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Investing: Two Truths and a Lie

Truth vs Lie

I can hear it now.

Why does Mark have a section on investing? Doesn’t he know that nonprofit workers live on a bare-bones salary in order to serve the needs of others? We don’t have the funds for investing. In fact, only wealthy, self-centered people invest, and that doesn’t describe us at all!

Two Truths and a Lie

There is an interesting icebreaker that is used in a lot of youth groups and other groups too. Here’s a quick explanation from As A Youth Pastor:

Two truths and a lie is a simple, yet engaging group icebreaker…. Instruct everyone to write down two truthful statements about themselves and one lie…. Starting with whomever you decide have them read off the three statements about themselves…. Once they have read the statements then have the group vote on which statement they believe is a lie.

Now, I don’t know your personal situation, but I’m going to take a guess at it. Here are two truths and a lie that are probably accurate for you:

  1. You are an investor in stocks and bonds
  2. You really should be putting more into your IRA
  3. You need to invest more than most Americans

Can you spot the lie?

1. You are an investor in stocks and bonds

This is probably true whether you know it or not. Do the terms “Roth,” “403b” or “IRA,” sound familiar to you? Then the answer is probably a Truth!

Some nonprofit workers are surprised to find out that they are already investing. In their haste to move to Viktorialand, they quickly signed documents containing words and numbers in seemingly random combinations. Their signature might have been on papers displaying things like 403b, HSA, Roth, 529, Traditional or words like pre-tax, post-tax and qualified. From past employment or experiences, some of these people may also have seen words like IRA, 401k or other such seemingly unimportant hieroglyphics.

If you recognize all of those terms, good for you. However, I have personally met with some of your colleagues in Viktorialand who were pretty sure they had some sort of retirement account but didn’t know how to find their 403b online. Others don’t the difference between a Roth and Traditional 403b. Still fewer know that it’s possible to invest in a 529 or HSA (Health Savings Account). After all, aren’t those “savings” accounts and not “investing” accounts?

It is in your best interest to familiarize yourself with any account you might own, see how it is invested and make some possible changes to those investments. There is an abundance of material out there for such things and we’ll try to cover some of it in future posts. If you really need immediate, simple advice, you might try putting all of your long-term investments (more than 7 to 10 years, like those for retirement) into Target Date mutual funds or ETFs. These are more conservative than many would recommend, but if I plan to retire in 2075 then a Target Date 2075 fund is not a bad first step for a retirement account.

A similar measure could be taken in the case of a 529 college savings fund for a young child. However, in a 529 that you plan to withdraw from for a child’s education in the next 1-5 years or an HSA from which you may have to withdraw any day for medical expenses, a cash, bond or other very conservative fund is probably the safest, best bet. (You’d hate to have to cash in your child’s college funds when the markets were down, right?) There is also a tax issue involved in withdrawing from your 529, but I think I’ve found a way around that.

2. You really should be putting more into your IRA

We all want to put more money away for retirement and Individual Retirement Accounts (IRAs) are a great tool to do that. Better still is the Roth IRA which allows you to pay a little tax now and save a bunch later. However, for a great many of us, this is a Lie!

The short explanation is that if we claim the Foreign Earned Income Exclusion (FEIE), spend the entire year overseas and earned less than the amount of the exclusion (which is over $100,000 per year!), we will have no taxable earned income in the US. Since an IRA can only be funded on taxable earned income in the US, we cannot open or fund an IRA under those circumstances. As you can read here, there are circumstances in which we can indeed fund our IRAs, but if it is not one of those times, there are hefty penalties to pay for illegally funding an IRA.

Well, if Missionary Mark is counting those last two as one probable truth and one probable lie, then we must have a true coming in the last one which is…

3. You need to invest more than most Americans

Leaving Lies Behind

Unfortunately, this is probably a Truth! One of the first questions a financial advisor asks any client is, “How do you imagine you will be living in retirement?” Some people plan to travel the world, take up an expensive hobby, buy a second house on the ocean, etc., but let’s not dream so big.

Let’s say you and your friend, Tiana Jones, talk to the financial advisor together. Why not? Your families are a lot alike. You’ve known Tiana since college where both of you got your bachelor’s degrees, she is a teacher in the US and you are a teacher overseas, you both married great people and both have two preteens at home. So, what is Tiana’s answer to the retirement question?

I just want to live with my spouse in our modest home, drive my 3 year old Toyota, have paid for half of my kids’ college education, visit the grandkids at least once a year, be generous toward the charities I care about and be debt free.

Nice, normal and modest. She took the words right out of your mouth.

The financial planner will then throw around some numbers, ask some additional questions and say something like, “Tiana, you and your husband, Ivan, will probably need to replace about 80% of your annual income in retirement.” That’s not so bad. A few would say 70% and many more would say 90%, but 80% will do us just fine for our little story here. Assuming Tiana and Ivan are making the average pay of a college graduate (back in 2015), they’re making $100,000 per year while living in their American Midwest town. They will need to be debt free upon retirement and count on their retirement funds, Social Security, savings and such to keep them afloat at the tune of about $80,000 per year. That’s doable!

To your ears, Tiana’s plan sounds very similar to your own. In fact, the financial advisor asks how you’d like to live in retirement and you give the same answer:

I just want to live with my spouse in our modest home, drive my 3 year old Toyota, have paid for half of my kids’ college education, visit the grandkids at least once a year, be generous toward the charities I care about and be debt free.

We can all probably see the problem at this point. Can I ask you some questions to be sure?

  • Are you making $100,000 per year as a family?
  • Are you halfway through paying on a 30-year mortgage?
  • Do you own a Toyota in the USA?
  • Are your grandkids going to be living in the same country as you upon retirement (or will they catch the “abroad-bug” or marry a non-American spouse)?

You get the idea. As we discuss when we talk about earnings, we know that our income base is almost always lower. Our annual expenses (e.g., visiting overseas grandkids) will often be higher. And probably the worst of it is that our initial expenses, if we retire from the field to the US, will be enormous. If we want to keep up with just these modest goals, we’ll need to buy a Toyota and a home for cash just to be in step with Tiara Jones’s modest dreams.

If we have lower earnings and similar retirement goals, we’ve got to do more to get there. If we want to be winning financial freedom so that we can be generous even into retirement, we’ll have to do more than saving cash in a bank account. Investing is going to have to be part of the plan.

While our American friends are investing in their home, we’ll be investing in a little cash, maybe a bit of bonds and a whole lot in stock mutual funds or ETFs. That’s because historically cash is a lousy investment, bonds are a bit better and stocks are the hands-down winner. That’s talking historically and over the long-term and if you don’t panic when markets go down and don’t get overly jubilant when they go up. No one knows the future and no one should risk their shirt (unless they don’t need to wear it in the next 5-7 years), but investments need to be considered for the long run.

For some of us, investing sounds terrifying. But it is worth remembering what we noted in our first point: You most likely already are an investor in stocks and bonds. We might go find those long forgotten retirement accounts only to discover that we are holding cash, money market funds or some fund suitable for a 70-year-old retiree. If we’re going to reach our goal, it is time to make some changes!

You don’t need to keep up with the Jones, Tiara and Ivan, but you do want to provide the chance to have at least a decent, minimalist future for yourself, for your family and for the charities you love.

See our posts on Investing.