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“4% Rule” Creator Doesn’t Agree With It Anymore…

Anyone who is serious about investing and planning for their future retirement has heard about the “4% rule” over a thousand times. 

But for those of you who are looking at me with confused eyes, allow me to bring you up to speed. 

“You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.” (Source: Schwab)

This rule was invented over 25 years ago by financial advisor Bill Bengen and became popular when he wrote about it in the Journal of Financial Planning back in 1994. But in a recent interview he did with MarketWatch, he said he’s long since moved on from it. 

Why? 

Bengen said his rule was accounting for the worst possible situation: Rising inflation and a stock market that keeps on getting more expensive. In that case, someone retiring for 30 years and presumably entering a bear market would be smart to withdraw only 4%. 

His rule also accounted for a retirement portfolio that forces you to play it safe: 50% in intermediate US treasury bonds, 20% in US small-caps, and the remaining 30% in the S&P 500. 

But what about when stocks are inexpensive and inflation is at low levels? Based on historical data, Bengen says that average annual withdrawal rates of 7-13% wouldn’t have hurt you. 

And in today’s market, Bengen would change his “4% rule” to the “5% rule.” And in today’s market, we are blessed to be dealing with very low rates of inflation. 

His closing comment was particularly insightful: “It’s not a law of nature, it’s empirical—in other words, based only on the data we have, going back to the 1920s. One size doesn’t fit all, and the number you choose could be anything.”

Makes you wonder about all of those personal finance zealots who blindly treat rules like religious dogma without looking up where they came from or in what context they are useful (or not)…

What do YOU think about this modern update to the “4% rule”? Do you agree with Bengen’s changes or disagree? Reply to this newsletter and share your thoughts with us!

Let’s Do the Math: Saving Up for a Down Payment

This is a news story you’ll definitely want to share with your younger children or any Millennial-aged adults you know… or just someone who is completely new to the house-buying process. 

Even if you’re a well-off individual buying a house for the very first time, you’ll have to save up a hefty portion of your bi-weekly paycheck. But whether you pay down the traditional 20% of a home price or the median average of 7.6%, you need to know what you’re going up against. 

According to calculations from online real estate marketplace Zillow and investing app Acorns, here is what you’ll need to do to save up enough money for a down payment on a $259,906 house within one year (i.e. 26 paychecks):

  • 3% down payment requires you to set aside $300 every paycheck (Total: $7,797)
  • 7.6% down payment requires you to set aside $760 every paycheck (Total: $19,753)
  • 20% down payment requires you to set aside $1,900 every paycheck (Total: $51,981)

But as any savvy real estate investor knows, going with the harder-to-reach 20% down payment means you won’t have to purchase private mortgage insurance. Not to mention the interest fees and other costs associated with closing, taking out loans, and so on. 

Plus, it’s a great litmus test to see if you would be able to reliably afford the monthly mortgage on your new home of interest. 😉

“Weird” Mindset Trick Leads to Extraordinary Investing Success

In the game of investing and finance, we don’t spend an awful amount of time talking about your financial mindset and how to improve it. 

But there’s an interesting phenomenon you’ll consistently observe among the wealthiest and most successful investors: They are completely detached from the outcome and are merely participating in the stock market for the fun of it. In a weird way, worrying less about the stock market leads to better results!

Here’s what I mean… investing is something that should ADD to your life, rather than BE your life. Instead of focusing on the external reward of a higher green number on the screen, focus on the ACT of investing itself being the source of enjoyment for you. The joy you experience should come from the participation itself. 

When you do it the other way around (i.e. become laser-focused on the dollar signs), you are more prone to bad investing decisions. Checking your portfolio ten times a day, fretting over day-old changes in the market instead of longer moves, and “panic selling” during corrections… you’ve likely seen those behaviors and engaged in a few of them as a beginner. 

What do YOU think about this weird investing paradox? Have you found the same to be true for yourself as a long-term investor? Reply to this newsletter and share your experience with optimizing your mindset for better investing!

“COVID-19” Graduates Have WORSE Employment Prospects

The previous generation of young adults had to face an extremely scarce job market following the financial crash of 2007-2008. And it affected them for a good four years after the event. 

But today’s generation of college graduates have to deal with COVID-19 and the financial recession that consequently came about. And according to newly released data from the Bureau of Labor Statistics, this newer generation’s chances of employment are far worse than their predecessors from 12 years ago…

  • The jobless rate for 20-24 year olds is over 10% higher than for any other age group of unemployed people at the worst part of the COVID-19 pandemic
  • Unemployment for recent college graduates peaked at 20% in June (no other age group with at minimum of a Bachelor’s degree has it this bad)
  • In workers under 20 years old without a college degree, the spike in unemployment was significantly larger

Imagine what’s going to happen to these young people. While they flail around hundreds of resumes and get the bone-headed idea to pursue even higher levels of education, they will perpetually end up in a state of financial hardship. 

They either have to take the next job that will pay them somewhat of a livable wage, or go the freelance route and find a way to leverage their skills into a better-paying profession. And I have a bad feeling they will take the former and less profitable route…

Can AT&T End Their Two-Week Losing Streak for Good?

As of the close of the market on October 7th, things were looking awfully bad for telecommunications company AT&T. 

Even though their Q3 2020 performance results were not officially released until last Thursday (October 22nd), investors were selling their shares and losing faith in the company. It got to the point where shares lost 7% of their value before the results went public. And it’s been nearly 10 years since the shares have dipped that low.

But the report appears to have comforted investors and demonstrated that the company isn’t going anywhere. At least not just yet…

  • Revenue: Actual was $42.3 billion, projected was $41.6 billion
  • Adjusted earnings before interest, taxes, depreciation, amortization: Actual was $13.2 billion, projected was $13.7 billion
  • Adjusted earnings per share: Actual and projected was $0.76/share

So despite some remaining concerns about cashflow, better-than-expected revenue numbers and notable growth in wireless and Internet subscribers pushed the stock up to 5.8% by the close of Thursday’s trading session. 

Moral of the story: Don’t panic sell before you get the full story (and numbers)!

Bubble Dining Pods: A STUPID Idea That Won’t Stop COVID-19 Transmission

Just one final safety precaution to warn you about before we close off today’s newsletter…

As restaurants nationwide face colder weather and ongoing restrictions to limit dining exclusively to the outdoors, they will start investing in “bubble dining pods.” And they sound and look as stupid as you think they would.

While the intentions to keep diners socially distanced from one another within a contained and warmer environment has good intentions, it could do far more harm in spreading the coronavirus. 

For starters, the seal between the inside and the outside of the pod is not tight. Enough ventilation can have air going in and out, and some of that air could have COVID-19 particles. And that’s not even getting into the possibility that somebody inside the bubble could be infected and transmitted the virus to others in a closed environment. 

Not to mention that you would have to ventilate and thoroughly clean the pods in-between each use. Which itself will take quite a while and severely limit the number of guests that a restaurant can take in for the day. 

Seriously, just stick with the heaters and wear better clothing. It’s just as practical as outdoor dining anyway and you won’t look so ridiculous. Not to mention it will be far safer to do so…

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