Freezing February Mailbag

It's the February Mailbag! On this episode of the Motley Fool Answers podcast, with the help of Motley Fool analyst Emily Flippen, hosts Alison Southwick and Robert Brokamp answer your very impressive questions about retiring early, generating income, lifecycle funds, and just what are Bro's credentials anyway?

A full transcript follows the video.

This video was recorded on Feb. 26, 2019.

Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick, and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.

Robert Brokamp: Hello, everybody!

Southwick: It's the February Mailbag episode. Thanks to Motley Fool analyst Emily Flippen, we're going to answer your questions about when to sell stocks, income-producing investments, mutual fund expenses, and more. All that...and more...this never works out. I stumble over that every time! All that and more on this week's episode of Motley Fool Answers.

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Southwick: Fans of the Rule Breaker Investing podcast are going to know our special guest, today, but those of you who only listen to Answers [and you're pretty cool if you do]...

Brokamp: We love you!

Southwick: ... [really the best, because you love us the best], you don't know Emily Flippen. She's an analyst at The Motley Fool, and she's going to help us answer your mailbag questions today. Emily, thank you so much for joining us!

Emily Flippen: I'm so excited to be here!

Southwick: Can you tell us a little bit about how you came to be at The Motley Fool?

Flippen: Sure, it's a long story. Isn't it always? I actually came from an internship. I did an internship in the summer of 2016 on the investing team and I was just hooked, so I'm really happy to be here full time. Those of you who are not listening to the Rule Breaker Investing podcast should get on that.

Brokamp: It is rather good I have to say.

Southwick: Before you came to The Fool -- if I'm remembering this right -- you worked in China? You specialized in China?

Flippen: I like to say I did both those things. I went to school in China. I did my undergrad in China. Then I worked in Connecticut before coming here.

Southwick: Well, we're happy that you are here with us today. Should we get into the questions?

Brokamp: Let's do it!

Southwick: The first one is going to Bro. It comes from Katherine."My husband and I are theoretically ready to retire. We have the savings, but it's mostly all in retirement accounts. Since he's only 57 and can't withdraw from these accounts for two and a half years without penalty, and I'm five years younger than he is, we are looking at a home equity line of credit to pay for our living expenses during the two and a half year gap. At 59 and a half, he would pay back the line of credit with money from his 401(k). Can you suggest resources for finding a good home equity line of credit?" Bro, what do you think?

Brokamp: First of all, Katherine and her husband are technically retiring early, so congratulations on that!

Southwick: Congratulations!

Brokamp: As I often tell people, right before you retire, you should see a qualified fee-only financial planner just to get that second opinion. Make sure you do have enough to retire.

The other thing that's important to know is there are some ways to get money out of retirement accounts before age 59 and a half without paying that penalty. I would look into those first before you do the home equity line of credit.

First of all, probably the one that's most applicable to you is something called "substantially equal periodic payments," otherwise known as 72(t). It's very complicated. Look it up. Basically you commit to taking out a specific amount from your accounts each year for five years, but then you don't have to pay the penalty. So definitely look into that.

The other thing is that in many cases, you can take money out of your 401(k) at age 55, but just from the 401(k) from the job you just retired from. Not a 401(k) from an old job, but from the current one. Check with your plan. You might be able to take the money out at age 55. Then there's one that we often point out, and that is contributions to Roth IRAs can come out tax free and penalty free anytime. I would look into that first before considering any sort of home equity.

If you're going to go that way, just know that nowadays the rate on a home equity line of credit... And that's the way to go, by the way. A home equity loan is just a big lump sum. I would go with the line of credit, which you basically draw on as you need it. The rates are like 5.5 to 7%. I would say that's middle range. It's not low. And because you're not using it to improve your house, the interest is not tax deductible. That's something to keep in mind.

In terms of finding the loan, there are plenty of places that will help you locate the best rate, like Bankrate.com and other websites like that. I would say the most important thing besides the interest rate to pay attention to is the up-front costs. Some home equity loans are basically like getting a mortgage. You have to pay for the appraisal, the credit check, and all that stuff which could add hundreds, if not thousands, of dollars to the cost of the loan.

Some will waive all those, so you want to look for someone who's doing that. You want to look for anyone that's not going to charge you any ongoing fees, and you want to know when the rate adjusts, because most home equity loans have adjustable rates.

And the final thing is if you do this route where you borrow money -- you're borrowing two years' worth of living expenses -- then you get to age 59 and a half and you're going to pay all that out of your 401(k). You're going to withdraw a large amount of your 401(k), and that's probably going to drive you up a tax bracket or two, so be aware of those tax consequences.

Southwick: Let's move on to the next question. This comes from BlueMax.

Brokamp: That's the name. What can I say?

Southwick: "On the Motley Fool Money podcast, someone asked whether they should sell some shares of Amazon.com because it was 20% of their portfolio. My question is instead of selling, why can't I just keep adding to other positions in my portfolio until Amazon is well below 20%? Since we all want to invest The Foolish way -- that is l-o-o-n-g term -- why sell the stock at all?"

Flippen: Well, it's such a good problem to have, and I think if any investor was capable of just adding a ton to all their other positions so that Amazon was suddenly less a percent of their portfolio, of course that's the better option. You always want more money in the market.

But I think the vast majority of investors who find themselves in a position where they look down their portfolio and one stock has appreciated so much that it's a much larger percent than they're comfortable with, they then have to struggle with, "OK, I don't have any extra money I need to put in, so maybe I should sell some of this to further diversify my portfolio."

I think ultimately it's a personal decision. There's definitely added risk when you have one stock that's a large portion of your portfolio, and if you're able to add to all your other positions, of course that's a great idea. Do that. Diversify via adding more money to your portfolio. But if not, there's some value in diversifying and making sure that you haven't added the extra risk of having a lot of your net worth in one or two stocks.

Brokamp: And this doesn't apply to Amazon because it doesn't pay a dividend, but if this were a dividend-paying stock, certainly one other thing to consider would be to not reinvest the dividends. Instead, let them accumulate in cash and then buy other stocks to rebalance your portfolio.

Southwick: The next question comes from Cody. "I took your advice on FI," [financial independence], "and now I am going to RE," [retire early]. "That being said, I'm moving overseas to do it. Southeast Asia has a low cost of living. Some places have great healthcare. The food is amazing and wow, the beaches. I'm just trying to understand tax implications. I will be in my mid-40s and plan to take a bunch of cash and move it into an index fund and other funds."

"For simplicity, let's say I am starting with $1 million in cash. I plan to dollar-cost average the $1 million over a couple of years before I head to my Southeast Asian retreat. I then need $50,000 for my new, comfy lifestyle. Each year when I withdraw the $50,000, will I need to be specific about which shares I sell? If I understand correctly, I will still be paying capital gains tax and possibly federal income tax. Or not, if this falls into the 'foreign earned income exclusion.' My fuzzy math says it does not matter which shares I sell, but there is a tickle in my brain that says I don't know what I am talking about."

Brokamp: Always pay attention to that tickle! That's always my rule of thumb.

Cody, you opened it by saying you took our advice to retire early. I would say we've never really advised that. I wouldn't advise against it. I would just say you definitely want to make sure if you're going to do that step that you have saved up enough to pay for your lifestyle.

And based on the scenario you laid out, you're saying that you have $1 million and you're going to withdraw $50,000. That's a 5% withdrawal rate. That's pretty high. Even the standard denizens of the FIRE community [Financial Independence/Retire Early] use the 4% rule and, as we have discussed and will discuss, again, in a future episode with an expert on this, 4% is actually pretty aggressive for those who are retiring young. I would say if that is really your situation, you might want to wait a little bit and save up some more before you retire early.

Your question was about taxes. The situation is if you are a U.S. citizen, you owe taxes regardless of where you live. You will be paying capital gains taxes [taxes on dividends, taxes on interest]. Unfortunately, you will not be able to take the foreign-earned-income exclusion because that only applies to getting a paycheck overseas. It does not apply to passive income or something you get from your portfolio.

Now when it comes to when you decide which shares to sell, it definitely makes sense to identify them, but for tax purposes. You're saying that you're going to dollar-cost average over two years. Every time you move money in, you're buying at a different cost basis, and if you're reinvesting the dividends, when those reinvest, you'll get a new cost basis.

It definitely makes sense to look at your tax situation every time you want to sell something. Let's say you're in a year where you have high income. Then you want to choose shares that have a higher cost basis to limit your tax liability. If you're in a year where you actually don't have a lot of income and you're in a lower tax bracket, then you might want to bite the tax bullet and buy something with a lower cost basis. You're biting the tax bullet when you're in a lower tax rate.

I should also add this is all about money that's outside of a 401(k) or an IRA. If it's all in a 401(k) or an IRA, it really doesn't matter. Whenever you take the money out, you'll pay the taxes unless it's a Roth.

Flippen: I'll add that depending on where somebody plans to retire, they're likely also going to be paying taxes in that country. America's one of the few countries that double taxes their expats, so it's important to remember that a lot of the cost savings that can be associated with retiring outside the country are counteracted by the relatively higher taxes you'd be paying.

Southwick: The next question comes from Chad. "I've been investing money for the last 12 years for the purpose of a family trip scheduled this summer after our oldest child graduates from high school. My question is when should money be removed from the market? If the best practice is to not invest money needed in the next five years, should I have stopped investing five years ago and kept that money in a low-risk savings account? I kept investing and I'm now ready to sell some stock to finance the trip. Unfortunately, the due date of the down payment last December coincided with the biggest market drop in several years."

Of course it did.

"I have toyed with the idea of pulling the balance out now to keep it safe even though it isn't due until the beginning of April. Right now I'm planning to leave it there until I need to pull it out, but I'm curious as to your thoughts on the timing of the withdrawals."

Oh, man, Chad, I hope you didn't send us this question a really long time ago and we're just now getting to it.

Flippen: Unfortunately, Chad, I think it's a great example of the fact that you are supposed to move your assets from risky assets to less-risky assets as you get closer to the date that you need them so you don't accidentally need a lump sum of money that you have to withdraw when the market is significantly down. And a lot of this for people who retire can be done via a laddering approach.

But when you're saving for something that maybe is more than five years out, I think keeping that in the market until you've reached that three- or five-year mark is probably OK. Once you start reaching that three-year mark, you need to think about how much money you have, how much money you need, and how much can that investment lose over the course of its life while you can still fund what you need to fund. So if you have $3,000 three years before [you need $3,000], put that into maybe a less-risky asset.

It's also important to note that if you invest that money, especially in a taxable account, you're going to be paying taxes on the money that you withdraw, as well. You should be aware of the fact that some of these investing avenues will create less of a tax liability at your time of withdrawal, but generally speaking, The Motley Fool doesn't recommend keeping money in the market that you'll need earlier than three years and maybe up to five years.

Brokamp: I would like to commend Chad, by the way, because he's been saving for 12 years...

Flippen: That's amazing!

Southwick: Yes, I want to hear all about this vacation!

Brokamp: ... for a family vacation, so that's pretty impressive.

Flippen: Most people don't have that discipline.

Brokamp: No. I just looked at the historical odds over different time periods when stocks made money. On a daily basis, stocks make money about 55% of the time. On a day-to-day basis, it's a little better than a coin flip.

Once you move out to one year, it's 75% of the time, so one out of every four years. Once you move to five years it's 85% and 10 years, it's 95%. So whenever I say how much you should have out of the market, I always say three to five years, because for some people, five years makes a lot of sense. For a lot of other people -- especially a lot of Fools -- that's far too conservative and they're very comfortable with even waiting until they need the money a year from now. It doesn't have to be an either-or situation, so you could have some of it in the market and some out.

But the safe thing to do is what Emily said, and that is if you need it in the next few years, keep it in cash.

Southwick: I remember when we were saying for the last many years that we were going to buy a new house. We just need that way for that new house to come along. And if we'd pulled our money out back when we thought we were going to buy a new house, it would have been out of the market for like eight years. So it's tough timing that.

The next one comes from Aaron. "I want to know how my funds have performed taking the fees into account. Can you tell me the best place to look for this? My active fund has produced an 18% annualized return over the past 10 years with a 0.85% expense ratio, while my S&P 500 index fund has produced 14% a year at 0.04%. Am I really paying 20X as much for the active fund? Does the growth of $10,000 graphics on Morningstar account for fees? Thank you for every episode and double thanks for the southern lawyer boys. The obsessively yours."

Brokamp: Do you want to explain the Southern lawyer boys?

Southwick: [In Southern accent] "Oh, I do declare." It's been a while since we've done those episodes.

Brokamp: Judge Bro episodes.

Southwick: Yes, we had a string of episodes where they just went off the rails and I was presenting different court cases.

Brokamp: Showing your talents I think is what you mean to say.

Southwick: My voice talent. One of my lawyers that was presenting the course was the genteel Southern lawyer. Gosh, it's been a while! Things used to get really weird around here.

Brokamp: Yes. Anyway, back to the question. Most of the expenses that come from running a mutual fund are captured in what is known as the expense ratio. You can look that up on any fund that you have. Again, Morningstar and your 401(k) always expresses that. In the vast majority of times, any performance numbers you see incorporate the expense ratio. In other words, it's an after-fee performance number. That is reflected in those numbers as well as those growth of 10,000 graphics you see on Morningstar or anywhere else.

However, there are other costs that are not captured by the expense ratio like loads, for instance, that are up-front commissions. Or any transaction fees. So sometimes if you're on a discount brokerage platform and you want to buy a fund, some of them don't charge transaction fees and some do, so that's not factored in there.

The other cost is the commissions that the fund pays to buy and sell investments. That is not in the expense ratio. The late, great John Bogle calculated that that adds about 0.5% to the costs of funds, on average. But that's not expressed in the expense ratio. You have to dig through their filings to find that, but you can approximate it by the turnover ratio, which is basically how much the fund trades throughout the year.

The average actively managed fund trades at a turnover ratio of 90%, which basically means over the course of the year, about 90% of its holdings have been rearranged. Compare that to the Vanguard 500 with a turnover ratio of 3%. So not only are you paying a lower expense ratio with index funds, you're also paying lower internal costs that you don't see.

That said, he has an actively managed fund that has significantly outperformed the S&P 500. I'd want to know more about that fund to make sure we're doing an apples-to-apples comparison. That's still pretty encouraging, and an 8.85% expense ratio is about average, so it's not outrageous for a good actively managed fund.

Southwick: The next question comes from Brian. "I'm 35 years old and contribute 15% of my income to my 401(k) and they match $0.50 on the dollar up to 6%. I will be a few thousand dollars shy of the $19,000 contribution limit. I also invest in a Roth IRA and I use what I learned from The Fool to invest in single stocks as I find it extremely interesting and fun." Yay! That's why we're here.

Brokamp: That's right!

Southwick: "I have read mixed reviews about using Roth retirement accounts. People say that it depends on what tax bracket you will be in during retirement, but since retirement is not for a while, how would I know this? Since I'm on the younger side, is this OK? Should I max out my employer 401(k) to get the tax benefits or just do a normal IRA so I can invest in the single stocks I want?"

Flippen: I'm sure you all get this question all the time.

Brokamp: We do.

Flippen: I'm a bit of a Roth IRA junkie, so I can't help but answer it.

Brokamp: So many Roth IRA junkies.

Southwick: There are dozens of us!

Flippen: Here's the thing. Here's the thing that drives me insane about other Roth IRA junkies and why I'm the best Roth IRA junkie. See, people don't understand that it doesn't matter what age you are. Mathematically speaking, the only thing that matters in the Roth vs. traditional debate is your tax bracket now vs. the tax bracket that you think you'll be in, in retirement. Nobody knows that. And like what you mentioned, Brian, nobody knows what your tax rate is going to be in retirement.

What we can do is think about two things -- historical tax rates. I think a lot of people are looking at the tax rates, now, and thinking they're historically low, so maybe I should go ahead and bank on those tax savings now, because I can't guarantee that in the future I will have those same tax savings.

But the flip side of that is if you're working, you're probably going to be making more money than you are in retirement. So all else equal, typically you're better off going with a traditional IRA or a traditional savings [it doesn't really matter the venue in which you do it], but traditional savings vs. Roth savings.

Us being human, and us having no clue what the government's going to do in the future, I think it's probably advisable to have a mix of both. Then the conversation comes to your earning potential. Are you at the lower tier of your earning potential, or are you making tons of money and you don't expect to make that money in the future? If you're at the lower tier, it's probably best to do Roth. Higher tier, probably best to do traditional.

It does not matter what your age is. If you are a 22-year-old making $1 million who expects to make nothing at 40 or 50, then you know what? Do traditional! Don't pay taxes on that $1 million.

So, I just wanted to clear that misconception up and say ultimately for making that decision it's probably best to do some type of combination, but it really comes down to what an individual perceives about their current tax situation and their future tax situation.

Brokamp: It's very tough to know what future tax rates will be.

Flippen: Impossible.

Brokamp: Impossible, so getting that tax diversification by maybe going with the traditional 401(k), but then the Roth IRA makes a lot of sense. I think one reason why people will say the Roth is better for young people is that it's implied that younger people aren't in a high tax bracket, but you make the important point that some are. If you're in a high tax bracket, maybe the traditional makes more sense. And as always, there are a couple of other benefits of the Roth IRA. One I already mentioned is that it's easier to get the money before age 59 and a half because you can get the contributions out ta -free and penalty free, and also there are no required minimum distributions at age 70 and a half for a Roth IRA, so you can let that money grow longer.

[...]

Southwick: The next question comes from -- oh! -- another Brian. Here we go. "My wife and I are in our mid-30s and are a few months away from paying off our house. Our next financial goal is to augment our retirement savings with a passive income stream so that we have more options later in life.

"I currently receive roughly $13,000 in dividends annually, so we're off to a good start. Real estate seems to be popular, particularly in the FIRE community, but I'm leaning toward truly passive income; i.e., not becoming a landlord. My thought is a combination of investments in real estate investment trusts [REITs], funds of dividend-paying stocks, and bond funds. Do you have any suggestions to this approach?"

Brokamp: As an income-generating portfolio, I love that combination! That is very similar to The Fool's Total Income service in which I'm a co-advisor, so I like the idea.

Just to make sure we're all on the same page, real estate investment trusts are stocks that invest in properties -- all kinds of properties -- like office buildings, hospitals, malls, storage units. All kinds. And the reason that they produce a good amount of income is they're required to distribute 90% of their net income. That makes them much higher yielding than most other stocks.

For example, right now the S&P 500 is yielding about 1.8%. The Vanguard REIT ETF is yielding about 4.2%. That's good. And over the long term, when you look at their performance, they're very competitive with the S&P 500, but they're not highly correlated to the S&P 500, so it's a good diversifier to your portfolio.

I like the idea of dividend-paying stocks and dividend-paying funds. The one drawback, I would say, is that if you focus just on stocks that pay dividends, you're going to be very focused on certain sectors like financials and you're going to exclude stocks like technology stocks that don't pay dividends. Or even like Berkshire Hathaway, and Amazon, and Google, and all these that are great companies but don't pay dividends. I would never recommend that anyone just invests in dividend-paying stocks. And then bond funds are very conservative, yielding around 3%. That's fine for money you need in the short term. I think as an income-generating strategy that's good.

You did say, though, that in you are in your mid-30s, so I don't know if you're suggesting that you're going to retire soon, but I would not necessarily recommend all of that if you're not going to retire for 30 years. If you're not going to retire for 30 years, I would focus more on growth than income.

Southwick: The next question comes from Twitter from SolelyWhat. "Do ETF prices move based on demand like stocks, or does the movement of the individual stock affect the price of the ETF? I'm growing my position in the Motley Fool 100 ETF and was just wondering what happens to my money once it gets to Motley Fool Asset Management?"

Flippen: That's such a good question, and I think there's a fundamental misconception about how ETFs work in the market. People genuinely do not understand what an exchange-traded fund is. And it's actually a combination of that explanation.

At its base level, it moves based on demand. It moves based on how much people are buying and selling the ETF. That can make a lot of investors very scared, because they're like, "Oh, my gosh, what if it really drastically differs from the underlying assets?"

Well, there's this nice little thing called "net asset value" [NAV]. When you look at an ETF, you'll also see a NAV reported, and you might notice that the stock or the price of the ETF is very similar to the NAV price. It should be almost exactly equal in a liquid market. And that's because people are going to trade based off the net asset value of that ETF.

Essentially [with] ETFs, I guess there is that added risk of demand for it, and maybe in an extremely illiquid, volatile market you might see that NAV and price start to differ. When you're trading in the U.S. with the vast majority of ETFs you'll see that it trades very similarly to its underlying asset, so the return that you're actually getting from the ETF doesn't so much depend on the demand for the ETF. It largely depends on the underlying asset prices which are changing every day.

Southwick: The next question comes from [unclear: 25:02]. "I've been investing for the last three years along with you guys and realize how awesome investing is, albeit scary recently, and wish I had more cash to put into investing."

Aw! Yet again, another letter that's telling us we're doing our job.

"My wife and I are in our early to mid-30s and have the bulk of our wealth tied up in our primary home. If that money were invested in the stock market or real estate, we would have been in a better financial state completely. We got an offer on our house, and I feel it would make more sense for us to rent anyway. The cash we'll have, if invested Foolishly in a variety of Stock Advisor and Rule Breakers stocks, as well as invested in multiple real estate options we're already interested in [producing 13-15% internal rate of return], would be in five to 10 years a game changer for us. Am I crazy?"

Brokamp: I would say no, he is not crazy.

Southwick: Though Emily is surprised by your answer!

Brokamp: We have talked on the show before -- and we will talk again -- on how home ownership is often not everything it's sold to be. If you look just at the historical returns of home prices vs. the stock market, the stock market [returns] 10% a year. Home prices about 1% above inflation when you factor in all the costs [maintenance, insurance, property taxes, and stuff like that]. I would say you're not crazy to think of that if you can free up some cash to invest elsewhere and you're happy renting.

I will say that investing in real estate does have advantages -- leverage, for example -- and you can buy a $500,000 property by putting down $50,000-100,000. And there are other tax benefits of investing in real estate that we're going to talk about in the next episode, and not all of them necessarily apply to just owning your primary home, per se, so I think he's good to differentiate between those two. There's looking at your own home as an investment, which often doesn't pay off vs. being a real estate investor, which can pay off.

I would say if he's happy being a renter, you definitely have to look at comparables like if you're paying $2,500 a month for your mortgage and rent is going to be $5,000 a month. But I think it totally could make sense. I would just make sure that your wife is also on board with this, because, boy...

Flippen: Honey, we're moving!

Brokamp: We're moving and we will no longer own our home. Home ownership is a big source of discussion among married couples.

Southwick: As well it should be!

Brokamp: As well it should be!

Flippen: Can I flip that back on you, Bro? Do you own a home?

Brokamp: I do.

Flippen: See, it's easy for you to take that position. I think you have the same general point, but I'm a renter right now. I've had to move three times in the past year and it is a pain. That being said, I'm a huge budgeter. I have run the numbers on home ownership, at least in this very expensive area, and every time it comes down to how much do you think that house is going to appreciate over the term in which you're living in it?

And for a lot of people -- especially if they haven't rented for a long time -- they forget how nice it is. The mindset of having a home. A place that is your own. So I think it's always important, when you look at finances, to also remember the human side, because there is a very psychological aspect at play when you own a home vs. when you're a permanent renter and you're 50 or 60 years old.

Brokamp: There's no question about one of the big benefits of having your own home is that it is your own home. There's a psychological benefit to it. You can do whatever you want to and you're never going to be forced to move out unless you can't pay your bills. There's no question there's a very big emotional attachment to owning your own home, which for some people is worth the extra money.

Flippen: And it is expensive.

Brokamp: And the hassle, and the taxes, and the insurance. And the repairs.

Southwick: Oh, repairs! The house is sinking in on itself.

Brokamp: Transaction costs.

Flippen: Also easy for me to say as a renter then, right?

Brokamp: Yes.

Southwick: Yeah, yes.

Brokamp: There's pros and cons.

Flippen: There are pros and cons. Always is.

Rick Engdahl: I think there's a business opportunity for someone just to be a per diem landlord that owners of houses can call. Like, "My sink's dripping. Can you come fix it?"

Flippen: I love that idea!

Engdahl: The Super.com.

Southwick: The last question comes from Sarah. Here we go. "I am a young federal employee [23] and I religiously listen to your podcast. Thanks, all."

Wow! I wish I was 23 again and did some things over differently.

Flippen: I don't!

Brokamp: Says the 23-year-old, here.

Southwick: "I'm currently contributing 10% of my salary into a Roth TSP and receive a 5% match from my employer, but your show has me thinking more about the allocation of the fund I'm in. I participate in the L 2050 Lifecycle Fund most aligned with my retirement date. This fund allocates approximately 28% to the I Fund," [which is international stocks], "11% to the G fund," [which is government bonds], "7% to the F Fund," [which is fixed income], "40% to the C fund" [which is the S&P 500], "and 13% to the S Fund," [which is small-caps].

"Because I'm relatively young and have a well-established emergency fund and high job security, I'm thinking that this allocation is too conservative for my preferences. I would be interested in 57% to C, 13% to S, and 30% to I and nothing to G and F. But I noticed that the share price for the L 2050 Fund is $19.34, while the prices for the individual funds are significantly higher than the aggregated Lifecycle Fund, so the Lifecycle Fund has a significant discount per share compared to the funds that make it up.

"I'm wondering why the difference in price exists between the Lifecycle Fund and the individual funds, and with the significant differences in share price, do I lose the value of a more aggressive fund allocation with the reduced purchasing power of my contribution?"

Flippen: I love this question, because we're based near D.C. at the Motley Fool, and I think we all probably know far more about the TSP than any nongovernment worker deserves to know.

Brokamp: That stands for the Thrift Savings Plan, by the way. That's like the 401(k) for federal employees.

Flippen: We have friends and family all working in the federal government [that] probably want that. Again, we personally get a lot. And when you look at the Lifecycle Funds and I'll just talk generally about the TSP right now -- I tend to agree with you. Sarah said she was also young. Sometimes target retirement date funds are just too conservative, and the reason why they're too conservative is because they're aimed for the general populace. It's better to be a little bit more conservative when dealing with the general populace because you don't know the risk tolerances of everybody, so I think it's a great idea when people think, "This is a great fund to be in if I don't want to ever have to think about my funds."

But if you are somebody who is passionate about investing and finance, you probably want that little bit of upside in exchange for a little bit more risk. And so moving in away from the fixed income and the government bonds is probably a good move, especially when you are extremely young.

That being said, it kind of goes back to that ETF question. The share price doesn't matter. The purchasing power of your money is the same. The Lifecycle 2050 Fund consists of the same funds that you'd be buying if you were buying them directly, so your purchasing power [the amount of money you have invested] will change the same whether or not you have invested in the 2050 Fund or the C Fund or the I Fund or the S Fund. As the stock price of the underlying assets move, so will your investment. The only thing you're really doing is moving away from fixed income, which will increase your risk but hopefully increase your return, as well.

Brokamp: I think her suggested allocation is good. It might be a little low on small-caps. She's putting 13% to S and generally I recommend, especially for people who are younger, to be a little more aggressive with that. And again, Sarah, congratulations because first of all you're saving for retirement. You have your emergency fund so you're in solid shape. And I'll just second what Emily said. The share price actually doesn't matter. They come up with the share price for mutual funds [otherwise known as the net asset value] for calculating the value of all the assets in the fund and dividing by the share price.

And for some reason there's this tendency in the mutual fund industry that when a fund comes out to have a NAV of $10. They figure out how many assets they need to put in and how many shares for it to come at $10. That's what we did at The Motley Fool with our mutual funds, and that's what they did with the 2050 Fund when they issued it in 2011. They just came up with accounting gimmicks to make sure it came out at $10 in NAV.

I asked some folks why that was in the mutual fund industry, and no one actually had a good answer other than it seems like the traditional thing to do.

Southwick: The way we've always been doing it.

Brokamp: Right, so I wouldn't focus too much on that.

I do want to add to this, though, because we got another question about the TSP but this one was from JD, who is a listener who's been encouraging his 24-year-old grandson to save for retirement, who is a staff sergeant in the U.S. Air Force and about to be deployed overseas. He's trying to get him to save for retirement because JD wishes someone had done that for him when he was younger. So he got an email from his grandson saying he's putting 5% of his paycheck into the TSP so he can get the government match of 5%, so a saving of 10%. That, by the way, is a great savings rate if you're starting early in your career. And he's decided to split up his funds into 40% C Fund [which is the S&P 500], 40% small-caps, 20% international. I think that's a pretty solid allocation.

So a great job to JD for encouraging his grandson and a good job from his grandson for choosing to take the advice and choosing what seems to be a pretty good allocation. Good luck to him as he's deployed overseas.

Southwick: A ton of A+ students today in the mailbag, huh?

Brokamp: Yes.

Southwick: Really impressive, you guys. Wow! You're putting all of us to shame. Maybe not Emily, but you're putting Bro and me to shame. Shall we move on to some listener feedback?

Brokamp: Let's do it!

Southwick: Blake on Twitter just finished the 2019 Loofie Awards episode, and he has two questions relating to the 50/30/20.

Brokamp: I think it was the 20/30/50.

Southwick: Here we go. Something we just cleared up. "Does the housing section just include rent and mortgage?" And the other question relates to savings. "Does the 20% include 401(k) and IRA savings in addition to money put into savings?"

Brokamp: First of all, the 20/30/50 is a budgeting rule of thumb. 20% for savings, 30% for housing, 50% for everything else. And it's all pre-tax, so it's not after-tax, but the 20% includes anything you're saving for the future, so it's IRAs, 401(k)s, 529 college savings accounts, money you're putting into an emergency fund. And then for the 30% for housing, it's all housing-related costs, so taxes, insurance, utilities, and all that type of stuff.

Southwick: Also on Twitter, Neal and [unclear: 36:26] ... We've got a couple of people who are not a fan of Sean talking about getting married in our wedding episode and particularly talking about his prenup. Neal wanted to know, "I was wondering if Sean wrote his own vows and ended them with, 'Until retirement do us part.' Particularly after his discussion on a prenup, you need to all reboot and have someone on who, with all due respect, has a clue about how to have a potentially successful marriage."

Brokamp: I think he talked about a postnup, as well.

Southwick: So good! That's so good! Chip also emailed us to say he did not love the "marriage as a transaction" portrayal from Sean. I believe on the show Sean did say that this was going to be a controversial take with the prenup.

Brokamp: Sean, first of all, relishes in being somewhat controversial and countercultural, and he met his wife here, at The Motley Fool. I know them both. I'm sure they're very happy and I'm sure they're going to be fine. He has a soft side to him.

Southwick: They say the first time marry for love, and the second... But the idea is that usually when you first get married, you're young and you don't have anything to protect. A prenup is not going to help because you don't have anything. But if I were older and already had kids and had my own wealth, I would absolutely want a prenup if I got married a second time around just to protect my own.

Brokamp: I think I would, too.

Southwick: But we're not getting divorced anytime soon.

Brokamp: No.

Southwick: No. Lock it down. Pick a good egg to marry, everybody!

Brokamp: Oh, my gosh, yes!

Southwick: On a previous episode, we talked about Acorns, and we said if anybody out there has any experience with Acorns, let us know what you think. Wendy responded and let us know that her experience is that it's an easy on-ramp to investing and not at all scary. "I started with an initial investment of $5 and enabled rollovers. That's the spare change part. And I chose how aggressive I wanted my portfolio to be and then I put away my phone. Set it and forget it. Easy." And she did forget all about it.

"Later I took the step of adding monthly automatic transfers of $150 to my Acorn account and I applied a 5X multiplier to my rollovers. It was equally painless and I have never missed the money. In fact, I forgot that I did this and I was completely comfortable month to month. Now my Acorns account is worth just under $3,000. I will sometimes take extra money at the end of the month and invest it as a one-time investment. I recommend Acorns to anyone who wants an easy [way] to begin investing. I like their interface which shows past and present data along with future projections."

She also said that she uses it in tandem with the Empower app. "These are two apps that help me manage my money pretty well." I don't know that one.

Brokamp: I don't know anything.

Southwick: Thank you, Wendy, for sharing that! Sean wants to know [and I don't think this was meant as a challenge, but I still read it as one just because it's funnier that way]. "I was hoping to get some more information about Bro's certificate from K State." I'm sure it was meant as an honest inquiry and not as a challenge. "I remember him talking about it, but I don't remember exactly what he got it in. Something like financial psychology or financial therapy." There you go!

Brokamp: It was financial therapy.

Southwick: And what was the point of financial therapy?

Brokamp: First of all, it recommends that financial decisions are often emotional decisions and sometimes we are making poor decisions, either not delaying gratification or it could be some sort of disordered thinking like being a shopaholic or being a compulsive gambler. Also addressing the issues with couples and making decisions like that. It was very interesting.

And if you're interested in finding a financial therapist in your area, go to the website of the Financial Therapy Association and put in your address. It's a relatively new field [maybe about 10 years old], so not every state and locality has someone in the area, but more and more of them are able to work with people online and long distance.

Southwick: Kim wrote in because she was concerned that I was taking the Theranos situation a little too lightheartedly. Bro is growling. You're in agreement.

Brokamp: No, because she was saying that people were chuckling, and that's usually me doing the chuckling.

Southwick: I just wanted to apologize if I sounded like I was joking too much. If I was laughing, it was laughter incredulity, I believe, that someone would have such little regard for human safety. What Elizabeth Holmes did was absolutely horrible and I hope she does serious time for it. Kim, I apologize if you felt I was being too lighthearted.

We have some postcards, here. Our favorite swimmer, Jim, sent in a card from Singapore. He said he's been living solely in hotels without a fixed income anymore because he saved up enough money, and now he just travels all the time. "It's crazy, but fun. Come join me and do the show remotely." And then he put JK. I'm like, "I don't know. I wouldn't mind going to Singapore to do the show remotely."

Jonathan from Indiana wrote that he spent Christmas on the beach listening to all The Fool podcasts except Answers because he listens to those the minute they are released. There's a card from the Caymans.

And here's one I feel bad about. It got lost in the mail, here at The Fool but it's a Christmas card from the Weaver family!

Brokamp: Oh, my gosh, look at those kids!

Southwick: Isn't that nice? I had said that I love getting Christmas cards from our listeners. This one unfortunately got lost, and I just discovered it.

I also, before we go, need to mention that we have a special guest behind the glass today, and that's Christian. He was able to swing by Motley Fool Studios today, get a tour, and sit in on a taping. Do you want to say hi?

Christian: Thank you for having me!

Brokamp: It's great for you to be here!

Southwick: Yes! We happen to stumble into each other at a local bar, actually, and now he's here, so it's so great to have you!

And the last thing is I want to say Happy Birthday to Motley Fool Money. Yes, it's celebrating its 10th anniversary this week. That's, of course, the podcast that started it all here at The Motley Fool, so if you aren't listening to Motley Fool Money yet, give it a listen, and hooray and congrats, you guys! If it wasn't for Motley Fool Money, we wouldn't be here in Motley Fool Answers.

Brokamp: It's true.

Southwick: That's the show! It's edited flippantly [word play] by Rick Engdahl. For Robert Brokamp and Emily Flippen, thanks again for joining us! This was great having you! Will you come back again?

Flippen: It's always lots of fun! Of course! If you'll have me. You're not scraping the bottom of the barrel.

Southwick: Oh, we'd be glad to have you any day!

Brokamp: Not at all.

Southwick: Any day! So like I was saying, for Robert Brokamp and Emily Flippen, stay Foolish everybody!

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