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Retirement Planning: The Young, Rich, and Stupid
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Retirement Planning: The Young, Rich, and Stupid


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Following in the footsteps of the young and the rich will lead to this terrible triple whammy.

Following in the footsteps of the young and the rich will lead to this terrible triple whammy.

Published in: Economy & Finance, Business

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  • Lower returns: file:///Users/brianstoffel/Downloads/Individual_Investor_Performance_Final.pdfLower returns:
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    • 1.  TAXES  Short-term capital gains are taxed at normal rates, up to 39.6%  Long-term capital gains are taxed at 0%, 15%, or 20%  Transaction costs  Assuming $5 trades, 360 trades per year would cost $1,800.  Lower returns  One classic study shows active traders returning 6.5% less than the market.  Another shows retail investors returning 4.2% over the past 20-years, versus the S&P 500’s 9.2% CAGR.
    • 2.  We’ll investigate the case of two families: the Drews and the Joneses.  Each is a family of three with 30-year-old parents.  Each brings home $50,000 per year after taxes.  Each saves $7,500 and spends $42,500 per year.  One family uses a low-cost, passive approach to investing.  The other copies the behaviors of the young millionaires from Fidelity’s study.
    • 3.  Most financial planners will say you need to take 80% of your yearly spending, and have 25 times that amount before retiring.  For each family, that means an inflation-adjusted total of $850,000  This doesn’t include Social Security.  That’s a mistake, but for illustrative purposes, we’ll ignore Social Security for now.
    • 4.  The Drew family makes one $7,500 investment per year into the Vanguard 500 Index Fund (NASDAQMUTFUND: VFINX).  The transaction cost is $5 per year  The expense ratio is 0.17%  The fund returns the inflation-adjusted market average since 1993 of 6.7%  Because all of this money is invested in a Roth IRA, there are no taxes on growth or distributions.
    • 5.  The family invests a total of $7,500 throughout the year in a dizzying array of stocks.  Let’s tone it down to just 10 trades per month, or $600 per year.  Because these investments are in stocks, there is no expense ratio.  Consistent with prior studies covering the past 20 years, this family’s average inflation-adjusted annual return is 1.7%.  All savings are via a Roth IRA  Growth and distributions are tax-free
    • 6.  The Drew family has $121,000 in retirement savings.  That’s 14% of their overall goal  The Jones Family has $84,000 in savings.  That’s 10% of their goal, and 30% less than the Drews
    • 7.  The Drews have $331,000 saved for retirement.  That’s 39% of their final goal.  The Joneses have $175,000 saved.  That’s 21% of the final goal, and 47% less than the Drews
    • 8.  The Drews are ready for retirement!  They have saved $887,000 for retirement.  The Joneses are nowhere near retirement.  They have saved $320,000 for retirement.  Even they work until age 70, they will only reach $404,000.  They will need to cut their expected yearly spending in retirement in half.
    • 9.  This example didn’t even take tax-hits into consideration, as both families used their Roth IRAs.  Every family’s situation is different, but the results of active trading will—on average—make huge differences.  Even Fools like us, that like investing in individual stocks, would rarely need to make more than one or two trades per month.
    • 10. As the previous slide mentioned, the effects of taxes—which can be huge for active traders—weren’t even taken into consideration. If you’d like to learn about an IRS loophole that helps you avoid certain taxes on retirement investments, check out the Motley Fool’s special free report: