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Personal financial management(3) –Quick and Dirty Rules

已有 9402 次阅读 2015-3-3 05:52 |个人分类:生活点滴|系统分类:海外观察

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For most of us, outside of daily financial management and paying for  children’scollege, the foremost question must be “Retirement Planning”. The paramount question (as is currently advertised heavily on US TV) is “WILL I HAVE ENOUGH ASSETS FOR  RETIREMENT?”. This leads to two subsidiary questions:

1.     How much will my current investment/saving have grown by my retirement age?

2.     How long will this asset last in my retirement?

Even assuming a fixed rate of Return On Investment (ROI) and an annual  withdrawal rate, to answer these two questions require spread sheet calculations, and longevity estimation  that cannot be done in one’s head. Since this is time consuming and most of us are not computer  savvy, we end up not doing them and have no idea to these important answers.  Let me offer a couple of simple rules which will enable anyone to do these calculations  quite accurately in one’s head in less than one minute. Knowing the answers will  enable one to takeproper action regarding this most important question timely.

 

Quick-and-Dirty Rule #1 (The rule of 72)   If you divide 72 by the ROI rate, the  answer will tell you the number of years it will take for your investment to double.

Quick-and-Dirty Rule #2 (The 4% rule) – If you withdraw 4% of your retirement asset annually,  then you can do this foreverand never run out of money.

 

I believe any ScienceNet reader can now use these two simple rules to answer the two important  questions above anytime in lessthan a minute (behind these two rules is the assumption you have a reasonable investment portfolio and not hiding your money under mattresses)

 

As to how to invest, I also offer two more simple rules

My Investment Rule #1 –Save, Buy, Diversify, and Hold. Unless you are a professional do  not trade orspeculate in the hopes of getting a better return.

My Investment Rule #2 –Rule #1 above means you should choose mutual fund and review  your investment infrequently, e.g., once every six months. However, mutual fund  charge management fees between 0.1 to 2% annually. This may seem a small fee or difference. However everything being equal the difference between 1.5% and 0.1% management fee overa period of 25 years can cause the final result to differ by 40+%. Furthermore,experimentally it is known  that 90% of the actively management funds do not beat market averages over long period of time.  Thus buy mutual fund that are basically market/sector following fund or what is known as ETFs  (ExchangeTraded Funds) which has ultra lower management fees.

 

Now if you start saving regularly and early, then you will have no worries in your old age. This is all there is to it for personal financial management for the rest of us! And basically this is what I did to have a worry free retirement.

Related articles:

http://blog.sciencenet.cn/blog-1565-808222.html

http://blog.sciencenet.cn/blog-1565-634189.html




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