Vanguard Migration

I finally decided to take charge of my finances and researched investment companies and how they made money. The first thing I did was gather up the courage to read the paper prospectuses and annual reports that I got in the mail every six months. These documents are intimidating and there is a lot of tiny print in these documents. Later, I realized the only thing you really need to know from these documents is the investment objective, past performance and the annual fees (i.e. expense ratio) of the fund. A lot of mutual funds my financial planner put me in charged an expense ratio over 1% annually to invest with them. While 1% doesn't sound like a lot of money, a 1% expense ratio with an 8% return compounded over 40 years results in over 30% of your returns lost to needless expenses.

I remembered the Vanguard recommendation from my co-worker all those years ago and decided to learn more. Vanguard's expense ratios were much lower than the competition for similar mutual funds, and one by one I rolled over / transferred multiple accounts into Vanguard in 2004. I had to pay some surrender fees to move some of the money that was locked into loaded class B shares. When I finally consolidated all my accounts with Vanguard I was very relieved to be out from under such high investment fees. I went with a basic portfolio of Total Stock Market / Total Bond Market / Total International Market funds.

Back then, Vanguard was recommending 20-40% of your stocks should be in international stocks. International stocks are typically more volatile than domestic U.S. stocks, and sometimes U.S. stocks are the better choice, and sometimes international stocks are. Unfortunately, we don't know ahead of time which one will outperform the other.

Building a do-it-yourself portfolio based on Vanguard funds can be a daunting task. You can compare past performance of various combinations of Vanguard funds using this tool.

In 2007, my dad came to me and asked me if there was any place he could move his money because bank Certificates of Deposits (CDs) weren't paying squat. He was also upset that he owed taxes on multi-year CD dividends each year while he didn't have ready access to the invested money to pay the taxes because of early withdrawal penalties on CDs. My dad was an entrepreneur and I asked him if he wanted to invest in the stock market. He said he would rather invest money in his own business where he has control than invest in someone else's business. Fair enough, so I asked him if we invested in bond funds what he wanted. He said he wanted to invest in the fund that pays the most interest with no taxes. So, we invested in the Vanguard Long-Term Tax Exempt Fund. This is where my obsession with long-term bonds began.

In December 2007 the Great Recession started. It was caused by a housing bubble where excessive subprime mortgages were issued to people who didn't have the financial stability to repay them. When their mortgage payments increased, mass foreclosures caused mortgage-backed securities to collapse and the stock market reacted by losing over 50% of its value in 2008. Still being in my accumulation years, I invested every bit of money I could into the stock market as it was going down until it hurt. It eventually bottomed out in March 2009. This paid off handsomely in the years to come.

Our first daughter was born in 2008. The following year we received a $1,000 child tax credit from the Federal government. We took that money and opened a UTMA account for college. We went with a UTMA account instead of an ESA or a 529 plan. ESAs and 529 plans have restrictions that the money must be spent on education and qualified educational expenses vary by plan. If the money is not spent on education, then Federal and state income taxes must be paid. With a UTMA account, the first $1,250 of dividend / capital gains income is tax-exempt each year (as of 2023), and the amount between $1,250 and $2,500 is taxed at 10%. This income can be reported to the IRS using Form 8814. Each year we buy investments using their child tax credit and attempt to sell investments to realize a gain between $1,250 and $2,500 for each child. If any taxes are due from the previous year, it comes out of their next child tax credit.

Time Value of Money

To illustrate the time value of money and power of compounding, if you start investing $1,000 per year ($83 per month) and earn an 8% return for your child when they are born and they continue saving $1,000 per year until age 64, they will accumulate over $1.7 million. The child tax credit in 2022 is now up to $2,000 per child. If you want to try different numbers for your calculations, you can use our Retirement Calculator.