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Retire Early: Implementing your low fee retirement plan.


Implementing your low fee retirement plan.

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A few readers have asked Retire Early to spell out exactly how one goes about implementing our low fee, low cost investment strategy. Here it is in about a page and a half.

CASH: (i.e., Credit cards, checking accounts and money market funds.)

The first question you're probably going to ask is "what does a credit card have to do with cash?" I use a credit card for almost all my purchases, even groceries. This allows me to keep more cash earning interest in a high yield money market fund and limits the number of checks I need to write. I recommend that you find a credit card that offers a rebate. (I use the Discover Card which offers a 1% rebate on all purchases.) It goes without saying that you should pay your credit card bill in full each month to avoid interest charges.

Next you'll need a checking account at a local bank. Even though banks are notorius for high fees and bogus charges, unfortunately you have to do business with them. (It doesn't cost a bank $20 to stop payment on a check. With automation, that has to be 10 to 15 times the actual cost of performing the service.) My strategy has been to get a basic checking account with no minimum balance, maybe 10 free checks per month, and a $2 or $3 per month fee. I can get by with 10 checks per month since I charge everything to my credit card. I never leave more than $500 in the checking account and use it for petty cash and to pay bills less than $250. Interest bearing checking accounts at a bank often have interest rates less than half what you'd get in a money market fund. That isn't an incentive to maintain a minimum balance. I'd avoid them unless they're competitive with the yield on your money market fund.

As an alternative to a bank checking account, you might investigate opening an account at a credit union. Credit unions often have lower fees and better interest rates on savings and checking than commercial banks.

Money market funds are almost always a better deal than anything a bank can offer you. I'd pick one than offers you unlimited check writing. Typically, the checks you write must be $250 or more. That's one reason you still need the the checking account at your local bank.

I use the Vanguard Money Market Reserves - Prime Portfolio, but there are at least 10 other money market funds with competitive yields and $250 check minimum to choose from.


A Treasury Direct account is the best bet for the bond portion of your portfolio. There are no fees or commissions if the account is less than $100,000. I recommend a laddered portfolio of 2-Year and 5-Year notes. These are typically auctioned by the Treasury in the third week of each month. Amazingly, entering a "non-competitive" bid will give you a higher yield than 50% of the major Wall Street firms participating in the same auction. It's one of the best deals available to the small investor.

There are times when a Certificate of Deposit (CD) at a bank, (but probably not a bank in your town) pays more than a Treasury note with the same maturity. For instance today (November 1997) the highest yielding 5-Year CD returns 6.50%, while the 5-Year Treasury note is yielding 5.76%. So for a $10,000 investment, you could get an extra $74 per year in interest. It may make sense to buy an "out of town" CD as long as the "wire charges" for sending the money from your bank to the out of town bank don't cancel out the added yield. Your local newspaper most likely lists the CD rates at local banks in your area. It's always instructive to compare this list to the current yields of the Treasury securities with the same maturity. There often so far below the corresponding Treasury note that it amazes me that anyone does business with a bank unless absolutely necessary.

Both Treasury securities and CDs from an FDIC insured bank are backed by the US Government. You are guaranteed both interest and principal when investing in these instruments.

Many people have asked about bond mutual funds. The problem with bond mutual funds is that they never mature, so you don't have a guarantee of return of principal. If you hold a 5-Year Treasury note to maturity you're gauranteed the return of your principal by the US Government. If you hold a medium-term Treasury securities bond fund, your mutual fund mamager doesn't guarantee the return of principal at the end of five years. Bond mutual funds may make sense for corporate and municipal bonds where diversification offers some advantages.


For the stock portion of your portfolio the easiest thing to do is to invest in an S&P 500 index fund. Index funds offer the advantages of broad diversification, low management fees, and tax efficency (i.e., their portfolio turnover is so low that they rarely make capital gains distributions to shareholders.) Fidelity, Vanguard, and USAA all offer acceptable S&P 500 index funds will appropriately low management fees.

More adventuresome investors may want to buy and sell individual stocks. The least expensive way to do this is through a deep discount broker that allows you to buy or sell an unlimited number of shares for $20 or less.

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Copyright 1998 John P. Greaney, All rights reserved.

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