Teela_Brown

This would probably be better asked in a financial forum, but given we are unsure where we might retire UK or US and the fact that we don't have huge trust in the US financial protections for consumers (had a couple of sketchy encounters when planning for our kids college expenses) I thought I'd start here and hope for general guidance. It's easy to get lost and overwhelmed online, I've listened to financial podcasts, read forums and googled and the like we've tried to prioritize with what we have so far. With the kids almost through college we will be in a better situation for investing soon.

We have mortgage and loans for house and cars in US. We have a 401K, and a Michigan 457 +401k. Once we're contributing the maximum to those, what should we look for next? I hear people mention IRAs and Roth IRAs, paying down loans with above certain interest rates before investing, opening CDs for certain amounts. Also on the previous thread investing in after-tax funds which are also HMRC reporting was mentioned, we have never held stocks, mutual funds or the like so i'm unfamiliar with a lot of the language. We are paying as much SS as we can and have applied to pay NI extra contributions. Before finding a financial advisor I'd like to at least understand the choices, priorities and implications a little better, so that at least I don't look as clueless as I am. Any advice on how you'd prioritize, and things to stay away from would be great.

Expatrian

Hi. That’s a lot to unpack there in one thread. I’d recommend you visit https://www.bogleheads.org/forum/index.php, which is great forum to get advice along these lines. My general input, after you have an emergency fund of 6-12 month of expenses, is to prioritize non-mortgage debt elimination before investing (except for up to your employer’s retirement fund match). Regarding financial advisers, my choice would be using that kind of service through one of the brokerage firms, such as Vanguard, Fidelity, or Schwab, where you’ll be better protected.

Pulaski

Personally, whatever your priorites are, I would stay away from financial advisors, as, by the time you've factored in any fees, either overt or embedded within the "plan charges", you are IMO highly unlikely to achieve investment returns for your portfolio (however you choose to define or build that) better by using an advisor than investing in low-cost tracker mutual funds, which you can buy directly from investment fund businesses such as Fidelity and Vanguard.

The only other very broad recommendation/ observation I would make is that in times of high inflation it arguably makes sense to hold debt (especially low interest debt such as a mortgage), which you will be paying off in future with devalued currency, and hold inflating assets, such as equities (unless the economy tanks) and real estate, but not bonds, which are bad for the same reason that having loans is arguably "good" - you will be receiving deflated currency when the bonds are repaid.

durham_lad

Good advice to visit Bogleheads. Another good website to get advice and a reading list of good information is
https://www.early-retirement.org/forums/

While you say you don’t know about mutual funds and the like, how are your monies invested in your 401ks?

Teela_Brown

Thanks for the link I'll check it out. Thanks for the tip on the brokerage firm I'll read up on them.

Teela_Brown

Yeah we have stayed away from Financial Advisors because we have a fear of hidden fees or being sold products that benefit the advisors more than us. But as we haven't been particularly focused on understanding all of this as there have always been other expenses so until now we haven't really learned where to go next.
The broad recommendations you made are helpful and I understand the points you make.

Teela_Brown

I have a Michigan 457, the 401K part of it is small and is only for the employers contribution. I definitely have a bunch of choices I can make on the 457 to change where the money is invested, balance funds and transfer fund to fund, I just need to understand what it all means a little better. Husband's 401K is also an employer's scheme which we pay into.

Expatrian

Most welcome. The philosophy behind bogleheads is self-investing exclusively in low cost, broad-sector (i.e., S&P 500) index funds, which I personally do. As Pulasky alluded, financial advisors are a significant drag on your investment returns, especially over the long term, and you’ll want to work towards eliminating that cost once you’re ready, if possible.

Pulaski

Does he have no choice as to how his 401k funds are invested?

It is often the case that an employer's 401k has a limited choice of lackluster funds, but I believe that there is usually some degree of choice. If on the other hand he accepted a default portfolio, until such time as he makes choices, but never got around to making choices, then I fear his 401k may be suffering from poor investment performance due to a portfolio skewed towards bonds.

Teela_Brown

That maybe the case, I haven't looked over it with him but I know he checks it. We'll take a look, best to straighten out what we've already got before venturing into new stuff.

tom169

Check out The Money Guy Show. They have a financial order of operations which is a good starting point.

A certified financial planner could help organize and guide on a personal level once your finances are at the optimization point, but I don't think you're at that stage yet.

Glasgow Girl

I would look at maximizing your 401K contributions first. Then I would look at maxing out a traditional IRA or Roth IRA to take advantage of the tax benefits. A Roth is better if you expect your tax bracket in retirement to be higher than it is when you make the contribution, and a traditional IRA is better if you expect your tax bracket in retirement to be less than it is when you make the contribution. But either is good. There are other considerations as well, not least of all the fact that distributions from a Roth will be tax free in the US and UK whereas distributions from a traditional IRA will be taxed in both the UK and the US. Both will grow tax deferred. In both cases each individual can contribute $6,000 annually, $7,000 if over 50, and your total earned income is less than $204,000 if married filing jointly. Google Roth vs traditional IRA and you will easily find detailed and simple descriptions of what might be best for you, why, and other relevant details.

However before that, if you qualify, I would look at funding a tax deferred HSA, which you can do in conjunction with your employer (if they offer one) or independently from an employer if you choose to, or you are not employed. In short, each individual can invest $3,650 annually (in addition to any Roth or traditional IRA contributions). Contributions are tax deductible and will grow tax deferred until withdrawal. Withdrawals will be tax free if used to pay for medical expenses at any age, and taxed as ordinary income if you are over 65 and not used for medical expenses. To that extent when used for medical expenses, it is better than a Roth because your contributions and withdrawals are tax free, and when over 65 it has the same benefits as an IRA with tax deductible contributions and withdrawals taxed as ordinary as income if not used for medical expenses. You do not have to claim the medical expenses in the year they occur. You can pay the expenses out of your other income, hang onto the receipts for years and claim them when you make a withdrawal enabling you to grow your investment tax free for as long as you want to. A very useful tool in the retirement tool box. Make electronic copies of your receipts, photos, whatever, because the original will fade over the years and you may lose them. There are rules as to who qualifies, but anyone with a high deductible medical plan (which most of us have these days) whether through an employer or independenty procured on the market place will qualify. Google tax deferred HSA for more information.

After that I would invest in mutual funds, online, with one of the major brokers. Since you currently have limited knowledge and experience I would look to invest in what are called lifestyle funds. In short they look at your age and risk tolerance and have a basket of shares, pooled funds (mutual funds, index funds, ETFs) and bonds, handpicked by fund managers with with expert knowledge at their fingertips, designed to provide the optimal return for your situation. Yes, you are paying a fee to the fund manager but you are paying an almost identical fee with any kind of investment in the stock market unless you are buying individual shares directly and even then you are paying some kind of broker fee. You are not however paying for the additional fees charged by a personal financial advisor which is always in addition to the aforementioned fees, and as you are aware (unless you get lucky) can be skewed towards the interests of the financial advisor. But in any case the advice is typically generic and limited because they are afraid of getting sued if they do anything out of the traditional playbook.

Lifestyle funds will typically lean towards shares and pooled funds when you are younger, and as you age they will start to favor bonds, but you will always have some of both. They will typically skew towards higher risk and higher return selections when younger and automatically transition towards lower risk, lower return selections as you age. It is a good hands off tool for those who lack the confidence, knowledge, or inclination to actively manage their investments. An advantage of using a lifestyle fund is that the managers have access to expert knowledge on when to transition in and out of bonds, and what market sectors to invest in. There are always some type of bonds that do well in any circumstances but it is a dynamic playing field, and expert knowledge is required to be successful. Research has consistently shown that investment returns are heavily determined by the sector you invest in and not so much the specific fund within that sector. For example, the most mediocre fund in a well performing sector may outperform the best funds in a poorly performing sector. If you have little knowledge and experience it is best left to professionals to make those decisions. The lifestyle fund managers have that expertise at their fingertips and know when to switch in and out of the various kind of financial assets to meet your risk/reward profile. Once you gain confidence you could switch from lifestyle funds to funds of your choosing if you are so inclined and possibly improve your returns, and of course if you decide you could also switch to HMRC approved funds if/when you move back to the UK.

You probably are aware of this, and it sounds like you will be doing it by default anyway, but unless you can read the market and buy low/sell high (and no one can do so consistently) it is wise to invest on a regular basis, putting money into the market no matter what it does, for example with a regular monthly contribution. When the market is doing well your existing investment will be growing but your regular contribution won’t buy as much, conversely when the market is doing badly your existing investment will have lost some value but on the other hand your regular contribution will buy more. Over time you end up buying in at an average cost which protects you from major losses by investing in the market at a bad time. The key is not to procrastinate and to that extent lifestyle funds will get you started avoiding the paralysis by analysis trap.

Most of the major brokers, Fidelity, Charles Schwab and others, will provide online help as to what might be right for you. You do not need to be a customer to use their website for research. For convenience you want one stop shopping for all of your investments. I can personally recommend Fidelity for excellent research tools, and every investment vehicle I have mentioned (and then some ) although I am sure most of the other major investment brokers are equally good.

Unless any of your loans have higher than normal interest rates and there is a large balance I would leave them alone. It is another form of diversification for reasons mentioned earlier.

For your existing investments, if there are no lifestyle funds available I would research the Morning Star Ratings for whatever is offered and pick funds based in the US with a 4 or 5 star rating for the past 1 and 3 years or just go with a straight index fund if none are available. If you want to take a little more risk perhaps a global fund spread across the world (not just just one part of it). Of course, if I was that smart I would be a billionaire, and I am not, so make your own independent decisions!

PetrifiedExPat

Another shout for Bogleheads.

We made a decision to pay down all debt, mortgages, cards, student loans and buy commodities outright. The two Mercs for example. Now just pumping money into the stock market to hopefully clean up. Have not regretted it, nice to be liquid since Miss Little Petrified has many activities/day care etc that need paying for.

Also hate credit as a general rule.

Feel its a personal choice though.

Pulaski

I am fairly sure that they're liabilities not commodities.

PetrifiedExPat

Liability for fuel right now! Great for the mileage I do though, would only have ever bought them with cash outright. Certainly not worth a loan (imo). Miss the CRV somewhat