The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life

by J.L. Collins

if you are willing to do a bit more work, you could slightly smooth out the wild ride and possibly outperform over time by adding 10-25% in bonds. If you do, about once a year you will want to rebalance your funds to maintain your chosen allocation. You might also want to rebalance any time the market makes a major move (20%+) up or down. This means you will sell shares in whichever asset class has performed better and buy shares in the one that has lagged.

Flexibility. How willing and able are you to adjust your spending? Can you tighten your belt if needed? Are you willing to move to a less expensive part of the country? Of the world? Are you able to return to work? Create additional sources of income? The more rigid your lifestyle requirements, the less risk you can handle.

Is there an optimal time of year to rebalance? Not really. I’ve yet to see any credible research indicating a particular time of year works best. Even if someone were to figure it out, once known everybody would rush to it, negating the effect. I do suggest avoiding the very end/beginning of the year. It is a popular time for rebalancing and many are engaged in tax selling and new buying.

Next, as a rule it is better to buy and sell in tax-advantaged accounts to avoid creating taxable events.

The results show the rebalanced portfolios outperformed but by a margin so slight it can be attributed to noise as much as the strategy.

You have bridges to build, nations to run, great art to create, diseases to cure, businesses to build, beaches to sit on. I’m here for you bunkie.

Vanguard is as well with a series of 12 TRFs (Target Retirement Funds).

For example, the exact same portfolio held by VTSAX can be found in six other funds, or what Vanguard calls “classes.” Below I list them followed by their expense ratios and required minimum investment. The first three are for us individual investors: Admiral Shares: VTSAX .05%/$10,000 Investor Shares: VTSMX .17%/$3,000 ETF: VTI .05% (ETF=exchange traded fund)

major mutual fund company now offers low-cost index funds. Just like the variations you can find in Vanguard of VTSAX, you can in all probability find a reasonable alternative in your 401(k). Here’s what you are looking for: A low-cost index fund. For tax-advantaged funds you’ll be holding for decades, I slightly prefer a total stock market index fund but an S&P 500 index fund is just fine. You can also look for a total bond

Let’s look at our three investments and consider where they might fit: Stocks: VTSAX (Vanguard Total Stock Market Index Fund) currently pays around a 2% dividend and most of the gain we seek is in capital appreciation. It is tax-efficient and we can use our ordinary bucket. However, since this will be a large portion of our total holdings and since any investment can benefit from the tax-advantaged bucket, we will also hold it in our tax-advantaged buckets. Bonds: VBTLX (Vanguard Total Bond Market Index Fund): Bonds are all about interest payments. Other than tax-exempt municipal bonds, they go into our tax-advantaged bucket. Cash: is also all about interest but, more importantly, it is all about ready access for immediate needs. Ordinary Bucket.

These are buckets provided by your employer, such as a 401(k). They select an investment company that then offers a selection of investments from which to choose. Many employers will match your contribution up to a certain amount. The amount you can contribute is capped. For 2016, the cap is $18,000

401(k) and 403(b) Type Plans Contributions you make are deductible from your income for tax purposes. Taxes are due when you withdraw your money. Money withdrawn before age 59 1/2 is subject to penalty. After age 70 1/2 your money is subject to RMDs.

In short, these can be summarized like this: 401(k)/403(b)/TSP = Immediate tax benefits and tax-free growth. No income limit means the tax deduction for high income earners can be especially attractive. But taxes are due when the money is withdrawn. Roth 401(k) = No immediate tax benefit, tax-free growth and no taxes due on withdrawal. Deductible IRA = Immediate tax benefits and tax-free growth. But taxes are due when the money is withdrawn. Deductibility is phased out over certain income levels. Non-Deductible IRA = No immediate tax benefit, tax-free growth and added complexity. Taxes are due only on the account’s earnings when the money is withdrawn. Contributions can be made regardless of income. Roth IRA = No immediate tax benefit, tax-free growth and no taxes due on withdrawal. A better Non-Deductible IRA, if you will. But eligibility phases out over certain income limits.

here is my basic hierarchy for deploying investment money: Fund 401(k)-type plans to the full employer match, if any. Fully fund a Roth if your income is low enough that you are paying little or no income tax. Once your income tax rate rises, fully fund a deductible IRA rather than the Roth. Keep the Roth you started and just let it grow. Finish funding the 401(k)-type plan to the max. Consider funding a non-deductible IRA if your income is such that you cannot contribute to a deductible IRA or Roth IRA. Fund your taxable account with any money left.

Let’s finish this chapter with the recommendation that, whenever possible, you roll your 401(k)/403(b) (but not your TSP) accounts into your personal IRA. Usually this will be when you leave your employer.

I’ve always been slightly paranoid about having my employers involved in my investments any longer than I had to. The moment I could roll my 401(k) into my own IRA, I did.

Fail to take your full distribution and you’ll be hit with a 50% penalty.

The bottom line is that anyone using a high-deductible insurance plan should fund an HSA.

Whenever a new grandchild was born, she would put in a starting amount equal to what was in the older children’s accounts. The earliest record is from 1994. At the start of that year, there was approximately $6,700 in the account and $1,000 was added by my grandparents each year until it hit around $25,000.

Currently, the maximum annual IRA contribution limit is $5,500 and he should try to fund it as close to the limit as possible.

A 50% savings rate is my suggestion, but others more committed to having F-You Money commonly reach for 70-80%.

You’ll recall the research shows ~20% outperform in any given year and looking at a 30-year period that drops to less than 1%. Statistically speaking that’s a rounding error;

“Wisdom comes from experience. Experience is often a result of lack of wisdom.” —Terry Pratchett

In the Berkshire Hathaway 2013 annual shareholder letter Buffett writes: “My advice … could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

bright analysts this firm employed. Each focused on one, maybe two industries and within those industries perhaps 6-10 companies and their stocks.

my enormous stock picking hubris was clear. Somehow reading a few books and 10-K annual reports7 was going to give me an edge?

Perhaps the best of these is The Intelligent Investor written by Warren Buffett’s mentor, Benjamin Graham.

when Graham wrote it in 1949, Jack Bogle’s first index fund was still 25 years away. Even actively managed mutual funds were few and far between. Analyzing and choosing individual stocks then was a far more necessary and useful skill. But as early as the 1950s, Mr. Graham was warming to the concept of indexing and by the mid-1970s in interviews was fully embracing its value.

A little humility goes a long way in saving your ass and your cash.

“Don’t worry. I can’t be conned.” “With that you have,” I said (and by this point my voice, I fear, was raised) “just violated the first rule of not being conned!” Make no mistake. You can be conned. So can I.

Rule #1: Everybody can be conned.

Rule #2: You are likely to be conned in an area of your expertise.

Rule #3: Con men (and women) don’t look like con men.

Rule #4: 99% of what they say will be true.

Rule #5: If it looks too good to be true, it is.

“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.” —Groucho Marx

So, you’ve followed the simple path big three: You’ve avoided debt You’ve spent less than you’ve earned You’ve invested the surplus

the “4% rule.” Unlike most common advice, this one holds up to our beady-eyed scrutiny pretty well,

in most cases the people owning these portfolios could have taken out 5, 6, 7% per year and done just fine.

Withdrawing 3% or less annually is as near a sure bet as anything in this life can be. Stray much further out than 7% and your future will include dining on dog food.

If you absolutely, positively want a sure thing and your yearly inflation raises, keep your withdrawal rate under 4%. And hold 75% stocks/25% bonds.

In fact, the authors of the study suggest you can withdraw up to 7% as long as you remain alert and flexible. That is, if the market takes a huge dive, cut back on your withdrawals and spending until it recovers.

said another way, your assets now equal 25 times your annual spending.

Plan your financial future assuming Social Security will NOT be there for you. Live below your means, invest the surplus, avoid debt and accumulate F-You Money.

if you are married and filing jointly you are allowed a standard deduction of $12,600 in 2015. Should you have less than that in itemized deductions you are better off taking the standard deduction and saving yourself the effort.

You can open your own foundation with as little as $25,000.

Avoid debt. Nothing is worth paying interest to own.

Spend the next decade or so working your ass off building your career and your professional reputation.

Sometime in your early to mid-thirties (or 10-15 years after you start) two things will happen: Your career will be hitting its strongest surge and you will be closing in on financial independence.

Once 4% of your assets can cover your expenses, consider yourself financially independent.