How much can I spend each year?
Each year you can spend between 3% and 4% of your networth.
Your networth is all your cash, investments, etc. added
together. Not real estate unless it is investment real estate.
Example: 500,000 networth = 15,000 to 20,000 for that year.
The next years amount to spend is calculated at the end of the
prior year. As your networth goes up and down... so goes the
amount you can spend. If your money is reasonably invested, at 3%
your money will never run out. 4% is will likely last your
lifetime but it is not a sure thing.
How should my money be invested?
Asset allocation is the key to successful investing. Some
in stocks, some in bonds, and some in cash. The exact percentage
in each asset depends on your risk tolerance and your age. The
older you are and the nearer retirement ... the more should be in bonds
and cash. Examples: 20 yrs from retirement - 90% in stocks.
Retired - 25% stocks.
Why not keep my money safe with cash & bonds?
Inflation averages 3 - 4 % year so with 3% inflation in 10 years
time $100 will only buy what $73.74 will buy today. Cash and
bonds cannot keep up. If you spend 3% per year and inflation is
3% then to stay even you must earn 6% after taxes. If inflation
is 3%, in 23 years your money would only be worth 50% of its worth
today. Examples of
historical returns with different asset allocations are listed on this
Only invest in low cost index mutual stock funds. Vanguard
has more than you need. Total Stock Market index fund is probably
all you need. Index 500 and Small CAP index are okay for some
money. It is not critical to invest in non-USA investments.
Changes your outcome very little.
Only invest in low cost index mutual bond funds. Primarily
in intermediate term bond funds. Long term are too risky.
Tax exempt (municipal bond) funds may or may not be useful
depending on your task bracket. If your highest tax rate is 28%
then tax exempt is worth checking out. One bond fund is all you
Cash? Low cost money market funds are the way to go. Keep 3 - 6 months of expenses in a money market.
not try to time the market. Do not try to beat the market.
No one can consistently do either. Actively managed funds
just take more of your money with higher costs. Their return is
no better than index funds over time (the long run).
Our asset allocation is 75% bonds and cash and 25% stocks.
If the stock percentage gets higher, leave it alone.
Transfer money from the bond funds as needed to keep money market
funds with enough cash. Probably won't be needed as we will be
forced to withdraw tax deferred retirement beginning age 70 and then
pay tax and reinvest. Whatever you liquidate from the
IRA/Retirement, buy the same thing in the non-retirement funds.
If you liquidate Index 500 money, then buy Index 500 fund in
Once a year, rebalance your networth. If your stock percentage
went from 25% to 28%, then sell 3% and invest the 3% in bond funds.
If bonds go from 50 to 55% then sell 5% of bond funds and use the
%5 to buy stock funds. Don't worry about what the market is doing
at any time and just follow the above instructions.