Forum Mailbag: Investing When FI, Preferred Stock, Using 529 Money On Yourself, And More!

There is so much great information on personal finance forums. I participate on several message boards, including the Bogleheads and White Coat Investor forums. Here are some of the discussions happening around the internet.

1. White Coat Investor: Continue To Play When You’ve Won the Game?

Question: Btollefsonmd is a 51-year-old EM doctor who plans to work full-time for 2-3 more years, and then work part-time for ten years after that. He currently has 50x annual expenses in investments. He will also get a pension for his military service as well as Social Security benefits in the future.

He was wondering whether it was still necessary for him to take risk in the stock market when he is already financially independent.

WSP’s Take: This physician is already financially independent by a wide margin (the general rule is that you are financially independent when your investments are 25x your annual expenses), so he can certainly afford to be less aggressive should he choose to do so.

The optimal solution isn’t to go 100% cash, although his money would probably last 40 years even if he never earned another cent or received any money from his pension or Social Security.

If his goal is just to “run up the score”, he might actually prefer to be more aggressive than the typical investor his age, since he already has so much more than he needs for a comfortable retirement and his portfolio can withstand a typical bear market.

If he only had 25x annual expenses and no outside sources of income, it’s important to remember that the Trinity University study concluded that you need to hold at least 50% in stocks during retirement in order to maintain a high probability of having your money last 30 years or more.

In short, it is not necessary for him to take significant risk in the stock market to have a comfortable retirement, but he should maintain some exposure to the stock market. The more stocks he owns, the higher his expected net worth will be over time, but this extra money would likely be for his children or charity since he is unlikely to use all his money during his lifetime based on his current spending levels.

2. White Coat Investors Facebook Group: Preferred Stock?

Question: A reader on the White Coat Investors Facebook group asks for opinions regarding buying preferred stock. His financial advisor suggests he buy preferred stock in order to receive more dividends to protect against the “coming crash.”

WSP’s Take: Set aside the financial advisor’s assertion that there is an upcoming crash in the stock market. People have been predicting for years that a bear market is coming, and it hasn’t happened yet. That doesn’t mean that a bear market won’t happen this year or next year, it’s just that you can’t reliably predict it in advance.

But let’s say you did know that there would be a bear market next year. Would buying preferred stock be a way to protect against a bear market? Given that preferred stock has both equity- and bond-like properties, we would expect preferred stock to be less volatile than common stock. So if you did know that the stock market was going to fall, then buying any asset class with less volatility (whether it be bonds or cash or preferred stock) would be better than owning common stock.

However, I disagree that any protective benefit of preferred stock compared to common stock is because it pays out dividends. Dividends mostly just shift your total return from stock price appreciation to dividends, without meaningfully improving your total return.

3. Physicians On FIRE Facebook Group: Using Child’s 529 Money On Yourself

Question: A reader in the Physician on FIRE Facebook group has a 529 plan for his children. Based on current projections, he doesn’t think he will end up using all of the 529 money after paying for his children’s educations. He is getting an online MBA from a state school and was wondering whether he could pay for his tuition from the 529. He is the owner of the 529 and his child is the beneficiary.

WSP’s Take: You absolutely can spend 529 money on your own education. As the owner of the account, you simply need to change the beneficiary of the 529 account from your child to yourself. However, there may be limits on how often you can change the beneficiary on your 529 plan. You should check your individual plan’s rules, but generally you can change the beneficiary on your account up to once per year, so you may not be able to rapidly switch beneficiaries in order to pay for both your MBA and your child’s college in the same year.

In addition, you should check that an online MBA is classified as a qualifying education expense under your 529 plan.

4. Bogleheads: Fidelity International Bond Fund?

Question: Longmonster notices that Vanguard’s target retirement funds include a small allocation in an international bond fund. On the other hand, Fidelity’s corresponding Freedom Index funds do not contain international bond index funds. He was wondering whether there was a philosophical difference between Vanguard and Fidelity regarding the role of international bonds in a diversified portfolio.

WSP’s Take: The primary reason why the Fidelity Freedom Index target-date funds do not contain international bonds is likely because Fidelity does not offer an international bond index fund.

I am not sure why Fidelity does not offer an international bond index fund. It certainly isn’t because there isn’t investor demand for international bonds — Vanguard’s International Bond Index Fund has over $11 billion dollars under management. Vanguard has proven that an international bond index fund can be managed cheaply, with the Admiral shares of their Vanguard Total International Bond Index fund having an expense ratio of 0.11%.

If you’re a Fidelity investor who wants to invest in international bonds through an index fund, you can purchase the iShares Core International Aggregate Bond ETF (IAGG), which has an expense ratio of 0.09% and is commission-free to trade at Fidelity.

Wall Street Shares: 5 Articles To Read This Week

1. White Coat Investor: 7 Reasons to Prioritize Retirement Savings Over College Savings — Pay yourself first before paying your children.
2. Physician on FIRE via Business Insider: I’m a part-time doctor earning $250,000 a year and I plan to retire next year at age 43 — here’s what a week of my spending looks like — A week in the life of a financially independent physician.
3. Our Next Life: Science Confirms Why a Low-Information Diet Is Bad for You — Tanja Hester argues against the assertion that you should avoid the news because it wastes time and just makes your more stressed out.
4. The Boss MD: Simplify To Succeed — Sometimes trying to do a little bit of everything means you accomplish nothing.
5. Rogue Dad, MD: Future Proofing Your Children: The Public School Debate — The public vs. private school decision is one that many physicians have to face.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?