My Investment Policy Statement

Bogleheads really stresses the importance of an Investment Policy Statement. They were one of my greatest resources as I slowly began to understand investing.

I’ve talked a lot about a savings snowball in the past. Having a plan for all money that comes in is incredibly important. I hate seeing questions like “How should I invest $10k?” across the various financial forums where I lurk. You should have an asset allocation plan that you apply to all money coming in.

My IPS is somewhat wordy, so you’re in for a bit of a long read. I definitely made some edits while writing this out for you guys where I found some strange things, e.g. thinking I need $2 million to retire! Enjoy!

1.0 Long-term goals

Retire at age 50 with:

  1. Enough in investments sufficient to cover estimated living expenses without a mortgage at a 3% withdrawal rate. Current estimation: $1 million
  2. A house paid off
  3. A working car that is at most 10 years old

Notice that there are no mentions of kids or marriage in my long-term goals. I don’t know if I want to ever have kids, but I think that I am saving more than aggressively enough now that having kids wouldn’t throw too much of a dent in my plans.

How am I going to get there?

  1. I need to contribute to tax-advantaged accounts.
  2. I need to continually save for the next car. Estimated cost: $30,000 every 10 years (e.g. in 2020, 2030, 2040, etc.)*
  3. I need to save at least $100,000 for a down payment on a house and then make payments on it using funds not earmarked for investments.

*I’m a bit fuzzy on this one. I’m not planning on setting aside money for a “next car” until the mortgage is paid off. But the idea here is to only buy a car with cash.

The priorities each year are:

  1. Max out the 401(k).
  2. Max out the Roth IRA.
  3. Make extra payments on the mortgage until it is paid off.
  4. Save for the next car.*
  5. Invest in taxable accounts.*

*4 and 5 are a bit fuzzy of priorities for now since I don’t foresee paying off the mortgage until mid-to-late 2016 at the very earliest.

2.0 Investments

2.1 Contributions

2.1.1 401(k)

  • Employer match is X%
  • Maxing out my traditional 401(k)
    • [2012] with $17,000 takes Y% (rounded up the decimals)
    • [2013] with $17,500 takes Y+1% (rounded up the decimals)
    • Why traditional? Am I really going to be in the 28% marginal tax bracket when I’m retired? I sure doubt it.

Note: X+Y+1% is < 20%.

2.1.2 Roth IRA

After maxing out the 401(k), the next goal is to max out the Roth IRA. As of October 29th, 2012, I have yet to contribute any money for my 2012 Roth IRA, so I will max out both the 2012 and 2013 Roth IRAs in 2013 using the backdoor. This means:

  • All money not allocated to the 401(k) will be sent to my taxable money market account at Vanguard until there is $5,000 to cover the 2012 Roth IRA contribution.
    • I will then take that money once it fully posts, contribute it to the Traditional IRA and once that posts, transfer the money to the Roth IRA account’s money market account.
    • The next $5,500 of money not allocated to the 401(k) will also go to the taxable money market account at Vanguard until there is the full $5,500 to cover the 2013 Roth IRA contribution. Repeat the same from the 2012 Roth IRA conversion.

For 2014:

  • All money not allocated to the 401(k) will be sent to my taxable money market account at Vanguard until there is $5,500 (assumed) to cover the 2014 Roth IRA contribution.
  • I will then take that money once it fully posts, contribute it to the Traditional IRA and once that posts, transfer the money to the Roth IRA account’s money market account.

How will this likely happen?

  • In 2013, the January RSU vest should cover most of the $10,500, if not all. Any further amount will come from my paycheck savings.
  • In 2014, my paycheck savings will cover this until I reach $5,500. That will likely take all of January’s and February’s, plus part of March’s.

Money going to the Roth IRA will reduce the mortgage pre-payments slightly, but I think that is worth it for the tax-free growth forever.

2.1.3 Taxable Investments

Until the mortgage is paid off, I will not make any further contributions to my taxable investments. In 2012, I bought shares of Vanguard Total International Stock Index Fund Admiral Shares and I will let that continue to gain/lose money for now.

2.2 Asset Allocation

The percentage of the investments in stocks is 100 minus (at the time of re-balancing):

  • My age (currently 24)
  • The multiples of $100,000 in investment assets that I have (currently 0)

I want the US stocks to replicate the entire US stock market. I will use an S&P 500 Index fund combined with an Extended Market Index fund to accomplish this, but I will only attempt to re-balance between the S&P 500 index fund and the Extended Market Index fund when I contribute to my Roth IRA early in the year.

I don’t want to stake everything on the US stock market. Market weighting sounds good, so my ideal split would be 50/50 on US/International Stocks.

Target asset allocation as of my birthday in 2012:

  • 76% Stocks
    • 50% US Stocks (38% overall)
    • 50% International Stocks (38% overall)
  • 24% Fixed Income

2.3 Index Fund Choices

To keep costs low, all of my investments will be done using Vanguard index funds:

International stocks

  • Vanguard Total International Stock Index Fund (VGTSX Investor Shares or VTIAX Admiral Shares)

Fixed income

  • Vanguard Retirement Savings Trust
  • Vanguard Total Bond Market Index Fund (VBMFX for Investor Shares) – if 401(k) does not contain the stable value fund anymore or need to place bonds in an IRA as well

US stocks

  • Split 80/20 into 40% S&P 500 and 10% Extended Market (30% / 8%)
  • Vanguard 500 Index Fund (VFINX) – 401(k)
  • Vanguard Extended Market Index Fund (VEXMX) – Roth IRA

I am using index funds over ETFs because:

  1. Once I have $10,000 in the fund, I will get the Admiral shares expense ratio, which is the same as the ETF expense ratio. That has already happened in taxable and will happen in January (hopefully) in my Roth IRA. By using a small number of funds overall, this is pretty easy.
  2. ETFs need to be traded during the business day. That was a huge pain since I couldn’t do it at night – only in the morning.
  3. You can only buy whole shares of ETFs, but you buy dollar amounts of index funds.
  4. You can make automatic trades with index funds.
  5. I am already well past the minimums for investing in the index funds at Vanguard.

2.4 Asset Location

I am investing in my 401(k), my Roth IRA, and in a taxable investment account at Vanguard.

Taxable

Since the most common good option in 401(k) plans seems to be an S&P 500 Index fund, I’m going to make the primary fund in my taxable account my international allocation. I will let it re-invest dividends to keep things simple.

Roth IRA

I keep two funds in my Roth IRA: the Extended Market Index to complement the S&P 500 Index shares in my 401(k) and the International index. Stocks should stay in here forever, with a preference to having fixed income assets in a Traditional/Rollover IRA or 401(k).

401(k)

My employer matches into shares of my company’s stock, which I count as a large US stock in my asset allocation calculations.

The good funds in my 401(k) plan are:

  1. Vanguard Retirement Savings Trust – fixed income
  2. Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) – fixed income
  3. Vanguard 500 Index Fund Investor Shares (VFINX) – large domestic stocks
  4. Vanguard Total International Stock Index Investor Shares (VGTSX) – international stocks

The implementation of my asset allocation calls for shares of #1, #3, and #4. #2 didn’t do a very good job of weathering the storm in 2008/2009, so I prefer to avoid it if possible. Having access to 3 of the 4 funds that my asset allocation calls for in my 401(k) makes rebalancing nice since it has no minimum dollar amount in each of the funds (unlike my Roth IRA) and no tax consequences (unlike my taxable account).

I occasionally exchange shares of my company’s stock into the S&P 500 index fund during a trading window. I should come up with a reason/timeframe to do this.

Other

I have some old, tax-deferred certificates that are all locked away for many years. I’m just letting them renew into a similar term. I include them in my fixed income allocation calculations.

2.5 Re-balancing strategy

I only re-balance with new funds. I had a tendency to fidget with my investments, e.g. between index funds and ETFs or between different funds (stable value vs. Total Bond Market Index), which I need to be especially careful with going forward as my portfolio size grows at an incredible pace.

I will re-evaluate the current asset allocation each month just before my 401(k) contribution posts and update it if necessary. This will only be necessary (most likely) if one if the following happened:

  1. I made a large contribution in another account (Roth IRA or taxable) earlier in the month.
  2. I moved to or from a regular contribution in my taxable account.
  3. Stock dividends posted.
  4. The market shifted significantly.

3.0 Property

3.1 Condo

In 2012, I bought a 2 bedroom condo valued at approximately $358,000 with at least a 20% down payment. I had a 6 month emergency fund at the time.

The monthly costs including mortgage payment (principal & interest), property taxes, and HOA dues add up to about $100 less per month than my monthly costs for renting would have been had I signed a new lease.

3.1.1 Mortgage Payoff

I plan to pay off the mortgage before the rate resets in 5 years (June 2017). I have a 5/1 ARM at 3%. Regular payments are $1,205 per month, which are autodrafted from my checking account on the 1st of each month.

To pay off my $286,000 mortgage, my average pre-payment over the course of the 5 year period needs to be $3,933.06 per month.

  • There are 5 payments in 2012 (August, September, October, November, and December), which means that I would need to make 5 x $3,933.06 = $19,665.30 in pre-payments.
  • There are 12 payments in 2013, 2014, 2015, and 2016, which means that I would need to make 12 x $3,933.06 = $47,196.72 in pre-payments.
  • There are 7 payments in 2017, which means that I would need to make 7 x $3,933.06 = $27,531.37 in pre-payments.

End of year balances on this schedule:

  • 2012: $263,769.89
  • 2013: $209,271.51
  • 2014: $153,115.52
  • 2015: $95,251.49
  • 2016: $35,627.47

And then the mortgage will be paid off in 2017!

As of October 29th, 2012, I am forecasting to have an end-of-year balance of about $258,000 on the mortgage, which is about one month’s required pre-payment ahead of schedule, so I am on pace to pay it off within 4 years, 11 months.

My stretch goal for 2013 is to get the balance under $200,000, which would be about $10,000 ahead of schedule.

The real goal is to pay off the mortgage by the end of 2016. When the mortgage balance reaches $20,000, I would strongly consider taking $20,000 of my emergency fund and paying it off, leaving $5,000 of my emergency fund behind and replenishing it slowly with monthly paycheck savings and the savings from RSU vests.

3.2 House

I will plan on selling the condo to raise more of a down payment for the house. I have zero interest in becoming a landlord. This means that the entire value of my condo, less closing costs (~10%), when I do choose to sell it will be available as a down payment on a house. I will probably also save up some cash so that I don’t have to rely on selling the condo first.

4.0 Car

I will budget to hold a car for 10 years and buy new cars at $30,000. This will be saved over the course of the previous 10 years, once the mortgage is paid off.

*This entire (car) section is a bit fuzzy as of now.

5.0 Short-term goals

For each year starting with 2010, I describe:

  • Ballpark net worth estimates
  • 401(k) contribution amounts
  • Large purchase amounts (e.g. car)
  • Roth IRA contribution amounts
  • Cash savings amounts
  • Mortgage balance goals (on the five-year pay-off plan and new, stretch goals)

6.0 Changes to the IPS

In order to make any changes to this IPS, I must journal them and reflect for two full months before updating this document.*

*This is probably the most important statement in this entire document.

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  1. #1 by Luis on November 12, 2012 - 6:03 am

    I see only goof stuff here, even the fuzzy stuff makes sense as that will come into play after a snowball is initiated. Good work!

    • #2 by Leigh on November 12, 2012 - 10:43 am

      Thanks!

  2. #3 by NoTrustFund on November 12, 2012 - 8:26 am

    Thanks so much for posting all this detail. I read Boggleheads awhile ago but clearly I need to reread it as we do not have an IPS.

    Your IPS looks great. I especially like the details on the car replacement/ savings. We talk about this but having it all in writing would provide so much motivation.

    For what it’s worth, having kids has changed everything for us- from what kind of house we bought to the kinds of cars we buy. Not to mention daycare costs and college savings. You are doing so well at 24 I have no doubt you would adapt to having a family extremely well.

    • #4 by Leigh on November 12, 2012 - 10:46 am

      Having it in writing would be especially important with two people! I really do think that the mortgage payoff plan needs to be wrapped into the investment strategy, even though I don’t think a home is an investment.

      I don’t doubt that having kids has changed everything!

  3. #5 by SP on November 12, 2012 - 8:47 am

    I really like this. Investing doesn’t interest me too much, so I did some cursory reading and picked a strategy and don’t think much about it. But this would be a great document to have, especially to help my husband and I ensure we are on the same page.

    One of the reasons I save more than I ‘have to’ right now is because we may have kids (and relatively soon!), and it isn’t that hard. I find it crazy that the standard advice is to save 8-15% and call it good. But i guess that is more acheivable and the math might work out for a higher retirement age.

    Also, regarding the car. It seems like you could easily save for a car within a year, so I wouldn’t worry about it much. We paid cash for our car, and the cash we are saving this year is possibly for a car for T and/or a longish vacation (depends on his final job offers).

    • #6 by Leigh on November 12, 2012 - 10:50 am

      I’m with you – I couldn’t imagine saving only 8-15%. I just can’t spend that much of my income! You’re right in that I could probably cash flow a car purchase quite easily once the mortgage is paid off (then I would have $3,000/month on today’s salary to save), which is why I’m not that worried about replacing my car or paying for a wedding.

      I think that my IPS is more involved than what Bogleheads suggests since it covers most financial things, but that’s not necessarily a bad thing. Everyone should have one of these, especially couples where one person knows more about the finances than the other person!

  4. #7 by nicoleandmaggie on November 12, 2012 - 11:50 am

    If I were to suddenly get 1 million dollars, my IPS wouldn’t handle that– my priorities would change. I think that may be the same for people who have much lower incomes with lower amounts of money. 10K is a lot when you only make 30K, for example,and it can go far beyond a person’s budget.

    Though I think I’m also guilty of not being sure what to do with unexpected cash infusions. I change my mind from time to time. And interest rates change. And plans about future work change.

    Sadly my laptop with my list like this fried, and the one file I didn’t have saved elsewhere was the list. I’ll have to come up with it again after we max out DH’s IRA. :)

    • #8 by Almington on November 12, 2012 - 2:44 pm

      I doubt that many people would have a plan in place to handle the sudden influx of many times their annual income. Where you suddenly get 10%, 25%, or 35% of you annual income is where something like this is MOST valuable, so that you put that money toward your most important goals and accelerate those timetables and not just seem to have the money leek out on less important things.

      • #9 by Leigh on November 12, 2012 - 7:19 pm

        Accelerating those timetables is pretty awesome :) You’re right – having a plan in place is super important. Otherwise, people would just spend the influx on random things. I’ve seen people just spend the extra student loan disbursements that they got and didn’t actually need and then needed to pay them back later.

    • #10 by Leigh on November 12, 2012 - 7:18 pm

      That’s a good point. My regular, expected income is high enough that there isn’t much I can’t buy with it, so I just save the unexpected cash infusions. I change my mind from time to time too. Plans change.

      Suddenly acquiring one million dollars would probably change things somewhat, but I think I would still have paying off the mortgage a priority and I wouldn’t quite know what I should do with the money after that.

  5. #11 by SWR on November 12, 2012 - 12:40 pm

    I would have guessed that you were several years older than you are.

    This is really well done. One thing that I had never thought of was to consider continually saving for a car- but it’s a very smart idea. When we’re on a more sound financial footing, I would like to save for our next vehicle right after purchasing our current one. Theoretically that’s when we would be spending the least on repairs and maintenance and could put a set amount most quickly.

    • #12 by Leigh on November 12, 2012 - 7:23 pm

      Funnily enough, in person, people assume I’m far younger :)

      My mom taught me that if you have to take out a car loan, you should pay yourself the amount that was your car payment once the loan is paid off and put it into a savings account. I did that at first, but then I decided that my car should last until the mortgage is paid off and the money is better off reducing mortgage interest (3%) than earning savings account interest (< 1%).

      I spend so little on maintenance and repairs (under $45 in the two years I've had my car), so it'd probably be pretty easy to set aside money during the early years of owning it, at least comparatively.

  6. #13 by Emily @ evolvingPF on November 12, 2012 - 1:08 pm

    I haven’t heard of this kind of statement so I will read about it over on the Boglehead forums. Thanks for sharing yours and it makes a lot of sense to me.

    • #14 by Leigh on November 12, 2012 - 7:25 pm

      Good luck! Bogleheads was incredibly helpful to me while I was starting to figure things out.

  7. #15 by cashrebel on November 12, 2012 - 6:41 pm

    I really enjoy your details and reasoning behind your investment strategies. I’ve got a question pertaining to Admiral Vanguard shares because I’m pretty new to this. Let’s say I’ve got $11,000 in VFINX. Can I transition this to the Admiral equivalent (VFIAX I think) without incurring taxes? This is a topic the books I’ve read so far haven’t broached.

    • #16 by Leigh on November 12, 2012 - 7:30 pm

      I think that Vanguard automatically “switches” you from Investor shares to Admiral shares if you stay over $10,000 for a certain period of time? I’m not sure. I would try contacting Vanguard directly. Once you log in, click on “CONTACT US” on the top right, then “By secure e-mail” and send them a message. It says they answer within two business days. Or you can call them. I just prefer emails :)

      Let me know what you find out!

      • #17 by cashrebel on November 14, 2012 - 8:18 pm

        So I asked Vanguard about my admiral shares question. Theysais that they automatically convert shares over $10,000 on a quarterly basis, or you can request it sooner. I sent them an email and they responded within a day, gotta love that customer service!

        • #18 by Leigh on November 14, 2012 - 10:40 pm

          Awesome!!! Points for customer service and points for automatically converting shares to the cheaper share class :D

  8. #19 by Janine on November 12, 2012 - 10:40 pm

    Wow, this is amazing! So detailed I absolutely love it!

    • #20 by Leigh on November 13, 2012 - 9:32 pm

      Thanks Janine!

  9. #21 by StackingCash on November 13, 2012 - 12:34 am

    One aspect that you might add in is the inflation aspect in regards to car prices. Being 40, I’ve noticed inflation more so than ever in regards to car prices. However, the trade in value of your old car can be worthwhile if you have one that holds some value like a Honda. The life expectancy of a car can go on for a long time as I’ve seen cars as older than me still on the road :) Even though I’ve spent quite a bit of money on my 2001 Acura to maintain it, it is still going strong after 117k miles. I feel it will last another 10 years and 100k miles. Too bad I would like something new…

    • #22 by Leigh on November 13, 2012 - 9:36 pm

      I have no idea how good of a trade-in value my car will have, but considering how few miles I put on it, I have a feeling it could last for many years. 117k miles in 11 years is a good amount of driving and I can’t believe the car is still doing great! I definitely have a policy of not giving up on something that isn’t broken, so hopefully I’ll be able to keep investing money month-after-month instead of buying a new car :) Something new is definitely shiny though I’d rather satisfy that with technology than a car…

  10. #23 by Harry Campbell (@PFPro1) on November 13, 2012 - 10:17 pm

    Wow this is a very thorough IPS. I actually didn’t know that Bogleheads are high on this. I guess I kind of have a lot of this stuff in my head but I should stop being lazy and just write it all down like you did :)

    • #24 by Leigh on November 14, 2012 - 8:04 am

      Yes, yes, you should, Harry!

  11. #25 by RMS on November 14, 2012 - 7:06 am

    Does your work offer 401(k) Roth? We have that but I haven’t converted. Just curious whether you would jump on that option if you had that at work.

    • #26 by Leigh on November 14, 2012 - 8:06 am

      It does offer one and I put some money into it in 2011. For now, I don’t expect to be in the 28% tax bracket in retirement, so I’d rather save on the taxes now by putting my contributions into the Traditional 401(k). So long as I’m still working, I’ll probably keep putting money into the Traditional 401(k) since I can always convert parts of it to Roth in a low-income year later.

      • #27 by RMS on November 15, 2012 - 12:07 pm

        That’s true about the tax bracket in the future, especially if you are retiring early. I would hope to do the same by 45-50, unless I end up changing my mind and raising a child (or two!). The only benefit I see Roth 401k is that you can put a bit more, since it is $17k after tax vs. pre-tax. I already have Roth IRA and traditional 401k, so just looking at other options…

    • #28 by Harry Campbell (@PFPro1) on November 14, 2012 - 11:44 pm

      I think Roth 401k’s are usually a pretty bad idea. They take the flexibility of a Roth away but give nothing in return. I’d just go for a regular Roth IRA with a company like Vanguard or someone like that. I have an article on my site about why roth 401k’s suck!

  12. #29 by TimelessFinance on November 16, 2012 - 12:38 am

    My policy:

    Get rich or die trying.

    • #30 by Leigh on December 13, 2012 - 12:59 am

      Sounds like a pretty sound policy!

  13. #31 by TJ (@SoCalTJ) on November 27, 2012 - 4:46 pm

    What kind of cars do you drive with that estimated saving cost? :)

    • #32 by Leigh on November 28, 2012 - 9:58 am

      Hah, I’m not sure. My current car cost about $20k new, so I’m not really sure what I would buy for $30k, but I figured it was better to estimate high? I’m not saving for a car now anyways, so it’s irrelevant.

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