#561: Q&A: Why Your Retirement Math Isn’t Adding Up

Joanne is confident that her short and long-term financial plans are set, but she’s not certain about the medium-term. What’s the proper way to allocate money for different time horizons?

Jessie is intrigued by Paul Merriman’s simple portfolio recommendations but wonders about his lean away from growth stocks. Are value funds generally better for everyday investors?

Nancy is worried she’ll miscalculate her financial independence number because her net worth includes pre and post-tax money, plus liquid and illiquid investments. What’s the right approach?

Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.

Enjoy!

P.S. Got a question? Leave it here.

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Joanne asks (at 03:20 minutes): I understand the short-term basics of personal finance such as having a fully-funded emergency fund. And I’m familiar with long-term investing, like letting money ride out in an index or target date fund. But, what about the medium-term?

I’m a 45-year-old recently divorced single mother of two kids, aged 10 and 12. I’m about to retire or semi-retire in a month or two after 20 years of working. I’m in good shape for post-age 60 with $1.5 million in my retirement accounts. But what about the money I’ll need in five years?

I have $500,000 in a CD ladder that includes a 2-year CD, a 3-year CD, and three 5-year CDs, all at over 4 percent.  For the next 4 years, I’ll also receive settlement payments from the divorce. Some of this money will go toward funding my children’s 529s for college.

I own two condos. They’re both paid off and worth $400,000 each. When I first divorced, I downsized to a condo that was too small for me and my kids. I was able to buy the adjoining unit and connect them. Once the kids leave for college, I’ll seal up the condos and sell one back.

I also have passive income from a family real estate property. This money along with interest from investments, the CDs, and some of the child support money, my expenses for early retirement are mostly covered.

But what should I do with my medium-term CD funds after they mature in five years? I’d need these funds to meet my needs over the next several years. Should I consider bonds or another investment?

Jessie asks (at 31:25 minutes): What a great episode with Paul Merriman. I noticed that he recommends diversifying with value stocks rather than with growth index funds.

Would there be similar findings if you were diversifying with growth-focused index funds, or do his findings suggest that value funds are more productive for most everyday investors?

Nancy asks (at 45:58 minutes): I’m working on calculating my Financial Independence, Retire Early (FIRE) number, but I’m a bit confused about which investments and values to include. My net worth combines pre- and post-tax investments, plus liquid and illiquid assets.

My money is split between a Vanguard account, a Thrift Savings Plan (TSP), and real estate. Vanguard is straightforward because I can log in and check the balance of my accounts.

With the TSP, however, what number would you consider to be the amount I have “invested”? Is it my total contributions, my contributions plus the employer match, or the total value of my portfolio? And, how do I separate the pre-tax portion from the Roth portion?

As for real estate, how should I assess my investment? Is it the cash I’ve put in, like the down payment and monthly payments? Or should I consider the equity minus the loan balance, the current market value, or the original purchase price?

Each of these approaches gives me different numbers, and I’m curious which ones you’d suggest prioritizing when calculating my FIRE target and determining how much I need to make work optional.

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