This section is basic information to get you started investing.  If you are unsure of some of the financial terms being used please go to the financial definitions section to gain a better understanding.

Section One – Before you start investing.

Section Two – Why invest?

Section Three – How to invest?

Section Four – What to invest in?

Section Five – Taxes and your investments.

Section Six – Personal Freedom 

Section Seven – Social Security

Section Eight – Wealth in America

Section ONe: Before you start investing

Your personal finances should be in order.  Create a budget by listing your known income and expenses and then start to track your spending.  Although many people find a budget constricting, I find it to be liberating.  It allows you to spend money guilt free if you have additional money after achieving your goals. It also allows you to see if your spending habits match your values.  Do you truly enjoy your where your money is going?  You might be surprised. Once your budget is in place the first step is to create an emergency fund if you don’t have one. Most financial experts recommend that you save enough money for 3 to 6 months of expenses. There is nothing wrong with having a larger emergency fund up to 12 months.  By keeping a large emergency fund, it can help downsize your stress.  Your emergency fund should be invested in a stable account like a savings or money market account.    

If you have debt it should be cleaned up first.  When you pay off debt it is an automatic guaranteed investment return.  To many of us look at the payment rather than the total cost of the loan.  The interest paid over and beyond the original loan amount can be substantial.  This is money in excess of the purchase price.  When you borrow money, I like to think of it as reverse investing.  There are examples ahead in this section that show how large amounts of interest are earned, but in this scenario you are paying that.  Why do you think there are so many people anxious to lend you money?  Don’t pay interest, collect it.

This might seem obvious, but you can’t invest if you don’t save.  The easiest way to do this is to set up automatic savings deductions each month from your checking account to your investment account.

Questions Before Investing

The following questions should be addressed by you before starting to invest any money.  If not, there is a good chance your money won’t be invested appropriately for your personal situation.

Personal Financial Questions to Consider

How much money do you have and where is it invested?  This should include everything from your retirement accounts, local banks & credit unions, investment accounts, cash in your sock drawer, etc.  This includes any shared accounts you may have with a spouse or partner.  Everything!  This would be your net worth not including any real estate or other non-investable assets.  If you are unclear on how your money is invested, find your last statement from those accounts. There will be information regarding the funds that you’re invested in, any contributions made, etc.

What is your income?  This includes everything from your primary occupation to any side jobs you may have or anything that is providing you income. It could include disability payments, social security or investment income.  A paystub is helpful to figure out your take home pay and any taxes or deductions that are being taken out.

Do you have any debt?  What type of debt?  How much are the payments?  What are the interest rates on the debt?  How long before each debt is paid off?   What is the total amount of all debt owed? If you’re expenses are more than your income there is literally no chance to invest.  This is why a budget is critical to help you achieve financial independence.  If you’re not operating from a clear complete picture it is difficult to succeed.

Do you have an emergency fund?  How long will it cover you and your dependents?  This is readily accessible cash for short-term emergencies.

Are you saving for retirement?  Does your employer provide a retirement savings match program and how much is it? Could you be saving more? Where is the money being contributed or saved to?  Is it pre-tax or after-tax investments?  A paystub is helpful to figure out what is being contributed by you and your employer regarding retirement plans.

Will you be making any large purchases such as a vehicle? This will need to be accounted for within your budget.

Do you have life insurance?  What type?  How much?  Do you need it?  Depending on your situation this acts as an emergency fund if you have dependents.  You may need a significant amount, or you may not need any.  Every situation is different.  Insurance is not an investment, so term life insurance is the right choice.  It provides a death benefit at the lowest cost. After you have saved enough money or when your children or dependents are self-sufficient you no longer need the policy. 

Do you have a will or trust? A will or trust can make sure your assets go where you want them to go after you’re gone.

Life Questions

What life do you want?  What are your goals?  Where do you want to be in 1 year, 5 years, or 10 years?  Most people have a difficult time answering this question, but consideration of this is valuable.  Take a look at your life including family members to think this through.  These are big questions and it’s important to know what you are saving for.  Do you want to retire early, leave an inheritance, give to charity, travel, etc.?    Money is simply a tool to achieve the life you wish for in the future.  It’s easier to succeed if you have a goal you are excited about attaining.

Are you satisfied where you are at both personally and professionally?  This can affect how you plan your future financially.  If you dislike your job, are you willing to leave it for perhaps a lower paying job that you enjoy?  Do you enjoy where you live, or want to move to somewhere more appealing? This stuff matters and money can be a tool to achieve these goals.

Are others dependent on you?  This could be children, elderly parents, other family members, friends, etc.  Will you be paying for your children to attend college?  Will you be contributing to your parents for their care?  If you are subsidizing anyone else for any reason, it is important to take that into consideration.  This should take into account the ages of dependents and how their needs will change over time.

Investing Questions

What is your knowledge of investing?  Do you know what asset allocation is and what yours is?  Do you know what fees and expenses are being charged on your account?  This information is absolutely vital to investing properly.  If you don’t know the answers to these questions continue reading through this section to get a basic understanding.  Then continue your investing education through independent sources that have nothing to gain by your investing or the advice they give.  A list of books, podcasts, websites, documentaries, YouTube channels, etc. that can help you, is in the recommended resources section of the website.

What is my tolerance for risk?  Can I handle the volatility of the investments that I choose?  More information on historical investment returns and volatility ahead.

What is your time horizon for investing?  How and what you invest in will change over your life along with why you are investing but keep in mind that your horizon may be substantially longer than you think. More information on this is ahead.

When do you plan to cease working for pay?  This affects how much you need to save, where to invest, etc.  There is information on how to plan this ahead.

When do you plan on receiving social security payments?  How much will you be receiving?  There is guidance to help answer these questions within the Social Security section.

Do you have beneficiaries on all of your financial accounts?  Make sure the money goes where you want it to go when you pass.  You can have primary beneficiaries (such as a spouse) and contingent beneficiaries (next in line if primary passes such as children).  Your beneficiaries can be anyone not limited to family.  Also, remember to update them as your life changes.  This is often forgotten.

Section Two: Why invest?

You have “bought” personal freedom when you invest. The play on words is intentional.  You can “buy” a lot of things, but in the end your most valuable “thing” is your life and the freedom to choose how you spend your time.  It allows you to choose your occupation, your hours worked, your hours doing what you love to do.  Allocate your money to “you” first.

Don’t “buy” into the myth you can’t become wealthy. Contrary to what you may have heard, almost anyone can become wealthy due to compound returns.  It doesn’t take a lot of money; it just takes some discipline each month to save a little and it’s not that hard.  By investing early, you have more money to spend during your life and you will have to save far less, therefore allowing you more money to spend today!  For example:

Invest $500.00/month for 40 years starting at age 25 and you will have saved $240,000.00 of your own money by age 65.  Based on an average stock market return, you would end up with $2,438,465. You end up with ten times more than you saved!

If you wait 10 years (age 35) you will need to save $1,200.00/month totaling $432,000.00 of your own money. Based on an average stock market return you would end up with $2,260,834.89.

By waiting 10 years you will have to save an additional $192,000.00 and still end up with less for retirement. The first example, you save less and end up with more, a win-win. Think about what you could do with an additional $192,000.00 over the course of your working life. This gives you a chance to live well today and tomorrow. The information provided isn’t meant to encourage you to save less, it is simply showing the power of compound returns over time.  Start saving early! 

Another name for the above example is passive income.  It’s like having a second paycheck with no work involved.  Example:

Work 40 years at an annual salary of $60,000.00 and you will have earned $2,400,000.00, or approximately $1,800,000.00 after taxes.  Save $400.00/month in a total stock market index at an average annual market return of 10% and the total would be $2,551,112.10.  If this was invested in a Roth IRA there would be no taxes on the gains.  Keep it all.  With passive income you can make as much money as working your entire lifetime. 

Even if you get started late your saving and investing time horizon is probably longer than you think.  At age 55 you may well live another 30 to 40 years.  This would allow your savings to compound almost as long as your working career.

Section Three: How to invest?


“After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only as good as a low-cost passive index fund.  The other 97% can be expected to do worse.” – Eugene Fama, Nobel Prize in Economics

By taking charge of your own investing, you can easily avoid hundreds of thousands of dollars in fees.  Yes, you read that correctly, hundreds of thousands of dollars.  For example:

If you invest $500.00 per month for 40 years and pay 1% in fund or advisor fees, you will forfeit $600,000.00 in returns due to that 1% fee. (Based on 9.53% historical average stock market return.)

If you pay 3% in fund or advisor fees on the same investment, you forfeit over $1,300,000.00 in returns due to that 3% fee. (Based on 9.53% historical average stock market return.)

High fees and expenses are unnecessary.  They don’t increase your return. You should be able to own a diversified portfolio of stock and bond index funds for around .08%.  By controlling expenses, you keep the returns, not the fund company or financial advisor.  This is how to achieve above average returns.

Many mutual funds can have additional fees (loads or commissions) above their standard operating expenses attached to them as well.  These mutual funds are sometimes referenced as Class A, B or C which is an indicator that there are loads attached to them.  These can be both front end and back end loads as high as 5.75%.  Front end means that the fund takes 5.75% of your money before they even invest it.  This means you would need to earn over a 6% return the first year just to break even.  Back end loads are taken out when you sell shares in the fund.  There is no reason to ever invest in funds with loads or any fee for purchase or sale.  There are many other options available to you that are better.

Financial Advisors

“There are two kinds of investors, be they large or small; Those who don’t know where the market is headed, and those who don’t know that they don’t know.  Then again, there is a third type of investor-the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”- William Bernstein, author of The Intelligent Asset Allocator

Most financial advisors don’t have a “fiduciary” responsibility and work for a financial company that is selling a product.  Most of their products are designed to make them money, not necessarily you.  I can’t stress enough how important it is to know how your advisor is compensated.

A fiduciary is required to put your interests ahead of theirs, but you still need to understand their advice and whether or not you agree.  They should only be paid by you. If they receive compensation from anyone else regarding the advice or investments they recommend they have a conflict of interest.  Also, just because a fiduciary has a requirement to act in your interests first doesn’t necessarily mean their advice is right for you.  Ultimately only you can decide what is right.  You can look up fiduciaries in your area at

There is fee only and fee-based advisors.  Fee only advisors are a better choice than fee based.  They charge by the hour or by the job, so you know exactly what you are paying for.  Fee only advisors can be helpful for occasional advice and questions you may have.  A CPA (Certified Public Accountant) who specializes in taxes is a good example of an advisor that can be useful.  Fee based advisors take a percentage of your overall investments and this can be incredibly expensive as shown above.

A Certified Financial Planner (CFP) is an advisor who is trained in all aspects of personal finance.  They can be located at  Unfortunately, many are fee based, but the website shows how they are compensated, and some are fee only.  If you use a CFP they can formulate an entire plan including taxes, education, estate, retirement, etc.  If you do use an advisor, it is important to ask them to disclose any conflicts of interest they may have and select fee only advisors.

There are companies now that offer advisor services online called robo advisors.  These companies typically have lower fees than a local advisor.  A couple of examples are Betterment and Wealthfront.  Vanguard also offers personal service for .3% and you are assigned an advisor available over the phone or online.  If you are comfortable working online and need help these might be right for you. Just remember they all charge fees and you still need to understand your investments and what service they are providing. Links for these companies are in the recommended resources section.

If you choose to hire an advisor you need to be comfortable enough with them to share all of your financial information.  They can’t do their job appropriately without knowing your total personal financial situation.  Unfortunately, I have reviewed many portfolios of investments for people and most of the time their advisors asked for little or no information.  There is no way to appropriately manage your finances without knowing the entire picture and if they don’t ask all of the questions listed above, find another advisor.  Lastly, an advisor needs to be thoroughly vetted before any information is given to them.  Check online, check references and make sure you are 100% comfortable with who you are dealing with. You can check your advisors history at (Financial Industry Regulatory Authority)

NEVER put your money into an account with someone else’s name on it, such as an advisor or financial firm.  All investing accounts should be in your name or spouse/partner only.  NEVER!

You can’t just blindly take advice from any advisor, be it a financial advisor, lawyer, CPA, etc.  Speaking from my own experience of having used many different professionals over the years, they don’t always get it right.  I have received incomplete, incorrect and conflicting information.  You need to do some of your own research.  The best option is to take control of your money by investing time to educate yourself.  If you decide to hire an advisor, you still need to thoroughly understand your investments.  It’s just too important to close your eyes and hope everything turns out well. 

Common myths on investing or what not to do!

Buying individual stocks or bonds is the wrong approach in most cases.  The depth of knowledge to understand buying securities is beyond most people, including professional money managers who fail on average 75% of the time to beat their market benchmark.  All stock market trades in aggregate break even, less expenses (fees.)  In other words, there is a buyer for every seller and they both think they know what they’re doing.  Paying less expense is the important thing to remember.  The financial industry is able to charge a fee on every transaction and by paying less expenses your return will be well ahead of a large group of investors. In Chris Hogan’s book Everyday Millionaires, of the 10,000 millionaires surveyed, none of them mentioned buying individual stocks as a contributor to becoming wealthy. Mutual funds or Exchange Traded Funds (ETF) are the best way to invest. They offer low cost and broad diversification through index funds.

Trading assets or market timing is not a good strategy.  Trying to guess when to buy or sell is a fool’s game; even Warren Buffett has stated he knows of no one who can time the market.  To quote Nobel Prize winner in Economics Eugene Fama, “Money is like soap.  The more you handle it, the less of it you have.”

The financial media is biased, inaccurate and typically wrong.  This includes tv, magazines, and newsletters.  Go to the best sources in the world for your investing information like Warren Buffett, John Bogle, and the authors listed in the recommended reading section; not your uncle, co-worker or friend.  Use sources that aren’t selling anything along with sources that show academic peer reviewed studies to back up their investing information. 

Life insurance is NOT an investment.  It is for insurance purposes only to protect any dependents in your life.  If you need life insurance, buy term life which is for a death benefit only and inexpensive to purchase.  Avoid most annuities, cash value life insurance, whole life insurance, universal life insurance, etc.  These products are sold as investments with a death benefit, but the return is poor due to high commissions and fees built into the product.  You are better off separating your investing and insurance needs. After your children are raised, debts are paid and your retirement is fully funded there is unlikely a need for life insurance.

Research Showing the Value of Index Investing

This table shows how many actively managed funds have failed to outperform their respective benchmark or index over three different time horizons; very few have.  For instance, 88% of actively managed large caps funds failed to beat their corresponding index after 5 years.  These are managed by professional money managers with large research teams and extensive knowledge of the financial industry.  If they can’t figure it out, what makes anyone think they can trade stocks or time the market?  What’s more incredible is if you own actively managed mutual funds you are typically paying higher fees for lower return.  Passively managed index funds are better than managed funds.  Choose index funds that are low cost and broad based; not all are.  More information on index funds ahead.

Fund Category                  5-Year          10-Year          15-Year

  • Large-Cap                          88%               85%                92%
  • Mid-Cap                             90%               96%                95%
  • Small-Cap                          97%               96%                93%

Data as of 12/31/2016 S&P Dow Jones Indices

University Endowments

The table below shows the average returns of college endowments (a large pool of donated money that is invested for income) versus the Bogle model.  The Bogle model is simply a portfolio of 60% stocks owned in a total stock market index fund and 40% bonds owned in a total bond market index fund.  There is no management involved.  The colleges employ sophisticated money managers and teams.  They search for alternative investments and try to maximize their returns.  These people are some of the best and brightest among us.  As you can see, they primarily fail to beat an unmanaged index.  After 10 years the colleges that have the top 10% of performance still fail to outperform this simple portfolio.  The funds used in the Bogle model are available to anyone through Vanguard.  You can outperform these colleges with just two funds.  It’s very simple.

Bogle Model          Average Endow.          Top Qtr. Endow.          Top Decile

  • 3 yrs.                   6.4%                 5.2%                              6.3%                            6.6%
  • 5 yrs.                   6.5%                  5.4%                             6.2%                            6.6%
  • 10 yrs.                  6.0%                 5.0%                              5.3%                            5.4%

Mutual Fund Rankings

The information below shows how the top six managed mutual funds of 2000 fared after a year.  Don’t be fooled by the data being from 2000, this is an annual occurrence.  Many people think they can just find the best performing managed mutual funds and that they will continue to perform, they don’t.  This shows that picking mutual funds is as futile as trying to pick stocks.  When you read a prospectus detailing a mutual funds objectives, all funds use this disclaimer: past performance is not a guarantee of future results.

Top Ranked Mutual Funds 2000          Same Mutual Fund Rank 2001

  •                        1                                                   2042
  •                        2                                                   309
  •                        3                                                   4013
  •                        4                                                   2459
  •                        5                                                   4225
  •                        6                                                   2810

The rankings would be worse if the mutual fund industry had to continue to track funds that simply closed their doors and transferred their assets to another fund within their company.  This is called “survivorship bias.”  These funds performance is effectively buried, never to be seen again. According to Mark Hulbert (editor of the Hulbert Financial Digest) in a 2017 article on MarketWatch only 1 in 20 actively managed mutual funds beats the index when survivorship bias is accounted for. According to an article on Yahoo Finance from a S & P Dow Jones report of 563 actively managed mutual funds that were in the top quartile of performance in September 2015 only 6.3% of those remained in the top quartile in September of 2017.   Index investing is simpler than trying to pick managed funds and more importantly, it’s more profitable.

Most Investors Earn Below Average Returns

Over a 20-year period ending 12/31/15, the S&P 500 Index averaged 9.85% a year while the average equity fund investor earned 5.19% according to a study by Dalbar, Inc.  This is due largely to trying to time the market.  Studies show that many investors would sell when the market was low out of fear and then buy after the market had reached new highs. This is sort of like buying something at regular price and then returning it when it goes on sale; not very profitable.  To be successful, one needs to stay the course and stick to your long-term plan even when the market drastically declines periodically.  Listed below are some financial terms that describe common investor mistakes.

Recency Bias – People tend to put too much emphasis on recent history.  You have to think long-term and avoid paying attention to short-term market fluctuations.

The Efficient Market Hypothesis – This is for people who think they can evaluate and pick stocks.  The Efficient Market Hypothesis states that all known information is already priced into the stock.  Meaning any information you may have to purchase or sell the stock is already known by others in the market and reflected in the price.

Modern Portfolio Theory – This theory spreads your money around different asset classes (stocks, bonds, international stocks, real estate, and cash) to fit your investment profile while maximizing return and minimizing risk.  How each individual asset class acts at a given time is less important than how the entire portfolio performs as a group.  The average investor doesn’t put much thought into their asset allocation, although it may be the most important decision you make.

Chasing performance – Some fund companies advertise they have funds that have beat their market index.  This can look very appealing to investors but when you look a little closer, you will see things aren’t always as they appear.  They use what is called data mining to come up with what appear to be winners.  Let’s say a large mutual fund company has 200 different types of funds that it offers.  In any given year some will surely beat their benchmark index.  The company will then advertise they have a half dozen actively managed funds that outperform.  Historical data suggests they will fail miserably the next year, but only after many investors have piled money into the fund.  As stated in every prospectus, past performance is no guarantee of future results.

Reversion to the mean – Investors tend to buy when stock prices are high and unfortunately sell when prices are low.  If the market is increasing at 20% a year for five consecutive years and the historical return is half of that, at some point the returns are not going to be so good.  Unfortunately, we don’t know when the market will adjust but we can protect ourselves by rebalancing our assets (stocks and bonds, etc.) when appropriate.  What goes up, must come down and vice versa.

Loss aversion – As explained in the book Your Money & Your Brain by Jason Zweig, humans have a tremendous aversion to losing money.  One needs to fight the urge to sell during market volatility.

It is important to thoroughly understand your investments and yourself.  If you sell at the wrong time in a panic, you have destroyed years of investment returns.  The book Your Money & Your Brain explains how we are hardwired in many ways to be bad investors and how to overcome some of those tendencies.

Become a Great Saver and a Great Investor

In order to become financially independent, it is best to do both.  Listed below are 3 scenarios of how each affects the other based on a person or family with an annual income of $60,000.00.

Example #1 – Great investor saves 5% ($250.00/month) of their salary and invests in a stock index fund earning 10%.

After 30 years the great investor has $515,728.28.

Example #2 – Great saver saves 20% ($1,000.00/month) of their salary and invests it at their local bank and earns 3%.

After 30 years the great saver has $578,715.46.

Example #3 – Great saver & investor Saves 20% ($1,000.00/month) of their salary and invests in a stock index fund earning 10%.

After 30 years the great saver and investor has $2,062,860.76.

You will notice that the great saver (example #2) doesn’t fare much better than the great investor (example #1).  The great saver (example #2) has to save over four times as much of their own money throughout the 30 years to keep up with the great investor (example #1).  The great saver and investor (example #3) show that a combination of both saving and investing can provide substantially better returns than just one or the other option.

Dollar Cost Averaging

The above example of the great saver and investor is also a good example of what is called dollar cost averaging.  This is saving a fixed amount of money each month and investing it regardless of the share price.  This approach will consistently buy more shares of mutual funds over time when prices are low.  It forces you to buy shares at discounted prices when stocks are low.  Here is an example of how it can help.

                                   Purchase           Price          Shares Bought

Month 1                    $100.00              $15.00        6.67

Month 2                    $100.00              $5.00          20.00

Month 3                    $100.00              $10.00        10.00

Total                          $300.00                                  36.67

Average Price Per Share $8.18

You will notice that you are saving $100.00 per month but that the share price is fluctuating.  Since more shares were bought at the low price of $5.00, the average price paid at $8.18 is lower than the average price of $10.00 for the three months. So, for your $300.00 investment you now have $366.70 which is 36.67 shares X $10.00 per share.  This is a simple example, but it shows how your returns may increase over time. 

Section Four: What to invest in?

Investment Vehicle (Where to invest?)

401k, 403b, TSP, 457(b), SEP, etc.  These are classifications within the IRS code given to retirement plans that are tax advantaged. They are not investments, they are how your investments are classified by the IRS.  They are just assigned to different groups of workers.  The 401(k) is for people who work for private companies, the 403(b) is for non-profits, the 457(b) is for city and state workers, the TSP is for federal workers and a SEP is for the self-employed.  Investing in these types of accounts creates a significant advantage in building wealth by either deferring taxes until retirement or by the gains not being taxed. These accounts should be fully funded if possible.

 Types of accounts within your retirement plan

Traditional Individual Retirement Account (IRA)-This is a tax deferred account on your contributions and any earnings while accumulating.  Taxes are paid upon withdraw in retirement.

Roth Individual Retirement Account (IRA)-This is a tax-free account on all gains.  You pay taxes up front on your contributions but pay no further taxes on earnings forever.

Types of accounts outside your retirement plan

Non-Retirement Accounts-This could be a brokerage account that is set up at Vanguard or the other companies mentioned or at a local bank or credit union.  This account gives you the option to invest in mutual funds rather than just a bank savings account.

Evaluating your options

When selecting among these options, there are many variables.  If you invest in a company retirement program, do they offer a match which is an additional contribution of money?  This is something you want to know and consider.  It is free money.  Typically, they require you to invest the same amount of money they match.  Another consideration is to know what your company offers for investments.  Depending on whether your employer offers quality investment choices will affect where and how much money you invest.  If they have poor investment choices you will still want to get the match, so try to find the least expensive, broadest based fund that is offered or possibly a target date retirement fund.  If the choices are poor limit your investing within your company plan to the match and consider opening your own IRA outside of your company.  Another consideration is how long you will be with your employer.  Some companies have vesting periods on their retirement matches.  This means if you leave the company before the vesting period they may reclaim all or part of the money they contributed.

When deciding whether to invest in a Traditional IRA or Roth IRA, you should consider your tax bracket as well.  Each individual needs to weigh their own situation.  Conventional wisdom suggests that if you are in a low tax bracket, the Roth IRA is a better choice and if you are in a higher tax bracket the Traditional IRA is a better choice.  If you are paying low taxes there is less reason to defer them until later which is why a Roth IRA may be appropriate whereas if you are paying higher taxes the deferral of a Traditional IRA may help more now.  Because we don’t know what future tax rates will be, it’s a guessing game and either choice is better than doing nothing.

If you max out your retirement accounts, and still have the ability to save, you could open a non-retirement account for long-term investing.  In your non-retirement account, you can own the same index funds as within your retirement account.  There is no tax-deferral or tax-free gain on this account, but if you invest long-term your gains are taxed as capital gains which is typically lower than your personal income tax rate.  Currently, depending on your tax bracket, this could be zero.

Your bank or credit union is an option for short-term expenses in your daily life.  Other options for short-term money needs could include money market accounts or short-term bond index funds.  Money market accounts invest in very short-term securities such as government treasury bills.  Short-term Bond Index Funds invest in short-term bonds but can have some minor volatility.   These typically pay above average rates over a local financial institution.  You can easily set up electronic funds transfer online to shift money back and forth as needed. They are not insured like a bank or credit union checking or savings account.  Banks and credit unions also offer money market accounts that are not insured, so when making your deposits it is important to understand what type of account it is if deposit insurance is important to you.

Asset Classes to Invest In – Stocks, Bonds, & Real Estate

Stocks, bonds, and real estate produce income and are the easiest to invest in for a small investor through a low-cost index fund.  They can be purchased with minimal expenses and are easiest to understand.  Good examples would be a Total Stock Market Index Fund, a Total Bond Market Index Fund and a Total Real Estate Index Fund.  By investing this way, you are in effect, buying the U.S. economy, the ultimate in diversification.  Please keep in mind that these investments are not insured like a bank savings or checking account and there is no guarantee of return. 

Avoid commodities like gold, oil, bitcoin, etc.  These don’t produce income and are pure speculation.  Warren Buffett in a CNBC interview used a humorous way to describe bitcoin, “Last I checked if I owned bitcoin, no little additional bitcoins will come out.”  This emphasizes he purchases investments that produce income.

A personal residence is often described as a real estate investment.  Your home is a place to live, not a great investment. Conventional wisdom describes it as an appreciating asset, but if you track all the expenses attached to it, it probably is more like a depreciating asset.  There are many scenarios where renting may be better financially than owning a home.  There are many considerations when owning a home such as your quality of life but don’t make the assumption that it’s an automatic winning financial investment.  Many times, it’s not.  Being a small-time rental real estate investor can work for some people, but realize it is a business and can be difficult and risky.  A Real Estate Index is a better option for most people wanting to invest in real estate.

Historical Returns of Asset Classes 

Value of $1.00 invested in 1802 through 2001 in the United States financial markets before inflation and after inflation:

                                                      Before inflation           After inflation

  • Stocks                                           $8.80 million                $599,605
  • Bonds                                           $13,975                          $952
  • Cash-Treasury Bill                      $4,455                            $304
  • CPI-Consumer Price Index        $14.67                            $0.07
  • Gold                                              $14.38                            $0.98

Stocks are without question the best long-term investment throughout the history of the United States; nothing else compares.  This return is through incredible volatility including the Civil War, World Wars, nuclear bombs, presidential assassinations, etc.  The returns have been equal throughout entirely different times in US history including the agricultural era, the industrial era and now the service and tech era.  Over time, volatility is washed out of the stock price and it simply reflects the earnings of business.  Also note the dramatic affect inflation has on your money.

Why do stocks return more than bonds and bonds more than cash over the long-term?  It’s what’s called the risk premium.  Investors are rewarded due to the risk of each asset class.  For example, if you own stocks you are the owner of a business.  If that business were to fail, any debt is paid first (bonds) and the shareholders (owners) are the last to be paid with any liquidation.  Therefore, shareholders are generally rewarded with a higher return for their investment.

Adding an international stock index is a common way to diversify further.  The United States used to hold a large percentage of the world market, but now owns less than half.  Finance theorists now recommend what is called the “efficient frontier” to calculate the current best mix of markets.  Put simply, the efficient frontier is the sweet spot of risk and reward.  This currently would be approximately 70% US and 30% Intl in your stock allocation of your assets.  This can be achieved easily having just two index funds.  Your international index fund part of your portfolio should be held in an after-tax account preferably.  Under current U.S. tax law if foreign tax is paid in a non-retirement account it can used as a tax credit on your overall tax liability.  Retirement accounts are not eligible for the credit.  When investing in an International Stock Market Index Fund please read how the index is constructed within the prospectus.  They do vary some.  For instance, Vanguard offers a more diversified index than Schwab or TIAA.  Vanguard invests in both developed and emerging markets whereas the others listed invest in only developed markets.  This is important information to know regarding your diversification and estimated return.  From 1970-2001 the International Index achieved a return of 10.86% versus the United States achieving a return of 11.59%.  These returns are before inflation.

Choosing appropriate investments

Historical returns are approximately 10% for stocks, 5% for bonds and 3.5% for cash.  Investing in the right assets and the right mix (asset allocation) of those assets is important. Based on these historical returns, if you saved and invested $100.00 per month in stocks over 40 years, you would have:

$400,000.00 more than if you invested in cash at a bank.

$350,000.00 more than if you invested in bonds.

Stocks produced almost 5 times as much.

Understanding the risk and reward of each asset class is important.

Stock market volatility over different time periods

Timeframe                Total Return    Annual Return

  • 9/1929 – 6/1932        -81.75%              -46.14%  Great Depression
  • 9/1929 – 6/1945         17.55%               1.03%  Great Depression & WW II
  • 1/1966 – 1/1982          135.93%             5.51%  Subpar returns for 16 years
  • 1/1982 – 12/1999        2027.37%           18.61%  Amazing returns for 18 years
  • 1/1983 – 3/2017          3654.34%           11.20%  My investing lifetime.
  • 10/21/1987                -20.40%                               Black Monday 1-day loss
  • 3/2000 – 3/2003        -38.73%              -15.07%  Internet Bubble
  • 3/2000 – 3/2009        -38.55%              -5.27%  Internet & Housing Bubble
  • 3/2000 – 3/2017          126.84%             4.94%   17 years of subpar returns
  • 3/2009 – 3/2017          269.11%             17.73%  After Housing Bubble
  • 9/1929 – 3/2017          208693.43%       9.13%  Return since Depression

These time periods show the incredible volatility of the stock market.  There can be long periods of subpar returns as well as long periods of superior returns.  The key is to invest for the long-term and ride out the peaks and valleys.  A good example of long-term investing is my personal investing lifetime from Jan. 1983 – Mar. 2017.  The annual return is 11.20%.  There was an amazing up market followed by two bubbles and the market still provided an excellent overall return.  Also, important to note is that after Black Monday in 1987 the market ended still being up for the year.

Asset Class Volatility

Listed below are the best and worst annual compound returns over each time period listed.  This covers all time periods between 1802-2001.

Holding Period                Stocks          Bonds          Cash (T-Bills)

  • 1 Year Gain                       66.6%           35.1%          23.7%
  • 1 Year Loss                        -38.6%         -21.9%         -15.6%
  • 2 Year Gain                       41.0%           24.7%          21.6%
  • 2 Year Loss                        -31.6%         -15.9%         -15.1%
  • 5 Year Gain                       26.7%           17.7%          14.9%
  • 5 Year Loss                        -11.0%          -10.1%         -8.2%
  • 10 Year Gain                      16.9%            12.4%          11.6%
  • 10 Year Loss                      -4.1%             -5.4%           -5.1%
  • 20 Year Gain                     12.6%            8.8%            8.3%
  • 20 Year Loss                     1.0%              -3.1%           -3.0%
  • 30 Year Gain                     10.6%           7.4%            7.6%
  • 30 Year Loss                     2.6%             -2.0%           -1.8%

This is a remarkable chart.  After only 5 years, the volatility (loss) between asset classes is almost the same and after 10 years, stocks are less volatile than cash or bonds.  This is contrary to most conventional wisdom.  And as you can see, the returns for stocks are significantly higher on the upside.

Asset Allocation Historical Chart

This section will help you decide what percentage of your funds should be in each asset classification based on your goals and risk tolerance.  The returns listed are based on a historical risk return from years 1926-2015. (90 years) They are broken down into three categories used by the financial industry of Income, Balanced, and Growth.

Income-An income-oriented investor seeks current income with minimal risk to principal, is comfortable with only modest long-term growth of principal, and has a short- to mid-range investment time horizon.

                                             Return                  Best                     Worst            Yrs w/loss

  • 100% Bonds                       5.4%                 1982-32.6%         1969-(-8.1%)      14
  • 20%Stocks/80%Bonds   6.7% 1982-29.8%         1931-(-10.1%)    12
  • 30%Stocks/70%Bonds    7.2%                  1982-28.4%         1931-(-14.2%)    14

Balanced-A balanced oriented investor seeks to reduce potential volatility by including income-generating investments in his or her portfolio and accepting moderate growth of principal, is willing to tolerate short-term price fluctuations, and has a mid- to long-range investment time horizon.

  • 40%Stocks/60%Bonds    7.8%                   1933-27.9%         1931-(-18.4%)    16
  • 50%Stocks/50%Bonds    8.3%                   1933-32.3%        1931-(-22.5%)    17
  • 60%Stocks/40%Bonds    8.7%                    1933-36.7%         1931-(-26.6%)    21

Growth-A growth-oriented investor seeks to maximize the long-term potential for growth of principal, is willing to tolerate potentially large short-term price fluctuations, and has a long-term time horizon.  Generating income is not a primary goal.

  • 70%Stocks/30%Bonds    9.1%                   1933-41.1%         1931-(-30.7%)    22
  • 80%Stocks/20%Bonds    9.5%                  1933-45.4%         1931-(-34.9%)  23
  • 100%Stocks                        10.1%                  1933-54.2%         1931-(-43.1%)    25

There is nothing surprising here; the more stocks you own-the higher the return along with higher volatility and more losing years.  By looking at these data, it can help you decide how much volatility you can handle.  You will notice that 1931 and 1933 were the best and worst years as you add more stocks to your portfolio.  Many investors probably sold after 1931 because they were afraid of further losses.  This is a typical reaction, but the long-term investor that stayed the course had a large rebound in 1933.  Although this was easily the worst time to own stocks, this is how to maximize long-term returns by staying the course.  If you sell and try to time the market you will most likely end up with much smaller returns over the long-term.  This is what you have to decide.  Can you handle the wild swings in the market?  Making an honest assessment of your personality and your risk tolerance is how you decide to allocate your assets.  It is perfectly fine to invest in less volatile assets but keep in mind your expenses will most likely increase over time and your standard of living may drop.  Your goal with your investments at a base level would be to keep up with inflation (cost of living).

Non-correlated assets can increase return and reduce risk.  Non-correlating assets don’t typically go up or down at the same time.  This would include stocks, bonds and real estate investment trusts (REITs).  For instance, the performance of bonds does not correlate highly with the performance of stocks.  This means that bond prices don’t always move in tandem with stock prices.  Real estate in the form of a REIT index can add another layer, along with an international index fund potentially.  All of these can be non-correlating producing a seesaw affect, which reduces volatility and can increase your returns by rebalancing when one asset class goes up and another goes down.  An example of rebalancing would be when one asset class grows beyond your preferred percentage of allocation.  Say you wanted stocks at 60% and bonds at 40%. Your stocks then grow to 70%.  You would then sell 10% of your stock fund and buy 10% more in your bond fund.  This in effect helps you to buy low and sell high and maintains your preferred allocation.  Rebalancing could be done once a year or at a certain percentage of change in your assets like the 10% example listed above.  Rebalancing within retirement accounts doesn’t trigger any tax liability.  After-tax accounts outside of retirement can, so you should always try to work within your retirement accounts when rebalancing.

When formulating your asset allocation, you will need to take into account where you are now.  To do this, write down every asset you own including bank accounts, certificates of deposit, stocks, bonds, savings bonds, mutual funds, cash in your mattress, literally all of the money to your name.  This will include both work and retirement accounts.  To get an accurate picture you need everything.  This could be a good time to transfer old work retirement accounts into a personal IRA and condense and consolidate after you have made your allocation decisions.  Please keep in mind there is no tax liability when rolling over a retirement account, but it has to be done according to IRS rules.  If you are unsure contact your fund company or a CPA.

Each person has their own unique situation before deciding what asset allocation is right for them.  This could be age, risk aversion, size of your portfolio (how much money you have) along with different needs.  Over time your needs may change, and you should adjust your allocation as necessary. You may want to lower the volatility of your investments.  Each person has to make that decision based on what fits their life.

Consumer Price Index (CPI) 

The Consumer Price Index is how the government tracks inflation and is important to understand within the context of investing.  You can see there are long periods of time where prices rise faster than cash or bonds perform on average.  This of course is an average and every person will vary within their own purchasing decisions.  Depending on your age, just keep in mind what an item may have cost years ago and what it would cost today.  Take for example an automobile.  An average new car is probably five times as much today as when I was in high school in the 1970s.  Other examples would be the cost of health care, health insurance and a college education.  These have increased at a much higher level than the Consumer Price Index.  If you invest 100% in cash or bonds, you will struggle to keep pace with the ever-increasing costs in your life.

  • 1913-1919      9.80%
  • 1920-1929      0.38%
  • 1930-1939      -2.08%
  • 1940-1949      4.86%
  • 1950-1959      1.82%
  • 1960-1969      2.45%
  • 1970-1979      7.25%
  • 1980-1989      5.82%
  • 1990-1999      3.08%
  • 2000-2009     2.54%
  • 2010-2015      1.86%
  • 1913-2015      3.18% Long-term average

Investment returns before factoring inflation are called nominal returns whereas returns after inflation are called real returns.

Summary of Asset Classes

Stocks-The Good

  • Highest historical returns
  • High probability of excellent returns long-term (over 10 years0
  • Stands up to inflation long-term

Stocks-The Not So Good

  • Extreme short-term volatility
  • Long periods of sub-par returns
  • Accounts are not insured and there is no guarantee of return
  • Buying individual stocks can be complicated and risky

Bonds-The Good

  • Historical returns better than cash
  • Less volatile than stocks short-term
  • Bonds can be a good addition to reduce volatility in your portfolio
  • Government treasury bills and notes are backed by the U.S. government

Bonds-The Not So Good

  • Bond funds can suffer large losses with rising interest rates
  • Buying individual bonds can be complicated and risky
  • Buying junk, high-yield, or long-term bonds is risky
  • Bonds can struggle to keep up with inflation
  • Accounts are not insured and there is no guarantee of return
  • Bond funds should be held in your retirement accounts for tax purposes

Real Estate-The Good

  • Adds a layer of diversification to your asset allocation
  • When purchased in an index it’s easy to own a broad diversification of real estate
  • Purchasing individual funds or REITS can be risky and complicated
  • Returns historically since 1970 have been similar to stocks

Real Estate-The Not So Good

  • Can be volatile (think 2007-2008 housing bubble)
  • Owning your own real estate rentals can be challenging and risky
  • Should make up no more than 10% of your total stock allocation
  • Accounts are not insured and there is no guarantee of return
  • Real Estate Index Funds should be held in your retirement accounts for tax purposes

Cash-The Good

  • Cash is 100% stable with no loss of principal when deposited at your local bank or credit union in a savings or checking account
  • Accounts are insured at a minimum of $250,000.00 (excluding money market accounts and treasury bills).  Depending on your account structure and family size, your accounts can be insured for substantially more.  Banks and credit unions offer uninsured mutual funds and money markets so if insurance is important to you, be aware of what they are selling you.
  • You will know exact return on your money when you purchase certificates of deposit.
  • Cash is necessary for short-term expenditures and financial emergencies

Cash-The Not So Good

  • You lose purchasing power over time due to inflation
  • You would need to save far more of your income due to lower returns

Index Funds to Own

The best funds to own are broad-based low-cost index funds.  These can be found through Vanguard, Schwab, Fidelity and TIAA-CREF (University of Iowa Retirement Accounts only) as well as others.


Vanguard is a popular choice among many investors.  They were the company that started the low-cost revolution.  They are investor owned and have no equity shareholders to answer to.  You the customer are the owner of the company.  They have always had low costs across the board.  Several other companies listed below are very competitive and could be used instead of Vanguard depending on your personal situation. 

The Vanguard mutual funds listed below all have $3,000.00 minimums to open an account.  There are no contribution minimums once the account is set up.

  • Total Stock Market Index Fund Admiral Shares (VTSAX) .04% expense
  • Total Bond Market Index Fund Admiral Shares (VBTLX) .05% expense
  • Total Intl. Stock Market Index Fund Admiral Shares (VTIAX) .11% expense
  • Real Estate Index Fund Admiral Shares (VGSLX) .12% expense
  • Short-Term Bond Index Fund Admiral Shares (VBIRX) .07% expense
  • Prime Money Market Fund Investor Shares (VMMXX) .16% expense


Schwab offers other index fund options, and I have listed several:

  • Total Stock Market Index Fund (SWTSX) .03 expense; no minimum
  • Total Intl. Stock Market Index Fund (SWISX) .06% expense; no minimum
  • U.S. Aggregate Bond Index Fund (SWAGX) .04% expense; no minimum


Fidelity has lowered prices across the board with many index fund options that have no minimums.  They have purposely lowered their expenses below Vanguard.

  • Zero Total Market Index Fund (FZROX) .00% expense; no minimum
  • Zero Intl. Index Fund (FZILX) .00% expense; no minimum

They have many other index options as well.

TIAA-CREF (University of Iowa employees)

TIAA also offers many Vanguard Funds through the University of Iowa Retirement Plan.  It is easy to construct a low-cost index investment plan.  If you are not in the University of Iowa Retirement Plan the expenses on their index funds are much higher and they are not the best option to invest with.

The funds and their expenses listed below are within the University of Iowa retirement plan.  Any of these fund choices below would be satisfactory.  The funds all have low fees and the differences are negligible.

  • Total Stock Market Index Institutional Fund (TIEIX) .05% expense
  • Total Intl. Stock Market Index Fund Institutional (TCIEX) .06% expense

Lazy Portfolios

Lazy portfolios are investment plans devised by some of the smartest financial authors, planners, and managers who are advocates of index investing.  They vary from using two funds to as many as eight funds, but they all have one thing in common. They are invested in low-cost index funds and are simple and easy to manage.  These portfolios give you a great example of how easy investing can be with examples by experts in the field.  The creators of the lazy portfolios along with their credentials are listed below. After that is a link to the actual portfolios on the Bogleheads webpage.  This website is a sharing website on personal finance and investing and is a great source for information.

Rick Ferri – creator of Two Fund, Three Fund and Core Four Portfolio

  • Master of Science in Finance
  • CFA (Chartered Financial Analyst)
  • Authored 6 books on investing- Including All About Index Funds, All About Asset Allocation, Bogleheads Guide to Retirement Planning, The Power of Passive Investing, etc.
  • and Wall Street Journal columnist

Taylor Larimore – creator of Three Fund Portfolio

  • Authored 3 books on investing-Including the Boglehead’s Guide to Investing, The Boglehead’s Guide to Retirement Planning, and The Boglehead’s Guide to the Three-Fund Portfolio.
  • Honored by Money Magazine as Champion for the Small Investor

Scott Burns – creator of Couch Potato Portfolio

  • Graduate of Massachusetts Institute of Technology
  • Nationally syndicated financial columnist
  • Co-Founder of the website Asset Builder which advocates using index funds over stock picking through his “Couch Potato Portfolio.”
  • Author of many books including Reinventing Retirement Income in America, The Coming Generational Storm, and Spend ’til the End

Andrew Tobias – creator of Three Fund Portfolio

  • Graduate of Harvard University
  • Authored the Only Investment Guide You’ll Ever Need, Money Angles, and The Funny Money Game among others.

Bill Schultheis – creator of the Coffeehouse Portfolio

  • Fee-Only Financial Advisor
  • Wrote a syndicated investment column for 8 years
  • NPR contributor on personal finance
  • Author of The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life.

William Bernstein – creator of the Coward’s Portfolio

  • Neurologist, Professor and Financial Theorist
  • Founder of the Coward’s Portfolio which argues against anyone’s ability to pick stocks or time the market, showing that asset allocation is more important.
  • Author of The Intelligent Asset Allocator, The Four Pillars of Investing, The Investor’s Manifesto and Rational Expectations among others.

Frank Armstrong III – creator of the Ideal Index Portfolio

  • Certified Financial Planner, Accredited Investment Fiduciary Analyst
  • Contributor to The New York Times, CNN, Wall Street Journal, The New Yorker
  • Author of The Informed Investor, Investment Strategies for the 21st Century, The Retirement Challenge, Will you Sink or Swim?, and Save Your Retirement.

David Swenson – creator of the Lazy Portfolio

  • PhD in Economics from Yale University
  • Chief Investment Officer of the Yale University Endowment since 1985
  • Author of Unconventional Success which is an investment guide for the individual investor.

I listed all of their credentials to show you that some really smart people believe in index investing.  They don’t try to beat the market but simply to match it with the lowest cost expenses. Just doing this with as few as two funds puts you well ahead of the majority of investors including professional money managers.

There are other good options as well, that require even less work.  All of the major fund companies offer Target Date Retirement Funds.  These funds are set up by your estimated retirement date. For instance, 2030, 2035, 2040, 2045, etc.  The further you are from retirement or the younger you are; the higher percentage of stocks would exist in the fund.  As you age, the fund automatically rebalances its assets from stocks to bonds.  If you choose to purchase Target Date Funds, please remember that low fees are important, just like when you evaluate any other fund.  Vanguard offers low fees on their Target Date Funds but not as low as simply doing it yourself.  For instance, if you went with the Bogle model of just two funds, the Total Stock Market Index and the Total Bond Market Index, you could adjust it on your own as time went by without a lot of effort.  Doing it yourself also allows you to adjust your ratio based on your own risk assessment instead of someone else.  Either way is simple.

Create a long-term plan  

Decide what you are investing for.  Every individual has a different situation regarding what they are investing for.  There are many variables including age, income, net worth, etc.  Investing for a person with limited resources and no heirs would be entirely different than a high net worth individual who has many resources and is in effect investing for their heirs.

Your time horizon may be longer than you think.  If you are investing at age 25 and live to be 90, you time horizon is 65 years.  Your asset allocation may change as you age, but it is a long time period.  Even if you are 65, you are still looking at potentially a 30 year or longer investing timeframe.  Taken a step further, if you have far more money than you need to live on, you may be investing for your grandchildren and that timeframe could be 60 years or longer.  This is important to note when deciding on your asset allocation

Money needed within 5 years should be invested in some form of cash, such as a money market account or short-term bond index fund.

Once you have decided on your investing plan and asset allocation you might consider writing an Investment Policy Statement.  This is a simple written account of what your intentions are.  This can help keep you on track and also help your spouse or family understand exactly how you are invested and why.  Become an investor, not a trader or speculator.  Think long-term.

Section Five: Taxes and Your Investments

John Bogle conducted a study that illustrated how devastating the tax bite can be for actively managed funds.  Over a 16-year period, Bogle concluded that investors kept only 47% of the cumulative return of the average actively managed stock fund.  Indexes kept 87%.  Source:  Daniel R. Solin, The Smartest Retirement Book You’ll Ever Read

According to Kent Smetters a finance professor at the University of Pennsylvania, 97% of actively managed taxable funds fail to beat their benchmark index.  If they are one of the fortunate 3% to accomplish that goal they have less than a 20% chance of doing it again.  Source:  University of Pennsylvania Wharton School Radio podcast

Taxes and Retirement Accounts

The most important thing you can do for long-term investing returns is to max out your tax advantaged retirement accounts.  By deferring taxes now in a Traditional IRA or eliminating all future taxes on gains with a Roth IRA you will increase your returns dramatically.  Depending on your employment situation and income you may be able to invest in your employment retirement plan and an outside Roth IRA.  When you start to withdraw your retirement account investments, you will be taxed at your ordinary income tax rate for that year.  You are not taxed on any Roth IRA gains.

Taxes and Non-Retirement Accounts

If you are able to max out your retirement accounts and have the ability to save more, one option is to invest in index funds just like your retirement account.  Unfortunately, there will be no tax deferral or tax-free gains, but there are some potential tax advantages for stock funds.  If your investments are held for over 1 year, currently your gains are taxed as long-term capital gains rather than investments held for less than 1 year that are taxed as short-term capital gains.  Depending on your tax bracket you could pay as little as 0% federal taxes when you withdraw funds held for at least 1 year.  Short-term capital gains are taxed at your ordinary income tax rate.

Index funds do very little trading, so they incur very few short-term gains each year.  This is an important point to remember when you look at returns of mutual funds.  Even if a fund has a slightly higher return, your tax liability could drop it substantially.  Again, this makes the case for owning index funds.  If an actively managed fund is trading investments constantly trying to beat the market index, the tax liability will be substantial as shown above by John Bogle’s study.

Non-Stock Investments

It is best to hold your bond and real estate funds in your retirement accounts.  They both produce dividends that are taxed as ordinary income.  Stocks are taxed at the typically lower capital gains tax rate.  They can be a better option for your non-retirement account. This can be accomplished by dividing your overall asset allocation between retirement and non-retirement accounts.

Interest earned on your cash is taxed at your ordinary income tax rate.  This is historically the lowest returning asset class along with potentially being at the highest tax rate of your investments.


Depending on your personal situation a CPA (Certified Public Accountant) may be advisable.

Be aware of federal and State taxes.  Know your rates and work to take advantage of all existing tax laws. Taxes may well be the biggest expense in your life.  Be aware of your options to decrease them.

Be in the right types of accounts as you acquire wealth.  Wealthy people tend to have more capital gains and less ordinary income due to their investments.  You have the same options, take advantage of it and pay less in taxes.

Section Six: Personal Freedom

There are many things in life to save for including marriage, children, college, housing, travel, etc. but I believe first and foremost your personal freedom/retirement should be funded after paying off debt and establishing an emergency fund.  As you age you may have health issues or difficulty working for a variety of reasons.  Beyond Social Security there are no other options.  Taking control of your financial life, will help you live “your life” on “your terms”.  This section will show you a simple way to calculate how much you need to save for personal freedom/retirement.

How much of my gross income do I need to save?  

The short answer is a minimum 15% of your gross income.  This percentage based on historical norms should achieve the equivalent of your current income in 40 years (a typical career length), meaning it is inflation adjusted and your living standard could remain the same.  Here is an example using $60,000.00 gross income which is the average family income in America today.

Save $750.00 per month for 40 years at a 6.7% return.  Your total would be $1,713,982.00.

4% of $1,713,982.00 is $68,559.00.  This would be your annual withdraw rate.

Here is an explanation of the above numbers

The 6.7% is an inflation adjusted historical Total Stock Market Index Return.  The before inflation return is close to 10% but by using the inflation adjusted return, it shows the totals in today’s dollars, meaning a more accurate portrayal of what your money is worth in the future.  Your return will differ depending on your asset allocation. Say, if you were invested in a Total Stock Market Index at 60% of your assets and 40% in a Total Bond Market Index.  This allocation would most likely generate a lower return which would require a higher savings rate to come up with same numbers as above.

The 4% withdraw rate is based on numerous studies that have shown if you are invested in a minimum of 50% Total Stock Market Index Fund at a low cost in retirement, you have a high probability of your assets lasting at least 30 years in retirement.  This is with a couple of important things to remember; it has to be a low-cost index fund and you have to have at least 50% of your assets invested in the Total Stock Market Index.  If these two guidelines are not followed, it changes dramatically.  It is important to allow an inflation adjustment of approximately 3% each year into your calculations.  In other words, you give yourself a raise to keep your standard of living the same.  Source:  Trinity University Study 1998 updated 2009 

Your withdraw rate should be flexible.  You may be able to withdraw more if your investment returns are favorable, but the opposite is also true.  If the markets are down for an extended period you may need to lower your withdraw percentage.  Noted financial expert William Bernstein prefers a maximum withdrawal of 3% whereas J. L. Collins sees higher rates as possible when markets are up.  Just remember, it’s not about spending every dollar before you die.  It’s about living a comfortable stress-free life while you are here.  

An example of being flexible would be the returns of two portfolios with the same return but different time periods.  They both start with $1,000,000.00 and plan on withdrawing $75,000.00. The first portfolio is from 1954-1983, the second from 1973-2002.  During both 30-year time periods the market returned approximately 12% but there are vastly different results.  The first portfolio ended up with over $7,000,000.00 at the end of 30 years.  The second portfolio ran out of money after 16 years.  The difference is in the first two years.  The first portfolio was up 52.6% and 31.6%, the second portfolio was down -14.66% and -26.47% respectively each year.  On the surface it would seem withdrawing 7% annually when the market is returning 12% over a set time period would be no problem, but returns aren’t even.   It is important to keep your expenses low and your income flexible to avoid withdrawing money if possible during down markets.  It helps to keep a couple of years of living expenses in non-volatile investments to ride out market downturns.  Source: The Simple Path to Wealth by J. L. Collins

There are many online calculators for estimating your withdraw rate.  This calculation is called a Monte Carlo simulation.  These calculators estimate 5000 different market scenarios.  These include up and down markets of various lengths, intensities and combinations.  It then tells you what your odds are of having enough money for a defined amount of time, say 30 years.  There is one available at

Keep in mind if you are paying an advisor 1% a year to manage your investments and you are withdrawing 4% of your assets, they are taking 25% of your income during retirement.  Let that sink in a minute!  This is another reason to know exactly what fees are being paid on your investments. 

Defined Benefit and Defined Contribution Plans

These are names of retirement plans and it is important to understand the difference as it pertains to your investing.  

Defined Benefit Plan – this is a plan that is quickly disappearing.  It is a plan where your employer guarantees you an income for life after retirement through a pension that they manage for you.  At their peak these plans covered almost 50% of private sector workers but today it is less than 10%.  

Defined Contribution Plan – this is the plan you are most likely in today with your employer.  The responsibility for managing the account along with making contributions has shifted to you.  This would be your 401(k) or for non-profits the 403(b). 

You may long for the “good old days” but they aren’t coming back, and I prefer to look at this as an opportunity.  Having shown that most money managers fail to perform at an average market level and charge excessive fees you will probably end up with more money doing it yourself.  If that hasn’t convinced you, take a look at some recent headlines from the past few years below.  Do you want them managing your money?

  • Pension Newspaper Headlines
  • America’s Pension Bomb:  Illinois Is Just the Start
  • IPERS’ Unfunded Liability Nears $5.6 Billion
  • UPS to Freeze Pensions for 70,000 Nonunion Workers
  • Expert Warns of IPERS Future
  • IPERS:  Pension Thefts May Be Linked to Database

“The typical pension plan is invested in the market, with the belief that those stocks and bonds will produce a certain return over time.  The plan issuers-say, state or local governments or corporations-have the responsibility to make good on their obligation to you.  But you always have to worry indirectly, because you don’t know for sure if those promises will be kept. – Jack Bogle, founder of Vanguard in AARP interview with Jack Otter

“Our employer-based savings system is a mess.  Everywhere you look, you see mismanagement, malfeasance, and meltdown…This situation didn’t happen by accident.  The federal government, with its own $11 trillion unfunded Social Security liability, has condoned the underfunding of private pensions for decades.” – Laurence J. Kotlikoff, professor of economics at Boston University

The above quotes aren’t meant to instill fear but to show that even if someone else is investing for you, they are investing in similar investments as you would be on your own, only charging more and returning less.  Understanding where the money is coming from, going to, how and where it is invested, and how much you are being charged is a much better situation for you.  

The information above doesn’t include your estimated social security payment which of course can and should be used to plan your future.  This is the focus of the next segment.

Section Seven: Social Security

This is a very important program to many people, but I believe isn’t completely understood.  It isn’t just a retirement pension, it’s more like an insurance program to protect you and your family in different ways.  It can be complicated, and it is important to review it thoroughly before taking any benefits.  

Many people believe that Social Security won’t exist when they are eligible for benefits but that is highly unlikely.  Currently, if congress doesn’t act, sometime in the 2030’s the system will only be able to pay out 77% of benefits.  This program is too important for many citizens and I would be surprised if no action was taken.  This may be an increase in retirement age, increase in taxes, decrease in benefits or a combination of all of the above.  

Social Security Website – Open up your personal account at this website.  This is where you should start.  It will show your estimated benefits, work earnings history and provide calculators for estimating different payout scenarios.  Make sure you check your work earnings history for accuracy and notify Social Security of any correction.  Your benefit could be negatively affected with incorrect or incomplete information.

Social Security Benefits

Social Security provides retirement benefits, disability benefits, death benefits, and survivor benefits.  These are provided in a myriad of ways.  Benefits can be eligible to married spouses with no work history, divorced spouses, spouses and children of the deceased, if you become disabled, and retirement.  The rules can be quite complex, and it is important to review your options thoroughly before taking any benefits.  Some benefits can be taken and then changed to a different benefit later while others can’t be changed.  If you make the wrong decision it could cost you thousands of dollars in missed benefits.  Review all benefits offered to make sure you aren’t missing out on any that you are eligible for.

Here is an example of benefits that are listed on a Social Security Statement.  Your personal benefits will vary depending on your work history and income.

  • Retirement – Full Retirement Age $2484 a month
  • Retirement – Age 70 $3225 a month
  • Retirement – Age 62 $1905 a month
  • Disability – $2472 a month
  • Family – If you get retirement or disability benefits your spouse and children also may qualify for benefits.
  • Survivors – Your child $1856 a month
  • Survivors – Your spouse who is caring for a child $1856 a month
  • Survivors – Your spouse, if benefits start at full retirement age $2475 a month
  • Survivors – Your family benefits cannot be more than $4332 a month

When you contact Social Security for information you need to be very careful about the information that is given to you.  To quote Social Security, “They don’t give advice, they provide information.”  Unfortunately, due to the complexity of the program you may receive incorrect information from Social Security’s own personnel.  Before, applying for any benefit it is important to get multiple opinions and thoroughly research what you are doing.  Social Security has many rules which aren’t necessarily clear. These include paying retroactively back six months when you file for benefits which could lower your benefits permanently due to a reduced age at application.  They may also automatically deem (this is social security lingo for permanently deciding your benefits) you into your highest current benefit when in fact that may not be the best situation for you.  Another potential pitfall is collecting your benefit at age 62 or any time before your FRA and continuing to work.  You may be penalized if your income is above certain social security thresholds.  Making the wrong decision could cost you thousands of dollars in benefits and possible leave your spouse or family with lower benefits.  

If you turned 62 before January 1st, 2016 you are eligible for some benefits that have been eliminated by an update in the Social Security regulations.  Understanding this can substantially add to your benefits in certain situations.

The book Get What’s Yours for Social Security is the most detailed book on Social Security that I have seen.  It would be worth reading the latest edition before filing for any benefits.  One of the authors, Laurence J. Kotlikoff, has a website called maximize my social security.  There is a link in the recommended resources section.  This website will help you decide when to take benefits and which benefits to take.  There is a charge for the service, but Professor Kotlikoff is one of the foremost experts on Social Security in our country and if you are unsure it is a small price to pay for what could be millions of dollars in benefits for you and your family. 

Social Security Retirement Benefits

This is the benefit that most citizens become eligible for at age 62.  It is critical to understand how the system works regarding payouts as you age.  There are hundreds of thousands of dollars at stake.  Waiting for your full retirement age (FRA) currently between 65 and 67 depending on when you were born will increase your payout 6-7% annually plus an inflation adjustment.  From your FRA until age 70 your payout increases by 8% annually plus the inflation adjustment.  Put simply, if you wait until age 70 you will receive benefits worth 76% more than age 62.  The investment return generated is excellent.  Yes, I called it an investment return and it’s guaranteed.  Many people reason that taking the money as soon as possible is their best scenario for them but there are a number of things to consider.  If you are unable to work and have limited resources or if you have a family medical history of a short lifespan, you might consider taking your benefits immediately but for most individuals not taking benefits for as long as possible is the best course of action.  There is no additional benefit for waiting past age 70, so it is important to file then as Social Security will not pay benefits missed.

Listed below is a table showing a real-life example of some different ways to examine your benefits.  I have said there are thousands of dollars at stake and this will show that.  FRA stands for full retirement age by the Social Security Administration.  Spouse #1 would be 66 years 4 months at FRA and Spouse #2 would be 67 years at FRA.  Spouse #1 is 6 years older than Spouse #2.  This table shows their social security payouts at combinations of ages 62, FRA, and 70 for starting their benefits.  It shows the monthly and annual payouts along with totals when this couple reaches age 90 and 84 along with 95 and 89.  According to Social Security shown on their actuarial tables the average 65-year-old male in 2016 will live to be 83 and the average female will live to be 85.  According to the Society of Actuaries the average is higher at 87 and 89 respectively.  These are just averages, there is a good chance you may live longer.

                                                           Monthly          Annual          90/84              95/89             

  • Spouse #1 Age 62            $1874               $22488         $629664        $742104
  • Spouse #2 Age 62            $1657               $19884          $437448         $536868
  • Total                                   $3531              $42372          $1067112         $1278972
  • Spouse #1 FRA                 $2484              $29808         $700488         $849528
  • Spouse #2 Age 62            $1657               $19884          $437448         $536868
  • Total                                  $4141               $49692         $1137896         $1386396
  • Spouse #1 Age 70            $3225               $38700         $774000         $967500
  • Spouse #2 Age 62            $1657               $19884          $437448         $536868
  • Total                                  $4882               $58584         $1211448          $1504368
  • Spouse #1 Age FRA        $2484               $29808        $700488         $849528
  • Spouse #2 Age FRA         $2353               $28236        $480012          $621192
  • Total                                 $4837               $58044        $1180500        $1470720
  • Spouse #1 Age 70           $3225              $38700        $774000          $967500
  • Spouse #2 FRA                 $2353              $28236        $480012          $621192
  • Total                                  $5578              $66936        $1254012         $1588692
  • Spouse #1 Age 70           $3225              $38700         $774000         $967500
  • Spouse #2 Age 70           $2918               $35016          $490224        $665304
  • Total                                 $6143              $73716           $1264224       $1632804
  • Spouse #1 Age 62            $1874                $22488         $629664        $742104
  • Spouse #2 FRA                 $2353               $28236         $480012         $621192
  • Total                                   $4227               $50724         $1109676         $1363296
  • Spouse #1 Age 62            $1874                 $22488         $629664         $742104
  • Spouse #2 Age 70            $2918                 $35016          $490224         $665304
  • Total                                  $4792               $57504          $1119888         $1407408

Let’s assume that this couple is in good health and has no known family medical history that may shorten their lifespan.  If they live to be 95 and 89 and hold off taking their benefits until they are both 70 rather than both taking them immediately at age 62 they will receive an additional $353,832 in benefits.  If they live to be 90 and 84 they will still receive an additional $197,112 in benefits.  This is significant for most people.  Another example is Spouse #1 waiting until 70 and Spouse #2 taking their benefit at age 62.  They still end up with $225,396 in additional benefits then if they both started at age 62 and by doing this if Spouse #1 passes away prematurely, the Social Security Administration then allows Spouse #2 to take over the larger benefit and is protected long term.  Previously, I mentioned that Social Security could be viewed as an investment.  A good way to look at this is based on the 4% withdrawal rule mentioned in the Personal Freedom Section.  If both spouses wait until 70 to claim their benefits the total annual benefit is $73,716.  Using the 4% rule, that would be the equivalent of another $1,842,900 in savings.  In other words, $73,716 is 4% of the $1,842,900.  Also, the 6 to 8% return plus inflation by waiting each additional year is an outstanding return that you may not achieve with your own investment accounts.  So, it may seem counterintuitive, but it could be wise depending on your own situation to spend down some of your savings instead of claiming benefits early.  

These are just a couple of examples but there are many variables to look at before taking benefits.

Section Eight: Wealth in America

It’s not what you think.  A book entitled Stop Acting Rich! by William J. Stanley (author of The Millionaire Next Door) influenced me to add this section.  It is important to debunk commonly held assumptions about wealth in America.  These assumptions are what keep most people from achieving their financial goals.  By exposing these “myths” you will realize that you can achieve some wealth. 

When you follow the “actual” behaviors of millionaires you will notice two things; they didn’t start out much different than you and they are frugal with their money regarding material possessions.   Another book just released titled Everyday Millionaires by Chris Hogan reinforces these ideals even more with a sampling of over 10,000 millionaires surveyed.

How does your wealth measure up to others 

Wealth Percentile          Net Worth

  • 90%                                    $1,182,390.36
  • 50%                                    $97,225.55
  • 20%                                    $4,798.06
  • 10%                                   (-$962.66)

Source: from the 2016 Federal Reserve Survey of Consumer Finances

This table shows how few people are wealthy in spite of the fact, I have shown that it’s not that hard.  If you have managed to scrape together $5,000.00, you are ahead of 20% of the population.  It would appear that as a country we spend everything we make and then some.  Don’t buy into the culture, buy your freedom.

Taxes paid by the wealthy

In 2012, the top 50% of all taxpayers (69.2m filers) paid 97.2% of all income taxes while the bottom 90% (124.5m filers) paid the remaining 2.8%.

The top 1% (1.3m filers) paid a greater share of income taxes (37.8%) than the bottom 90% (124.5m filers) combined (30.2%).

The top 1% of taxpayers paid a higher effective income tax rate than any other group, at 27.1%, which is over 8 times higher than taxpayers in the bottom 50% (3.3%).  


This information may surprise you, but it would appear the high-income earners in this country do in fact pay a substantial amount of income tax.  One tax law they take advantage of is paying less tax on their long-term investments by holding them for over a year and not trading or selling.  This same advantage is available to you and may even be lower rates than the wealthy can receive.  Currently if you are in the lowest two income tax brackets you would pay no taxes on your gains!

Habits of the Wealthy

  • They live well below their means.
  • They allocate their time, energy, and money efficiently.
  • The believe that financial independence is more important than displaying high social status.
  • Their parents didn’t provide economic outpatient care.
  • Their adult children are economically self-sufficient.

Source:  The Millionaire Next Door by Thomas Stanley & William Danko

Again, probably surprising information to some people.  The images that we see of “rich” people don’t match up with reality.  In fact, according to most of the research you wouldn’t even have any idea who they are by appearance.  Chances are, the people you assume are wealthy through their use of material items such as clothes, cars, jewelry, large homes, expensive vacations, etc. are not.  

You might say that millionaires practice “simple living.”