I have never been tempted to take on full-time work since the happy day I left a small publishing company that was coming apart and where my respected boss had just been shamefully fired.
My new boss wanted me to stay. I would have none of it. I had enough of the seedy subways and office politics. I gave three weeks’ notice and left my full-time job. However, I did agree to do some freelance work from home for the company, which was later sold and later welched on my freelance contract. Thank God it wasn’t 20 or 25 years before. Then it would have been a difficult to leave a job I had started to dislike but now it didn’t matter. My wife and I had plenty of dinero.
What a great feeling! My wife later quit her full-time mechanic job at Delta Airlines, which she had initially enjoyed but eventually came to hate. She now happily devotes herself to playwrighting efforts. Regardless of whether either of us ever earn another cent, we’ll be fine.
Of Financial Independence and Dollar-Cost Averaging
Early in our marriage, we made the commitment to saving enough to put a down payment on an apartment and putting money into a good mutual fund at an initial rate of $100 a month. Later, as we both earned more, as we entered the prime earning years of our work lives, we invested more and more.
We agreed to invest a set amount of funds every month in good times and bad. This is a strategy that is called dollar-cost averaging. This consistent buying strategy reduces investment risk over the long term.
When the fund’s share price is going down, you are getting more shares at a bargain price. When share prices rise, your balance is rising. You are rewarded in good times for your patience during bad times. Again, it is a strategy that tends to work very well over long periods of 20 years or more.
We used a low-cost balanced fund at the outset, the Vanguard Star Fund. That’s because it is an all-purpose fund that gave us a mix of both stocks and bonds. It is a good idea for those who can’t afford to buy both a stock and a bond fund. This balanced fund was a diverse investment that would never shoot the lights out in bull markets but would avoid self-destruction in bad markets because it wasn’t as risky as the all-stock approach.
Over more than 25 years of holding and adding to the fund, it has provided what we wanted, about nine to ten percent a year long-term. We still have some money in that fund because it is a sensible, conservative fund. Here is a true “Tacano” fund. It is a fund that has some of the lowest costs in the investment industry. The latter is an industry that sometimes abuses the small investor as I will detail later.
Make More, Save, Invest More
As we earned more and as I took on extra work, we put more into our investments. We raised it to $200 a month and eventually, over about a decade as we both earned more because we were in our prime earning years, we increased it to as much as $1,500 as a month spread over five funds. This was besides contributing to our retirement plans at work. It was a lot but no, we never starved ourselves or stopped taking occasional vacations to reach the $1,500 figure.
These investments included stock, bond and cash funds. They also included paying off a variable rate mortgage early. The general rule of thumb is one should use a variable mortgage for a relatively short-term mortgage, ten years or less, because rates tend to be lower at the outset. But use a fixed term mortgage over the long term, especially if you believe long term interest rates will be dramatically higher.
We increased our investments gradually so it didn’t result in a decline in our standard of living.
We had several different kinds of mutual funds. We also had some stocks and bonds. Besides our retirement plans at work, we each opened individual retirement accounts (IRAs). We saved for retirement through these qualified—qualified as in special, reduced tax, treatment—accounts for several reasons: One, in our early years of marriage, when we had relatively low incomes, they gave us immediate tax breaks by reducing our current tax liability. That’s always a big issue when you live in a taxing place like New York. Two, as these accounts built up, we paid no taxes on investment gains, which would not be taxable until between the ages of 59.5 and 70.
Tip: Wait until age 70 or whatever is the latest age if you don’t immediately need these retirement funds. The longer tax-deferred compounding takes place, the better. Remember how we have shown, time and again, that even just a few extra years of compounding can make a huge difference. And by the way, as per the advice of numerous financial professionals I have interviewed over the years, don’t expect Social Security to be a big part of your retirement income.
I will discuss these issues as well as the woes of Social Security with an official of the program in chapters at the end of the book. He concedes that changes must be made in the program. Don’t wait for them to happen because the changes—if they are like previous changes—won’t be good. Yet changes are inevitable because the system is running in the red. Prepare for them now.
Sack Away a Bundle on Qualified Funds
Keep adding to your qualified retirement accounts in your 60s if you are still a part-time worker as I am. If you have a Roth IRA, you can continue to contribute forever as long as you have earned income, up to $7,000 currently. It could be increased owing to inflation. You never have to take assets out of a Roth IRA and when they come out there are no taxes. That’s because, unlike a traditional IRA, you never received tax deductions.
Still, although this book is primarily about how to start with little or nothing and accumulate enough to make you financially independent, I also have a chapter for those who have already accumulated a nice amount and are close to or in retirement. It’s important to understand how to protect these assets in retirement, which were built up over decades.
One caveat of using these qualified retirement fund assets: My wife and I have a lot in our retirement accounts as do millions of Americans. As I write this, there are various pols who are coming up with schemes that would grab some of these retirement assets.
Be on guard for these money grabs. That’s because the government is increasingly becoming hard up for cash. When people or institutions are hard up for money—whether they are advanced welfare states with aging populations or crack addicts desperate for the next fix—they will do outrageous things they normally would never do. Desperate governments—the same as desperate drug addicts—could hurt all of us who have systemically saved over the decades.
A final point on our investment plan, these various saving and investment accounts would help us arrive at our goal: financial independence.
How did we do? What were our returns? Please see the next chapter.