The Retire Wealthy Report

Why You Should Never Buy a Front-End Loaded Mutual Fund

RetireWealthy — Sun, 21 Jul 2013 19:13:45 +0000

Mutual funds that contain front-end loads are one of the worst investments for individual investors. In a typical front-end load fund, the investor pays a 5.75% commission just for the privilege of buying into the mutual fund. What most people don’t realize, however, is that commission is largely paid to your investment advisor. Mutual fund companies use front-end fees as a sales incentive to get advisors to direct client assets into their funds. In a standard agreement, you as the client would pay 5.75% in a fee and your advisor would get almost 90% of that fee. For example, if you invest $10,000 into a mutual fund, the front-end fee would be $575 (5.75% of $10k) and your investment advisor would be paid $500 (5% of $10k) of that commission for sending your money to that fund.

There is no evidence that front-end load funds perform better than lower fee funds. In fact, logic would tell you that smaller, less successful funds employ front-end loads because they have been unsuccessful attracting assets in other ways, implying their performance could be worse. Additionally, when you see your personalized performance it won’t be based off your $10k investment, it will be based off the amount you invested AFTER paying the sales commission. Performance numbers are always inflated because they don’t account for that fact you started down 5.75% from day 1 due to the front-end load. If you invest the same $10k, your statement will show $9,425 as your cost basis. Meaning, if the value rises to $9,700, your advisor will tell you are up 3%, when in reality, you are still $300 in the whole from the $10k you invested.

If you’ve made the choice to use mutual funds in your investment strategy, make sure your advisor knows that you do not want any front-end load funds. In fact, if your advisor is recommending front-end load funds, I think it’s time to find a new advisor. Many advisors have developed very effective methods to slip a few front-end funds into your account, convincing you of the relative value of said fund. In reality, there is no reason for an advisor to recommend a front-end fund other than wanting to earn the sales commission.

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Retire Before 40?

RetireWealthy — Thu, 28 Mar 2013 15:27:51 +0000

A growing segment of the population is embarking on a plan being called ‘extreme early retirement.’ These individuals are families are looking to ‘retire’ by the time they are 40. Retirement isn’t exactly the right term, because the goal is more about establishing financial security by that age, such that they have the financial freedom to pursue their dreams and passions after 40 instead of being stuck in a 9-5 job.

I’m a big believer that the benefits of saving and investing is allowing money to provide financial freedom and while this type of extreme savings and minimalist living isn’t for everyone, it is an interesting new concept that more and more people are embracing. We can all learn a few things from these ideas.

Click Here to See the Full Article on CNBC.com

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How Much House Can You Afford?

RetireWealthy — Wed, 27 Mar 2013 14:02:15 +0000

As you begin to think about buying a house, it’s critical to determine how much house you can afford. Even with new rules and more stringent lending requirements, banks will often lend you more money to buy a house than you should consider borrowing. My approach to determining how much house you can afford is different and more conservative than many. I believe this approach will serve you well and keep from becoming ‘house poor.’

The idea of being ‘house poor’ means you have as nice a house as you can afford, but because your mortgage payment is so large, you can’t afford to leave your house and do other enjoyable things. Banks and other lenders are not concerned about your disposable income and overall happiness level. They are simply concerned with whether or not you can make your payment. My philosophy is exactly the opposite and asks not how much can I borrow, but how much do I want to borrow? It centers on the idea that low fixed costs and high disposable income reduces stress and allows you enjoy life to a much greater extent.

My general rule of thumb is to keep all fixed costs, including a mortgage, other debt, groceries and basic utilities to no more than 50% of your monthly take-home pay. That’s not 50% of your gross income; it’s half of what you receive in paychecks during the course of the month, after taxes have been withheld, 401-k contributions made, healthcare premiums paid, etc. If you can keep your true fixed costs to under 50% of your income, you should have plenty of money left over in the month to pay a cable bill, cell phone bill, eat out a few times or otherwise enjoy your disposable income however you see fit.

Realistically, this means you should target to keep your mortgage payment (including property taxes and homeowner’s insurance) to around 30% of your monthly take-home pay. This is significantly below what many ‘experts’ will tell you, but remember they are more focused on what is best for them and not what is best for you. For example, if your monthly take-home pay is $4,000, limiting your monthly mortgage payment to $1,200 will keep you from becoming ‘house poor.’ This isn’t a hard and fast rule, if you have no other debt (car payments, credit cards, etc) then you can probably afford a little more. Just remember, more disposable income reduces stress, increases your ability to save or spend on entertainment and overall leads to a happier, healthier life.

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