How to Invest and Get ready for Retirements, Starting at 55

Financial planning for someone who is 22 is fairly easy.  It is a bit like planning for a job loss you know you’ll have five years in the future.  There is plenty of time to check into different options, learn new skills, and make mistakes along the way.  You can also take calculated risks because you have something to fall back on – income from your job – for several years.  You could try your hand at painting and selling your art or digging for gold in your spare time before you focus into more concrete pursuits, knowing that you’ll still have that steady paycheck coming in each month for a few more years.

It gets much more difficult for someone who is in their mid-to-late fifties, and even more difficult for someone who is in their sixties or even retired.  By that point the die is largely cast and there is little room for mistakes.  Suffer a big loss in the stock market when you are 25 while invested in mutual funds and you can usually just hold on and wait since it is very likely the fund will recover a good portion of the loss over the next several years.   If you buy an individual stock that collapses and is not likely to recover in your twenties, you can cut your losses, build up some more cash, and buy into different stocks.  If you suffer a similar loss when you are 60, unless you have a net worth that will generate a lot more income than you need, and you may not have the time for your account to rebuild itself before you need to sell assets for living expenses.

How you invest in your fifties and sixties is therefore highly dependent on your net worth and your income needs.  Unfortunately most people still have quite a bit of debt in their fifties from home remodels, children’s weddings, children’s college, vacations, and other lifestyle choices.  Others are largely debt free, except for their home, but have little saved up in retirement accounts, let alone personal investment accounts.  So starting from this point, what are the priorities and what types of investments are appropriate?

1.  Get out of debt.  The biggest priority at this stage of life should be getting out of debt and staying there.  If you have lots of money, there is no reason to keep paying out interest every month (and no, you aren’t saving it on taxes – you’re receiving maybe 30 cents on the dollar).  Your financial security will increase dramatically if no one can come repossess your home or take your savings should your income stream slow or stop.  Owning your home outright also opens up the possibility of selling in a high cost area and moving to a condo or a townhouse in a low-cost one, freeing up a lot of cash for living expenses.  This was the typical retirement plan before the HELOC was invented.

2.  Build up assets.  If you don’t have a large number of assets (things like stocks and bonds that pay you income) by this point, you need to start working overtime to build you financial base.  The more assets you have when you enter retirement, the more flexibility you’ll have.  Because you’ll be able to take some risk with a portion of your portfolio, you’ll be able to earn more income in retirement if you have substantially more than you’ll need to generate the minimum income necessary.  Have $1 million, and you might have a $40,000 per year income.  Have $2 million, and you might have a $100,000 per year income because you can invest more agressively.

3.  Start safe, then get more aggressive with investments.  Your ability to take risks with your money declines as you get closer to needing the money.  Unfortunately, inflation is still eating away at your savings, so you can’t tuck your money in your mattress either.  You’ll need to start with placing a portion of your funds in assets you have confidence will be there, such as CDs, and then broaden out to gain investment return.  After securing a reasonable cash cushion (that you would grow as you get closer to retirement), you would start to branch out into large cap equity funds (or ETFs) and income funds, then move into REITs and small cap funds.  Finally, if you have the resources, you can start buying individual stocks and bonds.  You might also consider rental real estate, although this comes with headaches and some of the same risks of catastrophic decline that you see with individual stocks.  If you have been investing all along, you would make the shift the other way, selling of some of your individual stocks and buying mutual funds and ETFs as you got older, then building up some cash as you near retirement.

4.  Don’t count on the government.  Social Security and Medicare are in very precarious positions.  Both programs have far more in obligations than they have in projected revenues, meaning it is likely payouts will be reduced in the coming years or even eliminated.  The US Government has  $17 T debt load that is growing each year, so don’t expect them to be able to bail these programs out with funds from the general treasury either.  In fact, we may see taxes for these programs being directed more and more towards government operations and paying interest on the debt.  While it will be nice to get a check each month to supplement the income you’ll have from assets, don’t plan on it.  The math just doesn’t work.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What to Do with $1,000, $10,000, or $100,000

Money magazine periodically has an issue where they discuss what to do with $1,000, $10,000, or $100,000.  I’m always amazed at their suggestions since most involved spending the money rather than investing or saving.  The latest issue advises spending the $1,000 on a new suit for interviews as one suggestion.  Other suggestions may be electronics or appliances.  It seems that to the writers of Money, the humble $1,000 is not worth the time to keep around so you might as well blow it on the latest gadgets.

Those who can do compound interest, however, know what can happen to $1,000 if you let it grow.  Assuming a 10% rate of return, that $1,000 would double every 7.2 years.  So, $1,000 invested when you are 20, would be $2,000 at 27, $4,000 at 34, $8,000 at 41, $16,000 at 48, $32,000 at 56, $64,000 at 63, and $128,000 at 70.  Put that $1,000 together with ten of its friends, and you could become a millionaire even if you spent every other penny you made.

So what would I do with $1,000, $10,000, or $100,000 right now?  Here are some suggestions.

What to do with $1,000.

  • Put it in a money market fund and keep it as an emergency fund.  The next time the car breaks down, I’ll have the cash ready.
  • Pay down some credit card debt.  This is like investing at 18%, meaning it is like saving $1000 every 3 years.
  • Pay a couple of extra payments on the home.  If you make just one extra payment on a 30 year mortgage a year, you’ll pay it off about 8 years early.  With a $1,000 per month payment, that is a savings of about $74,000.
  • Put it in a CD and then save up $1,000 to $3,000 more to invest in an index fund or shares of a young growth company.  Make this a regular practice and you’re on the path to becoming wealthy.

What to do with $10,000.

  • Fund your IRA and that of your spouse.  Retirement may be a ways off but you’ll need a lot of money when you get there for necessities and medical bills.
  • Start an educational IRA for your kids.  If you’re hoping for your kids to go to college, you need to start saving early.  You can put $2,000 per child into an educational IRA that is tax-free for educational expenses.
  • Buy shares of a large cap and a small cap index fund or index ETF.  Index funds have low costs, which will make a big difference over time.  Buying two sectors of the market reduces volatility.
  • Buy 100 shares each of 3-5 of your top stock picks.  Add to these positions over time, gradually diversifying into more stocks and mutual funds as you get older and your portfolio grows.
  • Pay off your credit cards.  At 18% interest, you’ll be saving $10,000 every three years!
  • Pay off your cars, or buy a quality 3-5 year old used car.  Not having a car payment will allow you to pay cash for cars from now on if you save up the money you would have been putting towards payments, even after paying for repairs.

What to do with $100,000.

  • Pay off any remaining debts, except for maybe the house.  Paying off debts increases the amount of money you have available since you are no longer losing money to interest.  With rates as low as they are, keeping a home mortgage might make sense to have some money for investing, but there is also no other feeling like owning your home outright.
  • Buy a set of index funds.  Include large cap stocks, small cap stocks, real estate (through REITs), and income stocks.  Consider international stocks as well.  Bonds also belong in your portfolio, but they are to risky right now due to the low-interest rates.
  • Buy 500 shares each in 1-3 stocks that are the best performing growth stocks in their industries.  Keep these positions small enough that you can stand a loss should one of them fail outright.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Evil and The Tea Party

Webster’s Dictionary defines evil as something that causes misery and despair.  This is a particularly apt definition to describe Socialist programs that are promoted as being for the good of others but instead bring misery and despair.  While there is a bit of a chicken-and-the-egg aspect to it, one finds that the most misery is found with people who are heavily reliant on government programs.

It is also interesting that those promoting Socialism tend to engage in deceptive practices to advance their cause – behaviour such as telling lies that would be considered evil by many.  Sal Alinski is a famous community organizer who wrote the book Rules for Radicals.  One of the tactics promoted by Alinski was to demonize your political opponents personally.  Say that they were doing whatever it was you were really doing.  This tactic is alive and well today, as seen by the treatment of the Tea Party.  Rather than debating the ideas they put forth, they are called racist, anarchists, terrorists, or goons.  I was particularly disturbed by this political cartoon in my newspaper today where a couple of “Tea Party Goons” are assaulting a woman and her child for her food stamps.  One is seen kicking the child.

The truth is that the Tea Party is a group of ordinary, middle-class citizens.  Many of them have never been involved in politics in any way.  They were content to go about their jobs or run their businesses, save and invest their money, and live in a manner where they took care of themselves.  They did things like save up for college while others were buying new cars.  Pay off their homes early while others were taking out HELOCs for kitchen and bathroom expansions.

They became political in 2009, not because they wanted to, but because they had to.  After years of minding their business while seeing their taxes raised to pay for all sorts of programs rewarding the irresponsible, the final straw was dropped when the Affordable Care Act was passed by the slimmest of margins.  It was passed in a great rush, such that no one even read what was in the bill, and against the popular will of the people.  What was different this time was that rather than just taking money from the responsible and giving it to the irresponsible, the healthcare law would force everyone onto this new government program.

Those who became the Tea Party knew the effects of such programs.  While at first being handed “free money” might seem like a blessing, it would eventually become a curse with all sorts of strings attached, a degradation in quality of life, and misery and despair.

Just look at the curse of the evil that is Socialism.  Taking able-bodied people and making them dependent on the largess of the public does not bring happiness.  Just look at the misery and despair in the public housing projects where people are trapped in gangs and crime and death.  While in some places like Vietnam and India where there are political forces that prevent escape from poverty, most people in the American projects could climb out and live happy and fulfilling lives if they just threw aside the public assistance and did what was needed to become self-sufficient.  Instead they have come to believe that their life where housing and food are provided is the best that they can hope for.  They see that taking a job would reduce what they receive, and therefore they continue to live on what they are given.  What they don’t see is that the initial job leads to better jobs, and eventually to a much better life.

Socialism is evil because it encourages people to produce less, meaning that there is less for society.  Socialism degrades people by expecting little of them.  Encouraging people to do the bare minimum needed.

Those who formed the Tea Parties know that a better life comes from hard work and self-sustainment.  Even a frontiersman who worked hard each day for the few possessions he had was better off than those in the projects today.  He would have never considered himself poor, and he was happy because he lived a useful and productive life, doing useful and productive things for his families and others around him.

Unfortunately the evil that is Socialism is very persuasive to many.  Socialists use people’s natural tendency to envy and covet to gain power.  They know that they can get a certain percentage of the population dependant on them.  When those taking the free handouts discover that they are sad and miserable, as always comes to pass, the Socialists blame the those who have remained self-sufficient.  They then use jealousy and envy to tear down the means for anyone to take care of themselves.  They tear down the businesses through taxes, regulations, and wage and benefit laws.  They take away what people have saved through taxes and inflation.  They claim to act for the public good, but instead act for themselves.  This is evil.

It is not easy to reverse course once Socialism has begun to take hold.  It takes courage to pull oneself off of things on which one has become dependant and find another way.  When the government provides all of the food it is hard to believe that one could get food without them.  When they provide the housing you think that you will be homeless without them.  And yet people have and people can again.

When there are no government schools parents can get together, provide the buildings and hire (or be) the teachers.  When there is no government to provide food people can grow and trade so that everyone can eat.  If government did not provide roads people in communities could organize to build roads or pool money to have needed roads built.  The fact is that government never provides any of these things.  It just takes a belief in oneself and in the community.  The very thing Socialism takes away.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.