What makes a good investment? I want it to grow, be safe from market fluctuations, have a tax advantage so I can keep as much as I can, and I want to protect my family.
I want it to grow at a reasonable rate so my money will keep up with inflation. I want to know that I will be able to have at least what I am earning now without having to work at a job. If that isn't possible, then I will at least want to have enough to cover the basics like housing, whether I am renting, paying property taxes and upkeep on my own house or wandering the country in a motor home.
I have learned that the Rule of 72 tells me how quickly my money will double, assuming I can get a consistent rate of return. If I depend on the market, my return is going to flucuate between making me rich one day and making me work into my twilight years just to stay alive.
That means I also want some safety and consistency of growth. If I am going to depend on some nest egg of cash to tide me through to old age, I want to be sure I have enough and that it won't disappear due to something I have no control over.
I want a tax advantage. I have shown that money that grows without taxes is far better than being taxed as it grows. That eliminates things like CDs and savings accounts and even dividends received from mutual funds. All are taxed as I receive income. I want my money to keep up with inflation, too. I have seen that inflation can eat up value of my money.
Finally, I want my family protected if I die early and my wife and I protected if I live too long. To get all that, I need a very well-rounded and well-managed portfolio of investments, plus some life insurance for protection. Or do I? Let's look at this one level at a time.
For growth, I can put my money into a savings account or some other type of cash account, and let the interest accumulate. The best most banks and CDs pay, though, is about 2%, and we have seen that I need at least 5% to beat taxes and inflation. I can invest in mutual funds and even hire a manager, but that can be both risky and expensive. Still, not a bad idea, if I have enough money to start with. Banks call such managers Wealth Managers and they like to work with people with large amounts of cash they don't know what to do with. I am not one of those people, though, so count me out. What I would really like it something that guarantees me growth every year that beats inflation and taxes.
For safety, I would also like something that protects me from markets crashes. Again, savings accounts do that, though I still don't keep up with inflation. I have been told that bond funds are good in a lowering market so that is a possibility. But when the market goes back up, I need to run in and sell the bonds and move back to stocks. Who has time for all that? I want something that always keeps me above the market or at least doesn't deduct from my value when the market is poor.
My tax advantage comes with my 401k. I even get free money from my employer up to a certain percentage of my income. Maybe 401k's aren't so bad, after all. I can also buy a Roth IRA which lets me have tax free growth and tax free withdrawals. The trouble there is that I am only allowed to pay $5000 a year. In my case, since I am over 50, I can invest $6000, but that won't really grow fast enough for my needs. Remember, I need a million. What I want is something that allows me to invest as much as I want, let's my money grow tax free and also lets me take it out tax free.
In my next few articles I will show the type of growth I can get with and without the protection of market safety. I will also show how I can withdraw a living wage from my savings and still have it grow. Such safety isn't free, but the consequences of no safety net is like driving down the freeway without a bumper and seatbelt.
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