Listener Q&A: Early Retirement Pitfalls, Best Index Funds to Invest In, and More!
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Welcome to the Stay Wealthy Podcast with Taylor Schulte. I'm your guest host, Jeremy Schneider, filling in for Taylor for the month of August. Today, we're opening up the mailbag. I'll be answering some interesting and popular questions from fans and friends of the show. Specifically, I'm answering questions about which index funds to invest in, how to transfer money from an old account, how to access retirement money early, how to get a new

the pitfalls of early retirement, and more. If you'd like to hear from some other Stay Wealthy listeners, today's episode is for you. For all the links and resources mentioned in today's episode, head over to youstaywealthy.com slash 197.

If you are missing Taylor, I have great news. This is my last episode of the four that I'm covering for him this summer. He will be back next week. But until then, let's get into the show. Our first question this week is from Supraja from Atlanta.

Hi Jeremy, this is Supraja here. I've been following for a while now and I have a question. I've just started investing in index funds but I'm confused on what index funds to choose because most of them underperform the S&P 500. So should I just put my money in S&P 500 or should I go with a recommended index fund that you have?

Also, I have another question is my 401k is currently in my employer's contribution page. I only have one option to...

put it into a BlackRock targeted fund? Is that a good option? Or should I choose individual stock or a single index fund? This is a great question and something I get asked a lot, which is basically what's the best index fund? And first, it's important to note that there is no best index fund. Index funds don't really compete with each other. They just do a simple job

of all the same. They all follow a list. You mentioned the S&P 500, and that's a popular index fund, but primarily because it has a catchy name, it has a lot of history behind it when Standard & Poor came out with it in the 1950s, I believe, and it tracks the total US stock market pretty closely. It's mostly large cap companies. It's mostly large companies in the US. But if you look at the performance,

It's very similar to a total US stock market index fund. And I've heard a lot lately, why would you invest in anything but the S&P 500? Or why would you invest in anything but the total US stock market? And the answer is, that question really comes from the

The S&P 500 has done better than international markets over the last 10 years or so. And so why would you not just invest in the best thing? And the answer is what happened the last 10 years is not what's going to happen the next 10 years. I don't know what's going to happen the next 10 years.

As Taylor always says, we don't have a crystal ball. We don't know what's going to happen going forward. But I promise you, I know this, it's not going to be the exact same thing that happened the last 10 years. And so when we're just investing in the S&P 500, despite it being a fantastic investment, we're a little bit guilty of chasing past performance. And so to a US stock market index fund, I would personally add an international stock market index fund.

If you look at the U.S. and international markets historically, it's almost like a pendulum going back and forth. Sometimes international markets outperform, sometimes U.S. markets outperform. And by buying both, you get the benefit of diversification with less volatility along the way. And you might get ahead of the next swing of that pendulum if the next 10 years it really is international outperforming.

Also, I would maybe consider adding bonds to the mix. If you're young, you want to be mostly in stocks because you're not really worried about the income producing qualities of bonds. So if you're 20 years old, for example, you'd want to have a very stock heavy portfolio. But if you're 70, you might be much more concerned about capital preservation and making sure your portfolio doesn't drop by 50% in the case of a stock market crash, and instead would like the benefit of those income producing bonds. And so

And so when you bring that all together, you kind of end up with roughly a three fund portfolio, a US stock market index fund, an international stock market index fund, and a bond index fund in a proportion that's kind of appropriate for your age, less bonds when you're young, more bonds when you're old.

one kind of container that holds all these things is what's called a target date index fund. And you actually reference it in your question. So if your 401k only offers target date index funds, well, there's not much of your question there. You just use it at least until you leave that company. But even if not, I think a target date index fund is a great option for any retirement fund

account like an IRA, because it's one simple fund that includes all of those asset classes I mentioned without the speculation about picking one fund or one asset class over another. So great question. I like the more diversified approach. That said, if you buy a target date index fund or a three fund portfolio,

The biggest chunk of that is going to be the US stock market. Maybe 50% or more will be essentially the S&P 500. So it's a great start, but I would add a couple other funds to the mix. Our next question comes from Tommy from Dallas.

Hey, Jeremy, this is Tommy from Dallas. I've been a longtime listener of yours. So thank you so much for all the great content over the years. My question is about an asset class, which is small cap value. I know Paul Amerman has done a lot of research around small cap value and you actually, I believe in your Roth IRA.

have a small allocation to small cap value. So just curious, I know you love the total market funds, but just curious about your thoughts on the asset class and why you've included it into your strategy. Thank you so much. Thank you, Tommy, for the kind words. And I am a little curious how you got access to my Roth IRA. Just kidding. I usually post this stuff very transparently over in my Instagram account, Personal Finance Club. But this question kind of piggybacks off of the last question, which is,

Should you break away from that target date index fund or a three fund portfolio and do a small cap value tilt, as some people call it, which basically means buying more of this type of fund just for some framework. Small cap value means smaller companies. Small cap means small market capitalization or small cap in the $300 million to $1 billion range. These are small companies compared to the trillion dollars that

Apple and Amazon and Google are worth. And they're considered to be good value. They have good price to book or price to earning ratio. So these aren't very speculative companies that are trading way above their book value. They're considered more value companies that are a good price. And-

Somewhat ironically, well, I'm going to read a quote that Paul Merriman wrote, who you referenced, who's kind of done a lot of research into small cap value. And Paul Merriman writes, small cap value funds combine smaller companies, which historically tend to grow much faster than larger ones, and value companies, which have a long history, ironically, about growing growth companies.

You know, he points out there that even though they're called value, when you look at them over long periods of time, the stock prices perform better because the growth companies kind of have some speculation built into them. And so...

You're asking, you know, based on Paul Merriman's endorsement, and if you look at the historical returns of small cap value funds, they do tend to outperform slightly over most long periods of time and even have kind of reasonable risk portfolios compared to a total market fund. They're not dramatically more risky for your slight outperformance. They're about the same. And so I think it's perfectly reasonable to buy this.

That said, if Jack Bogle were here, rest in peace, the founder of Vanguard who popularized the index fund, he would say that picking small sectors like small cap value is just opening up yourself to underperformance. And as I mentioned in the last answer, it almost feels a little bit like chasing past performance. Paul Merriman has...

a thesis as to why small cap value has outperformed in the past. But in the future, we don't know that that's going to continue. And the fact that I'm saying these words on a podcast means that the secret is out and that maybe any edge there was to small cap value stocks over the last few decades is now priced into those stocks and those funds going forward. And so while I think it's reasonable to tilt your portfolio towards small cap value for the reasons I mentioned,

I wouldn't go nuts. I wouldn't go ham. And so in my own personal 401k, he actually taught me got it wrong. It's my 401k, not my IRA, where I do this. I have 90% of my portfolio allocated to a single target date index fund and 10% allocated to a small cap value fund.

Honestly, it's mostly for fun. It's not going to make a big difference. It's just to try it out, just to see how it goes. Scratch that FOMO. It's a little bit of trying to outperform. And if you look at the total stock market, like if you look at the total stock market index fund, about 3% of the value of that is

is small cap value stocks. Most of it is larger stocks, but about 3% small cap value. So by buying an additional 10%, I'm slightly outweighing small cap value. It's not going to make any difference to my life, but it's reasonable. And if you want to do it, I endorse it too. But I just wouldn't go ham on it. I'd keep most of your money, like Bogle says, by not giving yourself an opportunity to underperform in a total stock market index fund. Because I do believe the stock market is efficient.

and any advantage to these funds might already be gone. All right. Our next question is from Holly from Hawaii. Okay. So I signed up a while back for a Fidelity Go managed Roth IRA account. So it's essentially a robo-advisor. And I recently finished your course and I feel confident enough to manage my Roth IRA myself.

Now, if I cancel the Fidelity Go managed account, I have to open a new Roth IRA and then move the money out of the Fidelity Go account into the new self-managed Roth IRA. Is that a bad move at this point? I've had the money in there for probably a couple of years now, like two years maybe. And I'm assuming that if I move that money, it's going to liquidate it and then I'm going to have to reallocate it into different stocks and whatnot.

Will I be potentially like losing money basically because I'm having to like sell and then rebuy at this point? This genre of question I get a lot, which kind of boils down to I have money with an old company, an old advisor, an old account, and I want to transfer it, roll it over. Is that bad for some reason?

And I've got a few answers to that. First of all, if you're leaving an advisor or in Holly's case, a robo-advisor, my first advice is to start small. Before you move the lion's share of this money over, start with an empty account and put $100 or $1,000 in and do it yourself for at least a few months. If you're making a big major money move like this,

there's no rush. Even if you're paying fees, even if you don't like the advisor, even if it's in an old company, there's no rush. And being comfortable and confident you can do it on your own first is a better decision. So start on your own, buy your funds, watch it for a few months, and then compare what's going on between them. And so in Holly's case, you could look at what's going on in your new Roth IRA with your index funds you selected and look at what's going on in the robo-advisor. And compare is

Is yours, what's happening? Is it doing better? If not, why not? And I would also say next, what I would do is understand the impact of fees. The Fidelity Go RoboAdvisor has some modest fees. I think that's about 0.25%, same as Betterment and Wealthfront. And so you're paying a little bit in fees, but you wouldn't even notice that over a short period of time. You could project that out over decades and 0.25% starts to add up a little bit, but it's not a huge deal. It's not as bad as, you know, 1% or 2% type fee.

But understand the impact of that. When you're young, paying a 1% or 2% fee can dramatically impact. We're talking erase half the growth of your total portfolio. But when you're old, that's not true. If you're later in life and you're kind of in the income portion of your career here, a 1% fee may not be the end of the world. So understanding the impact of the fees and the trade-off that you're getting by moving this fund is another important aspect.

Next, is there a fee for moving out of an old account? Possibly. Some advisors or some accounts have account closure or account transfer fees. They're generally modest in the $100-ish range. And also...

It's not a reason to not do it. If you're moving money out of an old account, if it's a $100 fee short of the whole account being worth $100 or something, you wouldn't let the fee dissuade you from the bigger reasons of moving the money. And so there might be a fee, but generally it's not a big deal. Another question I get is, is it a good time? I think that might be partially what Holly's asking. She's like, oh, I've been doing this for a few years. If I sell now, am I going to lose out? Am I going to interrupt compound growth or is it going to hurt me for some reason? And the general...

answer to that is no, not really. We can't know exactly the right time. Logistically speaking, if you're transferring between accounts, there might be a moment, when I say a moment, there might be a day or a week or even a couple of weeks where your money's in cash, which obviously isn't ideal. But if you look at the big picture, the long-term investing for 10, 20, 30 years, if you're in cash for two weeks, it's not going to make a difference. If the worst case scenario is the market skyrockets

5% in two weeks or something like that, and you miss out on 5% of growth, which would be unfortunate, but still it's 5%. It's not going to ruin your whole investing career. And more likely, the market's going to be about where it was and probably won't be out of the market for two weeks. Overall, I actually generally like robo-advisors. And often working with a financial advisor like Taylor Schulte, whose podcast this is,

could be the right choice for you. And so when you're thinking about switching way, you know, really weigh the pros and cons, understand the fees, understand how it is doing it yourself. And so for Holly, I think that if you are ready to leave the robo and you want to do your own Roth IRA, I'd say go for it. Sounds like there's no real negative to it. And since you're going from, I think, a Fidelity robo advisor to a Fidelity Roth IRA, that being out of the market thing will almost be an issue. It should happen within a day or so. And so I say go for it. Thanks, Holly.

Our next question is from Myra from South Florida. Hi, Jeremy. My name is Myra and I live in South Florida. So how can a young cancer survivor invest and have easy access to the gains or to the money? So I am a young cancer survivor and before I was diagnosed with cancer, I

I was actually interested in retiring early. Right now, I've been on remission for one year. When you are a young cancer survivor, things can change at any given time and we need easy access to our gains. And now that I also have more medical expenses, I know the general idea when you retire,

Hey, Mayra. Well, first of all, congratulations on surviving cancer. That's amazing. I'm sorry you had to go through that. And I'm so happy and proud that you have survived. And I hope that you have

an extremely long and healthy life ahead of you. And the problem or the concern of needing to access your money before retirement age is not an issue because you're going to want to have many decades of retirement to use that money. That said, I actually did a whole episode on this, how to access retirement funds early. It was called six ways to access retirement funds early. And it was episode 115.

from June 29th, 2021. This was back when I was guest hosting for Taylor two years ago. That's a full episode. So I'll just quickly do a recap of those six ways to access retirement funds early. The first way is a regular old brokerage account.

I think many new investors get so wrapped up in all these fancy named retirement accounts. IRA, 401k, 403b, TSP, 457, HSA. And you live in this world where you're just trying to figure out the fancy names of all these accounts.

But in reality, all those are just kind of special iterations of a regular old brokerage account. And a brokerage account, in terms of deposits and withdrawals, works exactly the same as a savings account. You can put money in and out whenever you want.

The only reason you would use one of those other fancy accounts is simply tax efficiency. There are no benefits to using a 401k, HSA, whatever, other than mitigating your taxes. If you just wanted simplicity and flexibility, we would all be using a regular brokerage account. And in reality...

Brokerage accounts are often a great option because maybe you're not going to have a huge amount of gains or maybe you want the flexibility to access the money sooner. And maybe you're paying long-term capital gains on this money and you might not be working when you take the money out and you might pay little or no tax on those gains because there's a minimum income. I think you need $40,000 more.

as an individual or $80,000 as a couple of income before you pay your first dollar in capital gains tax. And so you might actually be taking out as a couple $80,000 a year from your regular old brokerage account with no tax.

So the simple answer to your question, Myra, is you could just invest in a brokerage account. But quickly, there's five other ways. For example, you can invest in real estate. Many early retirees have real estate that provides income that they can live off of that isn't in the side of an IRA. You can always take out your Roth IRA principal. Any money you contribute to an IRA or to a Roth IRA, you can take out with no tax or penalty, and you only would pay that penalty on the gains.

You could do what's called a Roth conversion ladder, which basically involves converting a traditional IRA to a Roth IRA. And then five years later, that money is fair game without the tax or penalty. And you do that one year at a time over the course of five years. Then you have this kind of income stream after that. There's also a rule called the Rule 72T, which involves setting up separate equal periodic payments,

from your retirement accounts to yourself that basically just a form you fill out with the government that says, hey, I'm going to access my retirement funds early, but not to buy a speedboat or something just to do early retirement in a more organized fashion. And also there's the rule of 55, which is way number six, which is if you are employed and you leave your company after the age of 55, it kind of gives you that four and a half year buffer where you can access your most recent 401k without actually turning 59.

There's even another way if you are talking about medical issues, which is you can avoid an early withdrawal penalty if you use those funds to pay for unreimbursed medical expenses that are more than 7.5% of your adjusted gross income. And so basically, if you are concerned about the medical expenses...

The government gives you yet another way to access this money without paying that early withdrawal penalty. And so overall, I treasure the question. I am proud of you for surviving cancer and I understand the concern, but I don't think that the fear of not being able to access your money should prevent you from taking advantage of these tax advantaged accounts.

In the best case scenario, you're going to live another 60 years and you'll be able to use this money in retirement. And in the worst case scenario, you can access the money if you need to, right? There's ways to get at it. So I would let that fear of medical issues stop you from using the tax advantage accounts.

Thank you so much, Myra. I hope you stay healthy. I hope you have been cancer for good. And thank you for sharing your financial knowledge with your fellow cancer survivors. Our next question is from Benjamin from Denver. Hey, Jeremy. I'm a relatively high earner and I'm hitting this point in my investing phase where the amount of money required to shave off another year to retirement is getting rather high and

I'm curious what your philosophy is on, you know, that trade-off between saving X dollars to shave another year off or maybe using that money to treat like friends and family in your life or something for your own self. How do you like manage that relationship?

Thank you for that question, Benjamin. A lot of my content involves living below your means, spending less money, investing more. And the reason a lot of my content revolves on that is because most people don't do that. If you look at the statistics among Americans, they're horrifying. 50% of people don't have a few hundred dollars to pay for an emergency expense. Most people are living paycheck to paycheck. And living on the edge like that is...

It's terrifying. You're setting yourself up for failure down the future. You know, you're worried about losing your job and you're worried about taxes and you're worried about your kids. And so living close to the edge of being broke like that is not a good way to live, which is why normally I'm beating this drum of spending less, investing more, getting yourself out of that

cycle of poverty and brokenness and building some wealth. But Benjamin, that's not you. That's most people, but it's not you. And I think some of the aficionados and probably many people who listen to the show, the pendulum might swing too far the other way where you get so amped seeing the progress, tracking how far you are till retirement, tracking the growth of your investments. And you forget that this isn't a race to die with the most money in your bank account.

It gets a little bit cerebral, but I kind of think it comes back to the point of life and the purpose of life. I think the purpose is to be happy and help people. I think that's what life is all about. It's to be happy yourself and help other people be happy. Money is just a tool to achieve that end. If you've gone too hard towards the early retirement end of the spectrum, too hard towards savings, too hard towards investing, and you're missing those opportunities,

to utilize the tool for its true purpose, being happy and helping people, then you're not doing the best you can with money. And so for you, if you're getting to that point where you're like, man, I'm making a lot of money and I'm saving and investing a lot.

it's not really moving the needle much anymore in terms of early retirement. I would shift your mentality. I'd say, hey, I'm going to look for opportunities to enjoy an experience, look for opportunities to help someone in an amazing way. And you'll live a richer life. You're clearly looking at the numbers. You could even do the math and say, hey, I have a family member who's in a really bad place and I could pay a month of their rent and they're

And that would change their trajectory. And in terms of my trajectory, it might cost me four days of a later retirement or something like that. I would do that because when you look back at your life,

Are you going to remember paying a month of rent for someone that's going to really move the needle for them or retiring four days earlier or later? And so congrats, Benjamin. When I talk about life being about happiness and helping people, most people are doing the other thing. They're spending so much that they're unhappy. But I think you might be in the other camp, which is you're spending too little. So I would be looking for those opportunities. Thank you for the question, Benjamin. Our next question is from Taylor from San Diego.

Hey, Jeremy, Taylor Schulte here, first-time caller, long-time listener. I'm a huge fan, and I just want to first say thank you very, very much for all that you do to create and publish high-quality financial education and help people like me make smarter decisions with their money. You just have this unique way of simplifying complex topics, and I know your work has made a giant impact on countless investors and retirement savers around the world. So thank you very, very much.

I also want to say thank you for taking the microphone away from the official host of this podcast from time to time. I'm a huge fan of his and I never miss an episode, but sometimes I just need a break from hearing the same messages over and over and over again. You know, like there's the textbook answer and then there's your answer.

The best investment is the one you can stick with or stay the course, ignore the noise. It's like, I get it. These are good reminders, but it's refreshing to hear a different voice from time to time, especially the voice of someone like you who's walked the walk and retired with seven figures in the bank at age 35. In fact,

That actually leads nicely into the question that I had for you today that hopefully you'll answer. As you and I both know, most retirement savers won't be fortunate enough to be in a position like you to hang it up before their 40th birthday. But I do see this uptick in people wanting to retire earlier than the traditional age of 65. Around age 50 seems to be a popular target for those with this sort of goal.

And with that in mind, I would just be curious to hear from you what you think the biggest hidden pitfall is for people wanting to retire early or achieve financial independence at a younger age.

What, if anything, caught you off guard when you achieved this at age 35 that might apply to someone wanting to retire closer to maybe age 50? What do people often fail to take into consideration that perhaps isn't talked about enough within the retire early communities? Thanks again, Jeremy. Keep up the great work and I look forward to hearing your answer.

Wow, we're really letting anyone ask questions. Vivi, are we even screening these calls? Alright, well, since we've already played it, might as well answer.

Just kidding. That was obviously Taylor, the actual host of the show, asking a very polite question. And the question about what to worry about in early retirement is usually asked by people who are worried about going broke. You know, they do the numbers, they look at the math, their income, their expenses, their investments, their wealth, and they think, man, the day they quit their job, they're

Will they be setting themselves up for failure? And my answer to that part of the question is almost always the answer is no, you're not setting yourself up for failure. If you're that thoughtful about the process, by the time you get there, it's usually too late. You could have retired sooner. One popular rule of thumb is what's called the 4% rule, which says, hey, you can take 4% of your investment portfolio out every year and even adjust it

up for inflation every year and then never really risk your principal running out. So you'll always have that income. But a few things about that. One, the 4% rule is actually really conservative. Even the original researchers have come out and said it should be more like 4.5% or even higher as you get older. And two,

The bigger issue is that retirement is not done in a vacuum. Early retirement is not in a vacuum. If you retire at 50, you hopefully have 30, 40 years of life left. You're not just going to be putting your head in the sand and your fingers in your ears for the entire time. First of all,

you'll probably have some more income from somewhere. You might be starting a side hustle or doing a hobby or working part-time at a job you love, or it just turns out people tend to have more income once they aren't burdened by their full-time job. And two, you can watch what's going on in the world. You can look at your portfolio and look at the market and make decisions along the way, maybe even going back to work, although probably not. And so I think people just are concerned that once they pull the plug on quitting their job, that

They just have to stick with that decision for 40 years and they're going to be stuck. And the answer is no. Usually people who are thoughtful and worried about that can retire and they're going to be better off than they even thought they're going to be. In my own experience, when I quit my job at 36, I did nothing for a year. And then I decided to start a little for fun Instagram account to help people with personal finance and investing. Basically what I was doing, living off my investments.

And then bored during the pandemic, I was like, you know what, maybe I'll just put together a little video course. I was going to give it away for free. I decided to sell it for 50 bucks. And then the first week, I made $100,000. And now I've made over $1.5 million from this side hustle turned, I guess, small business. And I have two full-time employees. And so my own experience, that was absolutely true, which is...

I wasn't just having zero income for the rest of my life, even though I didn't plan to. It just turned out that doing what I love, following my passion, turned into even more money than I was making at my day job. But to answer your question about the unforeseen pitfall, when I was working, I always saw early retirement as this finish line. I was like, ooh, once I get there, once I have millions in the bank and quit my job, I'm going to put my hands in the air and fly to a beautiful beach somewhere and

I'll have made it. And I didn't really think much about what then. And there's a saying that the reward for financial independence is an existential crisis. I think we're all so focused on the finish line. We don't realize that once you quit, once you retire, you have to be about something. What are you about? For sure, for a while, it was fun. But after like a year of that, I could see myself at dinner parties and people ask what I do.

And my answer would be something like, oh, I sold a company when I was 34 and I quit my job at 36. And now I've done nothing for years. And I didn't want that to be my story my whole life. And I also felt a lack of purpose. I didn't want to just be a guy that was living off of investments. I want to be building something. I want to be helping people. I want to be working towards something.

And I think happiness comes not from quitting your job and having a lot of zeros in the bank and raising your hands over your head. It comes from your health and relationships and fulfillment and progress and building things and purpose.

And that doesn't automatically come when you retire. For sure, quitting your job for a lot of people can open up some time to pursue those things, but it won't happen instantly. It won't happen automatically. It needs to happen thoughtfully. And so for me, I'm doing this. I like helping people with personal finance and investing. So I'm talking about it. I've now built a small business around it.

And so for you, I would think about not seeing retirement as a finish line, but think about it as part of your life and what your life's purpose is going to be after that. Because I think you might find maybe you've been working so hard towards this goal. And then when you get there, it's like the dog that chases the car and catches the car and then you don't know what to do with it. It's worth thinking about.

That is all the questions I have for today. Thank you to Taylor. I know Taylor rarely mentions his own service. He is just doing this podcast largely because the reason I do what I do, which is we just like talking about this stuff. We like doing it. But Taylor helps people with their finances. So since he doesn't mention it very often, I'm going to mention it for him. If you are 50 plus looking for retirement, tax planning, investment or financial help,

Taylor's firm is a fantastic option. You can head to youstaywealthy.com and click on work with me and work with him, not me, him. By the way, Taylor and I have no financial relationship. We've become friends over the year and no one pays anyone for this. He gets some time off. I get to practice being on a podcast. It's just a friendly thing. So I'm only saying this not because I'm getting a kickback or anything, but because I believe it. And that's why I'm on his show. There's lots of shows I obviously wouldn't want to be on because I don't agree with them.

But that is all I have for you today. For all the links and resources mentioned in today's episode, head over to youstaywealthy.com slash 197. This is my last of the four episodes I'm filling in for Taylor this summer. He'll be back next week. If you do want to hear more from me, you can head to personalfinanceclub.com where you'll find our videos, social media, email newsletters, and our courses. And I'll leave you with Personal Finance Club's Two Rules of Building Wealth

Rule number one, live below your means. And rule number two, invest early and often. See you next time. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.