You’re Probably Using the 4% Rule All Wrong
The 4% rule is the most popular shorthand in retirement planning. And you’re probably using it wrong.
The 4% rule is the most popular shorthand in retirement planning. And you’re probably using it wrong.
These last two articles have focused on how common it is for early retirees to continue making money after they say goodbye to the cubicle. I share stories like that because I’ve seen it happen in so many lives, including my own. Plus, if you do it right, work is fun. But the downside of all […]
Learning how to invest wisely at a young age will help you maximize your returns by allowing compounding to work to your benefit. Here’s how to get started.
The post How To Start Investing: A Simple Beginner’s Guide appeared first on Bible Money Matters and was written by Contributing Author. Copyright © Bible Money Matters – please visit biblemoneymatters.com for more great content.
Everybodyâs financial situation — age, income, saving rate — is different.
But every retiree, early or late, aspiring or actual, has the same, simple investing imperative: We must preserve and grow our purchasing power in real terms in order to finance decades of future consumption.
This sounds simple (which it is) and obvious (which it isnât).
Let’s assume you’re forty years old. Every week, you buy a six-pack of your favorite microbrew for $10. You have $520 in savings that will buy you your weekly six-pack for all of 2019. Life is good.
Here, for instance, is GRS founder J.D. Roth with a $10.19 six-pack of his favorite beer, which he’s drinking while he edits this article:
Now, let’s assume that the cost of this six-pack increases by 3% annually — which is a reasonable estimate of inflation. Every year, your $520 in savings buys you 3% less beer.
In thirty years, when youâre seventy and still enjoying your suds, that six-pack that costs you $10 now will cost you $24.27, which is a $1,262 annual expense if you continue to buy a six-pack a week.
In other words, your $520 in savings has to increases by nearly 145% to $1,262 over the next thir[s]ty years to merely maintain — let alone increase — your current beer consumption.
It gets worse.
Even if everything goes according to plan and your beer money grows from $520 in 2019 to $1,262 in 2049, youâll need to sell $1,262 worth of your investments to get the cash for your beer. That will trigger a $750 taxable gain, and at a 25% federal and state tax, you’ll have to pay approximately $188 in taxes. Your beer money is now approximately $1,074. This only buys you 44 six-packs of beer in 2049, whereas you were consuming 52 six-packs in 2019.
In other words, due to inflation and the taxation of nominal gains, youâll be poorer, with a lower standard of living, thirty years from now.
This bears repeating: A 3% pre-tax return on your investments will not preserve, let alone grow, your current standard of living.
Risk and reward is the basic relationship in investing. Learn how to apply it to your financial life.
My thoughts on investing have shifted over the years. New ideas consistently challenge me and force me to question my assumptions. The biggest: is there skill in investing?