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Automatic wealth The 6 steps to financial independence - Masreson M.

Masreson M. Automatic wealth The 6 steps to financial independence - Wiley & sons , 2005. - 291 p.
ISBN 0-471-71027
Download (direct link): automaticwealththesixstepsto2005.pdf
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Most of the money I put in the stock side of my portfolio is invested in no-load funds that track major markets. But now and again I’ll have some fun with an individual stock that is recommended by someone I trust and follow. In either case— stocks or stock funds—I’m not looking to get the best possible return for my money. I’m looking for a better return than bonds, but I’m happy with the return that the market has historically afforded—about 10 percent.
By following the advice of certain conservative investors, I’ve been able to achieve a slightly higher than average rate of return on stocks. My goal is currently 12 percent, and I’m thinking it might be possible to hit 15 percent. But I am not betting my retirement on that. Of my total investable wealth, less than 10 percent is ever invested in stocks of any sort. With a side business and real estate giving me superhigh, relatively risk-free yields, why would I want to take risks with stocks?
Stage Four: What to Invest in When You Are Financially Independent
When I first retired, at age 39, I did nothing but paint pictures and write short stories for a year. This was an enjoyable way to pass my time—but my income that year (not counting passive investments) was $600. I realized that would never do. I needed to find some sort of retirement hobby that could make me money. That hobby, as it turned out, transformed into a full-time consulting position, which earned me millions more than I needed and robbed me of a lot of the time I wanted to paint and write stories.
You don’t want to make the same mistake. That’s why it’s so important to come up with your retirement plan now—and stick with it when the moment comes.
How Will You Know When You’re Financially Independent?
When I use the term financially independent, I mean that you have at least 10 times the amount of posttax income you need to enjoy the
Step 6: Retire Early 253
kind of life you want to live. (By now, you should have figured out what that number is.)
If, for example, you are confident you can live well on $80,000, you have to have an income, before taxes, of about $120,000 per year. (I’m using an overall tax rate of 30 percent here, which is probably a fair estimate if you consider that you’ll be paying the top tax rate on only a portion of your income—and if you use a personal corporation and enjoy a retirement business, some of your expenses will be tax deductible.)
Ten times $120,000 is $1.2 million—the retirement nest egg you’ll need to pay for your lifestyle without ever digging into your principal.
As I explained before, if you’re a conservative planner, you might want to budget up on this—making $1.5 million your financial independence target. But don’t try to pinpoint the exact amount of savings you’ll need. There are too many variables in the economy and in your future to do that accurately anyway. The idea is to realize that you need a sizable chunk of savings—probably millions—and to plan your financial life to achieve that goal.
If and when you do, you’ll be able to relax and consider yourself financially independent. And if you are smart, when you hit that number, you’ll radically change your life so that you can have more time to enjoy those things that really matter to you.
Once You Reach That Point, How Should Your Retirement Portfolio Be Set Up?
My recommendation is very simple. I suggest you have your wealth invested in a combination of the following:
• Stocks and stock index funds
• Fixed-income instruments
• Managed real estate
• Emergency cash and gold
• “Play” money
Let’s take a look at these five investments, one at a time.
1. Stocks and stock index funds. As I pointed out before, you won’t need much money in stocks if you have a reasonable amount in real estate. Stocks will give you a 10 percent return, on the
average. Real estate should give you more than that, particularly if you are valuing it at cost and you’ve been holding onto it for 7 to 15 years.
I will probably never have more than 10 percent of my money in equities (of any kind), because I don’t get any enjoyment out of equity investing. But if you like watching the stocks you pick go up and down, I believe a 20 percent commitment is reasonable.
I wouldn’t recommend more than 20 percent—even for a 50- or 60-year-old retiree. Why? Because the stock market, generally (and individual stocks, especially), is unpredictable in the short term. And when you are living out your golden years, everything is short term.
2. Fixed-income instruments. I like bonds—even in today’s low-yield environment. Quality bonds give you the peace of mind that you should be looking for in retirement. I like all sorts of bonds, but I’m particularly fond of municipal bonds. They are very safe and offer tax-free income. So a return of 5 percent, for example, would be worth about 7.5 percent if you are in the top tax bracket.
The thing I like best about bonds is how simple they are. If you hold them till they mature, as I do, they are the perfect zero-hassle, zero-worry investment. You know what return you are getting when you buy them . . . and that’s the end of it. Bond funds are a good alternative if you want to diversify a bit. Like individual bonds, they can give you a fixed rate of return, simplicity, and peace of mind.
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