Should I Change My Investing Strategy?

Summary

Ramsey Everyday Millionaires: Episode Summary – "Should I Change My Investing Strategy?"

Release Date: February 24, 2025

In this insightful episode of Ramsey Everyday Millionaires, hosted by the Ramsey Network, listeners delve into the crucial question: "Should I change my investing strategy?" Featuring expert advice from notable hosts including Dave Ramsey, Ken Coleman, Rachel Cruze, George Kamel, Jade Warshaw, and Dr. John Delony, the episode provides a comprehensive guide for individuals aiming to optimize their investment approaches.

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1. Introduction to Glenn's Investment Dilemma

The episode begins with Speaker A presenting a real-life scenario from Glenn in New York:

[00:05] Speaker A: "Today's question comes from Glenn in New York. Should I change my investing strategy? I'm 50 years old and debt free with an emergency fund. I currently put 10% in a Roth IRA and another 5% in my 401k from work. Should I contribute more to my 401k to max it out or get with a financial advisor and start investing in individual mutual funds? Currently, I have around $600,000 in my 401k and the Roth has about $20,000."

Glenn's situation highlights a common crossroads faced by individuals approaching retirement age: balancing retirement contributions with potential diversification outside standard retirement accounts.

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2. Assessing Current Financial Standing

Speaker B responds by first acknowledging Glenn's positive financial status:

[00:54] Speaker B: "All right, so we're debt free. We're 50. That's good. We're investing 15%. So the question is, does he have a mortgage and is the house paid off?"

Key Points:

• Debt-Free Status: A significant milestone that positions Glenn well for future investments.
• Investment Rate: Glenn is investing 15% of his income, which is commendable but may require reassessment based on other factors.

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3. Strategic Recommendations for Maximizing Retirement Savings

Speaker B offers tailored advice based on whether Glenn's house is paid off:

[00:54] Speaker B: "If your home is paid off, I would continue to invest more and max out those accounts before working with the individual mutual funds outside of retirement."

Key Recommendations:

• Maximize Retirement Accounts: Prioritize contributing the maximum allowable amounts to both Roth IRA and 401k.
• Roth 401k Consideration: If available, shifting to a Roth 401k can offer tax-free growth benefits.

He elaborates on the importance of maximizing these accounts:

[01:25] Speaker B: "If you're in baby step seven, meaning your house is paid off, we don't use the 15% rule. We say max out all available retirement accounts."

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4. Evaluating the Need for Additional Investments Outside Retirement Accounts

Discussing scenarios where diversifying into individual mutual funds could be beneficial:

[02:45] Speaker B: "The only reason you would move some to that is if you were going to quit work before 59 and a half."

Insights:

• Bridge Investing: A strategy for accessing funds before the standard retirement age without incurring penalties.
• Emergency Accessibility: Having investments outside retirement accounts can provide liquidity in unforeseen circumstances.

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5. Understanding the Growth Potential with the Rule of 72

Speaker B introduces the Rule of 72, a fundamental financial principle:

[02:15] Speaker B: "There's a thing called a math anomaly called the rule of 72. And if you take an interest rate or a growth rate on your mutual fund, divide it into the number 72, it will tell you how long it takes a lump sum to double."

Example Calculation:

• Assumed Growth Rate: 10%
• Rule of 72 Calculation: 72 ÷ 10 = 7.2 years to double investment.

He applies this to Glenn's situation:

[02:45] Speaker B: "If you're making 10% on your mutual fund's average into 72 is 7.2 years to double... If he's 50. At 57, he would have not $600, but $1.2 million. At 64, seven more years, he would have $2.4 million."

Takeaway:

• Consistent and strategic investing can significantly amplify wealth over time, emphasizing the importance of maximizing retirement contributions.

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6. Real-World Validation of Investment Growth

Speaker A reinforces the theoretical concepts with real-world data:

[03:07] Speaker A: "Under Trump's presidency, the first term, three and a half years in, the stock market was up 53%. Under Biden, three and a half years in, it was up 50%. So 103% return in exactly seven years. Exactly what you say. The stock market doubled in those seven years."

Interpretation:

• Historical stock market performance aligns with the Rule of 72, demonstrating practical viability.
• Speaker B concurs, underscoring the reliability of these averages:

[03:30] Speaker B: "And that's about what it'll do."

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7. Conclusion and Final Recommendations

Concluding the discussion, Speaker B reassures Glenn of his sound investment strategy:

[03:30] Speaker B: "I didn't hear anything in this email that made me think that was going to occur. If that's the case, you would need to do what we call bridge investing... So, yeah, I mean, that's it."

Final Advice:

• Maintain Current Strategy: Given Glenn's stability and investment growth, continuing to maximize retirement accounts is advisable.
• Consider Future Diversification: Only when planning significant life changes (e.g., early retirement) should diversification into individual mutual funds be considered.

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Key Takeaways for Listeners

1. Maximize Retirement Contributions: Prioritize fully funding Roth IRA and 401k accounts to leverage tax advantages and compound growth.
2. Analyze Debt and Mortgage Status: Being debt-free, especially with a paid-off home, provides greater flexibility in investment strategies.
3. Understand Investment Growth Principles: The Rule of 72 is a valuable tool for estimating investment doubling times based on growth rates.
4. Historical Market Performance: Real-world data often supports theoretical investment strategies, providing confidence in long-term planning.
5. Strategic Diversification: Only consider investments outside retirement accounts when preparing for specific financial goals or life changes.

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By addressing Glenn's query with a blend of strategic advice, mathematical principles, and real-world examples, this episode equips listeners with the knowledge to assess and potentially enhance their own investment strategies effectively.

Transcript

[A]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor Today's question comes from Glenn in New York. Should I change my investing strategy? I'm 50 years old and debt free with an emergency fund. I currently put 10% in a Roth IRA and another 5% in my 401k from work. Should I contribute more to my 401k to max it out or get with a financial advisor and start investing in individual mutual funds? Currently, I have around 600 grand in my 401k and the Roth has about 20k. All right, so we're debt free. We're 50. That's good. We're investing 15%. So the question is, does he have a mortgage and is the house paid off? If so, I would continue to invest more and max out those accounts before working with the individual mutual funds outside of retirement.

[B]

Yeah, if you're in baby step seven, meaning and your house is paid off, we don't use the 15% rule. We say max out all available retirement accounts. Everything you can put in a 401k, everything you can put in the Roth. If your company has a Roth 401k instead of a traditional 401k, I would shift to that, too. That would be my plan. But I'm with you, George. If your home is not paid off, then you need to be working and pay off your home and leave this at 15%. You're fine. You're in good shape, dude. I mean, when you are 57, you're going to have a million two. If you don't add anything to it when you are 64, you're going to have 2.4. If you don't add anything to it. So that you know, if you're invested in good mutual funds, it sounds like you are. It sounds like you're doing the right things here all the way around. But no, I don't think you need to move to individual mutual funds. The only reason you would move some to that is if you were going to quit work before 59 and a half. I don't see that happening here. I didn't hear anything in this email that made me think that was going to occur. If that's the case, you would need to do what we call bridge investing, which is have some money that's not in a retirement account that you can get to before 59 and a half to have something to eat with. That's always a nice plan, too. So that eating thing is good. So, yeah, I mean, that's it. And, George, that's the second time in this hour we've used that. So here's a little quick lesson, boys and girls. There's a thing called a math anomaly called the rule of 72s. And if you take an interest rate or a growth rate on your mutual fund, divide it into the number 72, it will tell you how long it takes a lump sum to double. Okay? And so if you're making 10% on your mutual fund's average into 72 is 7.2 years to double. And so that's what I just did. I'm assuming he's going to be making at least that. If he's 50. At 57, he would have not 600, but 1.2. At 64, seven more years, he would have 2.4 and we could go all the way to 71 and have him sitting there at almost $5 million.

[A]

And this played out in real life, Dave, I went back and looked at the actual stats. Under Trump's presidency, the first term, three and a half years in, the stock market was up 53%. Under Biden, three and a half years in, it was up 50%. So 103% return in exactly seven years. Exactly what you say. The stock market doubled in those seven years.

[B]

Yeah. And that's about what it'll do.

[A]

So this is not just an opinion or a math formula. It plays out in reality.

[B]

And that's the averages. I mean, you know, and so we don't know what's going to happen from here. Exactly. But that's, that's, you know, that's a good thing to kind of coach yourself along and go, I think I'm going to be okay.