2022 is finally over. It has been one of those years where it feels like you are struggling to keep your head above water. No amount savings could turn those net worth graphs green. Most people under 37 years old are probably looking at the first (post college) year of negative year over year net worth growth.
Hello Andre, first thanks so much for all the write-ups. I have been reading your posts you for last few years inside Meta! I was wondering if you could mention any assumptions you are making for 80K total contributions for 529 plans. I am using rough calculations based on cost of private 4 yr college as per https://vanguard.wealthmsi.com/collcost.php#results and s&p returns of 7% as per https://www.nerdwallet.com/calculator/compound-interest-calculator which comes out to ~$200K initial contribution. I assume maybe you are consider in-state colleges which changes the numbers. Did you make any other assumptions e.g. additional funds outside of 529 to help with college costs?
I am assuming in-state tuition at a public university. This is just quick calculations from Empower's planning tool that assumes 6.5% equity returns, 4% inflation on eduction, or a 2.5% real rate of return. That would cover $23k per year in today's dollars. I would anticipate that anything above I can just pay out of pocket from other funds. I want to avoid over-contributing since there isn't really a huge tax benefit for contributions in California (beyond the tax free growth for the next 13 years).
I think about things in terms of both timelines and probabilities.
The shorter the timeline and higher probability items are just sitting in my high yield savings account (ie, I am certain I am moving in 3 months).
Longer duration access low certainty I typically don’t even sequester the money, it would simply be lumped into my normal investments. This is currently where my housing fund sits tbh. Once I firm up either the timeline or probability I’ll begin to shift to lower volatility investments.
There is a good quadrant across these dimensions that can be drawn out. I think the extremes are clear for the two quadrants mentioned. The other two might be more variable.
Perhaps something like paying for a child’s college lands in the long duration high probability bucket. You end up creating mini “Target date” indexes that begin with larger equity investments that shift to more towards lower risk as the spending years approach.
Short duration & low probability quadrant… likely just invested as usual.
Thanks for the write-up. I definitely love the voiceover as well! One question: why company 401ks are included in FIRE balance but vested RSUs are not? 401k are not easily accessible before 59.5 years old but vested RSU can be accessed anytime?
TY for the notes on the voiceover! Wasn't sure if anyone listened to it.
Not including vested RSUs is completely arbitrary. I want to personally penalize my spreadsheets by not including them to help influence my behavior that I would be selling them and holding them into index funds. Once they are sold and diversified they now "count".
As for including 401k money. Don't forget, a significant portion of FIRE is the normal retirement part! In addition there are different strategies to access retirement funds sooner. I need to make a post on this but until then, here is a good one: https://www.madfientist.com/how-to-access-retirement-funds-early/
Ah, I used to be confused about the simple formula for FIRE because I believe 401Ks (and the stock/RSU gains if any lol) balance need to be discounted by tax rate, making me feel that I can never get the calculation right...
Jan 6, 2023·edited Jan 6, 2023Liked by Andre Nader
Great article! I noticed that you haven't included maxing HSA in your investment goals. Did something change ?
In 2022, I began investing in a Mega backdoor Roth and HSA for both myself and my spouse. Previously, I limited my investments to 401k and a traditional brokerage account. It's been an amazing experience learning about and getting comfortable with these investment options. I wish I had done my research sooner - but better late than never :)
A few areas that I'd love to learn more about in 2023 are
1. How should I determine how much money to invest through traditional brokerage account vs after-tax roth 401k ? Is maximizing my after tax roth 401k the right step for my personal goals ?
2. I currently don't hold any bonds in my investment accounts - it's all index funds domestic + international. As someone looking to FIRE in the next ~15 years, should I allocate a percentage of my investment to bonds ? My emergency savings account gives me a 3% APY. Is that enough exposure to low risk saving or is investing in bonds important ?
3. Are iBonds right for my personal goals ? Given the market is down, shouldn't I be pumping money into index funds instead of ibonds - especially since I don't anticipate withdrawing this money for the next 15yrs ?
Thank you! I'll make sure to touch on your 1-3 in each of the relevant sections.
On HSA contributions. I personally love HSA's. They are one of the best types of accounts with a coveted triple tax benefit (pre-tax contributions, tax free growth at the federal level, tax free withdraws for medical expenses). And if your company contributes directly, it is even better.
It is a no brainer for someone who only uses Dr's for annual check-ups/Emergencies OR someone who always ends up hitting up against the max out of pocket. My family ends up in the middle where it is closer to break even in the short term and the ease of the PPO/EPO options end up personally winning out.
Was wondering the same @Andre - would love to hear more about your rationale for holding ibonds vs. taking advantage of falling prices to go hard into index funds.
Thanks for the insightful and candid post; appreciate the reflection laced throughout!
One topic I’d love to learn more about is the “After-Tax 401k (which gets auto-converted to a Roth 401k)” - setting this up, ensuring employer is on board, taking advantaged. For the past few years, I cap out my Roth 401k without any regular 401k contributions. However, I am looking to alter that now.
As for your ending question, 2022 has shown me how money by itself is not highly correlated to happiness - instead, the journey (time) could be a much larger force.
Yes, very insightful post indeed. I also had the same question as that from GM above.
"$32,250 After-Tax 401k which gets auto-converted to the Roth 401k in Meta’s plan."
How did you set up the auto-conversion to Roth 401k? My 401k is with Fidelity and they give me no option other than calling them every two weeks to request a rollover from AT-401k to my Roth.
I am also with fidelity. Previously I would need to call in and ask that they convert it. A few years ago the Facebook plan added the ability to auto-convert it instantly in the contribution screen. I'll add all the details into how it looks for Meta and Uber. You can use that information to advocate with your benefits team to try and get it added at your employer as well. Makes life much easier.
Ah! So it is the employer that needs to have them add the auto-convert option!? My employer always allowed in-plan conversions of AT 401k to Roth but I also have had to call Fidelity Netbenefits every 2 weeks to convert it.
I think so. Fidelity definitely has the capability but each plan is slightly different. For example, my partners Uber plan still requires that I call if I want to roll over the After-Tax -> Roth IRA, and they are with fidelity too.
I notice a lot of FIRE folks (particularly in America vs. Canada) plan to follow the 3 or 4% rule rather than simply live off dividends for a period of time (say 10 years or so to avoid sequence of return risk) and thus never sell (at least initially) and stocks before eventually living off of a mix of continuing dividends and selling stock (to "die with zero").
I think this is probably the result of the fact that index funds generally have a lower dividend yield than individual stocks (in Canada it's easier to re-create the TSX index of stable dividend paying stocks from the pipeline, railway, financial, and telecomm industries).
It is one of those things that sounds good in theory, but ends up not being very effective. ERE looked at this in detail as part of his safe withdraw rate series that I would highly recommend reading (the dividend areas are part 29, 30, 31, 40). Here is a quote that highlights the issue with using it to buffer sequence of return risk: "People in the FIRE community call it “Yield Shield” but, alas, that label is extremely deceptive because the whole thing doesn’t work very reliably. It would have backfired really badly during the 2007-2009 bear market. Instead of shielding yourself from the downturn, you would have aggravated the Sequence Risk."
Perhaps I'm missing something or misunderstand something but here is my thinking:
- In a bear market, my stock portfolio goes down 20+% but I don't care. I sit back and continue to collect dividends and never have to sell a stock in a down market and eventually my stock portfolio overall value returns in the next bull market. (Others following the 4% rule, may be forced to sell depressed shares of stocks if they don't have sufficient cash cushion or "timed" their sales poorly).
- While some companies can cut dividends, it's actually rare. In Canada, I own stable and safe paying dividend stocks with motes around them (Canada is a highly regulated oligopoly across industries I invest in).
- I'm talking here of Canadian banks (literally have been paying growing dividends for hundreds of years and there are only a few of them so take your pick, unlike the USA), railways (there are two in Canada so take your pick and they aren't building new railways), pipelines (Enbridge or Pembina take your pick - they aren't building new pipelines), insurance (there are a few in Canada so take your pick), telecoms (there are a few companies in Canada so take your pick between Bell and Telus or Rogers essentially)., and utilities (stable long term contract dividend payers).
1. This newsletter is focused on FAANG workers who tend to be in the higher income tax brackets. This alone makes dividend investing in a taxable account very unattractive and the preference would be towards lower dividend paying assets overall focused on growth (or my preference index funds not focused on dividend payouts).
2. As you say during FIRE, the biggest risk is sequence of return risk and the first 5-10 years of early retirement. The links I shared showed that a dividend portfolio does not achieve this and in fact does worse. Less diversification, dividends can be cut, the assets underperform. If you only read one article, you should read https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/
Looking for strategies that reduce sequence of return risk is an important area of study within FIRE and that is why ERE has so many posts on the subject. I definitely encourage a read.
Very insightful article, thank you! In addition to all the above investment options, have you evaluated universal life insurance? Do you happen to have any insights into when it would make more sense to go with that option?
I am mildly allergic to mixing life insurance and investing. It is rarely the optimal option, yet gets sold as a solution to every scenario.
That said, there are some scenarios where it could make sense. One of those being if your goals are more focused around passing down significant assets to your heirs. Since death benefits paid out by the policies are often tax-free (vs needing to pay estate taxes on amounts over the estate tax limit currently set at 12.92M per individual).
Hello Andre, first thanks so much for all the write-ups. I have been reading your posts you for last few years inside Meta! I was wondering if you could mention any assumptions you are making for 80K total contributions for 529 plans. I am using rough calculations based on cost of private 4 yr college as per https://vanguard.wealthmsi.com/collcost.php#results and s&p returns of 7% as per https://www.nerdwallet.com/calculator/compound-interest-calculator which comes out to ~$200K initial contribution. I assume maybe you are consider in-state colleges which changes the numbers. Did you make any other assumptions e.g. additional funds outside of 529 to help with college costs?
I am assuming in-state tuition at a public university. This is just quick calculations from Empower's planning tool that assumes 6.5% equity returns, 4% inflation on eduction, or a 2.5% real rate of return. That would cover $23k per year in today's dollars. I would anticipate that anything above I can just pay out of pocket from other funds. I want to avoid over-contributing since there isn't really a huge tax benefit for contributions in California (beyond the tax free growth for the next 13 years).
Where do you put the money targeted for moving fund? And, the house fund?
I think about things in terms of both timelines and probabilities.
The shorter the timeline and higher probability items are just sitting in my high yield savings account (ie, I am certain I am moving in 3 months).
Longer duration access low certainty I typically don’t even sequester the money, it would simply be lumped into my normal investments. This is currently where my housing fund sits tbh. Once I firm up either the timeline or probability I’ll begin to shift to lower volatility investments.
There is a good quadrant across these dimensions that can be drawn out. I think the extremes are clear for the two quadrants mentioned. The other two might be more variable.
Perhaps something like paying for a child’s college lands in the long duration high probability bucket. You end up creating mini “Target date” indexes that begin with larger equity investments that shift to more towards lower risk as the spending years approach.
Short duration & low probability quadrant… likely just invested as usual.
Thanks for the write-up. I definitely love the voiceover as well! One question: why company 401ks are included in FIRE balance but vested RSUs are not? 401k are not easily accessible before 59.5 years old but vested RSU can be accessed anytime?
TY for the notes on the voiceover! Wasn't sure if anyone listened to it.
Not including vested RSUs is completely arbitrary. I want to personally penalize my spreadsheets by not including them to help influence my behavior that I would be selling them and holding them into index funds. Once they are sold and diversified they now "count".
As for including 401k money. Don't forget, a significant portion of FIRE is the normal retirement part! In addition there are different strategies to access retirement funds sooner. I need to make a post on this but until then, here is a good one: https://www.madfientist.com/how-to-access-retirement-funds-early/
Ah, I used to be confused about the simple formula for FIRE because I believe 401Ks (and the stock/RSU gains if any lol) balance need to be discounted by tax rate, making me feel that I can never get the calculation right...
How can you do backdoor roth ira would be interested in understanding that piece
Great article! I noticed that you haven't included maxing HSA in your investment goals. Did something change ?
In 2022, I began investing in a Mega backdoor Roth and HSA for both myself and my spouse. Previously, I limited my investments to 401k and a traditional brokerage account. It's been an amazing experience learning about and getting comfortable with these investment options. I wish I had done my research sooner - but better late than never :)
A few areas that I'd love to learn more about in 2023 are
1. How should I determine how much money to invest through traditional brokerage account vs after-tax roth 401k ? Is maximizing my after tax roth 401k the right step for my personal goals ?
2. I currently don't hold any bonds in my investment accounts - it's all index funds domestic + international. As someone looking to FIRE in the next ~15 years, should I allocate a percentage of my investment to bonds ? My emergency savings account gives me a 3% APY. Is that enough exposure to low risk saving or is investing in bonds important ?
3. Are iBonds right for my personal goals ? Given the market is down, shouldn't I be pumping money into index funds instead of ibonds - especially since I don't anticipate withdrawing this money for the next 15yrs ?
Thank you! I'll make sure to touch on your 1-3 in each of the relevant sections.
On HSA contributions. I personally love HSA's. They are one of the best types of accounts with a coveted triple tax benefit (pre-tax contributions, tax free growth at the federal level, tax free withdraws for medical expenses). And if your company contributes directly, it is even better.
It is a no brainer for someone who only uses Dr's for annual check-ups/Emergencies OR someone who always ends up hitting up against the max out of pocket. My family ends up in the middle where it is closer to break even in the short term and the ease of the PPO/EPO options end up personally winning out.
Was wondering the same @Andre - would love to hear more about your rationale for holding ibonds vs. taking advantage of falling prices to go hard into index funds.
Thanks for the insightful and candid post; appreciate the reflection laced throughout!
One topic I’d love to learn more about is the “After-Tax 401k (which gets auto-converted to a Roth 401k)” - setting this up, ensuring employer is on board, taking advantaged. For the past few years, I cap out my Roth 401k without any regular 401k contributions. However, I am looking to alter that now.
As for your ending question, 2022 has shown me how money by itself is not highly correlated to happiness - instead, the journey (time) could be a much larger force.
Thanks again!
Yes, very insightful post indeed. I also had the same question as that from GM above.
"$32,250 After-Tax 401k which gets auto-converted to the Roth 401k in Meta’s plan."
How did you set up the auto-conversion to Roth 401k? My 401k is with Fidelity and they give me no option other than calling them every two weeks to request a rollover from AT-401k to my Roth.
I am also with fidelity. Previously I would need to call in and ask that they convert it. A few years ago the Facebook plan added the ability to auto-convert it instantly in the contribution screen. I'll add all the details into how it looks for Meta and Uber. You can use that information to advocate with your benefits team to try and get it added at your employer as well. Makes life much easier.
Ah! So it is the employer that needs to have them add the auto-convert option!? My employer always allowed in-plan conversions of AT 401k to Roth but I also have had to call Fidelity Netbenefits every 2 weeks to convert it.
I think so. Fidelity definitely has the capability but each plan is slightly different. For example, my partners Uber plan still requires that I call if I want to roll over the After-Tax -> Roth IRA, and they are with fidelity too.
Thank you for the info from you both - looking forward to more details in the time ahead!
I notice a lot of FIRE folks (particularly in America vs. Canada) plan to follow the 3 or 4% rule rather than simply live off dividends for a period of time (say 10 years or so to avoid sequence of return risk) and thus never sell (at least initially) and stocks before eventually living off of a mix of continuing dividends and selling stock (to "die with zero").
I think this is probably the result of the fact that index funds generally have a lower dividend yield than individual stocks (in Canada it's easier to re-create the TSX index of stable dividend paying stocks from the pipeline, railway, financial, and telecomm industries).
Thoughts?
It is one of those things that sounds good in theory, but ends up not being very effective. ERE looked at this in detail as part of his safe withdraw rate series that I would highly recommend reading (the dividend areas are part 29, 30, 31, 40). Here is a quote that highlights the issue with using it to buffer sequence of return risk: "People in the FIRE community call it “Yield Shield” but, alas, that label is extremely deceptive because the whole thing doesn’t work very reliably. It would have backfired really badly during the 2007-2009 bear market. Instead of shielding yourself from the downturn, you would have aggravated the Sequence Risk."
Link: https://earlyretirementnow.com/safe-withdrawal-rate-series/
Perhaps I'm missing something or misunderstand something but here is my thinking:
- In a bear market, my stock portfolio goes down 20+% but I don't care. I sit back and continue to collect dividends and never have to sell a stock in a down market and eventually my stock portfolio overall value returns in the next bull market. (Others following the 4% rule, may be forced to sell depressed shares of stocks if they don't have sufficient cash cushion or "timed" their sales poorly).
- While some companies can cut dividends, it's actually rare. In Canada, I own stable and safe paying dividend stocks with motes around them (Canada is a highly regulated oligopoly across industries I invest in).
- I'm talking here of Canadian banks (literally have been paying growing dividends for hundreds of years and there are only a few of them so take your pick, unlike the USA), railways (there are two in Canada so take your pick and they aren't building new railways), pipelines (Enbridge or Pembina take your pick - they aren't building new pipelines), insurance (there are a few in Canada so take your pick), telecoms (there are a few companies in Canada so take your pick between Bell and Telus or Rogers essentially)., and utilities (stable long term contract dividend payers).
A few thoughts:
1. This newsletter is focused on FAANG workers who tend to be in the higher income tax brackets. This alone makes dividend investing in a taxable account very unattractive and the preference would be towards lower dividend paying assets overall focused on growth (or my preference index funds not focused on dividend payouts).
2. As you say during FIRE, the biggest risk is sequence of return risk and the first 5-10 years of early retirement. The links I shared showed that a dividend portfolio does not achieve this and in fact does worse. Less diversification, dividends can be cut, the assets underperform. If you only read one article, you should read https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/
Looking for strategies that reduce sequence of return risk is an important area of study within FIRE and that is why ERE has so many posts on the subject. I definitely encourage a read.
Very insightful article, thank you! In addition to all the above investment options, have you evaluated universal life insurance? Do you happen to have any insights into when it would make more sense to go with that option?
I am mildly allergic to mixing life insurance and investing. It is rarely the optimal option, yet gets sold as a solution to every scenario.
That said, there are some scenarios where it could make sense. One of those being if your goals are more focused around passing down significant assets to your heirs. Since death benefits paid out by the policies are often tax-free (vs needing to pay estate taxes on amounts over the estate tax limit currently set at 12.92M per individual).