“I make $150k a year and put $1k into retirement every month. What else should I be investing in?”
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When you take the best investment advice from the best investors of all time, not one's talking about asset allocation. Not one's talking about buying U.S. versus international. Not one's talking about how to invest in venture cap. They're all just talking about behavior.

Hey, everyone. I'm Jean Chatzky. Thanks so much for joining us today on Her Money for a very special mailbag chat with Jenny Van Leeuwen-Harrington. I hope that you all had a chance to catch our earlier episode, which was really a 101 on dividend investing and why dividend income stocks can be a great option to add to your portfolio in uncertain times or any time you want to make sure that you've got some really predictable

income rolling in we heard from many of you who have questions about how to invest outside of your retirement account when you're in different stages of your life where you should be pulling money from as you retire and where's even the best place to save for your kids college education as you get closer to them leaving the nest so Jenny you ready for a whole panoply of questions

I'm super excited, actually. Oh, good. All right. Well, the first one comes to us from an anonymous listener who is wondering how to best invest pre-retirement.

She says, I'm nearing retirement and I've never invested outside my workplace simple IRA. I'd like to open a Roth IRA for the six years I have before I retire. I know I'm late, but better late than never. The problem, I don't know where to start. What do I invest in? Any guidance is greatly appreciated. So what do you think, Jenny?

Okay, so I have three younger brothers, and my youngest brother is about 10 years younger than me. And he finally, maybe three or four years ago, decided that he was going to start investing in some stocks, which also was a little too late. And...

Because it was his first foray, I was actually a little nervous about putting him all into the market at that point. And he said, my brother who has no investment experience said, oh, Jenny, when an elder was asked, when is the best time to plant a tree? He responded 20 years ago. And then when asked, when is the next best time to plant a tree? The answer was today.

So I think it really is never too late. The challenging thing here is six years. Is six years long enough to be considered long term? I would argue yes. I kind of like to think of three years plus as long enough term to comfortably buy stocks. And given that there's no experience, and Jean, I know I've told you in the past, I don't invest in exchange-traded funds or mutual funds. I'm a stock investor, but I do have no problem giving friends advice. Oh,

on when they're in this kind of situation, which exchange-traded funds I think they should buy. So I think a nice way to do it is to put a very plain vanilla

portfolio of exchange traded funds together. And as we've discussed in the past too, I have this wonderful friend, Nancy, who says, hey, put 80 to 90% of your portfolio into funds and then carve out 10 to 20% and buy a stock or two so that you pay attention and are sensitized. So if it were me, and this is what I told my brother to do way back when he asked me, I would do the equal weighted S&P 500, which is the tickers RSP. I would do an international developed market fund

The ticker is EFA. And I would do a mid-cap US fund. The ticker that I like, it's just the Vanguard one, is VO. And some combination of those three, because that's a plain vanilla, all stock, just you're going to participate in long-term equity returns. And then maybe carve a little out and buy one or two stocks so you pay attention and are sensitized. Are there specific proportions for those funds that you would recommend? And also, I have to say on the time frame question, I

I always think we think that retirement is the end of our risk horizon, but actually we've got 30 years of retirement. So your timeframe's not just six years. It could be 36 years, right? That's a really good point. Yes, you're exactly right. I might do something like 50% in the U.S.,

Maybe 30% in the international and maybe 20% in the mid-cap U.S., something like that where you're just balancing it out. But you know what's interesting? I taught a class at Baruch College in New York City a couple weeks ago for a friend of mine. He does the whole class. I did one session. It was on behavioral investing.

And I asked all the students to send in their favorite investment quotes of all time. And I put them all up on the screen. And it's all the usual, right? Like, be greedy when others are fearful, blah, blah, blah, blah, blah. And I said, what's the commonality? And it was Peter Lynch and Warren Buffett and John Maynard Keynes and John Bogle, all the most successful investors. I said, what's the commonality here? And they toyed it around. And I said, it's behavior. You know, what you see is when you take the best investment advice,

from the best investors of all time. Not one's talking about asset allocation. Not one's talking about buying U.S. versus international. Not one's talking about how to invest in venture cap. They're all just talking about behavior. And so I think even the proportions of that matter a little bit less than just buying it, being invested in equities, knowing that the math on those works over the long term and sticking with it to your point for 36 years.

Our next question comes from Jessica. She's got a question about saving for her kids' college education. And she says, for many reasons, we've had a horrible time being able to save for our kids' college. We have three in high school and are just starting to come up for air financially. What's the best way to put our money to good use with only a few years until college?

In this case, I think you go for bonds. When you only have a few years left, I do not think you have that long-term horizon and I don't think you can take risk. And where Jessica got lucky is that there's actually a return to be had on bonds right now. You can buy short-term corporate bonds, kind of one to three years, investment grade, but not super high grade, at five and change percent yields. That's amazing.

two years ago, even that wasn't available. So Jessica, you kind of got lucky in that you can buy bonds and actually get some return right now. Whereas for the better part of the last decade, there wasn't much return to be had. But I think when you're in that situation, you don't take any risk. You just put the cash aside.

Yeah, I totally agree. And Jessica, if you want to go the 529 college savings plan route, which may be a good idea in this case, go to savingforcollege.com. Look and see if you're eligible for a state plan that gives you a state tax deduction or any other sort of a perk for making a contribution. And then once the money is in the account,

account, you'll be offered a bunch of different strategies. But what Jenny is basically saying is you want to go the conservative route. You don't want to go with the aggressive portfolio or even the moderately aggressive portfolio with this few years between you and that first tuition payment. Jenny, before we take our last two questions, I'm going to take a breather for a very quick word from our sponsors.

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We're back with Jenny Harrington, author of Dividend Investing. Our next question comes from Mary Carmen. She's got a question about RMDs, required minimum distributions. And she says,

I'd like to start pulling money on a monthly basis to complement my social security. I'm a couple years out from needing to take required minimum distributions. I have two accounts, one brokerage account where I keep one type of stock that gives me a yearly dividend, great yearly dividend, she says, about $3 a share. I generally use this money to catch up on my credit card balance. It has a yearly return on investment between 8% and 10%.

The second account is a traditional IRA account, which is fully managed by my financial advisor at a 1% cost with an estimated 1% to 3% return on investment. So if you're to ask for a monthly distribution of $2,000, does it make a difference tax-wise or otherwise to pull from one account versus the other and why?

The first thing I just want to say is that required minimum distributions are a little bit of a

I think they're a little bit of a trap and I think they're a little bit of a misnomer. Most people, the vast majority of people, need to pull money from their retirement accounts before they get to the age of having to take required minimum distributions. And there is absolutely nothing wrong with that. You've been saving money.

for years and years and years to support yourself in retirement. And as the government raises the age of required minimum distributions from 70 and a half to 72 to 75, if you are trying to push that can down the road, you're buying yourself a big tax burden in later years, but you also may be trying to force yourself to live on less than you really could be or should be.

So I don't want people to think, oh my God, I have to wait until I need to take them. You do not. I am bothered by the...

account that is managed by the financial advisor at a 1% cost with a 1 to 3% return on investment. Me too. I would say... That was a red flag. Yeah, that is not a good financial advisor. You should be doing much better. And my inclination would be to pull the money from that account or to be looking around for other advice. So...

As I expected, you were going to give a much more thoughtful and sophisticated answer because you are far better at the financial planning part than I am in understanding the tax part. The only thing I would add is what I see people do a lot is bucket the accounts too severely.

with too much restriction. I would say it's all one account. Take from wherever you can maximize or rather minimize the tax impact. And so let's say that brokerage account is in a stock and she has a huge capital gain.

right? And so she's going to have to pay a capital gains tax every time she takes it. Well, if you're super rich, you're paying 23.8%. If you're a normal person, you're paying 15%. I have no idea what your ordinary income tax rate is. So what's going to create a lower tax bill, taking it from the IRA or taking it from the brokerage account? I'm not sure, but I literally wrote down, you saw that question, why so low? Red flag. So I think you have two things going on. One,

Don't worry too much which bucket it is. Just worry about which account is going to create a smaller tax bill for you when you take it. But then Jean brought up that important point that if you do kick the can on the retirement account, you can end up with a higher tax rate later. It's tricky, but yeah, do some hard questioning on that return. Absolutely. Those are really, really good points. Our last question is from Angelique. She says, I'm wondering about investing for dummies, me.

First of all, I'm just going to pause there. There are no dummies on this show. I hate the titles of those books. We're not dumb when we don't know something because we have never been taught something. We are just uneducated on these things. And that's why we're doing our homework. And it's why you're listening to this show. And no dummies.

Okay, going on. She says, I make $150,000 a year. I have a 401k and put $1,000 in it a month. I have a 15-year-old son and I also have a 529 and a uniform transfer to minors account for him to which I put in a total of $450 a month.

What else is easy to invest in? I'm going to be working for 14 more years, but I want to invest in something easy and moderate. Any advice would be great. First of all, Angelique, you're on this journey.

hundred and fifty thousand dollars a year you're putting away well over the 15 percent that is usually the hurdle that we say people have to hit so I just want to say that I think you're doing great and the fact that you want to do more is spectacular Jenny where would you point her

Well, first, what upsets me about this question is that someone like Angelique think, you know, even jokingly says investing for dummies. Because actually, Angelique, you're a brilliant investor. Because so much of those long-term returns are...

are putting the $1,000 a month in and good behavior. And it goes back to the comment that I made before. It's not about asset allocation. It's not about what you buy. It's about the behavior and the sticking with it. So what you're doing is extraordinary. What you're doing is real investing, which is putting money in in a consistent way.

Actual dummies are the ones who inherit $150,000 account and spend $12,000 a year and freak out when the market's at a low and then go buy Bitcoin or something to try and make up for it. Like that's an investment dummy. You, my friend, are the polar opposite. So that took me back in a good way. Okay, what I would do and what I love about this question is it gives us the opportunity to talk about compounding. And above any market return,

The value of compounding on your contributions is extraordinary. So here's what I did for fun. Okay, you said you've got 14 more years of work. If you put in $1,000 a month for 14 years, that's 168,000 of contributions. All you need to do is grow that by 7% a year.

And in 14 years, that'll be about $280,000. That's an incredible return. So what I would do is just seek something out where you can probably get a 7% or better return.

On average, the stock market's returned 8% to 10% historically. Over the past five years, it's returned about 16%. So let's say we've pulled a lot of growth forward. Let's say if the market's returned 8% to 10% historically, it's going to return, I don't know, 6% to 9% or 6% to 8% for the next decade.

The middle of that's 7%. All we need to do is get to 7%. And then I refer you to the top of the show where I said, all right, maybe you buy some exchange-traded funds. And you can buy that equal-weighted U.S. fund.

some international, maybe some mid-cap. But if you look at the history of all of those, on average, over the very long terms, they've returned 8% to 10%. You have a 14-year time horizon. That is long enough to comfortably invest in equities. It's easy. You can set it and forget it. Again, if you want to do some stocks for fun or for your 15-year-old son for fun, great. But I think I'd do your son's account the same way. You have so many things going in your favor, which is time horizon.

income from your salary and really good investment behavior. Really, really good. Just a couple of things in terms of maxing out on your ability to grab some additional tax advantages.

I can't tell from your letter how old you are. If you are old enough to make catch-up contributions, you may be able to put a little bit of additional money into that 401k, which would allow the money to grow tax-deferred.

If the $150,000 is your total household income, you may be eligible to put some money into a Roth and that could grow tax-free forever. If you have a health savings account, if you

are enrolled in a high deductible health plan that comes with a health savings account, you can put a little over $3,000 a year into that account. And then if you pay for your health care out of current cash flow, you can invest the money in the health savings account, and it can become a supplemental retirement account with all of the tax benefits of a 401k.

So there are other things that you can do to grab some additional tax advantages. And if you think you've just maxed them out, then just put the money in a brokerage firm. It's fine. You'll pay some taxes, but you'll still grab all the compounding that Jenny is talking about. Can I say one more thing on compounding? Yeah. If you want to do something fun by my sad standards of fun, Google compound savings calculator. Okay.

Oh, my God. I do this all the time, Jenny, like mind meld. Right. And so the good one is it goes to finrad.usalearning.gov. Is this the same one you go to? I just Google what will my savings be worth? And it usually takes me to a bank rate compounding calculator. But I just I love this exercise. OK, it can work for and against you. And I'll tell you the for and against part. But it's so cool because you can put in.

You know, you're going to put $1,000 a month in for two years, 14 years. See if you set a growth rate of 5%, what the difference is between a growth rate of 8%. It's pretty stunning. Jean, you're going to laugh so hard at this, but I was talking to someone recently who's in our business, and I was saying, well, you know, the problem is once you really understand compounding, it turns into a problem because, and I said to this person, I'm sure you do this too, but I'll do something like compounding.

okay, I really need to buy a new car, but that's $60,000. And so if I spend $60,000 on a new car, and by the way, I'm 49. By the time I'm 59,

I will have essentially lost not just the $60,000, but now it's doubled to 120. Because now I do negative compounding. And by the time I'm 69, 120 is doubled to 240. And by the time I'm 79, I'm like, so I've essentially lost half a million dollars by buying a $60,000 car when I really only needed a $30,000 car. Compounding can work both ways. But

But it can help you make really smart financial decisions. That calculator is a lot of fun. You guys have learned that Jenny and I are big money nerds. But beyond that, this has been hugely insightful and helpful. Thank you so much for coming back. Jenny's book, once again, is Dividend Investing. Where can we find out more about you? Oh, about me? You can go to the Gilman Hill website.

The book is on Amazon. And, you know, now that I do CNBC, there's lots of cool clips and stuff. And my team's really good. I don't like watching myself on these things. So my team goes and pulls out the ones where I actually say something that's useful and try and put them up there. Which is always, which is always. Thank you so much for being here. Thanks for having me.

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