Thimbleful of Prosperity

By: 
Al Jacobs

Over the past several decades I’ve been an advocate of prosperity. During this time I’ve encouraged people to save and invest for their future. My financial newsletter, as well as a regular flow of articles, stresses the importance of amassing assets. In these writings I discuss savings and retirement programs, corporate stocks and bonds, rental real estate, mortgage lending and a variety of other more or less sophisticated methods for achieving wealth. My belief is, provided with guidelines and encouragement, any person can learn to master the techniques needed to become prosperous. 

However, I recently received a letter which took me aback. Its writer, a woman from a small town in South Dakota, forced me to reevaluate my presumptions when she informed me: “My husband and I have read many of your articles these past months and most of it sounds like good advice, but we have a problem. Neither of us is confident we can select good stocks and we don’t trust the mutual fund salesmen. Neither do we want to own rental real estate, hold mortgage loans, or do many of the other things you discuss.

“Our question is simply this: Can you provide us with just a few things we can do which require no particular knowledge or involvement, so we can retire in comfort when we’re ready in about thirty years?”

Because I wasn’t quite prepared with a rational answer, I set her letter aside …  and there it sat for a couple of weeks while I mulled it over. What do I say to someone who hopes to achieve a comfortable retirement, but doesn’t really want to do much of anything to bring it about?

I’ve given it some thought and believe I’ve figured it out. And while pondering the dilemma, it dawned on me a lot of other people must be of like mind. Devoting an adult lifetime adroitly acquiring assets goes against the grain for many persons. Whatever they attain in life comes with minimal expenditure of time and effort.

For this reason I’ll offer an approach – though it requires a warning. What I advocate will enable most persons to conclude their working years with enough to live in the style they’ve become accustomed. But whoever chooses to go this route must realize the standard of living achieved in this manner will be something less than bountiful. With this understood, let me describe three life habits to enable you to enter the retirement years with some degree of confidence.

(1) Don’t buy anything requiring you to pay interest. Whatever you purchase will be something you can afford. If you possess a credit card on which you charge things, pay the balance in full each month before the credit card company collects any interest. Operate this way and the interest rate on the card means nothing. If for any reason you can’t conduct yourself in this fashion, cut up the card with a scissors. As another example of austerity, your dilapidated living room furniture is an embarrassment, with the only suitable furnishings beyond your budget. Your two likely solutions are to go into hock for months or years for the attractive set you want, or make do with low grade merchandise from a cheap discount house.

A better decision is a choice friends of mine, a young couple, made many years ago. For three years their living room sat vacant until they could afford to furnish it with what they really wanted. As you might guess, they are today wealthy oldsters. Stepping out a little further, consider transportation. Your auto, though paid off, is now seven years old, with nearly 75,000 miles on the odometer and no one you know drives anything this dated. A new car you might purchase for $28,500 is available on a 5-year contract through a dealer at zero percent interest. Is this the way to go? Absolutely not.

Although you’ll see no interest charged, it’s there, built into the price of the car. Bought all cash, it would probably cost $23,000. So what do you do? You drive the old car until you can afford its replacement.  And by “afford its replacement,” whatever you acquire, new or used, will be purchased cash on the barrelhead. You don’t borrow to buy consumer products – vehicles included; it’s a recipe for a lifetime of poverty. As a final thought on the subject, if your friends think your auto reeks of vintage, consider it a compliment.

(2) Own your residence free and clear. When your paycheck becomes a relic of the past, you’ll want your housing costs to join it into oblivion. This means you must own your home with no mortgage. It’s easily accomplished. Early in your life purchase a house with whatever down payment you can afford. Choose a long-term, fixed-rate, fully amortized mortgage and make the regular monthly payments until it’s paid in full.

As the years pass and your equity grows, avoid any temptation to dip into it for such things as schooling for the kids, the long-awaited vacation you’ve always wanted, or the surefire investment your brother-in-law guarantees will put you on Easy Street. Consider your residence a sacrosanct element of your retirement years, not to be further encumbered or compromised in any manner. 

(3) Set up your rainy day account.  Regardless of however else you choose to spend your money over a lifetime, one thing must take precedence: As quickly as possible open a self-directed Individual Retirement Account (IRA).  If you’re married, filing jointly, with Adjusted Gross Income (AGI) less than $196,000, you’re eligible for a particularly desirable Roth IRA. During each of your working years you and your spouse will each contribute the maximum allowable amounts into these accounts – $5,500 in 2017.

They’re best opened with a large discount brokerage, online if you wish, into which will go interest-bearing vehicles as the sole holdings. These will be guilt-edge securities such as U.S. treasury notes and bonds, FDIC-insured certificates of deposits, money market accounts – with banks, not mutual funds – and perhaps high-grade short to medium-term corporate bonds, if you’re willing to take the time to consider them.

Admittedly, interest rates on such investments are currently distressingly meager, but I don’t believe this will continue forever. Recently appointed Federal Reserve Chairman Jerome Powell announced of another interest rate hike soon. It seems reasonable we’ll see an improvement in secure interest bearing investments soon. And be aware the benefits you derive are twofold: You’ll reap the rewards of compound interest – the closest thing to magic you’ll ever see – and, under current rules, with the Roth IRA all earnings will be entirely tax-free. If started early enough in life, such an account may well accumulate substantial amounts.

Let me sum it up. If you follow this three-point program I’ve just outlined, you’ll enter your post-working years satisfactorily. Though you’ll not retire in grand style, able to tour the world on your private yacht or bask in the limelight as a celebrated patron of the arts, at least you’ll not be dependent upon family or government for your daily sustenance. It’s an acceptable conclusion; most people in this world fare far worse.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view it on http://www.roadwaytoprosperity.com

al@beachcomber.news

 

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