebalance semiannually on January 1 and July 1. We will not time the market or overthink things and make them too complex.