More on this book
Community
Kindle Notes & Highlights
Loss aversion is the flip side of overconfidence. Although overconfidence tends to make us overly bold, loss aversion makes us overly timid about investing.
Many of us have a tendency to confuse the familiar with the safe and overrate the value of what we already own. That’s the endowment effect.
Mental accounting is the habit of treating money differently, based on where it comes from.
anchoring—clinging to an old belief or comfortable opinion despite the fact that they may be harmful to your wealth.
Finally, procrastination is the biggest detriment to financial success.
The last suit we wear doesn’t need any pockets.
there are two simple ways to remain financially flexible and reduce the odds of running out of money. First, keep your fixed living expenses as low as possible.
You need to have the flexibility of spending less during bear markets and more during bull markets.
The second way to increase spending flexibility is to have a viable way to earn income if needed.
A final way to ensure income for life is to use part of your savings to purchase an immediate annuity that guarantees a fixed monthly income
when stock market returns are above average, they are usually well over 10 percent per year. When they are less than average, they are usually negative and reduce the value of a portfolio. Worse yet, above- and below-average returns tend to run in consecutive years but without a predictable pattern.
Most of the credible studies of 30-year portfolio survival rates conclude that you can withdraw from 4 to 6 percent of the portfolio value per year with a good chance of not exhausting the portfolio, depending on your portfolio’s asset allocation.
people tend to make three types of insurance mistakes: Insuring the unimportant while ignoring the critical Insuring based on the odds of misfortune Insuring against specific, narrow circumstances
You can greatly reduce or eliminate common insurance mistakes by following three simple rules: Only insure against the big catastrophes and disasters that you can’t afford to pay for out of pocket. The cheapest insurance is self-insurance. Carry the largest possible deductibles you can afford. The larger the deductible, the more you are self-insuring and the cheaper the premium will be. Only buy coverage from the best-rated insurance companies. You need insurance companies you can depend on when you need to file a claim.
If you have no dependents or are financially independent, you don’t need life insurance. If you have a substantial estate to leave to your dependents, you may not need life insurance.
If you need life insurance, buy term insurance. Term insurance is basic pay-as-you-go, no-frills insurance.
We don’t believe in mixing investing with insurance. Insurance is for protection and investing is for wealth building. Don’t confuse or mix the two.
Term insurance is purchased at a fixed rate for specified periods of time such as 5, 10, 15, or 20 years. The longer the period, the higher the rates will be. Buy the longest period that you can afford and need.
If you’re not covered by a group plan and need to purchase your own health care insurance, the most important feature is major medical coverage. That’s the part of the plan that covers the big bills such as hospitalization, X-rays, lab work, surgery, doctors’ charges, and rehabilitation services. The lifetime benefit of the policy should be a minimum of $1 million and preferably $2 million.
You can reduce the cost of a health insurance policy by taking the highest deductible and co-payment percentage that you can afford.
If you are under 65 and considering a high-deductible health care plan, you may want to consider establishing a health savings account (HSA). HSAs combine high-deductible health insurance with tax-favored savings.
Any money taken out of the account to pay for health care is tax-free. Any money that remains in the account grows on a tax-deferred basis.
HMOs frequently limit your choice of doctors and some services. If freedom to select your choice of physician is important, you probably don’t want an HMO policy.
buy as much disability coverage as you think you’ll need. The maximum amount you can purchase is usually 60 percent of your income.
you need a homeowner’s or renter’s policy to cover your residence and its contents in the event of a fire, flood, earthquake, robbery, or any major catastrophe. The two words you need to remember when buying this type of coverage are replacement cost.
Don’t assume that your policy covers all disasters such as floods and earthquakes, because it probably doesn’t. You usually have to purchase a rider. Do it. Cover all potential disasters.
you need to protect yourself against potential lawsuits that could wipe you out. In our litigious society, it’s an absolute must. Purchase a personal liability umbrella policy of at least $1 million, or an amount to cover your total net worth.
If you find yourself with liquid assets of between $200,000 and $2 million when you reach your mid- to late fifties, give serious consideration to buying long-term care policies for you and your spouse.
Similarly, for those with wealth who want to pass on their assets, owning a long-term care policy eliminates the need to retain a large portfolio in case long-term care were to be needed.
We recommend buying insurance from a company with an A. M. Best rating of A or better. To check the financial strength and overall quality rating of an insurance company, go to www.ambest.com.
Once you locate a good agent, it’s a good idea to give the agent as much of your insurance business as you can. By doing that, you become a more important customer and it’s in that agent’s best interest to see that you are well covered and well served.
Except in some limited situations involving small estates, your will must go through probate. Depending on your state, probate can be both costly and time consuming.
if you own assets individually and die without a will (intestate), the court would appoint both the executor and the legal guardian for any minor children.
The assets in a living or revocable trust avoid probate in your state of residence and also in other states where you might own property, if the out-of-state property is placed in the trust.
With a trust, there is a much smoother transition after your death, and the disposition of assets can start immediately.
If you do decide to create a living trust, you’ll need to retitle and transfer your assets into the trust. You can name yourself as the trustee while you’re alive, which means that you’ll still retain full control over the trust’s assets, just as you did when you owned them outside the trust.
A durable power of attorney for finances allows someone you designate to manage your financial affairs and act on your behalf in financial matters if you should become incapacitated and unable to take care of them on your own.
A durable power of attorney for health care allows someone you designate to oversee your medical treatment and make medical decisions on your behalf when you’re unable to do so.
If you have more than adequate assets and plan to leave a legacy to your heirs, you may wish to consider going against conventional wisdom, which says to spend down your taxable accounts first and then your tax-deferred accounts last.
With a charitable trust, you can make a donation, get a tax write-off, and receive annuity payments for the balance of your life.
One final document that you should prepare is a letter that contains your desires and instructions regarding your funeral arrangements or cremation and possible organ donations, that gives the location of any important papers, and perhaps contains final messages for those you’ve left behind.
