Investing Part 2

Saving / Investing Rate

Many people like to track their savings/investing rate as a percentage of their income. People like Dave Ramsey say if you aren’t at 15% or more you will for sure have too little at retirement. But when you look at these investment spreadsheets you might want to focus more on getting enough income to live comfortably while investing the needed amount weekly.

For myself I have run several scenarios and I must invest $150-250 weekly if I want to be reasonably sure I can retire with a million or more. I plan on working hard so that that amount will eventually be far less than 15% of my income leaving me with room to invest more if I choose. 

I think the average USA savings rate is currently around 4%. So pat yourself on the back once you're saving over 4% and then move onto hitting your weekly investing goal.

Investment Asset Classes And Vehicles

So by now you should know where you can put your money (asset classes) to get a good return on average that is higher than inflation. Now you need to decide what vehicle you will use.

There are tax deferred (pay tax later) and tax sheltered (pay now and growth is not taxed) vehicles.

Tax Sheltered

Most common example: Roth IRA

General consensus is if you have 20-30 years until you retire then max out on this type of investment and keep it up until you retire. You will get a better return and pay a lot less in taxes than say a regular Roth or 401k.

There are a lot of restrictions here so at least research:

• Your Yearly contribution limit
• When you can stand pulling out money tax free
• When you are no longer eligible (to old or to high income earner) to invest

Tax Deferred

With tax deferred you get to reduce your reported taxable income (might lower your tax bracket and might even keep you getting medicaid). And then your money grows and you pay taxes at whatever bracket you are at when you retire.

Most common examples: 401k, Government Pensions, SEP IRA

401k / Government Pensions

General consensus is always to go for the full employer match. Then once you have maxed out your contributions to the Roth IRA go back to the 401k for the rest of your passive investment allocation. Even if you still have some debt, do the employer match.

You also should research the mutual fund options you are given to find one with a very long successful track record. And many say you want to find out if the manager is still there that has been getting that return or if a new one just came in. I’ll show you how to see returns a little later.

SEP IRA

If you own your own business or are self-employed and make over 80k per year, this might be the best way to reduce your taxable income and therefore lower your tax bracket / percent of taxes you have to pay. This isn’t a good option if you have employees that stick around for years. So do your research.

Having a Financial Plan

He also mentioned the average of the super wealthy increase their worth by 5% annually.

Allocating Your Passive Investments

There is an amazing tool that has benchmarks for asset classes over time. You can put in any scenario by asset class and see what your returns would have been. In this scenario I have allocated 10K broken down by 80% to the USA stock market and 20% to the bond market. This would be an aggressive portfolio.

Pick And Test Your Exact Picks On The Stock Markets

Once again, Portfolio Visualizer helps us out. You can put in a specific stock or bond and compare any time frame to see how it did. You can put in any scenario by asset class and see what your returns would have been. In this scenario I have allocated 10K broken down by 80% to the USA stock (VT) and 20% to the bond (TFLO). This would be an aggressive portfolio.