With the S&P 500 closing at record highs on January 2, 2020, my investment portfolio finally entered into six-figure territory!
Achieving a $100,000 portfolio will by no means support my lifestyle. In fact, I’m still a long ways from achieving my first “mini-goal” of a million dollars and longer-term plans for financial independence.
However, accumulating six-figures in investments represents a certain milestone in my investing journey. This achievement offers reassurance and tangible proof that my savings strategy is working.
Over the last 4-5 years, I’ve sacrificed my lifestyle in order to invest as much as possible.
I’ve lived with roommates my whole life and driven a 10-year old vehicle with an endless supply of mechanical issues until recently. Even though I could afford to live on my own and drive something nicer, I delayed this gratification until I landed my current job which affords a more comfortable lifestyle.
FINALLY, I was able to move on my own (at least until my fiancee moves in) and upgrade my vehicle to a truck that isn’t constantly in the shop!
With my higher income, I can still afford these luxuries while saving 30%-40% of my after-tax income.
I plan to continue plugging away until my portfolio can both sustain my desired lifestyle prior to 59 1/2 AND in retirement.
An overview of my investment portfolio
My portfolio is diversified among a variety of stocks, ETFs, and mutual funds.
These investments are held in my employer-sponsored 401(k), Roth IRAs, a Traditional IRA (from a previous employer rollover), two separate Health Savings Accounts (HSAs), a couple of ordinary brokerage accounts, and a 529 Plan.
Here’s a quick snapshot of my portfolio:
My primary investing focus: saving for retirement
As you can clearly see, the vast majority (~76%) of my portfolio is invested for retirement. Ever since my first paying internship in 2015, I’ve contributed the maximum allowable amount into a Roth IRA.
While my investing strategies and goals have shifted and grown over the last 4-5 years, my focus has been primarily to invest in these tax-advantaged accounts for retirement.
The tax-favored status of IRAs allows my investments to continue compounding unimpeded.
Because of my 30+ year investing time horizon, each dollar invested should multiply 20x based on the historic market returns of 10%. However, since I invest more aggressively, I certainly believe ~12% is achievable over the long-term.
In just a few short years, I should have enough accumulated to “front load” my retirement savings and reach my goal of $5 million (adjusted for inflation) at age 60. While I’ll still contribute to get any “free money” through my employer match, I’ll plan to dial back my retirement investing.
My IRA of choice: Roth vs. Traditional
While Traditional IRAs and 401(k)s provide a tax deduction on contributions, distributions in retirement are taxed as earned income.
Don’t get me wrong – I LOVE tax deductions. A dollar saved today can be invested and grow to even more tomorrow. This is one of the main reasons I chose a High-Deductible Healthcare Plan (HDHP) with a Health Savings Account (HSA).
However, as a CPA myself, I love tax OPTIMIZATION even more than tax deductions. Therefore, I determined a Roth IRA (and Roth 401(k)) better optimized my total returns due to the unique tax treatment.
Why I chose a Roth
With a Roth IRA/401(k), I do not get a tax deduction on my contributions. However, 100% of my accumulated balance (including all earnings and dividends) will be tax-free after age 59 1/2.
Because I’m still very early in my career and my earnings and tax rate are relatively low, I anticipate having a higher tax rate in retirement (based on projected distributions).
Currently, my effective federal tax rate is ~12%. Based on my time horizon, expected contributions and cumulative returns, my retirement portfolio should compound into $5 million+ (after inflation) over the next 33 years.
With this balance, I could easily withdraw $200,000-$250,000 in today’s dollars without jeopardizing my financial situation. At today’s rates, the effective tax rate on earned income (i.e. Traditional distributions) in retirement would be well above what I would save on taxes today.
Plus, with the massive government spending, expanding deficits coupled with increasingly popular government entitlement programs, I anticipate tax rates to increase substantially over my lifetime.
(Note: This is pure conjecture. Nobody can predict legislative changes in the tax code. However, better safe to expect the worst than sorry I didn’t plan for it!)
However, as my effective tax rate increases beyond ~25% as my earnings progress or as tax laws change, I’ll consider my stance on the Roth versus Traditional IRA.
Perhaps, I’ll implement a strategy that includes both as a hedge on changes in tax brackets or tax rates!
My Roth IRA holdings
In my primary Roth IRA, I hold a variety of growth-oriented individual stocks ranging from Salesforce.com (CRM) to Amazon (AMZN) and Alibaba (BABA).
For diversification, I also own several dividend-paying staples such as UnitedHealthcare (UNH), Bristol-Myers Squibb (BMY), and Schlumberger (SLB).
However, given my risk tolerance and time horizon, I primarily focus on mid to large-cap growth companies in my individual stock portfolio. This focus on growth has allowed me to outperform the S&P 500 by 5%-10% since I began tracking my individual stock performance.
Diversifying with index funds
While I love individual stocks, I understand my picks aren’t infallible. Therefore, I’ve chosen index funds for ~50% of my retirement portfolio.
I have a rollover Roth and Traditional IRA from my previous employer’s 401(k) plan. While I could own individual stocks in these portfolios as well, I’ve chosen to diversify with index funds.
In my rollover IRAs, I own an S&P 500 fund and the First Trust NASDAQ 100 Technology Index fund (QTEC). As you would expect, this fund tracks the 100 largest companies in the NASDAQ.
As shown below, QTEC has performed exceptionally well over the last decade.
I plan to keep QTEC as a staple in my portfolio for the next few decades.
I’m a firm believer that large, growth-oriented companies will continue shaping our future as they morph into the next blue-chip staples. Therefore, I’m perfectly fine holding a large percentage of my portfolio in these growth-oriented stocks and funds at my age.
My future retirement contribution plans
As I’ve previously mentioned, I should have “front loaded” enough in my retirement savings to begin throttling back on my contributions.
Certainly, I’ll still contribute enough to get any employer matching. Who can pass up free money?
Currently, contributions to my Roth 401(k) represent ~10% of my gross income. At this percentage, I’m able to take advantage of the full match from my employer.
For the next 3-5 years, I plan to continue contributing $6,000 into my primary Roth IRA and picking individual stocks.
Ultimately, this plan brings my total retirement contributions to ~15% of my gross income.
However, in 3-5 years, I should be able to attain well more than my “retirement number” through my 10% contributions and employer match.
This will allow me to dial back my retirement investing in my primary Roth IRA and begin focusing on other investing and savings goals.
I also plan to diversify my individual stock mix within my Roth IRAs.
Currently, my Roth portfolio is heavily invested into technology companies. However, I plan to diversify my Roth IRA by adding financials/financial technology companies. I also want to add more exposure to healthcare, biotech, industrials, and other dividend plays for diversification and income.
Other investing goals
As you can see below, I’ve also worked to save for other investing goals.
Aside from my retirement accounts, my ordinary brokerages account for my next largest balance.
With these accounts, I’ve started planting the seeds for early retirement.
As I’ve finally accumulated ~4.5 months of cash emergency savings in a high-yield savings account (after purchasing an engagement ring and vehicle in early 2019), I plan to invest my monthly excess of ~$1,000-$1,500 in my brokerage account.
Eventually, I’ll be able to pull from this account to enhance or even sustain much of my lifestyle. However, this will probably take ~15-20 years.
My brokerage account holdings
Similar to my Roth IRA, my brokerage account is primarily invested in individual securities.
I own a mixture of growth-oriented companies such as Match Group (MTCH) and Etsy.com (ETSY) as well as dividend-payers such as JPMorgan Chase (JPM) and the first stock I ever purchased – Union Pacific Railroad (UNP).
I also hold an S&P 500 index fund that represents ~25% of my holdings. This allows for diversification. As I see opportunities for outperformance, I tend to cultivate from this position to reinvest elsewhere.
Investing in my Health Savings Account (HSA)
As I’ve previously mentioned, the CPA in me can’t pass up the opportunity for a good tax deduction!
Fortunately, at my age, I’ve managed to stay fairly healthy (knock on wood)! Therefore, I found a High-Deductible Healthcare Plan with a HSA (HDHP+HSA) to fit my needs perfectly.
With a HDHP, my premiums are substantially lower when compared to my old PPO (~40%-50% less per pay check). However, I shoulder the brunt of my medical costs until my deductible is met.
As the name implies, the deductible is substantially higher than the typical $250 or $500 many plans offer. In fact, to be a qualifying plan, the deductible must be at minimum $1,400 for an individual and $2,800 for a family in 2020.
However, the HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,900 for an individual or $13,800 for a family. (Note: This limit doesn’t apply to out-of-network services.)
Ultimately, a HDHP is generally great for those who are generally healthier (on average) or chronically ill (thanks to the out-of-pocket max).
Disclaimer: If you’re interested in learning more about what fits your personal situation, always seek the opinion of a professional financial advisor.
My healthcare journey to finding the HDHP+HSA
During my first year of employment, I signed up for a normal PPO with a fairly low deductible. While the premiums were about 2x of my current plan, the deductible was substantially lower.
From what I recall, the coinsurance ~20% and deductible was ~$500. However, my premiums were ~$50 per paycheck!
I was spending $1,200 annually and NEVER went to the doctor. Not even once during my entire first year of work.
Fortunately, I’ve always been fairly healthy. I exercise daily, eat well, and monitor my health fairly regularly. My main issues have generally always stemmed from allergies.
Even throughout my entire 5 years in college, I only went to the health clinic twice. Both instances were just for an allergy infection. Therefore, my health insurance company has profited greatly from my policy!
However, during my first year of work on my own dime, I hadn’t yet accumulated enough cash to “self-insure” the higher deductible.
If by some unfortunate event I were to reach my out-of-pocket max, I would have really been in a bind. Even eating the full cost of a routine doctor’s visit would have been financially painful right out of college.
For this reason, I passed on the HDHP+HSA my first year of work.
However, after my first year of working in public accounting, I managed to save a little nest egg. While reaching the out-of-pocket max would have been concerning, I could self-insure with my savings.
Therefore, I decided to elect the HDHP during 2018 open enrollment.
To offset the potential for higher medical expenses, I began putting away ~$2,000 to the maximum annually in my HSA.
I’ve found the HSA to be a wonderful tool!
The HSA is tax-advantaged in 3 ways:
1. Contributions are tax-deductible
Just like a Traditional 401(k) or Traditional IRA, contributions can be deducted to arrive at your adjusted gross income. With each dollar contributed to a HSA, you save your effective tax rate.
For instance, my effective tax rate is ~12%. If I contribute $2,000, I pay the government ~$250 LESS in taxes. Effectively, they’ve subsidized my investing!
2. Invested contributions are tax-deferred
Just like your Traditional IRA, your investment gains are shielded from taxes as long as they remain in the account.
This allows the dividends to be reinvested and capital gains to compound without the government taking their pound of flesh.
3. Distributions are TAX FREE when used for qualified medical expenses
That’s right! TAX FREE!
When you inevitably have medical bills ranging from acupuncture to x-rays, you can tap your investment gains in your HSA to pay for these costs. You won’t be taxed on any distributions used to pay for a wide array of qualified expenses that includes both doctor’s visits and medications.
However, if you do tap your HSA for non-qualified expenses, you’ll be taxed and penalized 20%.
My HSA plans
As I’ve managed to accumulate a greater cash cushion, I’ve invested 100% of my ~$7,300 HSA in index funds.
Because I plan to pay for medical expenses out of cash reserves, I treat my HSA as another retirement vehicle.
I KNOW I will inevitably have medical expenses as I age.
Plus, HSAs have a cool feature where you can reimburse yourself in the future for past bills. Therefore, I can simply save the receipt for the qualified expenses and delay reimbursing myself for years (or decades). This allows the money to stay invested compound.
Eventually, I can reimburse all of my past expenses at my leisure or when the money is better suited elsewhere. I’ll then be able to withdraw funds from my HSA tax AND penalty-free.
However, even if I don’t use 100% of my HSA, IRS regulations permit penalty-free withdrawals after age 65. Even though the gains will be taxed similarly to Traditional IRAs/401(k)s, unused HSA funds can act as another retirement vehicle.
My HSA portfolio
As I’ve previously mentioned, I have 95% of my HSA invested.
Just like my rollover Roth IRAs and 401(k), I elected to diversify with index funds. While I could buy individual stocks, index funds provided the best way to immediately diversify a relatively small sum of money.
As you would expect, I have a growth-oriented bent. Just like my rollover IRAs, I chose to invest 95% of my 2 HSAs in the NASDAQ -100 index fund (QTEC).
The other 5% of my HSA balance is kept in cash. While the cash balance isn’t needed for medical expenses, I like having some cash on the sidelines for market dips.
While I invest virtually all of my HSA balance, I have plenty of other sources I would prefer to tap in the event of medical expenses. For instance, I have enough cash reserves to cover my annual out-of-pocket max. Plus, my monthly margin of $1,000-$1,500 will allow me to cash flow most doctors visits and routine issues. Further, I have savings in brokerage accounts I can tap if needed.
These factors (coupled with my health history) mean I can be relatively more aggressive in my HSA portfolio allocation.
However, for most people, keeping a minimum cash balance to cover the annual deductible would be wise. If you’re particularly conservative, you can hold the annual out-of-pocket max in cash. Perhaps, you could invest any excess in less volatile funds (i.e. dividend-oriented funds, government bonds, etc). While you probably won’t earn 8%+, you may sleep better at night knowing your HSA won’t fluctuate with the stock market.
Getting a jumpstart on college
Earlier this year, I made the decision to preemptively save for future college expenses.
Currently, I don’t have any real plans to go back to college and obtain any more degrees. I’ve tossed around the idea of law school or getting pursuing a MBA. However, the reality is I probably won’t invest in more education for myself.
Instead, one of my primary goals is to be in a financial position to support my future children’s college endeavors.
With the escalating cost of college tuition, books, room and board, many Americans have turned to student loans to finance their higher education.
After all, few families can cash flow $25,000 annually in college expenses (which is the average cost of a 4-year, public institution). Instead, like the other 45 million Americans, they turn to students loans to fund their education in hopes of achieving a higher salary.
Unfortunately, student loans have been one of the greatest financial stressors of my generation.
Fortunately, through scholarships, savings, and aid from my parents, I was able to graduate from a relatively inexpensive in-state, public university with a Master’s in Accountancy.
My hope is that my future children can graduate debt-free and realize their full potential!
What’s so great about 529 Plans?
529 Plans are great accounts for educational savings!
These accounts are tax-advantaged similarly to Roth IRAs when the distributions are used for qualified education expenses. While you won’t receive a tax deduction on contributions, the account grows tax-deferred.
This means you won’t pay taxes on the dividends and capital gains. Ultimately, your account will compound without the 15% long-term capital gains tax (for most filers) on dividends and capital gains impeding your returns.
If the distributions are used for qualified educational expenses which includes everything from tuition, room and board, and other supplies such as books, you’ll pay NO TAX at all.
However, if the account is tapped for non-qualified distributions, then the gains are both taxed and penalized 10%.
Even if I over-save for college, I’ll likely be able to withdraw a substantial portion of the account penalty-free. This is because 529 Plan rules allow the amount of scholarships awarded to be withdrawn without the 10% penalty.
Let’s say I’ve managed to save $200,000 in my child’s plan to cover the full cost of attendance. If he or she receives a full ride scholarship (worth $200,000), I could withdraw ALL of the account and simply pay taxes on the gains.
Essentially, the account would work similarly to a Traditional IRA in this situation.
Alternatively, I could transfer the account to another child, pay for qualified education expenses, and avoid taxes altogether.
The tax benefits and flexibility offered by 529 Plans makes saving for college easy.
Opening a 529 Plan
529 Plans are educational savings accounts sponsored by each individual state.
Deciding which plan to open can be tricky. However, no matter which state you reside or where your child wants to attend school, you can open a plan with the state that looks best to you.
529 Plan contributions on not tax-deductible on your federal taxes, but many states allow for contributions to be a tax deduction on state income taxes.
Therefore, if you are in one of the states that assesses an income tax, it may be best to consider your own state’s options first.
Since 529 Plans can be transferred among family members without penalty (but beware of gift tax implications for transfers over $15,000 in 2020), I opted to open a 529 Plan in my name through Fidelity.
Choosing a 529 Plan
Ultimately, I chose the UNIQUE College Investing Plan sponsored by the state of New Hampshire.
This plan administered by Fidelity offered attractive investment options and was open to both residents and non-residents of New Hampshire.
Each month, I invest ~$70 towards my future children’s eventual education in what amounts to a Total Stock Index Fund.
Investing a relatively small amount today allows me to put away substantially less over time. Eventually, the portfolio will grow large enough to cover the full cost of college expenses as the market does the heavy lifting. Plus, my investment in the stock market should substantially outpace college inflation over the long-term.
While $840 certainly won’t grow large enough to cover $100,000+ in college expenses (especially considering college inflation), it’s a good start.
I’m still very early in the savings process (as I don’t yet have any children). However, I’ve still managed to accumulate just over $1,400 in 2019.
When children do come into the picture, I’ll substantially increase my contributions.
My future goals
Achieving a $100,000 investment portfolio is just the first milestone in what I hope to accomplish in my financial life.
While retirement savings have clearly been top of the priority list, I’m beginning to shift focus to other savings goals.
Since I’m getting married in 2020, I’ve already begun saving money for a home purchase. Since houses in my area are fairly expensive, I’m aiming to save at least $80,000 prior to purchasing. This amount should cover the down payment and/or any upgrades prior to moving in.
Currently, I also have a relatively small auto loan financed at 2.3% interest.
While the finance nerd part of me says to borrow at 2% and invest at 10%, I realize that having debt causes a bit more stress than I anticipated.
After paying off my vehicle in the next 1-1.5 years, I’d like to begin investing in a sinking fund for my next vehicle (in 7-10 years).
Ultimately, I plan to continue both optimizing my portfolio and saving to reach my financial goals of becoming a millionaire in the next 10-15 years!