If you have tremendous money strength, you will never have to draw down on your retirement principal. Your goal, if you choose to accept, is to create an estate that will provide for your loved ones long after you are gone. This is what endowments do. Why not consider doing the same if you are a magnanimous and financially savvy individual? You’re reading Financial Samurai after all!
I always scratch my head when I hear advisors talk about the “4% withdrawal rule” or any withdrawal rate that’s greater than a risk free rate of return for that matter. Times have changed folks. Interest rates are close to zero, the stock market isn’t a slam dunk, and we are living much longer now.
There are so many variables that it is impossible to calculate a bullet proof withdrawal rate rule unless that rate is 0%. Sure, there’s a 99% chance you will die before 110 and a 99.9% chance you’ll die before 150, but who really knows? We might be one with machines by the year 2030 and live forever!
Instead of thinking about how much you can withdraw to bleed your retirement funds down to $0 by the time you die, I highly encourage everyone to think about leaving a financial legacy for your loved ones that is so great you’ll never run out of money. Even if we fail to come up with a perpetual giving machine to leave for others, the end result will be much better than if we only focused on ourselves. Related: Is Not Wanting To Be Rich Selfish?
BREAKING DOWN THE IDEAL WITHDRAWAL RATE Read more…
View from Koko Head, Oahu
After rolling over my 401(k) into an IRA, I’d like to focus on potentially the single most beneficial reason why everyone should convert their 401(k) into an IRA after they leave their jobs: Rule 72(t).
Rule 72(t) allows for penalty-free withdrawals of your IRA account before the age of 59.5 provided that the IRA holder take at least five “substantially equal periodic payments” (SEPPs). The amount depends on the IRA owner’s life expectancy calculated with various IRS-approved methods.
Three IRS approved methods to calculate SEPP:
1) Required minimum distribution method: This method takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31st of the preceding year and your current life expectancy. With this method, your payments will change depending on your account value.
2) Fixed amortization method: This method amortizes your account balance over your single life expectancy, the uniform life expectancy table, or joint life expectancy with your oldest named beneficiary. Such a method is more stable.
3) Fixed annuitization method: This method uses an annuity factor to calculate your SEPP. It’s hard enough calculating life expectancy and portfolio performance, let alone forecast interest rates for annuities so let’s skip this method.
The most common withdrawal calculation method is #1. I’d like to use my example for how using Rule 72(t) can help an early retiree extract more income and lead a more comfortable financial life.
TAXES BAD, MORE INCOME GOOD Read more…
The stock markets surged to new highs on May 3, 2013 in large part because the Labor Department said the economy added 165,000 jobs in April, 15,000 more than consensus expectations. 15,000 is a rounding error in a nation of millions, but we’ll take it if we can see billions more wealth created!
Just think about this situation for a little bit. Is it not a little bit ironic that more jobs creates more stock market wealth, but once you have lots of stock market wealth you no longer have to work? I’m reminded about the parable of the Mexican fisherman who gets ridiculed by an executive with a fancy MBA for why the fisherman doesn’t want more than his catch. The whole point about investing our money is so that our money will one day work so hard for us that we don’t have to.
FORGET ABOUT THE SAME Read more…
The Nikkei 225 (Japan’s major index) is up over 60% since the election of Prime Minister Shinzo Abe on September 26, 2012. Abe has vowed to re-inflate the lagging Japanese economy with a target inflation of 2% through aggressive quantitative easing, setting negative real interest rates, and aggressive fiscal stimulus. So far, investors are in full belief of “Abenomics.”
One of the key results of effective quantitative easing is a depreciation of the Yen. The Yen has depreciated by around 25% vs. the USD and other major currencies. A weaker Yen is exactly what Japanese ministers need to reinvigorate Japan’s enormous export economy.
It’s apparent at least here in the US that Japanese electronics have waned with the rise of South Korean products from Samsung, KIA, and Hyundai. You wouldn’t be caught dead in a Hyundai 15 years ago. Now everything seems alright. Heck, the most popular YouTube sensation is PSY, a Korean pop singer.
Japanese electronics have always been considered of superior quality with premium pricing to boot. Now the difference in quality seems negligible at best, so prices must come down to stay competitive. A depreciating Yen is doing exactly that, while allowing manufacturers to save face by not cutting prices.
But let’s forget about the South Koreans for a while since they aren’t the Asian superpower the United States are worried about. Let’s try and get into the minds of the Chinese.
Every year I review my home insurance policy to make sure I’ve got the proper coverage. The reason why it’s important to check is because insurance policies change all the time. There might be discounts or special offerings for one. Meanwhile, your insurance company might slip in some extra charges without you even knowing. Finally, and perhaps most importantly, building costs are always rising thanks to inflation.
One of the worst things that can happen after a mishap is your home insurance policy covering much less than the true replacement cost. Even if your home appreciates by only 2% a year, if you don’t update your home insurance policy for 16 years, your policy will only cover half the rebuild cost! Let me share with you one of my rental property insurance mishaps and things you should think about when figuring out how much home insurance to get.
MAKE SURE YOU ARE COVERED Read more…
It’s hard to stay in shape as we get older. We move around less, our family demands more of our time, and our jobs stress us out to the point where we eat too much comfort food.
I’m about 10 pounds heavier that I was during college. I always tell myself it’s due to more muscle, but I know it’s a lie because I hardly ever lift weights anymore. When you no longer need to be in incredible shape because you’ve found someone who likes you just the way you are, why bother? All I do is play tennis and do the occasional push-ups and sit-ups now.
Motivation is something I’m perpetually looking for because my motivation meter never seems to stay full. I sometimes feel the paradox of freedom where America allows for a relatively correlated path to attaining what we want. If I want to get six pack abs, I’ll cut out the sweets and do 500 sit-ups every day for three months in a row. If I want to make more money, I’ll work harder at executing new ideas. I really don’t think there’s very much that’s inhibiting our progress other than ourselves.
I’ve got a confession to make. When I log into my Prosper account to figure out where to dole out my next $1,000 tranche to borrowers, I feel a little bit like President Obama handing out money to his supporters. The only difference is I’m figuring out how to allocate my own money, not my neighbor’s money to build wealth.
They say money is power, but I never experienced such intoxicating power until I started investing in peer-to-peer lending. P2P lending lets me help decide the fate of someone’s desires or well being. When I invest in the stock market or in private companies, I don’t feel empowered because I’m a minority investor with no say. In fact, I’m losing control over my money as I entrust others to do a better job at making a return on money than I can.
On a personal level, having money is empowering because money buys freedom. Freedom to do whatever was my main motivating factor to save so aggressively during my career. I never thought of making money so I could have power over other people like our great politicians. Now that I’ve tasted what it’s like to be a sugar daddy over peer-to-peer lending, I’m afraid of what I might become!
EMPATHY FOR GREED & CORRUPTION Read more…