Do you think you need to make a lot of money?

Or know what the best stocks are to invest in each year?

Of course not!

I’m a huge fan of early retirement stories of the everyday-man; stories that prove that good-ole fashioned saving, simple investing, and living within your means CAN and WILL provide you with not just the means to enjoy a healthy retirement, but (when used correctly) the opportunity to retire 20 years ahead of the typical schedule!

One incredible example of this has been captured in the outstanding ebook “How to Retire Early” by Robert and Robin Charlton.  The book tells the tale of exactly how the two of them were able to retire after just 15 years of saving by the tender age 43!

They go to great lengths to tell you just how much money they saved each year, what steps they took to get there, and how their general attitudes and philosophies played a major role throughout the entire process.

So who is this early retirement power couple?

Who Are the Charlton’s?

From all accounts, the Charlton’s seem to be a couple much like any other couple you’d meet – someone you know at work or maybe a neighbor.  They are a modest husband and wife without children.

At the beginning of their journey back in 1991, they were not a couple that you’d ever imagine was in a position to achieve an early retirement.  Robert was an unemployed technical writer and Robin was a travel agent earning around $14,000 per year.

Then in 1992, the Charlton’s made a conscious declaration that they would one day soon become financially free and travel the world.  And so they began taking the steps that would be necessary to get there, making a priority out of getting their finances in order.

How Were They Able to Retire Early?

The beauty of the Charlton’s strategy in “How to Retire Early” is how simple each of their actions was to get there.

There was nothing technical or complicated about their process.  Here are the pillars to their strategy that helped them to succeed:

Embraced employment.

This is one of my favorite parts about their plan; something I really liked!

Rather than whine and cry about not making enough money or hating their jobs, the couple understood that employment was going to be a necessary tool to help them achieve financial freedom.  As a result, they took some pretty drastic steps throughout their 15 year journey to re-invent themselves and their careers.  Robert ended up working his way up to a higher paying job and Robin completely changed occupations.  By the end of their 15 year stretch, the two of them were earning a combined income of almost $140,000 annually!

And what’s more important: They both actually started to enjoy what they did for a living.  The more they saw early retirement as a reality, the less “trapped” they felt by their jobs and were and could actually see them for what they were.

Fought lifestyle inflation.

As the couple’s incomes increased, they continued to live as they always had.  They didn’t buy fancier cars or take more frequent shopping trips.  They kept a modest budget and even made room for a little “mad money”.

Paid off debt.

Early on, the couple was saddled with car and college loans.  They focused on eliminating these right away.  When it came time to buy their home, they opted for a 15 year mortgage.

Saved roughly a third of their income.

The combination of earning more, having less debt, and keeping their lifestyles the same helped them go from saving less than $1,000 per year from 1992-1993 to as high as $44,000 annually during the last few years of the accumulation phase.

If you’re really technical, at the end of the book, you can see detailed charts on exactly how much they saved each year!

Invested aggressively.

To help maximize growth, the couple focused on more aggressive, stock-based assets (as opposed to bond-type products).

Invested simplify.

The couple stuck to mostly index funds as their primary system of investing.  No fancy stock picks or other complicated financial products.

Sold their home.

At the end of their 15 year savings streak, the couple had almost $700,000 in savings.  To help reach their ultimate goal of $1,000,000, they sold their home of $300,000.

Given that their retirement plans included a lot of traveling, especially in regions where the cost of living was lower, they did not feel as though they needed their home any more.  They planned instead to rent inexpensively and move from place to place.

Eventually, the Charlton’s did end up purchasing a smaller condo for a steal when home prices were at their record lows.

How Did They Fund Retirement Before Age 59-1/2?

The matter of how someone supports those pre age 59-1/2 years of financial independence is one aspect of early retirement planning that I always pay particular attention to.

The Charlton’s saved a significant portion of their money in taxable brokerage (non 401k or IRA) accounts; nearly $350,000.  Because these types of accounts aren’t tax-sheltered, you are free to withdraw the money any time you wish.

In addition to that, the capital gains and dividends you earn from your taxable investments is also taxed at much lower rates.  To give you an idea, in 2014, the Married Filing Jointly tax brackets are:

• 0% from $0 to $73,800
• 15% from $73801 to $457,600

Since the Charlton’s only needed $40,000 per year for living expenses, they were in the 0% bracket and paid pretty much $0 in Federal taxes!

To give you an idea of how complete this book is, the Charlton’s acknowledged other strategies for withdrawing your money early before age 59-1/2 such as the 72t, age 55 401(k) rule, and Roth IRA contributions.  However, they really wanted to keep things simple, and so they choose to use the taxable investment strategy as their means to support their pre age 59-1/2 years.

Another thing they did: They occasionally worked!  Yes, even in “retirement”, Robert received an offer to do some part-time consulting, and it was an opportunity that was too good to pass up.  He ended up making enough money to cover 1-1/2 years of retirement expenses without having to dip into their savings whatsoever.

What Retirement is Like for Them

Ever since retiring, the couple has enjoyed a very adventurous lifestyle of traveling to wherever they desire.  If you’d ever like to see what the couple is up to, they run a blog over at WhereWeBe.com.   The website captures all the places they’ve visited and travels they’ve had.

Other Notable Aspects

This book is a lot more than the life-story of the Charlton’s.  It really does a good job of covering a lot of other aspects of early retirement.  These would be things like:

• Safe withdrawal rates
• Medical coverage / insurance – Lots of useful info about ObamaCare
• Travel hacks
• Dealing with Recession – the couple retired right just before the big fall out in 2008! You can read how they dealt with that.

Conclusions

In summary, I really enjoyed this book both for its story-line as well as from a technical perspective. The whole time I was reading it, I found myself finding more and more confidence in my own early retirement plans.

We need more examples like the Charlton’s of how regular people like you and I can make our goal of financial freedom come true.  Too many people have this false idea that you need to be high-paid or good with stocks, but that’s not true.  You just have to dedicate yourself to the idea of making early retirement a reality, and then have the discipline to follow through for many years to come.

The math is all there: If you continue to save, avoid taxes, and keep your lifestyle modest, then you can in fact achieve financial freedom.  And the story of Charlton’s really does a great job of laying out the path for how to get there.

Definitely check this book out on Amazon!

Readers – Who else has read the book “How to Retire Early”?  What did you think of it?  What parts of the Charlton’s early retirement strategy will you be using for your own financial freedom goals?  Is there anything you would have done differently?

Photo credits: Pexels, Amazon

The post How This Couple Was Able to Retire Early After Just 15 Years of Saving appeared first on My Money Design.

That was the appeal behind the latest book I’ve been reading called “The 3% Signal” by Jason Kelly.

In case you’re not familiar with this author, Jason Kelly is a very well-known financial writer who created the “Neatest Little Guide to …” series on investing.  “The Neatest Little Guide to Stock Market Investing” was one of the first personal finance books I ever read, and to this day I still hold it in high regard whenever anyone asks for a good-book recommendation.

In this latest release, The 3% Signal offers investors a very simple, yet effective (… as the author claims …) strategy for “locking-in” to returns and forcing yourself to follow the age-old investment principle of buy-low and sell-high.

Here’s a little bit more behind how the 3% Signal works:

How the 3% Signal Works

The strategy at work behind the 3% Signal is brilliantly simple.

It involves:

• Owning only two ETF’s
• Checking the price and buying/selling once every three months

Not too bad, right?

Here is the method:

• Start by putting 80% of your money into a small-cap index fund ETF and 20% into a bond index fund ETF. For example, if you’ve got $10,000, put $8,000 into the small-cap ETF and $2,000 into the bond ETF.
• At the end of the first quarter, calculate the 3% Signal for your stocks. This is simply a 3% increase in your stocks.  So for your initial $8,000 investment, that would be 8,000 x 1.03 = $8,240.
• If your stock ETF’s are worth more than $8,240, then sell some of them and put the money with your bond ETF’s to bring your stock ETF value down to the 3% signal.
• If your stock ETF’s are worth less than $8,240, then sell some of your bond ETF’s to buy up more shares of stock ETF’s so that it brings you back up to the 3% Signal.
• Repeat every quarter!

Do you see what we’re doing there?

This method is forcing you to “lock-in” every quarter to a fixed 3% gain.  You are making an emotionless, calculated effort to buy low and sell high, just like you’re supposed to!

Does It Work?

Would Kelly have written a whole book about it if he thought it didn’t work?

(… my opinions are at the end of this post …)

After Kelly presents his arguments for using this strategy, he offers several sets of data from December 2000 to June 2013 (50 quarters) that suggest that the 3% Signal would prove to be triumphant over an all stock.

Here’s a quick summary:

• The 3% Signal worked when you used the S&P 500 index instead of a small-cap stock index over just investing in the S&P 500 only.
• The 3% Signal worked when you used the small-cap index ETF IJR and bond ETF Vanguard GNMA over just investing in IJR only (both in instances that included with and without adding in new cash – more on this below).

Not only do you end up with a larger sum of money over time as opposed to the traditional dollar cost averaging method, it it also helps to stabilize your investments.

More so, Kelly spends quite a bit of time arguing that in reality buy-and-hold doesn’t work.  It works on paper, but never in real life.  This is because in real life, people are emotional and make rash decisions when the market makes wild fluctuations.

He characterizes this type of investor calling him “Peter Perfect” and makes the case that he doesn’t exist.  Sure, people will pretend to be Peter Perfect and tell you about how much money you could have made if you had invested at this time or that.  But does anyone ever really hit the nail on the head and invest at the perfect time every time?  Of course not!  In reality, they buy high and sell low as the market swings up and down.  Most investors are far from being Peter Perfect even though they’d like you to think otherwise.

The 3% Signal is offered as a way around this.  By taking away emotion and turning the process into something mechanical, you’ll avoid irrational mistakes and buy low, sell high as you’re supposed to do.

What Happens When You Run Out of Bond ETF Money?

If you read the strategy above and quickly observed a situation where you could run out of Bond ETF money to fund your stock ETF’s, you’re absolutely right.  That will happen.

Kelly offers the solution to simply pump more cash into your portfolio.  In our example above, this means that from time to time you’ll have to infuse more money than just your initial $10,000 investment.

Kelly offers figures both with and without the extra cash infusion, and suggests (of course) that the 3% Signal strategy comes out ahead.

This will be an important point later …

Sound TOO Good?

I’ll admit, like any good argument, it’s hard not to read Kelly’s arguments and feel captive to his suggestions.  We as amateur investors really do sabotage our own efforts constantly by buying and selling at the wrong times.

So are you ready to take $10,000 and put the 3% Signal to work?

… Not so fast!

As smart investors, it’s important to never just jump in to any strategy without first asking the right questions.  For example, it seemed a little too convenient that all of Kelly’s conclusions were based on data from the same time period of 2000-2013.  What about other years or other time periods?

Also, generally speaking, Kelly is not the first person to suggest a re-balancing strategy such as this one.  If it’s so effective, why don’t more financial professionals recommend it?

To get to the bottom of all of this, I downloaded my own data from Yahoo Finance and have been doing my own investigation.  That’s exactly what I’ve been up to ever since I finished this book.

What have I found?

In the next post, I’ll share some of the results I came up with.  Some of them may prove to be a little skeptical.

Overall, whether you think this strategy will work or not, if you like books about investing and methods that are a little more creative than the typical conventional advice, then I’m sure you’ll enjoy The 3% Signal.  Though a little long-winded in some sections, Kelly does do a very good job of characterizing “real-world” investment habits and offers a method that may help us to prevent sabotaging our own portfolios.

Readers – Have any of you read Jason Kelly’s The 3% Signal book?  If so, what did you think of it?  Do you think this strategy will work as the author suggests?

Featured image courtesy of Amazon

The post “The 3% Signal” by Jason Kelly – A Book Review appeared first on My Money Design.

I say that because taxes are something that eats into your finances no matter how low or high your income is.  In fact the more money you make, the worse your tax bill becomes because it scales upward with your earnings to the point where it could potentially be one of the largest expenses you have.

But with the right tax planning strategies it doesn’t have to be this way.  There are many ways to lower your tax bill that you probably either don’t use or simply don’t even know about.

Lots of creative people have figured out legal tax savings strategies to avoid paying more than they have to.  And they’re willing to share that knowledge with you.

Surprisingly this one used to work as an IRS agent …

Outsmarting the System by Anthony Campidonica:

I LOVE to read a good personal finance book.  So when an author reaches out to me and offers to send me a free copy of their work, the least I can do is accept their invitation and then share what I’ve learned with you.

That’s exactly what author Tony Campidonica did.  He emailed me about his book Outsmarting the System and advertised it as being about “teaching people how to reach financial freedom by lowering their taxes in the same ways as the rich”.

What a beautiful topic!  How could I resist?

About the Author:

The first thing you need to know is that Tony Campidonica is a past IRS agent.  This gives him a unique perspective as to what the actual tax savings strategies really are in terms of what’s legal and what’s not.

As he describes there were many avenues and strategies “the rich” were using to lower their tax bill that most people didn’t even know they could take advantage of.

After a number of years he left the agency and now works independently as a consultant who uses his knowledge to help “the little guys” like you and me work on our own tax reduction strategies.

A Very Encouraging Message:

One of the things I love about this book is how motivational it is.  Even if you don’t follow any of the advice Tony presents, the message behind the writing should still persuade you to re-evaluate your own tax situation and what you can do to improve it.

Overall I whole-heartedly agree that the average person is NOT doing everything they can to reduce their taxable income and properly take advantage of all the options that are out there.

The unfortunate thing is that most of the time the reason many people don’t is simply out of ignorance.  They simply choose not to understand or take the time to get to know these rules when in fact they could be saving thousands and thousands of dollars in taxes every year.

Tony’s Tax Saving Strategies:

In general the tax reduction strategies that Tony presents fall into one of three categories:

1. Being an investor
2. Being a landlord
3. Being a small business owner

The content goes into great detail about how each of these tax savings strategies could be applied to your situation for your own personal gain.

Being an Investor.

Making money from the stock market isn’t the only way to get rich as an investor.

Do you remember the 2012 presidential candidate Mitt Romney and what a big deal the media made out of how little he pays in taxes?

Tony describes how most of Mitt’s income was derived from qualified dividends and long-term capital gains; both of which you may be surprised to learn are taxed at much lower rates than the taxes you or I pay on the income we earn from our paychecks.  When you’re talking about someone as wealthy as Mitt Romney, that’s millions of dollars in taxes saved!

This is a perfect example of a wealthy individual legally using the tax system to reduce how much they owe the IRS.

Being a Landlord.

Did you know that as a landlord you can reduce your total tax bill by claiming expenses associated with up-keeping the rental property?

It’s true.  Many of the things that you wouldn’t normally get to claim on your primary residence (like repairs, home owners insurance, HOA fees, etc.) are allowed if they apply to a rental property.

Not only that, Tony describes how you may be able to also use depreciation and losses to even further lower your taxes.

Being a Small Business Owner.

This is the area that most of the chapters of the book are devoted to.  In it Tony describes many advantages where being a small business owner can help you to claim certain expenses and pay yourself more in profit sharing.  In addition he also helps you to lay out plans for how to get there.

Earlier this year I found that out to be true for myself. Through making an income with my blogging, I discovered I could reduce my taxable income by about $750 if I choose to saves a portion of it in a SEP IRA.  You can read all about it here and see if it’s something you would qualify for as well.

More Tax Reduction Strategies:

In addition to the tax saving strategies shown above, there are plenty of other ones that I subscribe to.

401k, IRA, and Other Tax-Deferred Retirement Accounts.

One place where the book and I disagreed was in Chapter 2 where Tony presents taxable brokerage accounts as being more advantageous than tax-deferred retirement accounts (such as a regular 401k plan).  He then demonstrates a very simplified example that I feel does not entirely paint the whole picture of the situation.

Make no mistake – Tax deferred retirement accounts offer you HUGE, undeniable tax savings over the course of your life!

How much?  A while back I crunched the numbers for a hypothetical example and came up with almost $2 million more dollars in assets when you used your 401k!  You can see my entire taxable vs tax-deferred comparison here.

Sure there are some benefits to using a regular brokerage account.  For example it makes a great compliment to your overall retirement portfolio if you plan on trying to achieve an early retirement because you don’t have the same age restrictions as you do with an IRA or 401k.

However that doesn’t compare to this simple fact: The ability of a tax-deferred investment account to compound over time for years and years without any taxes being taken is and always will make it superior to most other taxable savings account options.

Flexible Spending Accounts:

As a family man another tax reduction strategy I’ve used over the years was to participate in flexible spending accounts to reduce my costs for child daycare and medical costs.

The way a flexible spending account works is a portion of your paycheck is deferred into an escrow before taxes are taken out.  You then pay for your qualified daycare expenses and medical expenses using this tax-free money.

Let’s say your tax rate is about 25%.  That’s basically like giving yourself an extra 25% more money in dependent and medical care expenses to cover these costs.

If you haven’t already I’d highly encourage you to check with the HR department at your employer to see if you can participate in such a plan.

529 College Savings:

If you plan to save money for your children to go to college, another tax saving strategy you can use is to do it through a 529 plan.  Though the contributions are usually only tax deductible through your State and not at the Federal level, the earnings do grow tax-free and are not subject to taxes when you use them for college expenses.

Understanding How the Marginal Tax Brackets Work:

Though it can be a little more complex at first, I do see a tremendous amount of benefit in understanding how the marginal tax bracket system works and what you can do with it to exploit them to your benefit.

For example: Let’s say you’ve saved a lot of money for retirement and plan to give yourself $132,500 in income each year.  How much in taxes do you think you’d have to pay?

0% if you know how to structure it properly!  That’s not a joke or gimmick.  Using a combination of the concepts above plus knowing where the marginal tax brackets start and stop could really make this into a reality.  Read here to see my complete example for how to have a completely tax free retirement.

Conclusions:

If you’re new to understanding what kinds of tax saving strategies are out there, then I’d recommend reading Outsmarting the System.  Not only is it easy to read and comprehend, but you’ll find the information just as useful as you will find the theme of the book to be encouraging.

Don’t be jealous of the wealthy.  Beat them at their own game.  Use these tax reduction strategies to your advantage and KEEP more of YOUR money.

Images courtesy of FreeDigitalPhotos.net

The post Tax Saving Strategies and Outsmarting the System – A Book Review appeared first on My Money Design.

That might sound crazy, but you have to remember:  All large companies were just small stocks at one time or another.  At some point they experienced a period of explosive growth, and someone became rich as a result!  Why can’t that someone be you?

This subject is exactly the premise of a book I recently finished reading called Big Profits from Small Stocks by Hilary Kramer.  (Actually the full name of the book was “The Little Book of Big Profits from Small Stocks + Website: Why You’ll Never Buy a Stock Over $10 Again”).  Kramer’s main punch-line to the book: It will be much easier to multiply your earnings when your cheap $10 stock goes up in value to $20 as opposed to when a $100 stock goes up to $110.

In the next few sections I’m going capture what her proposed strategy for this and what my feelings are on it.

Why Did I Pick This Book?

Why not?  Even though I’m big on value investing with large companies, I’m never opposed to hearing other theories or success stories on how to pick stocks.  And besides – I always like to have a good easy read book when I’m on vacation.  Magazines get really old really fast, so I stopped by the library and found this book based on title alone.

Why We Want to Find Cheap Stocks to Invest In:

The book starts off with Kramer making her fundamental claim for this strategy:

It takes less to make a $5 stock go to $10 than it does to make a $100 stock go to $200.

As a former Wall Street employee, she feels this statement is true mainly because Institutional investors (those with mutual funds, hedge funds, etc) will often not touch a stock if it is below $10.  Therefore, because Wall Street hasn’t quite yet had a chance to flood the stock with their enormous volume of capital and disrupt its supply and demand relationship, you, the small investor, still have a chance to pick it up before the big-boys do (p. 19).

Why Are These Stocks So Cheap To Begin With?

Chapter 3 opens with a discussion of the “fallen angels”.  Fallen angels are stocks of companies that used to be revered and loved, but have now fallen on hard times.  One example of a former fallen angel was the Ford Motor Company.  During the Great Recession when GM and Chrysler filed for bankruptcy, the entire economy was down on the automotive industry and Ford’s price was down.  But Ford was still fundamentally strong, and thus a good cheap stock to buy.

The questions you have to ask yourself for stocks that are fallen angels:

1. What went wrong?
2. Can it be fixed?

Kramer explains that the S&P 500 is a good place to start looking for the fallen angels.  Look for ones with a market capitalization under $1 billion and a share price below $10 (p. 34).

Chapter 4 explores another type of low cost stock: The undiscovered growth stock, or “darling” stock.  These are the smaller companies that no one has noticed yet and are poised to be picked up by the Wall Street big-boys at any given time.

To find these types of cheap stocks to invest in, you need to:

1. Look for stocks below $10 per share that have been growing earnings and revenue for at least 5 years (p.47).  Debt to equity ratio should be a maximum of 0.3 (70% equity and 30% debt) (p.48).  This follows legendary investor Benjamin Graham’s advice of owning at least twice what you owe.
2. Then look for companies who have products or services that have a strong potential to grow in today’s markets.
3. Insider ownership of 10% or more is also a good indicator of vesting.

Other metrics for finding cheap stocks to invest in:

• Look for companies with 100% earnings growth (revenue growth is not critical) (p. 49).  The debt to equity ratio maximum should be 50% and the share price must be $10 or less. (p. 50)
• Look for “Bargain Bin” stocks (Chapter 5) by examining the ones that are currently worth less than tangible book value.  You can find this out by subtracting intangible assets (like goodwill) and then dividing tangible assets by the number of outstanding shares. (p.55)  Set your stock screener to look for stocks with a price to book ratio of less than one.  Then set debt to equity ratio to a maximum of 0.3 and share price of less than $10.  Pick only the profitable companies by finding those that have a P/E ratio of 1 or greater (p. 62).
• In general you can ignore the actual numbers of the P/E and PEG ratios because our growth stocks will have little earnings when they are about to explode (p. 92).  We just want them to actually have earnings (PE ratio of 1 or greater).  Instead what you want to pay attention to is the direction of ROE, not the actual number itself. (p. 94)

Criticisms of Big Profits from Small Stocks:

Despite some of the practical advice that Kramer offers to pick these stocks, I found a lot of her evidence to be very lofty.  For example, she makes several claims about finding low cost stocks during the Great Recession of 2008 and then making a killing when the stock price rose a few years later.  Correct me if I’m wrong, but isn’t it common sense to pick up stocks when they are on sale during a financial recession?  For the non-obvious companies, I would have preferred some deeper or more technical analysis of why certain stocks were selected.

I also found Kramer’s enthusiastic promotion of the biotech and pharmaceutical industry stocks in Chapter 6 to be somewhat irresponsible.  For a book geared towards introducing readers to evaluating cheap stocks to invest in, I didn’t feel as though these two industries were really at the right level of complication.

And then just like any book these days, much of the content starts to feel like a giant advertisement to get the reader to author’s website and subscribe to one of the three publications she manages.  Then again, isn’t that what most books are these days?

My Stock Picking Experience:

I’ve been both burned and had some great success with being speculative about stocks.  In general I believe that if you’re willing to put the time and energy into really researching and understanding a company, then there are probably some good opportunities to be had.  Just look at the history of Warren Buffett’s stock picks.

However, I’m not one of those people with that kind of time.  I subscribe more to a John Bogle style of investing where I’d rather either invest in the stock market average or go for only large-cap companies that pay handsome dividends.

In past on My Money Design, we’ve covered a number of different techniques and metrics you can use to help figure out whether a company will be any good or not.  These are things such as:

• Basic metrics (that you’d find on Yahoo Finance, CNN Money, etc)
• Dividend Yield
• Dividend Payout Ratio
• The PE Ratio

Despite my beliefs though, I do include at least one speculative purchase each year just to keep things fresh.  This year’s gamble was on manufacturer Pitney Bowes (PBI).  Though the shares weren’t below $10 like the book encourages, I did pick them up for around $12 per share back in February.  Here is how the shares are doing today:

(You can see a complete list of all the stocks I bought this year and why in this post here.)

So while I’m not going to encourage anyone to rush out and make a bunch of risky stock purchases, I’m also not going to dismiss the fact that opportunities are out there for cheap stocks.  I think you’ve just got to be willing to put the time and energy into it to make a truly informed decision.

Readers – How many of you have ever found good cheap stocks to invest in and have a success story to share?  In general do you stay away from cheap stocks or flock to them looking for opportunities?  What do you think of Kramer’s advice on fundamentals to look for?

Related Posts:

1)      Why Total Return Investing Is Better Than a Dividend Strategy

2)      My Broker Lets Me DRIP Stocks – Why That’s Great

3)      One Man’s Success With Borrowing Against 401k Funds for a Comeback

4)      Reader Debate – Would You Borrow Money to Invest in Stocks?

Images courtesy of FreeDigitalPhotos.net, Amazon, and CNN Money

The post How to Find Good Cheap Stocks to Invest In – A Book Review appeared first on My Money Design.

So far I’ve already written two separate posts highlighting pieces of advice in this book. But there’s actually a lot more to it. Solin has JAMMED PACKED this book full of useful knowledge. The information it contains could be appreciated by both newbies as well as intermediate/advanced investors. Here’s some of the more important tidbits you can take away from The Smartest Retirement Book:

Asset Allocation Models:

If you think you need to be a wizard at picking out stocks to have a successful retirement, think again. Early on in The Smartest Retirement Book, Solin tells you to not even bother with individual stocks (p.14). His advice: Construct a simple investment portfolio using these great low cost Vanguard funds (p. 16):

• Total Stock Market Index Fund (VTSMX)
• Total International Stock Index Fund (VGTSX)
• Total Bond Market Index Fund (VBMFX)

Read more about this strategy in my post: Asset Allocation Models from Author Daniel Solin

Retirement Income Planning Using an Appropriate Withdrawal Rate:

One of the cruelest ironies of saving for retirement is blowing it all too quickly by taking too much out early on. Should you take out 4 percent each year, or could you possibly take out more and still be safe?

Solin dives deep into the 4 percent rule for retirement withdrawal rate. He starts out by commenting on the traditional route – starting with a 4.15% withdrawal and then increasing this each year to compensate for inflation (p.79). If you have 60 to 65% stocks, you might be able to make this work for the next 30 years.

But another spin on the 4 percent rule comes from investment advisor Michael Kitces. By examining the ten-year average P/E ratio of the market, you may be able to predict with some confidence what the market will do over the next 15 years. Depending on how we think the market will perform could mean being “safe” with a rate as high as 5.5 percent (p. 81-83).  Read more about this strategy in my post: Retirement Income Planning with Author Daniel Solin

One final variation on the 4 percent rule comes from William Bengen. Bengen devised a floor-to-ceiling strategy in which withdrawals were dictated by whether we are in a bull market (higher withdrawals allowed) or bear market (lower withdrawals recommended). This strategy had a 91% of 30 year success given a portfolio of 63% large-cap stocks and 37% intermediate-term bonds (p. 84-85).

Drain Your Accounts by the Order of Tax Consequence:

This is one piece of information I may return to for a separate post all its own. Along the same lines of knowing the consequences of the withdrawal rate you choose, it’s also extremely important to know what the tax consequences are for each of your retirement funds.

The Smartest Retirement Book suggests one strategy for stretching your money is to drain your accounts in the following order (p. 90-91):

1) Post-tax accounts (where you can pay lower taxes on the withdrawals)

2) Deferred retirement accounts like a traditional IRA’s, 401k’s, etc (because the money will grow greater tax free)

3) Roth IRA (where the money grows tax free and you pay nothing on the withdrawals)

More Great Advice:

As if that’s not enough, here are some more tips that Solin offers in the Smartest Retirement Book:

• Have a 2-year cash cushion to give yourself the courage to invest in stocks and beat inflation (p. 9).

• Index funds receive superior returns due to low cost, better diversification, tax advantages, and the nature of their low cash holdings (p. 22-23).

• You can ignore ETF’s because they are not as good as your low cost index funds (p. 28)

• If you want to invest in bonds, just buy a low cost index fund (p. 36). You can ignore treasury inflated securities (TIPS) because of lower returns, higher volatility, and the risk of deflation (p. 40).

• If you’re looking into annuities, go with immediate annuities (p. 60) or try a charitable gift annuity (one issued from a noble non-profit agency) (p. 63).

• Variable annuities are a bad idea because of the long-term commitments, big fees, and the taxes that either you or your heirs will have to pay (p. 65-66). Equity-indexed annuities are also bad news (p. 70).

• For most employees, rolling over their 401k into an IRA is the best move because of lower fees and better choices (p. 97).

• If you are a high income earner, converting from a traditional IRA to a Roth IRA may be a good way to avoid having to take minimum withdrawals and leave tax-free money to their heirs (p. 99)

• Don’t get punished with a “reverse hold-up”. When the government says it’s time to start taking minimum required distributions (MRD’s), you had better start or the penalties will be significant (p. 101-104)!

• If you can do it, wait until age 67 to start taking your maximum social security (p.110). Not only will it be better for you, but it will also leave more money for your spouse after you pass away (p. 114).

• If you’re lucky enough to get a pension, elect to take the monthly payments over cashing it in for one lump sum (p. 121).

• Reverse mortgages are generally bad and should only be used as a last resort (p. 145).

• If you retire before you will qualify for Medicare, you might have some costly options to consider (p. 158).

• A shorter long-term care policy with bigger benefits is usually your best bet for care when you’re older (p. 166).

• You need a will before you die (p. 174). Also, you need to have your estate in order to help your loved ones avoid probate court (p. 178). To really leave your loved ones something special, designate a Roth IRA to them (p. 181).

• Don’t be impressed with so-called phony retirement specialists (p. 192) or free seminars (p. 195). The motive is usually to sell you something and make a commission; not actually help you. To avoid a Bernie Madoff type of scandal, chose someone who uses a reputable independent custodian of the money (like Fidelity or Charles Schwab) and tries not to out-perform the market (p. 198).

Give The Smartest Retirement Book You’ll Ever Read a Try:

Like I said – this book is pretty well compacted with useful information!

In my opinion, give The Smartest Retirement Book You’ll Ever Read a try. The chapters are extremely short, straight to the point, and very easy to read. Whether you’re just starting out or looking for advice on specific subjects, I believe there is a lot of practical advice you can learn from this book and apply to your own strategy!

Readers – What do you think about all of Daniel Solin’s tips in The Smartest Retirement Book You’ll Ever Read?  Do you agree with his advice?

Related Posts:

1) Book Review: Rich Dad Poor Dad by Robert Kiyosaki

2) Book Review: “Dividends Still Don’t Lie” by Kelley Wright

3) Book Review: “Higher Returns from Safe Investments” by Marvin Appel

Image Credit: Amazon

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When was the last time you were told that going to college and becoming an employee for someone else for the next 30 years is a terrible plan? Or that the only reasons you became an employee in the first place was out of your own fear and greed of money? Or that your house is NOT one of your greatest assets?

Rich Dad Poor Dad is NOT a book that will explain to you what a 401k or an IRA is. In fact, it will try to discourage you from putting money in your retirement account at all. Instead, Rich Dad Poor Dad offers you something completely different – it will make you think! It will challenge you to reconsider what you’re doing with your money, life, and what you’re doing to reach your maximum earning potential!

The Beginning of the Rich Dad Poor Dad Dichotomy:

It is my belief that one of reasons why Rich Dad Poor Dad was such a success was due to the nature in which it was written. Most personal finance books read like an encyclopedia – they explain everything to you a series of facts. Rich Dad Poor Dad is more like a story. Most of it is a narrative told from Kiyosaki’s autobiographical perspective.

Chapter 1 begins in the 1950’s with Kiyosaki and his best friend Mike going to work for Mike’s Dad for 10 cents an hour. Despite being a high-school drop-out, Mike’s Dad is a very successful business owner. After only a few short weeks, Kiyosaki is angry, ready to quit, and confronts Mike’s Dad! Mike’s Dad is pleased by this discouragement, and thus begins Kiyosaki’s lessons from Rich Dad.

“Job is an acronym for Just-Over-Broke” (p. 122)

Rich Dad teaches Kiyosaki and Mike that most people never reach their full potential because of fear and greed. He makes an example of “Mrs. Martin” and several of his other employees by explaining how they live in ignorance fueled by their own fear and greed. Rich Dad’s lesson is simple: “The poor and middle class work for money. The rich have money work for them” (p. 22). Throughout the rest of Rich Dad Poor Dad, Kiyosaki will refer to this system of fear and greed as the “rat race” (p. 55) (He even creates a board game by the same name to use as a teaching tool).

Unfortunately, the “Poor Dad” in the story is Kiyosaki’s own real father. Poor Dad or Educated Dad as he sometimes calls him was an academic who worked for the government. Poor Dad encouraged young Kiyosaki to go the traditional route that most parents encourage their children to follow – do well in school, go to college, get a job, be a good employee, and maybe retire in 40 years.

This dichotomy between Rich Dad Poor Dad will be very instrumental throughout young Kiyosaki’s development and will shape the decisions he makes as an adult.

Lessons in Assets and Liabilities:

Unfortunately, Poor Dad goes on to lose his job, blame others for his failures, and die in debt. Rich Dad goes on to be even more successful than ever. The older Kiyosaki becomes, the more and more he chooses to live by the lessons of Rich Dad. Kiyosaki learns that the goal is not to become “rich” but to become wealthy as given by the definition of R. Buckminster Fuller, “Wealth is a person’s ability to survive so many number of days forward” (p. 70).

“There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.” (p. 5)

This is a pivotal lesson in Rich Dad Poor Dad. Kiyosaki teaches us:

• “Rich people acquire assets. The poor and middle class acquire liabilities they think are assets.” (p. 46)

The difference between these two things is paramount:

• Assets put money in your pocket. Liabilities take money out. (p. 48)

As common sense of an explanation as that may sound, Kiyosaki spends many pages in Rich Dad Poor Dad illustrating how the poor and middle class misunderstand this concept:

• The poor and middle class focus only on increasing their income. They then use it to buy more liabilities. And when they have too many expenses, they again try to make more money. This is the very essence of the rat race.

• By contrast, a wealthy person buys “assets”. Assets can be real estate, stocks, bonds, notes, intellectual properties – anything that will generate more income (Rental income, interest, dividends, royalties) for them each month. (p. 53)

• This is point in Rich Dad Poor Dad where Kiyosaki makes his infamous “a home is not an asset but a liability (p. 61)” claim. By his definition, your house does not put money in your pocket that you can physically use each month. Rather, it takes money out because of the mortgage. Thus it is a liability.

Introduction to the Concept of Passive Income:

Introducing the World to the theory of collecting assets that will create income is how Kiyosaki became associated with the concept of passive income. He goes on to describe how he especially focuses upon assets that do not require his presence (p. 77):

• Stocks

• Bonds

• Income generating real estate

• Notes (IOU)

• Royalties

• Anything of value that is market ready

Since Rich Dad Poor Dad’s publication, a legion of other websites and books (including more from Kiyosaki) have expanded upon this concept and these methods.

“My highly educated Dad always encouraged me to work your way up the corporate ladder. My rich Dad said why not own the ladder?” (p. 88)

Leveraging Taxes:

Kiyosaki considers taxes to be one of the ultimate expenses; so much so that he devotes the entire chapter to the subject. Kiyosaki explains how taxes have evolved over the years and how they are used to exploit those who do not understand them properly.

One of the differences between the rich and the middle class / poor is that they use the legal corporate structure to their advantage when it comes to taxes (p. 85). In summary, they use the laws as follows (p. 92):

• Business owners = Earn money, spend their money, then pay taxes on what’s left

• Individuals = Earn money, pay taxes on that money, and then spend what’s left

Kiyosaki Encourages Us to Learn:

A re-occurring theme in all Robert Kiyosaki books is to develop your Financial IQ and to continue learning the traits that will make you wealthy. He opens Chapter 5 by discussing how developing your Financial IQ will help you proposer greatly (p. 95). The reason for this is because Kiyosaki feels the most powerful asset we have it our mind (p. 100)”. He says that to get rich, we have to evolve beyond the “old ideas” and recognize new paths to wealth. To develop our Financial IQ, we must concentrate in 4 areas (p. 106):

1. Accounting – Our ability to read and understand financial information

2. Investing – The science behind finances

3. Understanding the markets – The science behind supply and demand

4. The law – The rules of the game and how they apply to what we do

In Chapter 6, Kiyosaki continues this discussion with one of my favorite stories from Rich Dad Poor Dad:

• A young female reporter from Singapore tells Kiyosaki she wants to be a best-selling author like he is.

• Kiyosaki recommends she take a course on selling. The reporter is appalled! Why should she “lower herself” to becoming a salesman when she is a well-educated writer?

• Kiyosaki points out that he is not a best-“writing” author. He is a “best-“selling” author. The girl is not amused by the lesson. (p. 121)

Kiyosaki goes on to talk about how your employment should be used to help you acquire the skills you need to run your own business someday. The most reason why is to learn how to lead other men.

“If you’re not a good leader, you’ll got shot in the back, just like they do in business” (p. 122)

Rich Dad Poor Dad explains that you don’t need to be highly technical or specialize in any one specific thing. You just have to know a little bit about a lot. There are plenty of other smart people you can hire to work with you and make a part of your team (p. 129).

Overcoming Obstacles and Getting Started: 

Rich Dad Poor Dad concludes with Chapter 7, 8, and 9 discussing some of the common complaints and excuses people have about going down this path. Kiyosaki summarizes them as fear, cynicism, laziness, bad habits, and arrogance (p. 131). He then gives us some words of wisdom and 10 tips for implementing these lessons into our own lives.

What Rich Dad Poor Dad Means to Me:

I was luck. This book came out at just about the same time I was finishing college and beginning life as a young adult. And like most young adults, I thought that the goal was to become “rich”. I thought that having a big house, nice car, a boat, vacation homes, etc all were signs of being rich. And like most people, I was wrong.

I remember referring back to the section on assets and liabilities many times. The concept was so simple. All those things I thought you get when you’re rich were really only trophies – they were things Kiyosaki would consider to be liabilities.

What I really should be focusing on are things that will make me money, especially those things that could generate wealth while I sleep – passive income!

As I started my first job out of college, my goal would not be to get promotion after promotion so I could simply increase my income. My goal should be to learn! Learn how to lead other men, learn how to work with customers, and learn how to run a business.

Developing my own Financial IQ and understanding of money would become a lifelong passion. I found myself naturally gravitating towards reading anything financial – knowing good and well that it would benefit me to learn more about the subject.

To this day I still screen most of my purchases according to the lessons of Rich Dad Poor Dad. Will this purchase be for an asset that will make me more money, or will it simply be just another liability that will take money out of my pocket. To live by such criteria not only helps keep your expenses low, but it also shows you just how frivolous most of our wants really are.

Perhaps the greatest take-away from Rich Dad Poor Dad was the “idea” of passive income. It became like an addiction for me. I understood that stocks could make a person rich while they slept. I could have surmised that real estate would do the same as Kiyosaki is obviously a big fan of the real estate market. But what else would fit the Rich Dad Poor Dad model? How could I use this formula to create a perpetual stream of income the way that Kiyosaki had done with real estate? In a lot of ways, you might say that Rich Dad Poor Dad was the seed for developing this blog and many of the ideas we explore today.

I don’t fully agree with everything in Rich Dad Poor Dad or that Kiyosaki preaches. I went to graduate school. I save money for retirement in a 401k. Rich Dad Poor Dad teaches you to develop your own mind and draw your own conclusions about creating wealth. It is only natural that not everyone will agree on the path.

About the only criticism I had of this book was the way in which Kiyosaki portrayed his own father. Although he never mentioned any ill-will towards him, Kiyosaki clearly paints Mike’s Dad and his own father at two polar extremes – often times with Kiyosaki’s real Dad on the short end of the stick. And although Rich Dad’s lessons may have ultimately been better, I could not think of honoring the memory of my own father (or my son to me) in this manner. However, this is only my personal opinion on the matter. I do not know nor claim to know the full history behind Kiyosaki and his father’s relationship. Kiyosaki does seem to make some redemption towards the end of the book by discussing how Educated Dad helped develop his sense of compassion – a characteristic that made Kiyosaki into “a socially responsible teacher who is deeply concerned with this ever widening gap between the haves and the have-nots” (p. 129).

Obviously (as you can tell by the analysis within this post), I would recommend that anyone read Rich Dad Poor Dad. The story is interesting, entertaining, and very easy to understand. Above all else, the lessons are vital and may change the way you think about creating and spending your money. For that reason alone, I would give it a try!

Readers – Who has read Rich Dad Poor Dad? Did you love it? Hate it? Did you find the advice practical? Even if you haven’t read it, what do you think about the concept of building “assets” that will create multiple streams of perpetually generating income?

Related Posts:

1) More Passive Income Ideas

2) Top Money Book Recommendations

3) How Much Money Would I Make If I Rented Out A House?

Photo Credit: Amazon.com

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The main theme of the book is that a stock’s dividend yield is the best indicator of its value and ultimately the right time to buy. Building upon “The Dividend-Yield Theory” presented in the first book, Kelley reviews and updates this theory using new and recent data. The book then goes on to explain how this theory can be applied by individual investors.

The Dividend-Yield Theory:

The Dividend-Yield Theory is very interesting. Rather than look at 100 different metrics, the theory follows one simple premise.

If you take any reputable, blue-chip stock and follow its dividend yield, you’ll notice it cycling up and down over time. It’s within these cycles that upper and lower-limit boundary lines can be established. As the stock’s dividend yield cycles up and down, this will reveal if it is either “over-priced” or “under-priced”. As you can probably guess, we want to buy when the stock is under-priced!

Unlike many books on this subject, the text gets pretty graph and chart heavy towards the middle to support this theory. You can see the cycle in both the Dow Index as well as a few individual stocks.

So how can we find out just what these boundaries are? By subscribing to Kelley’s publication of course!  His newsletter “Investment Quality Trends” (to which Kelley is the Editor of) does just that – reviews and analyzes stocks for these types of occurrences. And he makes sure to mention this every couple of pages …

Making a Strong Case for Stocks:

Even if you don’t believe this theory, the book is packed with a lot of great reasons why stock investing is one of your best strategies for the long-term.

For example, Chapter 2 (p. 17) proclaims that between 1926 and 2008 that the average annualized returns for the following investment types were:

• S&P 500: 9.60% (or 7.10% after inflation)

• 20-Year Government Bonds: 5.70% (or 2.20% after inflation)

• 30-Day Treasury Bills 3.70% (or 0.50% after inflation)

Obviously there are going to be periods where bonds do better than stocks. So Kelley tests that theory by comparing the “rolling averages” against each other over certain lengths of time (20 years, 10 years, etc). What did he find?

• 20-Year Holding Period: Stocks outperformed fixed income 98.43% of the time (p. 22)

• 10-Year Holding Period: Stocks outperformed fixed income 85% of the time (p. 25).

• 5-Year Holding Period: Stocks outperformed fixed income 73.41% of the time (p. 25).

Focusing on Blue Chips:

In the value-investing mentality of this book, it really focuses a lot on blue chip companies that issue dividends. Not only is there a lot of argument for blue-chips and the Dow Jones, but it also gives some good rule-of-thumbs to follow:

• Stay away from dividends that have a payout ratio (dividend divided by the 12-month earnings) that are higher than 50% (or 75% for utility companies) (p. 178).

• A stock is likely to increase its dividend when the payout ratio is 30% or less (p. 178).

Not Necessarily for Beginners:

As I’ve already mentioned, this book is very chart and graph heavy. The text basically already assumes you know something about stocks and investing. It does not get into what a dividend stock is, using them for retirement, DRIP’s, or any other 101 lesson such as that. If you’re just starting out, you may want to consider reading “The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns” by Charles Carlson first.

Related Posts:

1) Book Review: “The Little Book of Big Dividends” by Charles B. Carlson

2) Protecting Yourself with Dividend Stocks

3) Will Dividend Stocks Help Me Retire Early?

Photo Credits: Amazon, Dividends Still Don’t Lie

The post Book Review: “Dividends Still Don’t Lie” by Kelley Wright appeared first on My Money Design.

There are a million books that encourage you to save as much money as you can in your 401k and IRA. However, as a student of passive income, I wanted to read about something different from conventional advice. Along the same theme of how the book “ProBlogger” entices you to become a six-figure blogger, I figured why not see if this guy can help me step it up to a million?

What Is This Book About?

As you would expect, “The Millionaire Messenger: Make a Difference and a Fortune Sharing Your Advice” is precisely about what the title suggests – marketing yourself as an “expert guru” and getting paid to do so. Afraid you’re not expert? Author Brendon Burchard disagrees.

Chapter 1 begins with Burchard describing the event that changed his life forever – a near-death car crash in the Dominican Republic. His survival of the wreck led him to the deep realization that his second chance to live should be measured by three simple questions:

• Did I live?

• Did I love?

• Did I matter?

During his young corporate career, Burchard quickly began to realize that his true calling was to spread the power of his message. Chapter 2 chronicles his departure from his day-time job and the struggle to make it in the expert industry.

However, within 24 months, Burchard started to see massive results. He became a best-selling author with his book “Life’s Golden Ticket“, getting paid $25,000 for speeches, selling out seminars for $10,000 per ticket, and making $2 million per major marketing promotion. Talk about finding the silver lining to your misfortune!

Are You an Expert?

Would anyone ever believe you’re an expert? Could you ever get paid for it? These are exactly the topics that the remaining eight chapters cover.

Did you know that there’s more than one type of expert? Chapter 4 goes over each of them:

1. The Results Expert

2. The Research Expert

3. The Role Model

For example, you don’t have to be married to be an expert in marriage. You could research the topic and become a Research Expert. You don’t need to be a financial planner to give money advice. If your methods lead to repeatable results, then you could be regarded as a Results Expert.

If you accept that you might actually have what it takes, then Chapter 5 moves on to outline a path for picking your message, directing it towards your audience, developing your story, and finally packaging it into something of value for others (in other words, creating your product).

That’s Great. So How Do I Get Rich Doing All This?

Once you’ve got a passionate message and a value-added product, Burchard outlines his six “pillars” for making money:

1. Writing

2. Speaking

3. Giving Seminars

4. Coaching

5. Consulting

6. Online Marketing

Depending on how many of these you’re willing to engage in will dictate how much revenue you generate. Burchard goes through several examples where doing a combination of these pillars could generate +$1 million in revenue each year.

As you may guess, many of these pillars involve creating videos and DVD sets that sell for $400 each. Or hosting seminars that cost +$10,000 per ticket.

The Bottom Line:

Usually when I read a book that encourages you to start selling this type of overpriced mumbo-jumbo, I stop right there and put it down. I want like to have advice that is tangible and can be useful, and I usually dismiss this as being not helpful.

But I’ll admit: there was something a little different about this book. It held the same positive encouragement that a Dale Carnegie book would have. It was very persuasive in making you believe that you may actually have what it takes to break into this market.

On top of that, he makes several good points about the expert industry. Why are billions of dollars spent every year on this type of stuff? Why does Burchard make millions of dollars each year coaching and speaking?

To some degree I can see this already within our limited blogging niche. Why do some bloggers produce six figure incomes? To Burchard’s point: The money is there for the taking. You just have to find something you can be passionate about and create a product that matters and provides value to others.

Overall, this book was an interesting mix of things I both liked and disliked. But as I’ve mentioned before: Getting rich comes in many forms, and you have to be open to all kinds of advice. Even if I never act upon one word from this book, it is helpful to know about this industry and the potential market it serves.

Readers: Check back on Wednesday when my next post explores this theory a little more closely.  But for now, has anyone else read this book? What do you think about this type of advice?

Related Posts:

1) The Value of What You Know

2) Book Review: “ProBlogger: Secrets for Blogging Your Way to a Six-Figure Income” by Darren Rowse and Chris Garrett

3) What Results Are You Getting From Learning?

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