7 Reader Questions: Answered [Reader Mailbag – Christmas Eve Edition!]

‘Twas the night before Christmas, and all through the blog… not a creature was stirring, not even a money wizard.

Merry Christmas Eve, folks!

For this holiday week, I thought I’d take a break from the usual writing schedule. Instead, we can dip into a mailbag of reader questions so big it would make Santa’s own giftbag proud.

Read on for my answers to seven of the most common / interesting reader emails over the past few weeks:

1. Should new grads get life insurance?

Hi, how’s it going? I am 24, just started making 75k after recently graduating and am in 27k debt. I have started talking to a few financial advisors, who have suggested investing in whole life insurance, and I have been seriously contemplating it. I am interested in obtaining FIRE [Financial Independence/Early Retirement] as well. I wanted your perspective on if it is something to start investing in or just max out roth/401k instead.”

Hey there!

First thing’s first, why do you need life insurance? Most 24 year old recent college grads have nothing to insure against.

Do you have a wife or kids? Life insurance only matters if you kick the bucket while other people are depending on you.

Even if you do have people depending on you, whole life is pretty big scam, in my opinion. It’s expensive life insurance combined with a low return, high fee investment.

This goes directly against what the slick talking salesmen will tell you. The secret is that whole life insurance is also one of the most lucrative products for insurance agents to sell, which is why it gets peddled so hard. They’ve become masters at playing on people’s fears and making things intentionally complicated, so that they can earn their huge commission on the sales of whole life insurance policies.

(Typical commission is usually 50 to over 100% of your first year’s premium. Big bucks for them.)

You’re much better off saving the money and building up some assets. If you’re interested in the investment feature of a whole life policy, you can just invest in an index fund that should cost less and earn more than whole life insurance’s investment feature.

And if you’re still worried about your dependents, you can buy term life insurance for waaaay cheaper than the insurance included in a whole life policy.

Term life policies are better anyway, since there’s really only a short window in life where people are depending on your salary.

Think about it this way. Before you have dependents, there’s nothing to insure against. After your dependents leave the nest, there’s nothing to insure against. With whole life you’re paying for decades of insurance you don’t need.

A long winded response… but those sleazy salesmen get me fired up!

2. How do taxes on Vanguard funds work?

We max out our 401ks and Roth Iras. We want to start investing after tax money. From reading your post, it seems you are suggesting mutual funds through Vanguard.

I was wondering how taxes apply to this type of investing (will we have to pay taxes every year on what the fund makes, but not on what we actually contributed to the fund)? What percentage of tax would be due? Also, can we access this money before 59.5 without being penalized? Any help that you could offer in this category would be sooooo greatly appreciated!!!!!!”

With a taxable index fund (that’s anything outside of a 401k/IRA/other retirement plan) you pay taxes on the dividends received and capital gains. Like anything tax related, the answer is long, so here we go:

Dividends are those periodic checks that come your way for owning the funds. They’re usually paid quarterly, and most Vanguard index funds pay about 2% dividends. The dividend rate is referred to as the “SEC yield” on Vanguard’s pages… more info can be found in this big article of mine.

For most people, dividends are taxed at 15%. The highest tax bracket pays 20% on dividends and the lowest two brackets pay 0%.

Capital gains are the gains you receive after buying and selling a stock. So if you buy $10 of Vanguard funds and sell it once it’s worth $15, you’ve made $5 of capital gains. There’s two types of capital:

• Short term capital gains: apply if you’ve held the stock/index fund for less than a year. These are taxed at whatever your ordinary income bracket is.
• Long term capital gains: apply if you’ve held the stock/index fund for more than a year. These are taxed at 0%, 15%, or 20% depending on your bracket. Most everyone pays 15%.

Here’s a decent article about it.

Any taxable index fund or regular stock market investment can be accessed before 59.5 without penalty. I could sell all my Vanguard funds today, and I’d have access to the money within 3 business days. I recently posted about this in my liquid net worth article.

3. If some index funds are good, are double and triple leveraged index funds even better?

I am curious on your thoughts regarding double and/or triple leveraged ETFs like SPXL? The expense ratios are much higher, about 1% on average, compared to your standard low cost index funds of 0.04-0.08%, but to be able to double or triple your returns seems worth the added expense. Of course, the downside is losing a ton when the market goes down, but if we go by the 6-7% (adjusted for inflation) annualized return on the stock market for the last 100 years it doesn’t seem like a bad play long term. I am sure I am missing something, but thought I would run it by you to see if you know anything about them. Keep up the great work on the blog!

I’m not a fan. Like you pointed out, leverage works both ways, and it tends to be more destructive on the way down than up. Worse, leveraged ETFs often lag their index due to some complicated math. This article explains how a leveraged ETF can lose 31% over a year, even while the underlying market stays flat.

Even worse, most of these leveraged ETFs are funded by the same derivative contracts from a few banks. Refer back to the 2008 crisis to see how bad things can get when big banks try to unwind derivatives in a down market.

I can see the allure, but in a nutshell, AVOID! haha…

4. Bringing My Money Wizard to 60 million readers

Our company will promote your business to 60,000,000 real people from worldwide to any niche. So you can contact the right audience, driving traffic to your website.” -K[email removed for privacy]@hotmail.com

5. Phone calls from Personal Capital?

Hi My Money Wizard, your blog has been a great recent find — thank you for all your thoughts and advice on personal finance on it. I recently signed up for Personal Capital after reading a few of your blog posts on it. Soon after that, Personal Capital got in touch about scheduling a info session to talk over my financial plan with an advisor — with the eventual intention for having me sign up for their paid services. I was wondering if you encountered that when you signed up with the company? If so, did you have any thoughts on the paid services that they were offering?”

Yep, this is Personal Capital’s business model. They provide awesome software for free, and they hope to use that to generate leads for advising services on their higher net worth clients. I compared business models in my Personal Capital vs. Mint article.

I seem to get a phone call from them once or twice a year. I’ve never taken them up on the advising services, since I prefer a DIY approach, and I’m not a huge fan of advisors in general.