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Saturday, January 3, 2015

INVESTMENT ADVICE


INVESTMENT ADVICE
A very popular “Go to” article in newspapers or the internet is always someone telling you how to retire a wealthy person.  Let me amend that, “How to retire as a wealthy person” retiring a wealthy person is an illegal short cut to becoming a wealthy person.
Let me start over.
HOW TO RETIRE AS A WEALTHY PERSON
These articles are particularly popular around this time of year as people prepare their New Year’s resolutions and their tax returns.
These tips to become wealthy are all good and all valid.
1.    Withhold from taxes as much income as possible. Sure, you can earn interest on this money if you hold on to it and not let Uncle Sam use it, but unless you are already wealthy you’ll just spend it anyway.

2.       Save 10% of your income and invest 75% in the stock market (reduce that percentage as you get closer to 70 years old.) Give up that Starbucks every day, keep that old hooptie, don’t take vacations etc. etc.

3.  Mortgage your house with as little a down payment as possible, take out a shorter term loan and pay more than the minimum each month. If you only make minimum payments on a thirty year $100,000 mortgage, you will pay $300,000 in interest*
4.  Contribute the maximum amount allowed to any 401K plan. It is tax deferred and payable probably at a lower tax rate when you retire. (Unless you are really wealthy when you retire which is…never mind, just do it!) 
5.  Contribute the maximum amount every year to an IRA.  You can use the contribution to reduce current income tax, and the interest earned is tax deferred.    
6.  Keep at least 6 months income in cash as insurance for hard times or emergencies. Because that is so easy to do when you are just starting out.
7.  Postpone retirement and collecting Social Security until you are 70.
The problem with these tips to retiring as a wealthy person is that you pretty much have to be a wealthy person to follow any of them.
1.  If you are not already wealthy, you want to make sure you don’t get hit owing money to Uncle Sam at the end of the year, and you depend on that annual refund as the only way you are really able to force yourself to save any money at all. 
2.  Lovely to save 10% of your income and invest it every month, however if you are not already wealthy you probably find it is better to pay your rent and the electric bill first.
3.  Pay off that house…great advice once again if you are already wealthy, otherwise pay it off with what, and should I pay it down first and then save 10% of my income, vice versa, or both?
4.  See response  #3 "great advice once again if you are already wealthy."
5. See response  #4.
6.  See response  #5.
7.  Great advice, the difference in monthly income from social security from taking it at 62 and taking it at 70 is almost 60% higher at 70.  Of course if this is the correct choice for you requires knowing how long you are going to live.  It also assumes you can retire at 70 and not be retired earlier against you wishes as is common in today’s environment.  It also assumes the government will not default on SS or push the retirement age back.
Living within your means is very good advice.  Following these 7 tips is good advice to the extent you can follow them, however living today is also important.  It would be nice to take a skiing vacation at 35; at 70 you may not be able to ski.  It would be nice to afford a big house at 70, but at 70 you only need a small apartment.  It would be nice to be able to give to your grandchildren and help with their college expenses and other things, it is more important to provide those things for your children.
All these 7 tips do is make people living pay check to pay check feel guilty.  Save what you can when you can, pay down debt if and when you can, don’t buy a mansion when a nice townhouse will do, be responsible.
But: 
Don’t sacrifice everything today to be wealthy when you are 70.  You may not make it to 70.  You may not be able to use the money at 70 like you could have used it at 35-60. 
Finally, if at 70 after scrimping your entire life to pay down mortgage and debt, saving retirement funds to the maximum, investing in the market and all the things experts say you should have done, you become the wealthy person that your heirs just may want to retire as a short cut to becoming wealthy.

15 comments:

  1. Excellent advice. All of it is true. Most people do not retire wealthy unless they are already wealthy. What you hope to do is retire with a reasonable income to pay all major expenses with just a little left over for dreaming. Also the definition of wealthy is pretty broad here. There are a lot of intangibles that make one wealthy.

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  2. So so true - all of it - your advice I mean, not the standard advice. Those articles really frustrate me! Though I do also enjoy reading the letters where people ask for advice: "I am 35 and have paid off my home. I have an investment property and $50,000 in savings. I have just inherited $30,000, should I pay off the loan on my investment property or put the money into my wife's superannuation?" EFF OFF! :)

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    1. AGREE!! People who call just to radio dude tell them how well they are doing. They remind me of the "Teacher's Pets" of my school days.

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  3. Life is pretty much a scam. The amount of money most of us have to discretionarily turn to wealth wealth is a pint of water over someone else's Niagara Falls.

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  4. great post, cranky. all truth you speak. :)

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  5. I agree with all of this. Mrs. Chatterbox and I are doing our traveling now in case health issues later bench us. We're fortunate enough to own our own home; we've worked hard over the years but we've also had help along the way. Hopefully, one day we'll have grandchildren to help like we've been helped. I don't see how young people can achieve financial security in this economic climate on their own.

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  6. I like all those points. Living within your means is not so hard except for those medical bills.

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  7. Yep, it's not that difficult to plan for ones retirement. The debt can kill you and some folks just don't get that.

    Have a fabulous day Cranky. ☺

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  8. I jumped out of the work force at 62 and don't regret one minute. Sure I could have enjoyed more disposable income today if I followed all of those rules--not yours, theirs-- but like you said, reaching an active old age is no guarantee. You nailed it.

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  9. I don't trust Wall Street, annuities, and all the rest. I've chosen to follow the Jeff Foxworthy "Good 'ol Southern Boy" retirement investment plan: All my money is in "The Legends Of NASCAR Commemorative Plate Series". (Just be aware they are NOT dishwasher safe.) :)

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  10. Nothing is guaranteed, so the best you can do is the best you can do. Make choices that feel right. I worked longer than I wanted to, and suffered some anguish over that (my boss was a dick), but now we are both retired and we can pay our bills, and it feels like it was worth it. Live within your means is the best advice ever. And "appreciate what you have" helps make that possible. Just a thought.

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  11. I'm not at all wealthy, being just below the poverty line here in Aus. and I spent years living from one payday to the next, but always within my means, never using credit or going into debt. But I had no savings, no funds for any emergencies that might arise. Then I read a book which included a section on budgeting, which I was already good at, but it said when allocating funds for groceries, utilities, rent etc make one further allocation. ~Pay yourself~ Set aside as little as you like or as much as you can every payday. So I reworked my entire budget that year and set about "paying myself" $20 a week. That's $1000 a year and in the first year I was able to pay for my daughter's wedding photography. It's more difficult now that I'm not working, I still set aside "my" payment, but sometimes have to use some of it, which really just means a bit less to spend on Christmas, birthdays etc. And I'm still debt free.

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  12. This reminds me of the goal of all financial planning, according to an investment adviser I once talked to: You want to retire rich and die poor.

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  13. I don't know how people live these days. Working people who get no freebies. I can't imagine that they have enough left over to save.

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  14. I think you're right that most of the expert advice isn't very practical for most of us to follow, at least not all of it at the same time. Living within your means seems to be good advice.

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