Now that I’ve given our savings account the cold shoulder in hopes of building long-term wealth via our taxable and retirement accounts, basic investment strategies just wont cut it any more.
The need to go deeper.
In 2007, when I landed my current job with the Feds, I was handed a fat stack of HR paperwork as part of my new hire packet. One of the pieces of paper in this stack asked if I wanted to begin contributing to the government’s version of a 401k, known as the Thrift Savings Plan (TSP).
The paper told me that if I contributed 5% of my salary, the government would match that contribution and throw in an additional 5% on my behalf.
I didn’t have to be a savvy investor to know that a 100% return on investment was an incredible opportunity.
The TSP is nice in that it only has five funds that one can choose to invest in. They are…
- C Fund: Essentially an S&P 500 index fund
- S Fund: A total US stock market index (so companies the S&P doesn’t cover)
- I Fund: An international fund that mimics a Morgan Stanley International fund
- F Fund: A broad index representing the US bond market.
- G Fund: A guranteed return fund. Currently about 2% ROI.
For all of the bureaucratic red tape and politics that comes with the government, you sure can’t beat the simplicity of the TSP.
But the thing that puts the TSP miles ahead of the competition, likely even your 401k plan, is the expense ratios.
If you’re a super passive contributor to your retirement accounts you might not even know what expense ratios are.
Without boring you to death, expense ratios are a fee that you pay the organization that manages your investment account. You may not have known these expenses existed because you don’t pay them out of pocket, instead your organization just debits them from your account.
Know your expense ratios.
It could literally mean the difference of tens (or hundreds) of thousands of dollars over the course of your accounts life.
For example, the TSP charges expense ratios of 0.029%. Or in other words, for every $1,000 you have in your TSP, they will deduct 29 cents, annually.
Whereas, if you have an actively managed account, it isn’t uncommon to have expense ratios of 1%, or in other words $10 is deducted for every $1,000 invested, annually.
Ten dollars a year might not seem like a lot, but OH BOY does it add up quick.
Impact of Expense Ratios over the long term
For the sake of making everything easy, let’s say you have $100,000 in your 401k right now. You add $10,000 to your account each year. You are planning on earning an 8% return on investment over the next 30 years.
Take a look at how an account with a 0.030% expense ratio absolutely DESTROYS an account with a 1.0% expense ratio.
So while a 1% expense ratio may not seem like a lot up front, man-oh-man does it cost ya big bucks in the long run, $419,181.44 to be exact.
Why pay an organization $420,000, when you could keep all that money for yourself?
I’m fortunate that the TSP has insanely low expense ratios. It would be stupid of me to not contribute as much as I can each year to take advantage of the low fees (hence the reason I’m hoping to max my contributions this year).
And the good news is, even if I quit working for the Feds, I still get to keep my TSP. This will be one account I will probably never get rid of.
“But Ninja I don’t work for the Feds.”
You ever heard of Vanguard? Of course you have! It’s universally known as being one of the most legit investing institutions in the universe (think the Costco of investing).
Vanguards expense ratios are really cheap compared to most of their competitors (although still two to five times that of the TSP).
The more money you have, the better rates you will get.
From 2007 to 2014, I was contributing to VTSMX, which is Vanguards version of a broad based stock market fund. The expense ratio was 0.17%. Not too shabby.
But now that I’m committed to not being such an investing dummy, I’ve sold all $30,000 of that fund and bought VTSAX, which is EXACTLY the same fund, but has an expense ratio of 0.05% (1/3 of VTSMX). The catch with VTSAX is that you have to have a minimum of $10,000 to invest in this account to qualify for the cheaper fee.
Had I left my money in the more expensive VTSMX, I would have paid $22,000 more in fees over the next thirty years.
THAT IS SOOOOOOOOOOOOOOO STUPID.
So, seriously, if you haven’t thought twice about your investment (taxable and retirement) accounts’ expense ratios; you need to get off my web site and start doing some research (especially because your employer might have some really sucky options).
Not doing so could LITERALLY cost you a fortune.
*make sure you consider tax implications on realized gains if you sell investments from a taxable account.