At the 11th hour, thankfully, I phoned a friend.

He is an experienced Airbnb investor. He looked at my spreadsheet and asked where I’d accounted for cleaning costs between guests. It’s not that I’d forgotten them. I’d accounted for them differently than Airbnb does.

That accounting detail turned my projected profit into a -$10k yearly loss.

I resisted that realization at first. I was excited about a new investment and owning more property. I tried to rationalize that the operating loss was ok. I told myself I locked in a great interest rate while rates were rising. I told myself the property is probably going to appreciate.

But I came to my senses and pulled out of the deal.

A few weeks ago, I started wondering how that property was doing, so I looked it up. I had offered $510,000 in early 2022. It’s now worth only $493,000 four years later.

Adding up all the costs of negative cash flow, negative appreciation, and comparing the home equity to my stock market investing, that investment property would have lost over -$100k in just 4 years.

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Lessons learned

I honestly don’t feel smart for pulling out of that deal. I just feel lucky to have dodged a bullet.

And it was an interesting learning experience about the math and work involved in real estate investing.

My biggest takeaway was just how much time it took. Even tho I didn’t buy the place.

I spent countless hours on market research and financial modeling. Then I spent 15 more hours on the closing process alone. There was driving back and forth to a new city, agent calls, inspection coordination, and loan paperwork.

I spent more time on the closing process than I have managing my entire stock market portfolio over the last 10 years.

Buying my favorite fund takes about a minute. I set up automatic contributions, and the money invests itself. No tax bookkeeping, no tenants, no cleaning schedules, no 2 AM texts about a broken water heater.

It wasn’t just the work that turned me off. I was interested in and willing to do it.

But I was not willing to work more to lose $100,000.

Real estate has not been a good investment over the last 10 years

My property is just one case study. So let’s zoom out and look at the market.

Even the professional, passive version of real estate investing (REITs) underperformed the stock market.

From 2016 through the end of 2025, U.S. stocks returned about +270%, and Real Estate returned about +63%.

I was going to have to spend $90,000 up front to get my property running. That would grow to $337,000 in the stock market after 10 years.

That’s enough to buy a few Porsches. Or take 2 years off for a career break to travel the world.

“But what about leverage and tax benefits?”

I know what you’re thinking. James, you’re forgetting the mortgage leverage. You’re forgetting depreciation. You’re forgetting the 1031 exchange.

I haven’t forgotten any of it. I love nerding out on tax strategies. I modeled the leveraged IRR, cash-on-cash return, and cap rate. I include mortgage interest deductions, depreciation schedules, and equity. Even with every advantage modeled in, the property still underperformed.

I spent hours on it. Financial modeling became a side hustle in itself. Then add to that the job of managing a property and tenants, and it was going to be a lot of work. (My friend who runs Airbnbs assures me that it gets easier once you set up systems, but that’s work too!)

Meanwhile, my VTI fund sat there making more money with zero effort.

Why do we fall for it? When effort ≠ reward.

Investing is the only arena I know of where working harder makes you less money.

Somehow, our brains are wired not to accept this truth.

It goes against everything we’ve been taught. More effort should equal more reward. You get promoted because you outworked people. You earn more because you developed valuable skills. Effort usually always pays off.

So when someone tells you that the best investment strategy is to take 1 minute to buy a fund and never think about it again, it doesn’t feel like enough. It feels like you’re leaving some opportunity on the table because you aren’t working for it.

Combine the ‘effort = reward’ fallacy with the American obsession with land and a heavy dose of real estate FOMO, and you have a perfect recipe for a financial disaster.

However, we need to draw a clear line here. There is a massive difference between a spreadsheet error and an intentional spending choice.

Second homes are fine!

We need to stop conflating investment properties with second homes.

A second home is like buying a sports car. You’re not doing it to make money. You’re doing it for the experience.

Second homes are great. You can expand your life into two locations that bring you joy. It’s hard to imagine a better way to spend your wealth. You can be bi-continental, live by the ocean and the mountains, or balance city life with country relaxation. Go for it!

You don’t need to try to rationalize it because you think it’s a good investment. If you’re buying a life upgrade, that’s great. If you’re trying to build wealth, there are better ways.

Skip the real estate investing.

You simply do not need to own an investment property to build wealth.

If you’re maxing out your tax-advantaged accounts, investing in low-cost index funds, and managing your tax strategy well, you are already doing the highest-return work available to you. My 10 Steps to Life Changing Wealth has the full framework.

Adding a rental property on top of that adds complexity, time, and risk to what has recently been a lower-return investment.

If you still want to buy one after reading this, I respect that. Just run the numbers comprehensively first. Include cleaning, vacancy, property management, maintenance reserves, insurance, property taxes, and your actual time at whatever your hourly rate would be. If it still pencils out after all of that and you want a side-hustle, go for it.

Otherwise, send that cash to an index fund and get back to having fun.

PS. Curious what your down payment would be worth in the market? This link downloads my Excel calculator for that.

If you understand investing and still feel vaguely unsure, you probably have a problem with the portfolio's goal, not its contents.

You can’t evaluate a portfolio without knowing what it’s for.

Not a vague sense of retirement or financial security. A specific age, a specific annual number, and a real picture of what the day looks like. Most people haven’t done this thinking. Most financial advice skips it altogether.

Once you have a target, your questions start having obvious answers.

What Is Your Portfolio For?

Your investment portfolio is a delivery mechanism for the life you want to live.

It’s supposed to deliver a specific life at a specific time. If you don’t know what that is, or when, you can’t tell whether the mechanism is working correctly. You’re optimizing in the abstract. This often leads to random tactics without a strategy, like:

• Compulsive Price Monitoring: Continually checking your portfolio balance or the stock market.

• Market Timing Paralysis: Not investing extra cash because of headlines or a gut feeling that a crash or something bad is coming.

• FOMO Trading: Buying random stocks or trending ETFs because they are hot or because you really believe you can make some big money.

When you have clearer goals, you stop worrying and stop the reactive investing.

Why This Is Harder Than It Sounds

For people in demanding careers, defining a retirement age and lifestyle means getting specific about what you’re working toward. And that question has a second question inside it:

Who are you without your career?

Naming a target date can feel like planning an exit from an identity you’re not ready to let go of. Your career is a title, a peer group, a sense of mastery.

Setting a concrete retirement age forces you to reckon with that, which is uncomfortable. So most people keep the horizon vague. “Someday.” “When it makes sense.” “When I have enough.”

But those answers make it impossible to design a portfolio, because a portfolio needs a timeline and a goal.

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How We Found Ours

My wife and I have a habit of doing our life planning in the car. Something about being bored on a long drive makes the big questions come up naturally.

On one of these drives, we started talking about the next phase. What would we actually do if we didn’t have to work? We threw out ideas: living part-time in France, spending more time in Tahoe, businesses we’d want to start, projects we’d kept putting off. Specific enough to be clear and exciting, but open enough to be flexible.

Then my wife asked the question that changed it: “How soon could we actually do this?”

I turned it back: “When would you want to?”

She threw out a year. We both liked the sound of it. I did some quick math and told her we’re probably not on track for that yet. That’s okay. What mattered was that we had a year and a life to aim for, rather than a vague “someday.”

That conversation has made every later financial question easier to answer. Not because we had everything figured out, but because we knew what we were planning for.

The Three Questions That Define A Target

This doesn’t require a financial planner or a 40-tab spreadsheet. It requires honest answers to three questions.

1. What Age?

Not the age you’re supposed to retire. Not 65 because that’s when Medicare starts. The age at which you actually want to stop being required to work.

If you don’t have a strong opinion yet, start with 55. You will adjust later. What you cannot do is leave it blank and expect any downstream financial decision to make sense.

2. What Does It Cost?

What is your annual spend in retirement, in today’s dollars? Not your current spend, which includes retirement contributions, work expenses, and probably a level of consumption you maintain partly because your income supports it. Your target spend for the life you actually want.

A useful forcing function: look at your last 12 months of spending and subtract work-related costs and savings. You won’t need to pay those in retirement.

Then ask whether you’d want to maintain, reduce, or increase that lifestyle. Most people with higher incomes find the number is lower than they expect, because a significant chunk of current spending is stress-response spending.

Once you have the number, multiply it by 25 if you’re targeting retirement at over 60, or by 28 if you’re targeting before 60. That’s your rough portfolio target.1

3. What Does The Day Look Like?

This one isn’t a math question, but it might be the most important one. A lot of financial planning fails because the destination is just an absence: no more meetings, no more performance reviews, no more inbox. That’s not a target. That’s an escape.

What do you want to be doing at 10 am on a Tuesday when you’re 55?

People who have thought through what they’re retiring to tend to have lower spend targets and more realistic timelines.

In the absence of a clear vision, people tend to adopt an overly conservative stance, stockpiling far more than necessary because they aren’t clear on what “enough” actually looks like. That means working more of your healthy years than you need to.

You don’t have to have this fully figured out. The France and Tahoe ideas my wife and I threw around weren’t a plan. They were enough to make the question real.

How The Target Changes Every Other Question

Once you have a target with a date and a number, the portfolio questions that felt unanswerable begin to have clear answers.

• Should you prioritize tax-advantaged accounts or taxable investments? Well, a younger retirement age needs more in a taxable account.

• Which target date fund should you use? Your real retirement age, not 65.

• How much equity exposure makes sense? If you know how many years before you retire, you can start building your safe investments at the right time.

None of these are complicated questions once you have a target. All of them are unanswerable without one. The next pieces in this series go through each of them specifically.

The Exercise To Do This Week

Find 30 minutes where you’re not going to be interrupted. A long drive works.

Write down:

1. The age at which you want to stop being required to work

2. Your estimated annual spend in retirement, in today’s dollars

3. One paragraph about what you’re actually doing on a Tuesday morning at that age

Calculate your target number using the 25x or 28x multiplier above. Then look at your current net worth and your annual savings rate to see how far you need to go.

That number might be bigger or smaller than you think. Both are useful because they let you start building a portfolio that’s right for you. That’s real financial planning.

It’s easy to wonder:

• What should I do first?

• How do I make sure I don’t miss something?

• How do I know if I am choosing the right investments?

• Is now even a good time to invest in the market?

In this article, I boil down the answers to these questions and more. I walk through exactly what I would do if I were starting from scratch today, using what I’ve learned from two decades of investing and financial planning for global organizations.

Let’s get started.

Starting early matters more than almost anything else. It gives you time to build skill, confidence, and momentum as an investor. More importantly, it gives your money time to compound.

Because when money sits uninvested, it’s getting eaten by inflation. For example, $5,000 invested for 30 years at a 7% return could grow to about $40,600. But uninvested, an inflation rate of 2.5% would reduce the value to $2,400.

Step 1: Check That You Are Ready To Invest.

Before I invest seriously, I would make sure I am not passing up free money, carrying expensive debt, or one small emergency away from selling investments. Taking care of those first would make me wealthier in the long run, so I would not skip them.

Capture your employer match first, always.

I’d grab my employer’s 401(k) matching contributions before anything else. That’s free money and an immediate 50% to 100% return.

Pay off high-interest debt next.

I’d eliminate any debt above 7% interest, like credit cards, payday loans, and personal loans. Paying off a 20% APR credit card is a guaranteed 20% return. That’s much higher than average stock market returns.

Have a small emergency fund.

This may be a controversial opinion, but I would not wait to have the often-recommended 6+ months of expenses in a savings account before starting to invest. That would just delay investing too long. Instead, I would start investing as soon as I had enough cash available to cover day-to-day surprises (e.g., a car repair) so that I don’t put myself in a pinch.

Step 2: Pick One Of The Major Brokerages

Now I’m ready to invest. I would first choose one of the major brokerages for my investing: Fidelity, Schwab, or Vanguard. I would not overthink this because they are all excellent. They’re low-cost, well-run, and have been around long enough that I would not worry about using any of them.

I already have accounts at all three, but do over 75% of my investing through Vanguard. If I were starting over, I might choose Fidelity because the interface is a little easier than Vanguard, and more of their funds have no minimums. But I’m splitting hairs. I love them both.

Step 3: Open The Right Account

If you want to build true wealth, understand how to save on taxes. And tax-advantaged accounts are your first line of defense.

A tax-advantaged account lowers taxes either when money goes in or when it comes out. The main types are IRAs, 401(k)s, and HSAs, and they usually come in two versions:

• Roth: You pay taxes now and withdraw tax-free in retirement

• Traditional: You get a tax break now and pay taxes when you withdraw later

As a general rule, invest first in tax-advantaged accounts. After maxing out those, move on to taxable accounts.

I would start by opening a Roth IRA account. In a Roth IRA, contributions are made with after-tax dollars, growth is tax-free, and qualified withdrawals in retirement are tax-free. It’s one of the best long-term advantages available to investors.

However, high-earners can’t contribute directly to a Roth IRA. If you make more than $153,000 for single tax filers or $242,000 for joint tax filers in 2026, you have to go through the backdoor Roth IRA process. It’s a few extra steps, but it’s worth it. I’ve written a full guide to that here. The process is to contribute to a Traditional IRA and then convert those dollars to a Roth IRA.

The account type determines how you are taxed, but not what you own. That choice comes next.

Step 4: Buy One Low-Cost Fund

Many people get stuck on choosing from thousands of potential investment options and then figure out how to combine them into the perfect portfolio.

If you enjoy that kind of thing, go for it. But it’s entirely unnecessary. It will just suck up your time without increasing your expected returns.

Instead, I would simply buy a single low-cost stock market index fund. These funds hold thousands of companies across every sector and size. You get to own the entire market instead of betting on individual pieces of it. It’s simpler and gives you a better chance of matching market returns at a very low cost. See my favorite fund here.

A few things worth knowing:

• Low-cost: Expense ratios matter over long time horizons. A fund charging 0.03% is dramatically cheaper than one charging 0.5%. That difference can easily cost you tens of thousands of dollars over 30 years.

• Stock-picking is nearly impossible to win. More than 75% of professional fund managers fail to beat simple index funds over 15 years. For a non-professional, it’s even harder.

• Bonds are optional to start. You don’t need bond exposure on day one if you are still many years from retirement. But if you want it, allocate a portion of your investing to a low-cost fund like Vanguard’s BND or Fidelity’s FXNAX.

I’d pick a low-cost diversified index fund like VT or VTI and invest the first dollar.

Step 5: Automate It And Stop Thinking About It

This is one of the simplest ways to “pay yourself first”.

Set up a recurring contribution to run automatically. It could be weekly, biweekly, or monthly: whatever matches your paycheck schedule is usually easiest.

For example, someone paid semi-monthly could time their automatic investing to match one paycheck each month and their mortgage to the other, since those are usually the biggest cash needs.

Why set this up? Automating does three powerful things.

1. It removes the decision entirely. You don’t have to remember to do it, and you can’t talk yourself out of it when the market dips.

2. It smooths out your entry points over time, so you’re buying at a range of prices rather than all at once. This is called “dollar cost averaging”.

3. It takes money out of your checking account quickly, helping prevent impulse purchases and lifestyle inflation.

Start with whatever amount you can. Even $100 a month is enough to build the habit. Increase the amount when you get a raise. The system grows with you.

The goal would be to make investing automatic, not something that depends on willpower each month.

The Final Hurdle: Don’t Wait For The Dip.

As I write this, market valuations are still fairly high despite recent volatility. The mood is a mix of optimism and pessimism. On the positive side, the tech giants are still making big investments in AI, funded by strong profits. On the negative side, geopolitical uncertainty, rising prices, and fears of a bubble are worrying many investors.

Let’s start with looking at the fears of a bubble or that the market’s all-time highs mean we are ‘due’ for a correction. The high valuations may seem scary, but they are very common. Consider this analysis by JP Morgan1. Even when people invest at all-time highs, they tend to perform better over the next few years.

Maybe stocks are on the decline as you read this, and you think: Should I wait for the dip to go lower? It may sound reasonable. But in practice, it usually means sitting out while other people make money.

When you are sitting on the sidelines, you could be missing some of the market’s best days, and that matters a lot. The research below from Wells Fargo shows that missing just the best 10 days in a 30-year period would cut your return by a third, from 8.4% to 5.6%, and it gets worse from there2.

Even investors who bought right before major crashes like 2000, 2008, and 2020 recovered and then some, as long as they stayed in. The holding period is what matters. Over any 20-year window in modern market history, a diversified index investor has come out ahead (yes, even during the great depression3).

Investing success comes from investing early and staying invested, not from trying to perfect time entry points.

If you’re still uncomfortable putting money in right now, make the amount smaller and invest once a week to get into the market slowly over time.

Get started today.

You do not need the perfect plan. You need a simple system. The goal is to get invested and stay invested.

• Get the basics in place

• Open an account at a brokerage

• Buy a low-cost diversified fund

• Automate the habit

• Don’t wait for the perfect moment to start

That’s it! Everything else can come later, while the system is already running.

A straightforward investing system started today can easily change the rest of your life.

Keep going: Ready for the full playbook? Here are my 10 Steps to Life Changing Wealth, covering everything from your 401(k) to tax-loss harvesting. Earning above $150K? You need to know how to do a Backdoor Roth IRA the right way before you invest in a regular IRA.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your full situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a professional before acting on any investment ideas.

My wife and I joined them for 5 days. Within an hour of landing, we were all sailing off to a small island.

We dropped a fishing line into the water. It was a warm December afternoon. The rod started shaking. A fish, already? They gave me the honor of reeling in our first fish. I was a shiny skipjack tuna. That night, we ate ceviche on deck as the sun went down over the water.

Today, I’m going to show you exactly how you can fund your career break like this, and include a table to help you check whether you can afford to pause. We'll get to it below.

Career Breaks Are Growing In Popularity

They go by many names: sabbaticals, career breaks, mini-retirements, or working holidays. I use the name interchangeably. Some are company-sponsored. Most are self-funded breaks between jobs.

They are becoming more popular because a career break gives you space to recover, reconnect, and think clearly again. It can improve your health, give you more time with family, and help you reorient your career.

How To Fund Your Career-Break

The good news is that you do not need to replace all of your income to take six months off. You need to cover your expenses while away and your re-entry into the workforce.

Step 1: Calculate your current spending

Start by tracking your current monthly spending. Let’s say your household spending is about $85,000 per year or about $7,000 per month.

That is your baseline monthly spending. Multiply it by the number of months you plan to be away.

Step 2: Adjust for your lifestyle

Then adjust your baseline spending for the kind of career break you actually want. Often, it costs less than your normal life.

Housing is the highest cost, so it pays to be creative. You can sub-let your place, house-sit, or my favorite strategy: home exchanges. Home exchanges are how I was able to spend months traveling in France and Italy for less than I spend at home, even while still paying my mortgage.

Finding unique housing strategies is not only about saving money. It can also let you buy a different kind of life for a season.

Maybe your home is an RV while you take the family on a summer-long national parks trip, hiking in Yellowstone by day and playing cards around a campfire at night.

Maybe you stay home and spend six months on a creative project you never seem to have time for. You write the children’s book that has been sitting in your head for years, then use it to help teach your own kid to read.

Or maybe you spend a summer in southern France housesitting. French practice at the market in the morning. Cooking long dinners in a little village home at night.

Location is the other major variable you can use to control expenses.

If you choose a low cost of living area, it can be surprisingly affordable. Some people have made it work for $50/day in places like Southeast Asia. That’s about $10,000 for six months. One woman took off for a 1.5 years and only spent $34,000.

Start researching locations and the associated costs for housing, food, transportation, and healthcare. The more specific you get, the more possible it starts to feel.

Step 3: Add a re-entry buffer

Some people line up a new role before they leave. Others negotiate a leave of absence and return to their current job.

If you are taking a longer break without something lined up, build in a few extra months for the job search at the end. It feels a lot better when you are not rushing the re-entry.

Step 4: Figure out timing and healthcare

If you are waiting on RSUs or a bonus, leave after they hit. This alone can often materially improve the math.

And do not overlook health insurance. Sort out your COBRA or bridge coverage in advance to avoid surprises.

Step 5: Get Started Saving

Even if you do not yet know exactly where you would go, start saving now.

Open a separate savings account. Name it something concrete, like “Sabbatical Fund”. Set up an automatic transfer every month. The automation matters as much as the amount.

Will A Career Break Derail My Retirement Goal?

The impact of pausing retirement contributions

First, let’s consider the impact of missing contributions you pause during the career break. Let’s say you are saving 15% of your take-home for retirement, which is equal to $2,500 per month.

Now you plan to pause saving for six months. In this case, you would miss out on $15,000 in contributions. Over decades, that missed money can grow into something meaningful, but luckily, it’s not so large that you can’t make up for it.

For example, if your target is $2.5 million, you would be pushing back the end goal by roughly 2-3%. That is small enough to recover later with a higher savings rate, a bonus, stronger future income, or a slightly later retirement date.

Make sure your current retirement savings are on track

The second question is whether you are already roughly on track - at least where you should be at this point in your life.

The table below shows a simple rule of thumb for how much you should have saved based on your age. It shows the amount as a multiple of your current spending (not income). It assumes you save about 15% of your income and earn a conservative 5% real return over time.

How to read this table: Look up your age in column 1. Multiply your annual spending by the amounts in column 2. If you have at least this much invested for your age, a short career break will not knock you off course.

If you are well below these numbers, your first move should be increasing retirement savings until you catch up.

Your Career Break Might Have A Financial Return

This whole analysis assumes the career break only has a financial cost.

But it often has a financial benefit.

A real break can help you recover from burnout, avoid a bad career move, improve your health, or create the clarity to make a better next move.

Done wisely, it is not an interruption to compounding. It puts you on a more sustainable path and can improve the rest of your working life.

What Will You Regret Not Doing?

I hear many people hesitate to take a career break in their peak earning years. The logic is “Make hay while the sun shines”. I get it.

But your health doesn’t last forever. So I say: make miles while your knees still bend.

Fast forward 30 years. What will matter more to you?

Another six months in the same job.

Or the season when you finally stepped out of the routine and did something you’ve always wanted to do.

Last month, I realized I hadn’t turned on dividend reinvestment for a major ETF. What an unforced error! Especially for someone like me who does this stuff every day.

I started visualizing a week of my future freedom vanishing because I wasn’t paying attention. Complexity catches up to us all at one point or another.

That inspired this review. Every dollar you lose to these mistakes is another day or week you are forced to work for others rather than for yourself. Another day of being tethered to a desk instead of your dreams.

The good news is that plugging these leaks is one of the easiest ways to build wealth and spend less time thinking about your money.

That’s because these create a hidden Complexity Tax on your life. One that you can quickly fix it with simple systems.

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The Behavior Mistakes That Eat Your Returns

1. Trying to time the market

Maybe you pause contributions because “things look shaky.” You move part of your portfolio into cash to keep some “dry powder.”

Unfortunately, markets tend to recover before we feel safe.

Missing the best 10-20 trading days destroys long-term returns. From 2002 to 2021, staying fully invested in the S&P 500 returned 9.5% annually. Missing just the 10 best days dropped that to 5.3%. Missing the 20 best days? 2.6%.1

This mistake is so common because it feels responsible. Yet, the compounding damage comes from missing just a handful of strong days, plus the psychological hurdle of reinvesting once prices rise. Timing the exit is hard. Timing the re-entry is even harder.

A better rule is: automate your investing on a schedule, stay the course, and let time do the heavy lifting.

2. Changing your allocation during stress

This one is a cousin of market timing, but it deserves its own category because it tends to be permanent.

You start with a 90/10 portfolio of stocks and bonds. Then a real drawdown hits. The market falls 20 or 30 percent, and your account balance is significantly down. The economy is in the dumps.

So you reduce risk. You sell into safer assets right after the drop.

On paper, this feels like prudence with a weak economy. In practice, it locks in losses and reduces your participation in the recovery.

It also creates a new problem: when do you raise risk again? The same fear that pushed you to de-risk will keep you from reentering the market.

This bad timing costs investors about one-fifth of their returns or (-1.7%) according to Morningstar.2

Instead, choose today a portfolio that you can actually stick with. A slightly more conservative allocation that you can hold for 20 years is better than an aggressive allocation you abandon.

3. Letting cash build up unintentionally

Cash drag is one of the most underappreciated tactical mistakes, especially for high earners.

It shows up as:

• bonuses sitting in checking

• “temporary” cash parking that lingers indefinitely

• transfers that land in a brokerage settlement fund and never get invested

• indecision about where to invest (analysis paralysis)

It costs you in terms of immediate returns and all the compounding future returns you’ll miss.

Automatic contributions and investing solve this for you. Make sure your investing platform allows it and go set it up today.

4. Not increasing investments as income rises

Many investors set their investments and retirement contributions once and never touch them again.

Meanwhile, income grows, which usually leads to lifestyle inflation.

It doesn’t even feel like a mistake because you’re still investing. You’re still doing more than most people. But a savings rate that slides from 25 percent to 15 percent is a major shift in your financial trajectory. It pushes financial independence and your goals further into the future.

The easiest fix is automatic escalation in your 401(k). Raise contributions by 1 percent each year, or set a rule that every raise or bonus triggers an increase. It is by far the easiest way to become a multi-millionaire.

Tax Mistakes That Suck Your Money

The biggest tax errors are rarely about complex loopholes.

The errors come from misunderstanding the basics, missing simple settings, or not using the tools you already have.

5. Not updating your cost basis method

This one matters most in taxable brokerage accounts and especially with mutual funds.

Many brokerages default to a cost-basis method such as FIFO (first-in, first-out) or average cost. Those defaults can create unnecessary taxable gains when you sell, because they don’t let you choose the most tax-efficient shares.

Instead, use Minimum Tax (MinTax) or specific lot identification (SpecID). These allow you to often reduce your capital gains by selling the highest-cost shares first. That can mean thousands saved on a single sale and much more over a lifetime.

Go to your brokerage settings and update them like this example from Vanguard:

6. Not harvesting tax losses

Market losses create opportunity in taxable accounts. When assets drop below your purchase price, you can harvest the loss, reduce current taxes, and reinvest to stay in the market.

Tax-loss harvesting lets you deduct up to $3,000 per year from ordinary income. Unused losses carry forward indefinitely. Over 30 years, consistent harvesting can save $40,000+ in taxes at higher brackets.3

Tax loss harvesting adds a little record-keeping that may feel like extra work, but think of it as a side hustle. How much time would you invest in a side hustle for $40,000? And often you can do a tax-loss harvest one time and carry forward the $3,000 per year for a decade or more.

7. Poor asset location

Most people understand asset allocation: how much they hold in stocks, bonds, cash, and other assets.

Fewer people think about asset location, which is where you hold each asset within taxable, tax-deferred, or tax-free accounts.

The placement matters because different assets generate different kinds of taxable income. Putting tax-inefficient assets in taxable accounts can create ongoing tax drag. Putting tax-efficient assets in IRAs can waste valuable space.

It’s less complicated than it sounds. The general idea is:

• keep tax-inefficient income-producing assets in tax-advantaged accounts when possible (e.g., bonds, REITs, high dividend stocks, actively managed funds)

• keep tax-efficient stock exposure in taxable accounts when it fits your plan (e.g, stock index funds, municipal bond funds, stocks you hold for the long-term)

Set it up once and benefit for decades.

The Fee And Structural Mistakes That Are Relentless

8. Paying high expense ratios without realizing it

Fees are one of the few guaranteed negatives in investing. And because they’re expressed as small percentages, they’re easy to dismiss.

But a 1% fee versus a 0.1% percent fee is not the same. That difference could cost you hundreds of thousands of dollars over your lifetime.

Make sure you know your all-in costs and use low-cost index funds as much as possible. As a general rule, I consider anything over 0.25% to be a high fee.

9. Leaving old 401(k)s unmanaged

Old employer 401(k) or 403(b) plans often sit untouched and forgotten for years. That can mean:

• higher fees than your current options

• mediocre fund lineups

• no rebalancing

• forgotten allocation drift across your household portfolio

Even if you leave an old 401(k) where it is, it should still be part of your total portfolio plan. In many cases, consolidating accounts or rolling into a better plan reduces complexity and saves fees.

Execution Errors That Prevent Compounding

10. Forgetting to turn on dividend reinvestment

Dividends are a major driver of long-term equity returns. If dividends aren’t reinvested, they become idle cash and the compounding engine loses power.

From 1980 to 2019, 75% of S&P 500 returns came from reinvesting dividends!4

This one is painful because it’s purely about one specific detail. You can do everything right and still miss huge gains if you never toggle that setting.

Check your account settings. Make sure dividends and capital gains distributions are reinvested in all your accounts, if that aligns with your plan.5

11. Failing to rebalance systematically

Without rebalancing, portfolios drift away from your plan.

If stocks rally for years, your 70/30 can easily become 85/15 or 90/10. That means you’re taking more risk than you intended, often right before a drawdown reminds you what risk actually feels like.

Rebalancing is not about predicting markets. It’s about maintaining your chosen risk level and forcing discipline: trimming what has grown and adding to what has lagged.

Pick a rule you can follow and do it once or twice per year. It could be calendar-based, threshold-based, or a combination.

12. Creating too many small positions

This is a modern problem. With zero-commission trading and endless content, it’s easy to accumulate a messy portfolio. Especially with new platforms popping up every day and offering incentives to set up an account.

Too many positions creates:

• rebalancing headaches

• tax complexity

• unclear exposure and allocation

• more opportunities to make mistakes

Complexity is not sophistication. It creates more opportunities for problems and more headaches to manage for no added benefit.

Create Systems To Remove The Complexity Tax

Every mistake in this post has a common root: complexity. Complexity is a tax that sucks time, money, and energy. It leads to worse decisions and mental load.

The antidote is more systems.

• automatic contributions

• automatic investing

• a fixed allocation you can hold through volatility

• a simple fund lineup

• cost basis settings and tax rules handled upfront

• scheduled rebalancing

You’ll create a simpler portfolio that is easier to manage, easier to rebalance, and stick with.

You’ll build the wealth so you can go create the life your wealth is meant to pay for.

Which of these 12 are you currently guilty of? Leave a comment.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your whole situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a professional before acting on any investment ideas.

A year ago, Alan quits his job, and his whole family jumps on a plane to Korea, where they are from.

His two sons immediately enroll in school there. They spend 6 months making friends and getting to know their aunts and uncles. They explore all over the country. His sons get comfortable speaking Korean fluently for the first time.

When the semester ends, they start worldschooling. Six more months of learning and traveling with stops in Cambodia and the Great Barrier Reef before finishing with a month in the French countryside. They are now home and reenergized for life.

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Wealth = Choice

Stories like Alan’s are achievable for people who understand how to use their wealth to create more choice. Choice in how to spend your time, location, and career. And you can do it on a middle-class lifestyle, like Alan.

And there’s one major mistake people make that takes away their future choices and costs them hundreds of thousands of dollars.

They pay off their mortgage too early.

Managing the biggest financial commitment: a mortgage

I’m going to take a deep dive on this question of “Should I pay off my mortgage or invest?” in the context of a framework that’s designed to make you wealthier and to give you more choice.

Although I’m discussing mortgages, the principles I share in this article apply to all wealth decisions. Renters and people with paid-off mortgages will still take away a framework for prioritizing how they build wealth and create choice.

The 10 Steps to Life Changing Wealth

There is a clear, fastest, and smartest route to building life changing wealth. The kind of wealth that Alan has.

I’ve shared it in my 10 Step framework. You can read the full overview here.

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Paying off low-interest debt is the final optional step. That’s by design.

The goal is to build wealth to have more control over your work and life along the way.

The goal isn’t to defer your life into the distant future. Or to prioritize removing debt as quickly as possible. Those are decisions driven by fear rather than opportunity.

By doing steps 1-9 first, you’ll move faster toward a future full of choices where you can travel, make career pivots, and live differently.

Let’s go through them now.

Start by checking your financial foundation: Steps 1-4

If you are considering paying off your vs. investing more, first check:

• Are you getting your full employer match? [Step 1]

• Do you have high-interest debt (eg, credit cards)? [Step 2]

• Are you tracking your spending and know what’s coming in and out? [Step 3]

• Do you have an emergency fund and basic insurances? [Step 4]

Take any steps you’re missing. Then move on.

Then move to funding your future next: Steps 5-8

If you have extra funds, you also need to ensure your savings and retirement are rock-solid. Why?

A funded retirement gives you control and leverage immediately.

Fully funding your retirement is as much about now as it is about later. The more future-you is funded, the more present-you can take career risks and design work that fits your life.

Retirement gives you access to the most powerful wealth-building strategies.

Maximizing your investment in your retirement accounts has two big wealth-building advantages:

1. These accounts give you significant tax savings. With smart tax planning, you can effectively earn 15-25% more on your investments through lower taxes.

2. The 2025 tax law increased the SALT deduction cap, meaning more homeowners can now deduct mortgage interest. (Applies to some cases, particularly in high tax states.)

What to do last: Invest before Paying The Mortgage.

Once you have completed Step 8, you’ll have a secure foundation and retirement.

At this point, investing extra funds still gives you more wealth and more options than paying your mortgage. There are several reasons.

1. Investments create income and choices now

This gets at the heart of thinking about giving yourself choices in how you live your life.

Invested assets don’t just grow in the background waiting for old age. They create options you can exercise immediately and at any time in the future.

A paid-off house only helps after it is paid off in 30 years.

An investment portfolio can throw off dividends, interest, or gains you can use to:

• Take a sabbatical

• Try a career change

• Fund time with your kids

How could you use investment income to improve your life?

2. You’ll almost always be richer by investing

If your expected investment return is higher than your mortgage rate, you build more wealth investing. It’s as simple as that.

Let’s say you have an extra $750 to invest each month and you are debating between investing it in the stock market vs. paying down the mortgage. We’ll assume you have a $500,000 mortgage at a 4.5% rate and expect an 8% return on the stock market.

How would your wealth grow in either scenario?

After 30 years, you have a paid-off house in both scenarios. But by investing, you would have made $410,000 more and had more choices the entire time.1

3. Real Estate doesn’t always go up.

Investing your money in stocks and bond funds keeps your assets flexible while you diversify your investments instead of concentrating them on real estate.

You still build home equity through your regular mortgage payments, while building more accessible wealth in a diversified investment portfolio.

Recent years have shown that the belief “real estate always goes up” is simply not true.

Housing prices are down year over year in many desirable metro areas like Austin (-7.3%), San Diego (-6.7%), San Jose (-5.5%), Minneapolis (-4.9%), and Washington DC (-4.8%).2

Remember that stocks have outperformed real estate on average.

4. Liquidity gives you contingencies when life throws a curve ball

Jobs change. Health changes. Families change.

Every dollar you send to your mortgage is a dollar you can’t touch.

If you get sick or lose your job, having cash and liquid investments to support yourself is incredibly valuable. You can adapt without scrambling for a HELOC or selling your home at the wrong time.

You can make other choices in life knowing you are prepared if things go wrong.

5. You can always pay off the mortgage later

Once you send extra money to your lender, you can’t easily get it back. (You generally have to pay for taking out a refi or a HELOC.)

But if you invest instead, you can still pay off the house at any time in the future, including by using the money you earn from those investments.

If you wake up at 55 and want the house paid off, you can write a check. But if you’ve previously paid off your house and then need cash, you’re stuck.

Keep the mortgage

Investing and wealth-building are primarily a game of managing our behavior and feelings toward money.

Some people will tell you it’s OK to pay off your mortgage if it makes you feel better and helps you sleep at night.

But it comes at a huge cost and hidden risks.

I know that debt can feel scary. But so can investing your money for the first time.

If you can learn to examine those parts of your emotions and stil to make money decisions based on a thoughtful plan for your life, you will reach your goals much faster.

—

Please share in the comments: What choices do you want your investments to buy you in the next 5 - 10 years?

Welcome to our new readers! This is an update to the piece I published this time last year, using current market conditions and newly released data to revisit the big question on everyone’s mind: “Is the stock market in a bubble? And what should I do about it?”

How high is the stock market, historically speaking (2026 update)?

The market continues to show some intimidatingly high valuations.

Let’s take an updated look at the S&P 500 CAPE ratio, a classic measure of valuations.

As of January 2026, the CAPE ratio is indeed historically high. The only time we’ve seen higher valuations was right before the dot-com bubble burst.

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So, what do we know about what tends to follow high valuations?

When valuations are this high, returns over the following 10-years have been terrible.

Here is the same chart from JP Morgan that we looked at last year, updated at the start of 2026. We see a clear trend of higher starting valuations translating into lower 10-year returns.

Today’s level at the start of 2026 is highlighted with the vertical bar. Historically, we have seen low single-digit positive or even negative returns over the 10 years following similar market conditions.

Of course, that’s just what has happened in the past. We know that past performance is not indicative of future results. But it certainly is a concerning pattern.

What about the short term? Should we be bracing for a crash?

Now, look at the 1-year returns from JP Morgan’s research updated at the start of 2026.

There’s no pattern here at all.

Valuations tell us very little about what happens next year. Even at high starting valuations, one-year returns have ranged from deep losses to gains over +40%.

In 2025, investors who waited for prices to fall missed a +17.9% return. No Wall Street bank predicted a return that high.

That’s not surprising because the one-year return is always unpredictable.

Are these high prices justified or are we in a bubble?

As we discussed a year ago, it comes down to earnings per share growth (EPS).

The bull case: Many analysts are penciling in low-to-mid teens earnings per share growth for 2026. The Fed has cut rates from the peak, which helps justify paying more for future cash flows. Optimists are still betting on productivity gains from AI and continued profit growth.

But the bear case is also basically unchanged. When valuations are elevated, there’s little margin for error. A small earnings miss or slower-than-expected AI productivity gains can quickly weigh on prices. And with so much market leadership concentrated in the biggest tech names, sentiment can swing fast.

There is still a reasonable case that stocks are not overvalued if earnings keep growing as they did in 2025, but high valuations are fragile and difficult to sustain.

What’s a wise investor to do?

The lesson from 2025 and the JP Morgan analysis is that the stock market is unpredictable in the short term but tends to follow long-term patterns. This matches everything we know about the stock market.

Historically, investors have been rewarded for staying invested, even during periods like today, because:

1. We never know when the market will turn. It could take years.

2. Once you get out of the market, it’s hard to know when to get back in. How much would valuations have to go down to start investing again?

We might have another great year before a downturn, just like we did in 2025. Or the market could drop tomorrow. No one can predict it. Be skeptical of anyone who says otherwise.

I still have 4 recommendations for investors today.

1. Follow your timelines, ignore the headlines.

Keep investing based on your financial plan and retirement timelines. We know that the stock market tends to go up in the long-term, even if they can be extremely volatile in the short-term.

Timelines and goals should always guide your strategy, not what the market does on any given day.

2. Work on your financial plan.

If you haven’t thought about it in a while, now is probably a good time to update your financial plan with an asset allocation that matches your goals and timelines.

For example, are you 100% in an S&P 500 index fund? That’s a pretty good general-purpose strategy, but only if your timelines are long and can handle the volatility.

But what if you are about to start a family? Or buy a house? Take a career risk? Those need a different plan. If you don’t know where to start follow my 10-Steps to Building Life Changing Wealth.

3. Adjust your expectations.

Markets don’t consistently deliver double-digit growth over the medium term and are unlikely to provide anything close to that when valuations are so high.

This probably won’t be the decade where you get rich.

If you are counting on 12% annual returns to retire 3 years from now, it’s probably time to review your planning assumptions and take some risk off the table.

4. Stay diversified.

Just as we can’t predict one-year returns on the total stock market, we can’t expect to pick the winners and losers of individual stocks and sectors. That’s why my favorite fund is fully diversified.

Keep investing. Spread out your risk. Ensure you have the right asset classes in the right proportions to match your goals and timelines.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your whole situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a professional before acting on any investment ideas.

Each year, JP Morgan publishes this “quilt” in their Guide to the Markets1. It ranks major asset classes2 from best to worst based on annual returns, going back 15 years.

2025 was a strong year across most asset classes.

International equities (stocks) did very well. Money rotated out of the US into other markets, and the US dollar weakened significantly. Large cap US equities also stayed on a hot streak.

If you were broadly invested, you likely did fairly well in 2025.

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What Does This Tell Us About The Market?

Zooming out and looking at the full chart, it’s hard to discern any reliable patterns.

The top performer one year was sometimes near the bottom the next. The worst performer could become the best when market cycles changed.

Take emerging market equities. They led all asset classes in 2017 at 37.8%. In 2018, they were dead last at -14.2%. Then they had several mediocre years. In 2025, they led the pack again.

Large cap equities have been the most reliable asset class over the last 15 years. They ranked in the top third of returns in 11 of those years. Even so, they still had a poor year during the 2022 bear market.

Once again, we see that the market is unpredictable from year to year.

Despite that, we consistently see positive results when we look at the 15-year returns in the far left column of the chart. There has never been a 15-year period in which the S&P 500 has had negative total return.3

Consistently investing pays off without requiring the best performance in any given year.

Reality Doesn’t Match What You Read

The short-term unpredictability generally doesn’t show up in what you read online.

News coverage focuses on extremes. Influencers are rewarded for promoting something different. Usually, it’s a “secret” investment they claim to have figured out first. Things like crypto, micro-caps, gold, and silver.

The assets that dominate online are rarely the ones that are actually building the most wealth for investors.

Be cautious of focusing on recent performance or narrow investment advice. That’s how people end up chasing returns.

Refer to the chart above. Yesterday’s winner often becomes tomorrow’s loser. The result is poor returns, higher taxes, and an emotional roller coaster.

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Play A Different Game. Always Win In The Long-Term.

You can sidestep the game of return-chasing entirely by building a diversified portfolio of stocks and bonds.

You won’t ever have that year’s best returns. But you’ll consistently be in the top half.

That’s like getting a bronze medal at the Olympics. If you get on the podium every year, you’re still doing better than the vast majority of people.

Thankfully, that’s all you need to do to build real wealth.

Here’s how:

1. Buy low-cost broadly diversified index funds.

   1. Buy a stock fund. Great options include: VTI for US stocks (my favorite fund), VT for total world stocks, and/or VOO for the S&P 500.

   2. Plus buy a bond fund. I use BND.

2. Base your bond allocation on your time horizon.

3. Then set a calendar reminder to rebalance your portfolio once a year.

That’s it. You’re done. Go back to living life and going on adventures.

Benefits of a diversified strategy:

• It’s much simpler. It requires fewer decisions and less effort. You set an allocation and stick to it. No debating the exact right time to buy or sell.

• Lower stress through lower risk and volatility. Investments always have ups and downs, but diversified portfolios mute the wildest swings.

• You save on taxes from trades. Holding index funds minimizes capital gains taxes and lets more of your return compound.

Diversification works because it removes the need to be right about what comes next.

You automatically own the winners when they emerge, without trying to predict them ahead of time. You also own the laggards, but that’s the trade-off that lets your portfolio grow with a rising market without return-chasing and with less risk.

The goal isn’t to predict the next winner. It’s to avoid being wrong in ways that permanently set you back. If you do that for long enough, the result takes care of itself. You will build life-changing wealth.

PS. If you want to play along, make a prediction in the comments about which asset class on this list will do best in 2026. We can see how we do in a year. Odds are, it will be humbling.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your full situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a licensed professional before acting on any investment ideas.

You can easily become a millionaire by the time you retire. Even a multi-millionaire. And you don’t have to spend less, budget harder, or change your lifestyle.

This is one of my favorite tactics and takes about 5 minutes to implement: Give your 401(k) a raise.

If you got your annual raise in January, now is the perfect time to do this before you get used to the higher paycheck.

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Why the 401(k) Raise Works

There are many benefits to giving your 401(k) a raise, with very few downsides.

• You invest more and spend more. Your take-home pay still goes up. You’re not sacrificing anything or cutting back. You don’t have to budget or track spending.

• It blocks lifestyle creep. Instead of your spending rising to match your income, your investments rise first. You pay yourself first, before you can spend it.

• It’s automatic. Once you increase the percentage, it comes out of your paycheck without you having to think about it or manage it.

• Save on taxes. If you have a traditional 401(k) like most people, part of your raise doesn’t get taxed immediately. The money goes straight into your account pre-tax. (It will be taxed when you withdraw it in retirement, ideally at a lower rate.)

How To Give Your 401(k) A Raise

This should take you 5 minutes.

1. Log into your 401(k) portal

2. Find “contribution rate” or “deferral percentage.”

3. Increase it by 1% (or whatever you would like)

It’ll look something like this. That’s it.

If your 401(k) plan lets you set a dollar amount instead of a percentage, the same idea applies; just figure out how much is 1% of your salary.

Take It One Step Further By Enabling Auto-Escalation

Some plans offer an “auto-escalation” feature, also called an “annual increase” program, that automatically increases your 401(k) contribution percentage each year on a certain month, without you having to remember.

You can set your contribution to increase by 1% until you reach a cap you set or the contribution limit. You get automatic wealth building, which is the best kind of wealth building.

If you decide to turn it on today, your plan takes care of the rest. No annual reminder or to-do list needed.

Here’s what this feature looks like in Fidelity’s 401(k) as an example:

How It Could Make You A Multi-Millionaire

Let’s look at an example. Alma is 25 years old and earns $75,000. She expects 3.5% annual raises. She is currently contributing 5% to her 401(k), and her employer matches 4%.

She decides to implement this tactic to increase her contribution by 1% each year. How much is that worth?

By age 60, she’ll have over $2.4 million in her 401(k), adjusting for inflation and assuming an 8% return.

This is Part of a Wealth Building Framework

The 401(k) raise tactic is Step 8 in my 10-step framework for building life-changing wealth. Step 8 is where you max out your retirement accounts.

Ideally, you’d handle these things first.

• Get your employer match (Step 1): If your employer matches retirement contributions, contribute at least enough to get the full match before anything else. It’s free money.

• Pay down high-interest debt (Step 2): Credit cards, payday loans, personal loans - anything above 7% interest.

• Build your emergency fund (Step 4): 3-6 months of essential expenses in a high-yield savings account.

• Max out your HSA (if available) (Step 5): If you have access to a high-deductible health plan, HSAs offer triple tax advantages that beat even a 401(k).

• Max out your Roth or Backdoor Roth IRA (Step 6): These accounts give you tax-free growth and tax-free withdrawals in retirement.

• Automate savings for future goals (Step 7): Set aside about 5% of your gross income for major expenses, like travel, a car replacement, or a down payment on a house.

That’s the perfect order to optimize your financial life. You can see the complete framework with detailed explanations in my posts on The 10 Steps To Building Life Changing Wealth.

That being said, don’t let perfect be the enemy of good. You can do this step in parallel with others you are working on.

If you want one of the easiest ways to increase your retirement savings, go ahead and bump your 401(k) percentage now. This strategy is powerful even if you haven’t checked every other box. Getting started early matters more than waiting for perfect conditions. No one ever said, “I wish I waited longer to save for retirement.”

If You’re Ready, Do it Now

Log in to your 401(k) and increase your contribution by 1% today. If your plan allows it, set up automatic annual increases for every January or whenever you typically get raises.

It’s quite possibly the easiest way to build wealth without having to spend less.

For more on common 401(k) mistakes and how to avoid them, check out my post on common investment mistakes and a 401(k) FAQ, including what to invest in and how to choose between Roth and Traditional 401(k), if you have the option.

FAQ

What if I’m already contributing a lot? How much is enough to contribute to your 401(k)?

Assuming you’re starting in your 20s, traditional advice is to invest 15% of your gross salary to retire by 65. That includes your employer match and all retirement investing - 401(k)s, IRA, and taxable.

Want to retire earlier? You’ll need to save a higher percentage. For example, to retire in your 50s, you’ll need to invest at least 25-35%. See the table here where I go through this question in my 10-step framework for building wealth.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your full situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a licensed professional before acting on any investment ideas.

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Over Christmas, tension crept into our stay with my in-laws. Some of my in-laws were fighting with others. Voices rose behind closed doors. My wife kept getting pulled into things that weren’t hers to carry. At one point during our stay, my wife and I looked at each other and said, “Well, if this gets to be too much, it’s okay. We can always just find a hotel and make the best of it.”

Having the hotel option lifted a weight off our shoulders. The relief was immediate.

That moment reminded me how a financial buffer can prevent small stressors from piling up into major stress. It doesn’t remove problems. But it does give you control over how much they compound.

The goal is not to create zero friction in your life or prevent all minor inconveniences, but to allow you to show up calmly and choose which things you want to invest mental energy into and which you don’t.

That’s why it’s important to not just learn how to build wealth through investing, but also to learn to use it strategically.

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Scarcity Thinking: When Frugality Stops Working

Spending money strategically to reduce stress and make your life better is a skill. It often doesn’t come naturally to many people who built their stability through saving.

If you’re wired for frugality, you can treat every dollar as fragile. That mindset is useful when you’re paying off debt, building an emergency fund, or getting your investing habits in place.

But it can become a problem later.

You can objectively have enough money and still feel like you don’t. In Scarcity, Sendhil Mullainathan and Eldar Shafir describe how perceived scarcity narrows your attention and makes small costs feel bigger than they are. When you feel constrained, you fixate. You overthink. You debate with yourself. You hold that stress longer than you need to.

You can carry that mindset long after you’ve built enough wealth to have a financial buffer.

Tools For Using Money To Reduce Stress

A buffer only helps if you can actually use it without feeling guilt or stress about the spending itself. Here are four tools that make that easier.

1. Set aside a buffer category.
   Set aside money you can spend on stress reduction without guilt. It’s like an emergency fund for things that keep a small problem from turning into a bigger one.

2. Write your “Always OK” list.
   Decide ahead of time what you permit yourself to spend on without overthinking. For me, it’s an Uber to the airport and takeout when life is busy.

3. Set yourself a guardrail.
   Put a clear limit on buffer spending so it stays a tool, not a habit you regret. A simple cap works. And another rule is non-negotiable: don’t go into debt for this.

4. Run a quick review.
   Once in a while, ask yourself: Did this actually reduce stress? If it didn’t, stop doing it. You’re only trying to remove the few frictions that affect you most and have some extra when the unplanned pops up.

Use Your Life Changing Wealth

Of course, some stress is unavoidable. Family dynamics don’t disappear because you have money. Travel still goes wrong. People still act like people.

But having a financial buffer changes which stresses are allowed to pile up.

You no longer have to stay stuck in a situation that is wearing you down. You don’t have to grind through every inconvenience to prove you can. You can choose the option that helps you show up better.

That’s what the hotel option gave us. We didn’t spend the money. We just stopped feeling trapped.

There’s enough stress you can’t control. Use your buffer to reduce the stress you can. That can be life-changing.

Holding $30,000 at Chase can easily cost you $1,000 per year. Do you like Chase enough to pay that?

There are much better places to park cash. This post shows how to pick a high-interest account you can set once and never worry about again. It takes about 15 minutes.

If you have money for an emergency fund, travel, or a future down payment, read on.

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What cash are we talking about?

I’m going to show you what to do with your savings. By savings we mean either:

1. Money you might need at any moment. Your emergency fund falls here. So does that “not sure yet” cash, where you don’t have specific plans but want flexibility. Or,

2. Money earmarked for something specific. Travel next summer. A car in six months. A house down payment in a few years. These are still relatively short-term needs, and you generally have an idea of when you’ll need the money.

We are not talking about money for retirement, long-term wealth building, or anything beyond about 5+ years. Those should be invested.

Option 1: High-Yield Savings Accounts (HYSA)

For most people, a high-yield savings account (HYSA) is the best all-around savings option.

A HYSA is a savings account that pays a competitive variable rate. The best ones live at online banks without physical branches, which is how they can afford to pay you more. Right now, the best HYSAs are paying around 3-4%.

Savings accounts have another advantage - FDIC insurance. The US government guarantees up to $250,000 per depositor, per bank. You don’t have to worry about your bank failing.

What are the advantages:

• Clean separation from your checking account, which helps you not spend your savings

• Good for both emergency funds and specific savings goals

• Most let you create named sub-accounts for different goals, like “Travel Fund.”

• Easy to automate transfers

What to look for in a HYSA:

• Competitive yield

• No monthly fees

• No minimum balance requirements to earn the rate

• Fast transfer speeds and reasonable withdrawal limits

• A bank with a history of paying competitive rates consistently

Some banks play games. They offer a great rate to attract you, then quietly drop it six months later when switching feels like a hassle. Stick with providers known for staying competitive.

My favorite options for online savings accounts

I like these banks because they all have a strong history of paying competitive rates, no fees or minimums, have good online platforms, and are backed by large public companies.

• Ally Online Savings: 3.3% interest rate, no fees, no minimums

• Capital One 360 Performance Savings: 3.4% interest rate, no fees, no minimums

• Marcus by Goldman Sachs: 3.65% interest rate, no fees, no minimums

All rates as of December 2025. Rates change often, so treat all rates in this article as a snapshot and double-check.

I have personally used Capital One for many years, and I have clients who use Ally. I have consistently heard positive reviews of Marcus, but I don’t have personal experience with it.

Use your HYSA to automate your financial life.

One of the best things you can do to build wealth and simplify your life is to set up automatic transfers from your checking account to your HYSA. Figure out how much you need month-to-month in checking, then set up a recurring transfer to move the rest a day after payday.

If you’re saving for multiple goals, either open separate HYSAs or use sub-accounts within one account. This automation matters more than you think. It removes decision fatigue and makes saving a default behavior instead of something you remember to do. I’ve used this technique to automatically save for replacing my car, and it’s allowed me to never have a car loan. I can always pay cash.

Option 2: Money Market Funds (MMF)

A money market fund (MMF) is another good option to hold cash.

It is a mutual fund designed to maintain a stable $1 share price. It invests in ultra-short-term, high-quality investments, such as government bonds. The goal is to generate yield with low risk.

The advantage of a MMF is a slightly higher interest rate. Right now, MMFs are paying 0.2-0.4% more than most HYSAs, as of December 2025:

• Vanguard VMFXX: 3.72%

• Fidelity SPAXX: 3.42%

• Schwab SNVXX: 3.47%

A difference of 0.3% equates to about $30 per year on $10,000. It’s not life-changing. But it’s worth considering if you have a lot of cash.

The downsides of a Money Market Fund vs. HYSA

• MMFs are not FDIC insured. Money market funds try to keep each share worth $1, but that isn’t guaranteed. In real life, they almost always succeed, though there have been rare exceptions when they’ve lost money.

• Access timing is slower. Moving money from an MMF to your checking account usually takes 1-2 days.

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Lesser Common Options: T-Bills Or CDs

A HYSAs or MMFs is the best option for most people.

But there are a few situations where you might consider Treasury bills (T-bills), which are short-term loans to the U.S. government, or Certificates of Deposit (CDs), which are bank accounts that lock your money for a fixed period in exchange for a set interest rate.

T-bills are worth considering if:

• You have a known spending date - like a house down payment and tuition payment. You can buy T-bills that mature right when you need the cash.

• You’re in a high state tax bracket (eg, high income in California, New York, New Jersey). Treasury interest is exempt from state and local income taxes. At the same time, HYSA interest and most MMF income are taxed as ordinary income at both the federal and state levels. (However a portion of some MMF’s are state-tax exempt.)

You can buy T-bills directly through TreasuryDirect and manage maturities yourself, or buy a short-term Treasury fund at your brokerage for less hands-on management.

CDs are worth considering if:

• You have a known spending date and are sure that you will not need the money early. There are early withdrawal penalties on CDs.

• You are willing to lock in money and deal with a little extra hassle in return for a slightly higher rate.

• You value FDIC insurance and the simplicity of a bank product.

Right now, CD rates are around 4%, which is not dramatically different from HYSAs.

Pick One And Automate Your Savings

A High Yield Savings Account (HYSA) is the best all-around option for the vast majority of people with typical needs to park cash for savings or emergency funds. It’s the most flexible, easiest to automate, and comes with FDIC insurance.

If you have $50,000+ and already use a brokerage, a money market fund is worth considering for the extra yield. If you’re in a high-tax state with a large cash balance, look at Treasury funds or direct T-bill purchases.

The important thing is to pick one today and set up automatic transfers. Your cash should work for you, not sit idle earning 0.01% at a bank that doesn’t care whether you stay or leave.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your full situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a licensed professional before acting on any investment ideas.

Here’s a finance secret. It’s easy to pay $0 federal income tax in retirement. Even spending $150k+ per year. It all starts with a word: Roth.

Today, I am going to show you how to do a Backdoor Roth IRA. Use it to invest and avoid future taxes, regardless of income.

Many people can avoid federal taxes entirely in retirement by using a Backdoor Roth with traditional and taxable accounts.

I plan to save hundreds of thousands of dollars in taxes over my life. That’s why a Backdoor Roth is one of my 10 steps to life changing wealth.

What is a Backdoor IRA?

The Backdoor IRA isn’t a separate account. It’s a two-step process to avoid contribution limits. If you execute this before year-end, you’ll minimize paperwork headaches and keep your taxes clean.

The term backdoor refers to converting your money instead of contributing to it directly.

Why would you need to do it this way? Because there’s an income limit on direct contributions. Check the table below to see if you are over the limit.

If you are over the phaseout limit, you lose the direct contribution option. You must use the Backdoor Roth two-step process. You still get access to the same tax-free growth of a Roth IRA.

2025 and 2026 Limits. Do you need to do a Backdoor Roth IRA?

You need to do a Backdoor IRA if your income exceeds the phaseout limits in the first two rows, depending on whether you file separately or jointly.

Timing: Do the contribution and conversion before December 31

I recommend doing both the contribution and conversion steps before December 31st. Your tax return is much simpler if you complete both the contribution and the conversion within the same calendar year.

Technically, you can make an IRA contribution until Tax Day in April of the following year. But it can make the paperwork more complicated. That’s because the IRS will look at your total IRA balance on December 31 to calculate taxes on conversions.

The biggest challenge: The Pro Rata Rule

The “pro rata rule” is the place most likely to cause you problems. Get this wrong, and you could end up with an unexpected tax bill.

Understanding the pro rata rule: If you have other Traditional IRAs in addition to the amount you want to convert, you will trigger taxes. That is bad. You can avoid taxes if you don’t have any other Traditional IRA accounts. That is better.

⚠️ Check this first

Do you have any other Traditional IRA accounts? That includes all types of Traditional IRAs, including Rollover, SEP, and SIMPLE IRAs.

• If you DON’T have any other Traditional IRAs, great! You aren’t at risk of triggering the pro rata rule. You can skip to the section on how to do the Backdoor Roth IRA.

• If you DO have other Traditional IRAs, you need to understand the pro rata rule and your options. Read on.

How the pro rata rule works

On December 31, the IRS looks at all of your Traditional IRAs as one big bucket of funds. Not only the amount you have converted.

When doing a conversion, the IRS assumes you pull a mix of dollars from all of your accounts. Yes, even if you only pull money from one account. They ignore that fact. They look at the overall mix and charge tax on it in proportion. That includes:

• After-tax dollars. These are the amounts you contributed this year and want to convert through the Backdoor Roth IRA, and

• Pre-tax dollars from your other traditional accounts

The Pro Rata Trap Example

Let’s say you have:

• Existing pre-tax Traditional IRAs: $93,000

• New non-deductible (ie, after-tax) contribution that you want to convert through a Backdoor Roth: $7,000

• Total IRA balance on December 31: $100,000

If you convert $7,000, only 7% of that amount is tax-free under the pro rata rule. The remaining 93% would be taxed.

On the other hand, if you did not have the $93,000 in other Traditional IRA accounts and those were in your Traditional 401(k) instead, then you aren’t taxed at all. The entire $7,000 is converted to a Roth without being taxed.

What DOESN’T Count (These are Safe)

The good news: all 401(k), 403(b), 457, TSP balances, HSAs, and other Roth IRAs don’t count. These do not trigger the pro rata rule.

The Fixes (If You Have a Balance)

1. Option 1 (Best): Reverse-roll over your old IRA into a current 401(k), which removes the problem. Call your 401(k) provider to start the process immediately so it can finish before December 31st.

2. Option 2 (Exercise caution): Deliberately convert your entire amount of Traditional IRA to Roth. This is a real tax decision because it will be taxed. It can be worth considering if you expect higher future tax rates or if your balance is very small. But make sure you understand the tax implications or consult a tax professional.

How do the Backdoor Roth IRA: Step-by-Step

Pre-Work

• Double-check you are over the income phaseout. If you are under the phaseout limits, you can contribute to a Roth IRA directly and avoid the extra conversion step.

• Double-check for the pro rata rule. Confirm you have no pre-tax Traditional IRA balances. Traditional, Rollover, SEP, and SIMPLE IRAs should total $0 on December 31. If not, see the section above.

• Open the Accounts. Open a “Traditional IRA” and a “Roth IRA” with your investment brokerage. You need both accounts. If you don’t have one, Vanguard and Fidelity are good options.

Step 1: Contribute to the Traditional IRA

Contribute to your Traditional IRA account up to the annual limit ($7,000 in 2025, or $8,000 if you’re 50+). This is a non-deductible (ie, after-tax) contribution because you are over the income limit and covered by a workplace plan. That’s what we want here.

The money will usually be deposited into a settlement fund or money market holding account. That’s fine. We don’t need to invest them yet.

Now you need to wait for the funds to settle before moving to the next step, which typically takes 1-5 days if you transfer from a bank. Wait at least one day if the funds settle the same day before taking the next step.

Step 2: Convert 100% of What You Contributed

Once the funds have settled, do the conversion.

• Go to your Traditional IRA account and find the option to “Convert to Roth” or “Transfer” in your brokerage account.

• Move the entire balance, including pennies and interest.

• Tax Withholding: Select 0% (NO). You already paid tax on the contribution money.

In Vanguard, you would see:

Step 3: Invest Your Money

Don’t forget to invest your money!

A target-date fund is always a good option for a retirement account, such as an IRA. If you want to control how much you put in stocks, you can choose your own allocation with a simple index fund. I share my pick for the single best investment for long-term wealth here.

The Paperwork: Tax Time (Form 8606)

• When tax time rolls around, you will receive a Form 5498 for the contribution to the Traditional IRA and a 1099-R for the conversion.

• In your tax return, you will need to fill out Form 8606. It is mandatory. This form tells the IRS: “I made a non-deductible contribution, and then I converted it to Roth. Please don’t tax me twice.”

Make sure you ask your tax preparer to confirm that they understand how to report a backdoor Roth IRA contribution and fill out tax form 8606 correctly. If your tax preparer isn’t familiar with the term “Backdoor”, explain to them you made a “non-deductible contribution” and then “conversion to Roth”. Those are the technical tax terms.

If you’re doing it yourself with TurboTax or H&R Block, you must explicitly answer “Yes” to “Did you make non-deductible contributions?” That will trigger the software to walk you through Form 8606. TurboTax used to make this very complicated, but they’ve recently made this a little easier. This video has a helpful TurboTax walkthrough.

You’re done!

If this process feels complicated the first time, that’s normal. But the mechanics are simple once you have done it. The important part is avoiding the pro rata trap and keeping your paperwork clean. Do it carefully the first year. After that, it becomes routine.

The Backdoor Roth is one of the most powerful tools for controlling taxes later, not just saving them today. It gives you real flexibility over where your retirement income comes from and how much tax you owe. That flexibility is how many people legally drive their federal tax bill down to $0 in retirement.

If you want to save a ton of taxes, this is one of the highest-impact places to start. It’s a key part of my 10 steps to building life changing wealth.

In summary:

1. Log in to every brokerage and retirement account to have and confirm balances in Traditional, Rollover, SEP, and SIMPLE IRAs. (Remember, you can ignore all 401(k) accounts.)

2. If Total > $0: Check if your current 401(k) accepts roll-ins. Call your 401(k) to start that paperwork immediately.

3. If Total = $0: Open Traditional and Roth IRAs.

4. Contribute up to the annual limit per person to Traditional.

5. Convert 100% to Roth once settled.

6. Invest the funds. Don’t leave them in cash.

7. Save your 1099-R, 5498, and Form 8606 for tax season. Double-check your tax preparation.

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Frequently Asked Questions

“Is it worth it? It looks like extra work over putting the money in a taxable account.”

Yes, these steps will likely save you tens of thousands of dollars in taxes over your lifetime. Importantly, more money in a Roth allows you to control your tax bill in retirement, which is incredibly important when you start taking required minimum distributions and want to benefit from ACA subsidies. That said, for people who are already multi-millionaires, where $7,000-$16,000/year in tax-free investing doesn’t really matter to your lifestyle, you could skip it.

“When should I do it?”

As soon as you have the funds. The earlier in the year, the better. Many people aim to do it in the first week or two of January each year. This allows you to invest in your Roth IRA as soon as possible and maximize the time your investment can generate compound growth. But that assumes you have the cash to contribute.

Regardless of when you contribute, aim to do the conversion once. It can make the paperwork more complicated to convert multiple times within the same year.

“Is this the same as the Mega-Backdoor Roth?”

No. The “Mega-Backdoor” involves after-tax 401(k) contributions. Although the names are confusingly similar, they are entirely separate strategies. You can often do both.

“I earned ~$3.50 (or some other amount) interest while waiting. What should I do?”

It’s common to have a small amount of interest if your original $7,000 contribution to the traditional IRA has been sitting there a while. It’s fine. Just convert it too. You will pay ordinary income tax only on the $3.50, which would be about a dollar in taxes. No big deal.

“I already contributed directly to a Roth but realized I’m over the limit. What now?”

You likely need to do another step first: Recharacterize that contribution to a Traditional IRA, then you can convert it using the process described above. Search for “recharacterization” on your brokerage site.

“What are the downsides?”

These are still retirement accounts that come with similar constraints as other retirement accounts. The biggest of which is waiting until 59½ to access the earnings. Although you can access the principal in a Roth IRA account if it has been in the account for at least 5 years.

Disclaimer: This is for educational purposes only. Make sure you understand the tax implications of your situation and that you are reporting it correctly on your tax return. If you are unsure, verify all details with a tax professional.

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Have you decided you want to invest in the S&P 500, but not sure which ETF to use?

Don’t waste hours comparing funds. Today, I’m going to share my pick for the fund that makes the most sense for long-term investors.

But first…

Should you choose and S&P 500 fund or Total Market Fund?

I wrote last week that I prefer total market funds, particularly VTI. But some people have said they would still like to just buy the S&P 500. In fairness, I think a low-cost S&P 500 ETF is still an excellent long-term plan. So, if that’s what you’re set on, you’re not making a mistake. After all, getting started investing is much more important than quibbling about minor differences in portfolio strategy.

What’s the difference?

• A Total Stock Market Fund, like my favorite VTI, owns almost the entire US stock market: it owns the entire S&P 500 plus mid and small-cap stocks. That’s roughly 3,500 companies.

• S&P 500 funds own only the largest 500 US companies.

What are you missing by choosing the S&P 500? You’re missing mid- and small-cap stocks, which historically provide modest diversification and slightly lower risk.

Why might you still choose and S&P 500? You want to invest in only the largest, more stable companies in the USA. After all, they have slightly over performed the total market over the last decade.

For most long-term investors, both approaches work well, but only if you follow a few strategic principles:

1. Keep fees ultra low

2. Diversify

3. Hold for the long-term.

4. Match to your risk tolerance and timelines.

The Four Main S&P 500 ETFs

Four ETFs dominate the S&P 500 space:

• VOO. Vanguard S&P 500 ETF, launched in 2010. Low fee, clean structure, and the perennial community favorite because it is operated by Vanguard, the most trusted investment company out there.

• IVV. BlackRock iShares Core S&P 500 ETF. Launched in 2000, it is low-fee and nearly identical to VOO in every practical way.

• SPYM (recently changed from SPLG). State Street’s SPDR low-cost S&P 500 ETF. The lowest expense ratio of the bunch, but less popular and somewhat smaller than VOO or IVV.

• SPY. State Street’s SPDR S&P 500 ETF Trust is the original S&P 500 ETF, launched in 1993. Massive trading volume but slightly higher fees. It has a unique fund structure that makes it suited for frequent traders (which isn’t important for us long-term investors).

Choosing the Best. What “Best” Means

For us investors who want to build life-changing long-term wealth. “Best” doesn’t mean “had the highest return last year.” It doesn’t mean what’s the trend of the day. It means focusing on what matters.

What matters

• Ultra-low expense ratio (ideally under 0.05%). Because lower fees = higher returns.

• Tracks the S&P 500 index reliably.

• Simple, rules-based, buy-and-hold friendly.

• Tax-efficient, especially in taxable accounts.

• Easy to trade at common US brokers.

What does NOT matter much:

• Tiny performance differences (0.01% variance)

• Trading features aimed at day traders

• Marketing hype

With that framework in mind, let’s compare these four options.

Comparison Table: What to know about each

Here’s how they stack up:

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Comparison Summary:

All four are solid index funds that will get the job done. IVV, VOO, and SPYM(SPLG) look almost identical for long-term buy-and-hold investors.

SPY costs three times as much (0.09% vs 0.03%) and uses an older fund structure that matters more to day traders than to investors. If you’re investing $10,000, the difference between VOO and SPY is $6 per year, not life-changing, but why pay extra?

How to Pick the Right Fund

Step 1: Check what your accounts offer

In 401(k)s, use the low-cost S&P 500 index option available. You usually won’t have a choice between these specific ETFs anyway.

In taxable or IRA accounts at any major brokerage, you’ll have commission-free access to all of these ETFs. If your current broker still charges commissions, that’s a sign you should switch to a modern, low-cost platform like Fidelity, Schwab, or Vanguard.

Step 2: Pick one cheap, modern ETF and stick with it

Here’s my recommendation:

1. Use VOO as the Default Choice. Vanguard is the gold standard for index investing. Jack Bogle, the inventor of index funds, literally founded it. VOO has a 0.03% expense ratio, strong performance tracking, and it’s the fund I would pick.

2. Use IVV if it makes more sense for your situation. BlackRock’s iShares IVV is equally good: same 0.03% expense ratio, same modern structure, same reliable tracking. Choose IVV if your broker offers commission-free trades on IVV but not VOO, or if your employer retirement plan includes IVV.

3. SPYM(SPLG) is also fine. It has the lowest expense ratio at 0.02%, saving you $1 per year on every $10,000 invested compared to VOO. If you are trying to squeeze out every penny and ok with a slightly smaller fund, it’s still perfectly fine.

4. SPY is not a top choice unless you already own it or if it’s the only option in your plan. I wouldn’t start fresh with it today, given the higher fee.

Step 3: Automate and stop comparing

Set up automatic contributions. Focus on your savings rate and staying invested through market ups and downs, and don’t worry about re-shopping tickers every year because you know you have chosen one of the largest and lowest cost funds available.

What if you already own another fund?

If you already hold a low-cost S&P 500 ETF in a taxable account with gains, switching funds to save <0.1% in fees usually isn’t worth triggering a taxable event. Stick with what you have.

If you are currently using a high-fee fund. For example, >0.2% Move all your new contributions to one of these low-fee options, rather than sell your existing fund to avoid capital gains tax. You can wait until the market goes down and you have a loss to move the money. Make sure you select MinTax as your cost basis method. To learn how to manage investment taxes, see here.

The Bottom Line

My default recommendation is still a total market fund like Vanguard’s VTI, but a low-cost S&P 500 ETF is also a great long-term plan. The difference is small enough that you won’t regret either choice in 30 years.

My answer: Pick VOO. If IVV is commission-free for you and VOO isn’t, pick IVV instead. Invest consistently, ignore the noise, and let compound growth do its work.

That’s it. Now get started, automate it, and start building life-changing wealth!

I’d love to hear from you: Which fund did you choose? What investing topic should I cover next? Drop a comment below.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your whole situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a professional before acting on any investment ideas.

Have money to invest that’s been sitting on the sidelines for a while? Not sure where to put it?

Maybe you’ve been meaning to do something with it, but who has time to research hundreds of investments and read through endless conflicting advice?

Or maybe you don’t know where to start. Should you invest in tech, crypto, NVDA, or make a sector play?

So let’s cut through the overwhelming number of choices with a simple question:

What is the single best investment that I would recommend to almost anyone?

The Answer: VTI

It’s an easy answer for me.

I would buy the Vanguard Total Stock Market ETF. Also known as its ticker symbol: VTI.

I love VTI because it represents the most well-tested and evidence-based investment strategy: a low-cost, broadly diversified fund. It’s less risky than sector investments and individual stocks. You own the entire market instead of trying to beat it, which helps you stay consistent, stay invested, and let compounding do the work.

Vanguard Total Stock Market funds1 have $3.3 trillion in assets under management and an expense ratio that’s dropped to just 0.03-0.04%.

It’s become the largest single investment on earth! And they are a major part of the portfolios of both individuals and sophisticated institutional investors.

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Why VTI Is The World’s Best Fund

VTI Is the U.S. Market

VTI doesn’t try to beat the market. It simply owns it all. The fund holds more than 3,500 stocks, which is nearly 100% of the investable U.S. stock market. From mega-cap tech giants like Apple and Microsoft to small-cap companies you’ve never heard of, VTI captures them all stocks in the US2.

Which means it provides fully diversified and comprehensive market coverage across all important sizes and sectors.

VTI Has Ultra-Low Fees That Keep Falling

At a 0.03% expense ratio, it’s as close to free as you can get. That means you pay just $3 annually for every $10,000 invested. To put that in perspective, the average fund charges around 0.37%, more than 12 times higher.

These razor-thin fees compound in your favor over decades. You would save $30,000+ on fees over 30 years at 7% returns compared to average fees.

Set It and Forget It Simplicity

VTI automatically rebalances as companies grow or shrink. When a small-cap company becomes a mid-cap, or a mid-cap joins the large-cap ranks, the fund adjusts without you lifting a finger. No trading decisions, no market timing, no second-guessing.

This is the same approach used by major institutional endowments, like Harvard, Yale, and countless pension funds that use total market index strategies to build wealth across generations.

The long-term results show how powerful this is:

• 10-year annualized return of VTI: 13.86%

• 20-year annualized return of VTI: 10.90%

• 30-year annualized return of VTI: 10.46%

A one-time $10,000 investment in VTI 30 years ago would be worth approximately $225,000 today with dividends reinvested.

Tax Efficiency Built-In

VTI’s turnover rate is remarkably low at just 2-3% annually. A low turnover rate just means the fund rarely sells holdings. That’s a good thing because every time a fund sells a stock, that can lead to taxes. VTI minimizes taxable capital gains distributions. Compare that to actively managed funds that can have turnover rates of 50-100%, triggering big tax bills year after year.

For couples in a higher tax bracket, this tax efficiency can add an extra 0.5-1% to your after-tax returns annually. For example, investing $10,000/year would mean you earn an extra $200,000 over 30 years! Taxes matter.

Here’s What People Usually Ask Next

“Shouldn’t I tilt toward small caps, value stocks, or tech?”

Let’s look at the data. Small-cap and value stocks have underperformed the broader market for much of the past 15 years. Only tech has outperformed in that time frame.

But here’s what’s great about this fund: VTI already owns all the tech companies. It also owns every other sector that might overperform next year. So why try to guess who will go up when you can buy it all?

The fund currently allocates approximately 31% to technology stocks, including Nvidia, Microsoft, Apple, Amazon, and Meta in its top holdings. You name it, it holds it. So you’re already benefiting from tech’s success without overconcentrating your portfolio in a single sector.

“Why not just buy the S&P 500 (like SPY or VOO)?”

This is probably the most common question, and honestly? The S&P 500 is also a solid strategy. The performance difference between VTI and SPY is minimal. They’re 99% correlated.

But there are two key differences:

1. Lower cost: VTI’s 0.03% expense ratio beats SPY’s 0.0945%—that’s three times cheaper. Sure, it’s only $6 on every $10,000 invested. But with compounding, it adds up.

2. Broader diversification & better “bubble protection”: The S&P 500 represents about 84% of VTI. The remaining 16% includes mid-cap and small-cap companies that don’t make the S&P 500 cut. Over VTI’s 23-year history, this broader exposure has added meaningful value. For example, Carvana is up 1,800% over the past five years, and it isn’t in the S&P 500 but is in VTI.
   

“What if I don’t have access to Vanguard funds in my 401(k)?”

No problem. These excellent alternatives are extremely similar. If none of these are offered and you want to follow this strategy, look for a “total market fund” with fees <0.5%. If your 401(k) doesn’t offer that at all, complain loudly to HR, because they are not acting in your best interest.

• Fidelity Total Market Index Fund (FSKAX) - 0.015% expense ratio

• Schwab Total Stock Market Index Fund (SWTSX) - 0.03% expense ratio

“What about international diversification?”

This is a fair and important question. VTI is 100% U.S. stocks, which means you’re betting on continued U.S. market leadership. That’s been a good bet over the last few decades.

For true global diversification, consider the Vanguard Total World Stock ETF (ticker symbol: VT). It’s the one-fund global alternative, holding approximately 60% U.S. and 40% international stocks, essentially VTI plus international markets in a single investment.

The trade-offs:

• VT expense ratio: 0.08% (slightly higher than VTI, but still very, very low.)

• 10-year annualized return: VT has returned 11.38% vs. VTI’s 14.04%

• Volatility: VT is slightly less volatile due to international diversification

Many sophisticated investors split the difference with an 80% US stock fund like VTI and 20% International stock fund. This gives you customizable international exposure while keeping costs low and maintaining the foreign tax credit benefit in taxable accounts.

The Bottom Line

The sheer number of investment options makes investing more complicated than it needs to be. While Wall Street often profits from complexity, the evidence is clear: a low-cost, broadly diversified fund that you actually stick with beats a “perfect” portfolio you abandon during volatility.

For most couples working to build long-term wealth, VTI offers all of the reward with none of the complexity. It’s not the sexiest answer, but it’s smart for nearly everyone. But remember to consider your own goals, understand your risk tolerance, and do your research before deciding if it’s best for you.

Three decades from now, your future self won’t regret spending hours and hours researching investment and trading funds for no extra return. What will matter is that you:

1. Started investing now

2. Kept costs low

3. Stayed the course through market ups and downs

4. Automate monthly contributions so you don’t have to think about it

VTI checks all the boxes.

What’s in your portfolio?

Are you team VTI, team S&P 500, or charting a different course? Reply and let me know your strategy. I’d love to hear how you balance investing simplicity and your goals.

Disclaimer: This article is for general education only. It isn’t personal financial advice. I don’t know your full situation, goals, or risk tolerance, and nothing here should guide your decisions on its own. Do your own research or speak with a licensed professional before acting on any investment ideas.

One overlooked detail in my brokerage settings has already cost me $5,400 and counting.

The culprit? Cost basis.

The Small Default Setting that Got Me

It’s November 2022. VTSAX, my biggest investment holding, is down 20% from its high, and the S&P 500 is about the same. It’s ok. I’m not panicking. I know declines are temporary, and I see a silver lining: tax-loss harvesting (explained below).

If I sell the right shares, I can deduct $3,000 a year and save about $1,350 annually at my 45% combined California and federal tax rate.

I log in to Vanguard, grinning. Few things make me happier than figuring out a trick to save money.

Then I’m confused. None of my shares show a loss, even though the market is way down. How is that possible?

It turns out that Vanguard prices your shares based on the “Average Cost” method, which averages the cost of all shares you’ve purchased up to that point. This is a setting you choose, called the cost basis method. And you can’t change this cost basis retroactively. So I couldn’t do anything about it, except change it going forward.

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Fundamental Concepts: Understanding stock market taxes

You pay capital gains taxes when you sell for more than you paid. Long-term gains (over one year) are taxed at lower rates: 0%, 15%, or 20% depending on your income.

Which specific shares you sell determines how much profit you make. Each set of shares is called a tax lot. Say you buy 10 shares of investment A in January, then 5 more in March, and dividends buy you 2 more shares in June. You now have three separate tax lots, each with its own purchase price.

The purchase price of each tax lot is the cost basis. When you eventually sell shares, your brokerage needs a method to determine which shares you’re selling and what you originally paid for them to calculate your gain or loss. There are multiple methods to calculate cost basis.

5 Strategies for saving taxes on investments

Once you understand these concepts, you can use them strategically to minimize or defer.

These strategies only apply to taxable accounts, so you don’t need to worry about them with your IRAs and 401(k)s. They are also advanced strategies. Before you do them, make sure you have taken advantage of lower-hanging fruit by maxing out your tax-advantaged accounts in this order.

1. Tax loss harvesting: When the market is down, you can sell investments at a loss to offset other gains or deduct up to $3,000 per year from your ordinary income. While the max is $3,000 per year, you can carry forward extra unused losses indefinitely. So if you harvest $30,000 in losses, you can deduct $3,000 this year, and each year for 10 years. I expect this strategy alone to save me $10,000+ in taxes over my life time.

2. Rebalancing without taxes: While rebalancing your portfolio, you can sell tax lots with a loss to avoid capital gains taxes entirely. You can also harvest a loss, as in strategy #1, or combine the loss with selling lots that have a gain, so they net to zero and avoid tax.

3. Fill up the 0% tax bracket on gains: Did you know that you can earn $126,000/year in capital gains and pay 0% federal income tax? If you ever make less than $126,000 and have long-term capital gains, consider harvesting those gains by selling investments that have an unrealized gain for free. This is perfect for sabbatical years, early retirement, or any year you’re making less. But watch out for the impact on Social Security and on ACA subsidies.

4. Charitable giving: If you plan to donate to charity, don’t donate cash; donate your shares with the highest capital gains instead. You get to deduct the full market value and never pay capital gains tax on the appreciation. If you bought a stock at $10 and it’s now worth $100, donating it gives you a $100 deduction without paying tax on the $90 gain.

5. Step-up basis for heirs: If you’re planning your estate, know that your heirs get a “step-up” in cost basis when they inherit. Shares you bought at $10 that are now worth $100 get reset to a cost of $100 for your heirs. All the taxes on those capital gains disappear, and your heir doesn’t pay any tax. It can make sense to hold your highest-gain lots until death and spend down or gift your lower-gain lots.

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Beware of Wash Sale Rules

The IRS doesn’t allow you to sell a stock at a loss and immediately repurchase it. If you sell and repurchase a “substantially identical” security within 30 days before or after, the loss is disallowed. Dividend reinvestments or 401(k) auto-buys can trigger it, too.

To avoid it, buy a similar but not identical fund, like selling a total market fund (VTSAX) and purchasing an S&P 500 fund instead. After 31 days, you can switch back if you want.

Set Your Cost Basis Method. Check it now.

Your cost basis method decides which shares your brokerage sells first and how much tax you pay. If you don’t choose one, your brokerage’s default will likely cost you more in taxes.

I recommend choosing either option #1 for those who want to fully optimize or #2 for those who want to set it and forget it.

1. Spec ID (Specific Identification) gives you the most control. You can choose exactly which tax lots to sell. It’s the best method for strategically managing gains and losses, but it requires more effort and understanding.

2. Min Tax (Minimum Tax) is simpler but less flexible. Some brokerages offer a “Minimum Tax” option that automatically minimizes current-year taxes. It’s helpful for basic tax-loss harvesting but limits some other strategies.

3. FIFO (First In, First Out) sells your oldest shares first - usually the ones with the biggest gains - so you owe more tax. It’s often the default for ETFs and rarely ideal for long-term investors. There is also LIFO (Last in, First Out), which can lead to higher short-term capital gains tax.

4. Average Cost is the default for many mutual funds and the worst option. It treats every share as having the same cost basis, eliminating strategic control. Once you use it for a fund, you can’t change it retroactively, unlike other methods.

Here’s what it options are in Vanguard:

Takeaways

Tiny investing details compound. One unchecked setting can quietly drain your returns. So, spend 10 minutes today reviewing your brokerage defaults, then choose Spec ID or Min Tax.

If you want to get smarter about tax-efficient investing, subscribe and get more practical strategies and frameworks.

A Quiz of Your Investing Intuition

Are you up for taking a one-question quiz? This will test your intuition of compound interest.

You’ve likely seen a compound interest chart, a curve that bends upward, showing investments grow faster over time. Like this:

Now read this scenario. Guess the answer without doing the math or reading ahead. Just go with your intuition.

• Scenario: Let’s say that Sara makes $100k per year and invests 20% of her pay. We’ll assume inflation-adjusted returns of 7%.

• That means it takes Sara 22 years to accumulate her first $1M.

• Quiz: At this rate, how long does it take Sara to accumulate the second $1M?

Do you have your guess? Is it twenty years, fifteen years, twelve years, ten years? Less? It’s actually eight years. It took Sara twenty-two years to earn the first million. She earned the next million 3x faster.

The problem with our intuition is that it tends to underestimate exponential growth. We’re not used to it. Things tend to change linearly in the physical world. If you run twice as long, you go twice as far. But, with exponential changes, if you invest twice as long, you have ~5x more.

What was your guess to the quiz? I’d love to see your guess in the comments.

Longevity = Time. Time = your biggest asset.

Living longer, healthier lives will amplify investment compounding.

If Sara continues to invest similarly for 50 years, she will end up making $1M every 18 months! That’s the tip of the iceberg if she lives to 100.

Despite this, longevity has traditionally been considered a risk in financial planning: the risk of outliving your money.

How can that be true when the benefits of compounding increase with time? It’s a half-truth, and we need to update our investing frameworks with the full picture.

Living to 100 can 3x your portfolio

The human longevity revolution is exciting. It’s not clear whether it’s here yet or a decade or two away, but it is clear we are on the cusp of a new wave of healthcare advances and treatments that can potentially increase lifespan. We already have new treatments like immunotherapy for cancer and GLPs for metabolic diseases. All sorts of other1 cool2 things3 are on the way4.

There’s a lot of optimism. Stanford University’s Center on Longevity believes “In the United States and beyond, 100-year lives will be common for those born today.”5

Will I live to 100?

Reading about longevity made me start to wonder what it means for me and my investment strategy.

That question led me down a rabbit hole of actuaries’ tables and statistical models as I tried to answer one question: How likely was I to live to 100?

The most helpful resource I found was the American Society of Actuaries Longevity Illustrator tool. It combines your age, sex, Social Security data, a rough health adjustment, and projected longevity gains.

I learned, however, that the tool doesn’t consider one major predictor of longevity: money. A JAMA study found that people in the top 20% of income live about +4 years longer than average6. Shifting the longevity curve by +4 years turns out to be huge. W already know that lifelong investors can reliably reach the top 20% of wealth, even if their income starts small.

I wanted to take an optimistic view of longevity, so I added a scenario with +3 extra years from possible medical breakthroughs in my lifetime. Granted, this is a pretty speculative guess.

Probability of living to 100, the numbers

Here are the results of my simple math7 for a 45-year-old in average health:

• 6% living to 100 for current actuary estimates

• 18% for adding +4 years for high income. Nearly 1 in 5.

• 29% for high-income individuals and assuming 3+ years for medical breakthroughs. Approaching 1 in 3. (Speculative)

I’ll be mildly optimistic and call it a 1 in 4 chance to reach 100. Not bad.

Now let’s see what that means for investing.

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How does a 100-year longevity affect our investments?

Warren Buffett has likened his wealth growth to a snowball. He said, “I started building this little snowball at the top of a very long hill. The trick to have a very long hill is either starting very young or living to be very old.“ Buffett did both.

You don’t need to beat the market to have above-average results. You just need to stay in the market for an above-average amount of time. A few examples illustrate this:

Example #1: Warren Buffett, mogul

It turns out that Warren Buffett made 99% of his money after age 50. Not a typo. I fact, Warren Buffett didn’t cross the $1 billion mark until age 56. He is now 95 and is worth $150B.

Buffett got rich because he is a great investor. He got fabulously rich because he was a great investor into his 90s. His last $100B was simply a matter of investing a very long time.

Example #2: Grace Groner, secretary

In the 1930s, a young secretary named Grace Groner bought three shares of Abbott Laboratories for about $180 total. That was it. She never sold. She simply reinvested dividends for the rest of her life.

When she passed away at 100 in 2010, her family was shocked that those three little shares had quietly multiplied into over 100,000 shares, worth over $7 million.

Example #3: Sara, our hypothetical saver

Let’s return to Sara. We’ll assume she works for 40 years, retires at 60, and lives to 80. She wants to live it up, spending $200k/year in retirement.

• If she lived to 80, she would die with about $8M. Not bad

• If she lived to 100, she would die with an inflation-adjusted $22.5M or 3x more!

Important note - Sara is investing 20% of her salary. That’s the minimum to let compounding do its magic. Saving more would obviously get you there faster. So if you aren’t there yet, start working through this step-by-step guide.

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Avoiding Wealth Traps

Now that we’ve seen the upside of living a long time and how much compounding can impact later years, let’s look at some traps that pop up.

Of course, no one should cry over your extra million, but thinking ahead can help prevent some thorny issues.

1. You will need more high-growth investments in retirement

Most financial advice treats longevity as the risk of outliving your money. That’s true within the traditional investing framework. In the traditional view, you should move to safe investments in retirement to protect your wealth.

But longer timelines call for a different framework. Rather than focusing on protecting wealth, your mental model should be how to manage the risk that your portfolio may not grow sufficiently.

Your portfolio needs to outpace your spending and inflation, which means more equities later in retirement, while still managing sequence of return risk. A standard 60/40 portfolio won’t deliver enough growth to last 50+ years. You need a glidepath that reduces equities around retirement and then increases them again.

2. You should wait to take Social Security

Social Security becomes even more valuable the longer you live. It’s the one annuity that is indexed to inflation and you get as long as you live (with some survivor benefits.

There is a lot of debate over whether to take Social Security right away or wait until age 70 for the maximum monthly benefit.

The right move for those aiming to live longer is to wait until 70.

3. You’ll need a comprehensive tax plan

Many people default to using a Traditional 401(k) when accumulating wealth. You might assume that if you’re earning a good salary now, you probably will be in a lower tax bracket in retirement.

But if you end up wealthier than you guessed, you could easily find yourself in a higher tax bracket in retirement. This often happens once Required Minimum Distributions (RMDs) kick in at age 73, which can lead to tax bombs that cost you $10,000+.

Then there are the tax cliffs to navigate. Medicare’s IRMAA surcharges jump at specific income thresholds, the 0% capital gains bracket is limited, and the interaction between all these different income sources matters. What seemed simple becomes a puzzle that requires detailed planning.

3. You shouldn’t delay living your life.

It’s sadly common to see people with millions in their portfolio still agonizing over whether they can “afford” a nice vacation. They’ve spent so long optimizing their net worth that it becomes hard to switch out of their frugal mindset and start spending on the things that matter to them.

As you accumulate wealth, you’ll also need to think deeply about how you want to use it. How would you live if you had to spend more money? What would you start doing now?

Would you take the whole family on vacation to an Italian villa? Take a career break to learn a language? Sponsor of a local charity? Pay for lessons to finally learn the piano?

Instead of a bucket list of things I want to do when I retire. I have a list of things I want to do before I retire. It helps me 1.) force myself to live now, and 2.) it gives me license to spend while I am still getting a paycheck.

4. You’ll probably have to confront your sense of purpose.

Do you have goals for your next phase of life? Do you know how you want to spend the next 5 to 7 decades of your life? It’s easy to feel a bit lost in this transition. Work gives structure, purpose, and identity.

You should start building other sources of meaning and community well before achieving our financial goals.

It could involve volunteering, mentoring others in your field, participating in local community groups, or engaging in local politics. The goal isn’t to fill every hour of your day, but to have a sense of purpose beyond accumulating wealth.

Live long and prosper.

Today, living to 100 is at least a 1 in 5 chance for middle-aged investors in average health, and the probability is only likely to increase with time.

This can make your portfolio grow astonishingly well, and it can also lead to unexpected wealth traps in your financial plan.

Getting ahead of these will allow you to avoid the mistakes I’ve seen others make. I’ll be writing more in the coming months on managing these particular problems.

FAQ

What if you plan to retire early?

Even if you plan to retire early, most people still work longer than they need to. The extra income will compound dramatically if you live a long time. People like to have extra money. It helps you sleep at night. It helps you worry less about a potential medical emergency or other curveball.

Working longer than planned is something nearly everyone does, and we have a term for it: one-more-year syndrome.

For a similar reason, diligent savers tend to be overly conservative. Most retirees still have 80% of their initial portfolio after 20 years of retirement. I wrote about why we do that here.

But what if you don’t have a high income?

You don’t need a high income. But you do need a few things. You need a high savings rate. You need curiosity and a willingness to learn to invest. You need patience over decades. I also hope you naturally want to get the most out of life.

With these, many middle-class earners have built impressive wealth. These are the people I’m writing for. I think that’s probably you.

There is, of course, a dimension of luck in all things. Most of all, health. A serious diagnosis for yourself or a loved one can, sadly, derail any life and financial plan.

Lastly, the market has to stay on track, over the medium and long term. (Although with valuations so high, and the risk of stagflation rising, some dark clouds are growing on the horizon.)

The odds are more in your favor than you realize.

• The last stagflation was worse for investors than the 2000 dot-com crash and the 2008 Great Financial Crisis, combined.

• Your standard-issue “safe” cash and bonds portfolio doesn’t protect you from stagflation.

• There are investment tools that you’ve heard of but aren’t yet using that can help protect you.

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How to Stagflation-Proof Your Portfolio (Without Blowing Up Your Plan)

Experts are Fretting About Stagflation.

In recent months, a growing number of leading economists and central bankers have flagged the possibility that the U.S. economy may be entering an era of stagflation.

Stagflation is particularly worrying for those who have been diligently investing for a while and for those who want the freedom to step away from the 9-5.

It’s a problem for you for two reasons:

1. You need your portfolio to grow to reach financial independence

2. It’s really difficult to enjoy your money when you are watching it disappear.

What leading economists have to say:

“It seems increasingly likely that the American economy is sleepwalking toward stagflation. In case you’re wondering, that is not a good thing.” Tyler Cowen, George Mason University1

“Inflation and unemployment in the U.S. are both rising. … The Fed faces a ‘challenging situation,’ Jay Powell, its chair said”2

Nobel Prize winner Joseph Stiglitz, speaking to the Guardian, argued U.S. trade and policy uncertainty make the country “a scary place to invest” and risk triggering “the worst of all possible worlds: a kind of stagflation.”3

Stagflation: When Everything Goes Wrong at the Same Time.

Stagflation occurs when there is high inflation, high unemployment, and weak economic growth. Stagflation defined the economy of the 1970s and led to 14 years of negative or flat investment returns. That was the worst period to invest since the great depression.

What’s happening in “Stagflation”? In simple terms, prices are rising, but the economy is not growing. Here’s how it works:

1. Stuff costs more → because inputs like oil, gas, or imports get expensive.

2. People can’t buy as much → because wages don’t keep up, and high interest rates make debt less accessible.

3. Businesses don’t grow → higher costs + weaker demand = layoffs, slow investment, (which amplifies #2)

Some economists didn’t even believe that stagflation was possible until it actually happened. The U.S. economy experienced a painful period of stagflation throughout the 1970s.

The previous theory was that you could not have high unemployment and high inflation at the same time, because when one goes up, it should push the other down.

We learned it was indeed possible when the 1973 OPEC oil embargo led to a price shock. Oil prices quadrupled within months. Higher energy prices pushed up the cost of almost everything. Companies faced higher costs, and job losses rose. Consumers spent more on essentials and less on other goods, resulting in slower growth.

In the 1970s, the oil price shock drove prices higher. Today, tariffs are at risk of doing the same by raising costs through the entire supply chain.

Whether we are actually in stagflation yet or how bad it could get remains to be seen. There are some indicators that we aren’t there yet. In particular, the US is still experiencing GDP growth, while other measures, such as Gross Output, are indicating weakening economic growth.4

Sequence-of-Returns Risk in Stagflation: Being Homeless vs. an NBA Salary

During our last period of stagflation, the stock market had no gains in inflation-adjusted terms for 14 years. That sounds bad. But how bad is it?

Let’s examine a case study of financially independent retirees living off their portfolio. We’ll assume they have a $1 million portfolio, consisting of 80% stocks / 20% bonds, and are living off 4% annual withdrawals.

Retirement start year vs ending real balance

Case 1: Homeless

• Retired before stagflation in 1965

• Portfolio after 40 years: Negative -$0.4M

They would have run out of money in about 30 years!

Case 2: Rich

• Retired during stagflation in 1975

• Portfolio after 40 years: $8.3M

Notice the difference in missing just half of stagflation. Like wearing a seatbelt, you just need to survive the worst.

Case 3: NBA Salary

• Retire after stagflation in 1985

• Portfolio after 40 years: $12.5M

That’s about an average NBA salary.

Conclusion: The period leading up to stagflation poses by far the most risk for investors. That could be the period happening right now.

How to understand the critical concept of Sequence-of-Returns Risk

The difference between our homeless outcome and NBA salary outcome is due to stagflation, and it’s also related to a type of risk known as sequence-of-returns risk, which can occur when there is any period of poor market performance early in retirement (stagflation being just one example).

The “sequence” term refers to the fact that the risk is higher if your portfolio declines occur at the beginning of retirement compared to toward the end. The reason it’s so devastating when it happens at the beginning of retirement is that you are withdrawing from your portfolio to pay bills while your portfolio hasn’t produced any gains to fund your withdrawals. Your portfolio gets smaller and smaller to the point where future stock market growth can’t replenish your portfolio. And then you run out of money. 🙁

Reminder: The Risk of Ruin, aka running out of money, is enemy #1.

Now, let’s turn to how to update our portfolio in light of the growing risk of stagflation today.

Stagflation Portfolio: What to do to protect yourself from Stagflation

Our goal here isn’t to make huge amounts of money. It’s to stop the bleeding and preserve our wealth while everyone else is losing their shirt. Two investments stand out to help us here.

Reminder: This is a fairly advanced asset allocation strategy. It’s important, but other things are more important to do first; make sure you are doing those first so you aren’t leaving the easy money on the table.

1.) Hold international stocks:

Portfolios with international stocks tend to do better in those periods because you aren’t relying on only the US economy. Even when the U.S. economy is dragging down the global economy, generally, there will be other countries doing better.

The dollar matters too. A weak dollar boosts returns for U.S. investors holding international stocks, while a strong dollar can cancel those gains.

Many passive investors already hold international stocks. If you don’t, now is a good time to add them.

How much should you add?

Following a passive index strategy, you would evenly diversify across the entire world. That splits your stock investments proportionally across all of the world’s stocks.

Today, your portfolio would be split approximately two-thirds into U.S. stocks and one-third into international stocks, although the ratio fluctuates over time.

There are index funds that buy the whole world’s stocks for you. It’s easy to just put all of your stock investments into one of these funds. Some fund options that I like:

• Vanguard Total World Stock Index (Ticker: VTWAX or VT, Expenses: 0.06%)

• SPDR Portfolio MSCI Global Stock Market ETF (SPGM, Expenses: 0.09%)

• iShares MSCI ACWI ETF / fund (ACWI, Expenses: 0.32%)

If you currently have a sizable amount in U.S. stocks that you don’t want to sell. In that case, you can instead add an international stock market fund to your portfolio and make future investments in this new fund to slowly grow your international allocation. You would buy a fund that holds all the stocks outside the US, such as Vanguard Total International Stock Index (VTIAX or VXUS).

2.) Add inflation protection with TIPS and/or Gold

TIPS

Treasury Inflation-Protected Securities (TIPS) are tied directly to inflation. When inflation goes up. TIPS values are periodically adjusted to cover the inflation increases, so you preserve the real value of your investment and still earn interest.

TIPS are directly indexed to inflation, so they preserve their value if held to maturity. Therefore, they provide reliable protection during inflation and stagflation. Adding TIPS to your portfolio gives you a pot of money that you know will grow, no matter what happens in the market. The tradeoff is that the growth tends to be slow.

The amount you choose should be based on your timelines, goals, and risk appetite. Generally, the closer you get to retirement, the more you want to hold in these kinds of safe investments to protect your portfolio from sequence-of-returns risk.

Many financial planners recommend having a safety bucket of 2-5 years of expenses so that you are not forced to sell equities during a downturn. TIPS are a good candidate to be part of your safety bucket, especially during periods of inflation.

Some fund options that buy TIPS for you are:

• Vanguard Inflation-Protected Securities (VTIP, Expenses: 0.03%)

• Schwab U.S. TIPS ETF (SCHP, Expenses: 0.03%)

• Fidelity Inflation-Protected Bond Index Fund (FIPDX, Expense: 0.05%)

You can also buy TIPS directly from the U.S. government at treasurydirect.gov.

Gold

Gold often benefited from supply shocks and rising input costs, like the 1970s stagflation. Gold prices tend to increase during periods of inflation.

In particular, gold is an investment that people often flock to when the economy is uncertain, inflation is high, or there is weakening trust in the US economy and the US Dollar.

Gold performed extraordinarily well in the 1970s, while the stock market struggled.

Today, gold is also a hot commodity. The price has increased by over 35% so far this year.

If you’d like to add gold to serve as a hedge against stagflation and other major crises, most portfolios tend to recommend 5-10% of your portfolio. However, this will again depend on your goals, timelines, and risk appetite. For example, Ray Dalio suggests a 7.5% allocation to gold in his All-Weather Portfolio, which is designed to handle any economic environment, including inflationary periods.

Here are some fund options that allow you to invest in gold. Each has low expense ratios and holds physical gold bullion in vaults, so you actually own a fraction of their gold:

• iShares Gold Trust (IAU, Expenses: 0.25%)

• Aberdeen Standard Physical Gold Shares ETF (SGOL, Expenses: 0.17%)

• SPDR Gold Shares (GLD, Expenses: 0.4%)

These changes help you manage risk, but there’s no free lunch

Adjusting your portfolio with some of these suggestions could provide significant protection if stagflation or inflation gets worse.

As with all investing, it comes with a tradeoff. In years when the US stock market is doing great, you would be giving up some of the return. So don’t sell all of your US stocks. Stay diversified and be ready to benefit from whatever happens in the world.

Think of it as a seatbelt for your portfolio. If you are nearing retirement, this is even more crucial to protect yourself from outliving your money.

Implementation best practices

Whenever you make changes to our portfolio, how you implement them can significantly impact your taxes and help you set yourself up for success. These best practices apply in nearly every situation, including this one.

1. Use broadly diversified index funds with low expense ratios. (The funds we suggested above are good examples.)

2. Dollar cost average (DCA) into new investments. Direct all new contributions rather than selling existing ones, so that you can make the transition gradually and avoid capital gains taxes.

3. Pay attention to tax location. Put bonds and TIPS in tax-advantaged accounts, like 401ks, when possible because they are less tax-efficient than stocks.

4. Rebalance annually or semi-annually.

5. Set your plan and then follow it. Avoid chasing performance by investing in investments that are doing well and changing your plan too often.

6. Have cash available for near-term needs and emergencies, especially if you are nearing retirement.

7. Avoid overcomplication with too many funds or complicated funds.

Check your plan:

• Do I hold international stocks, not just US?

• Do I have reasonable allocation to TIPS or some short-term Treasuries?

• Do I have a set rebalancing plan and calendar?

• If close to retirement, do I have a cash buffer for the first few years of retirement?

• Have I written down my investment plan?

Conclusion: Protect yourself from stagflation

The risk factors for stagflation in the U.S. are growing and worrying. There are several adjustments you can make to your portfolio to protect yourself by investing internationally and incorporating inflation protection through TIPS and/or gold. As always, implement these changes carefully to minimize taxes and meet your goals.

Are you taking any other steps to protect against stagflation or inflation? Leave me a comment below and let me know how you are protecting yourself.

FAQs

What about real estate during stagflation?

Real estate income can perform well during inflation because it has room to adjust as rents and costs rise with inflation, although higher rates can still put pressure on the value of real estate. Real estate can be a mixed bag, depending on various factors.

During the 1970s, Real Estate investment returns generally outperformed those of stocks and bonds. However, residential home values remained relatively stable throughout that period. REITs were a relatively small asset class in the 1970s, but they didn’t perform well.

What about the Crypto? Isn’t it the “digital gold”?

Despite being trumpeted as “digital gold”, it has not behaved like gold at all. During the last stock market decline and inflation spike a few years ago, BTC and other cryptocurrencies performed poorly, tracking more closely with growth stocks.

Crypto fits better in the speculative part of your portfolio, alongside private equity, stock picking, and other investments that may not be ideal but are often pursued due to their appeal and enjoyment. That being said, we have so little history with crypto that it’s hard to predict exactly what it would do in an extended period of stagflation.

Disclaimer

This post is for education only. This information is not intended as financial, legal, or tax advice, and it does not establish an adviser-client relationship. Investing involves risk, including loss of principal. Past performance does not guarantee future results. Examples are provided for illustration purposes only and should not be considered recommendations to buy or sell any investment. Consult with a qualified professional about your situation before making any decisions.

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The Free Press

Brace Yourself: Here Comes Stagflation!

It seems increasingly likely that the American economy is sleepwalking toward stagflation. In case you’re wondering, that is not a good thing…

Read more

7 months ago · 103 likes · 189 comments · Tyler Cowen

For me, life changing wealth is having geographic freedom. I will not wait to travel for retirement. I think that’s too late. Good health in retirement isn’t guaranteed.

I’ll be writing here periodically on how to use your growing financial freedom to get the most out of life in smart, cost-effective ways. Meanwhile, I’ll continue to share strategies for growing your wealth and preparing for an off-ramp to the 9-5.

Today, I want to share how I travel for months at a time and what I’ve learned doing it.

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The Dolphin and the Whale: Why bother with extended travel?

A vacation is about fun, relaxing, and recharging. Extended travel gives you more time to reach remote places, try on new daily routines, and let spontaneous things happen.

If a ten-day vacation is a dolphin: playful, social, full of quick bursts of fun; then a sabbatical is a whale: vast, migratory, unhurried, with moments of wonder like a sudden jump out of the water.

I’m still on a high after finishing a 9-week sabbatical this year. As a working adult, I’ve now done stays of 2+ weeks in London (3 times), France (3 times), NYC (twice), Italy, Costa Rica, and the Faroe Islands. I often string multiple extended stays into trips of 6 weeks or more. In my younger years, I spent 7 months living out of a car and circling the Australian continent, among other adventures.

After much trial and error and learning from other master travelers, I’ve accumulated these rules and tips that I now follow to make the most of my experience when I’m overseas for extended periods.

I’m sharing these here because they’ve worked for me. Try out the ones that make sense to you and share your own in the comment.

My Rules for Extended Travel

1. Start with something extraordinary.

The best ones are activities or events that truly feel special to you and follow things you're passionate about. This will be the anchor of your trip, and everything else gets planned around it.

There are so many incredible possibilities, and that’s what makes travel truly special. In my recent sabbatical, I planned it around a Safari in Southern Africa. But what excites you? Doing a hut hike in Switzerland? A yacht trip around the Mediterranean? Trekking to Machu Picchu?

2. Think about destinations in weeks, not days.

When you are somewhere for a week or more, you will run out of things to see and do within a few days. That’s great! That’s when you slow down and start doing what the locals do with their free time. Many of the most interesting and serendipitous experiences happen when you aren’t rushing.

3. The longer you are gone, the more you need a living room

When you slow travel, there will be days you just chill inside all day and read or binge-watch something. This is much less appealing in a hotel than in a real home, where you can spread out and relax. Airbnb is a good option, but also check out home swapping sites like HomeExchange.com1.

4. It’s okay to do a lot and go everywhere, but recognize the signs of over planning.

After choosing the primary anchor destination, it’s ok to squeeze in as many other things as you feel excited about. But that inevitably leads to complicated itineraries. I’ve found that, after I do this, there’s usually a moment when I feel in the pit of my stomach that something’s off. I’ve learned to recognize that as my flag for having overplanned. If you are feeling just a little bit uneasy about your trip, try cutting out one destination from the itinerary. It usually fixes that worry.

5. Go to the most remote location first.

This is advice I learned from Kevin Kelly, Founder of Wired magazine: “On vacation, go to the most remote place on your itinerary first by passing the cities and then return to the big city at the end. You’ll maximize the shock of otherness in the remote, and then later you’ll welcome the familiar conveniences of a busy city on the way back.”2

I take this a step further, and I love to add a luxury experience to the end of a long trip. End with getting pampered and with something memorable. During my sabbatical, I ended with a splurge at a three-star restaurant in Copenhagen.

6. The more you move, the less you should pack.

The more places you tack on, the more you will have to lug your luggage around. The 80/20 rule of packing is to minimize coats and shoes. Those are what take the most space. I follow the “Always, Sometimes, Never” rule for packing coats and shoes. Always bring one, sometimes bring two (such as when traveling to multiple climates), and never bring three or more. A puffy jacket is almost always the best choice for a coat when traveling. It provides the most warmth in the least amount of space.

7. Invite friends. But keep the time together tight.

Time with good friends can create the highest highs of a trip. But less is more. Pick one tightly defined period to spend together, and then build it into the plan that each couple or family will go their own way afterward. This keeps the energy high, lets everyone recharge their batteries without getting on each other's nerves.

8. Read books & watch stuff set in where you are going.

It helps you build context to orient yourself to new experiences better. And it simply gets you excited about going! Fiction is particularly good at giving a glimpse into some of the intangibles of the culture and habits that are hard to learn from a Wikipedia page (but read those too!).

Watching In Bruges before heading to Belgium made the trip hilarious - nothing like quoting depressed mobsters while walking through one of the cutest towns on earth. And a Sherlock Holmes story or two always gets me in the mood for London’s foggy streets.

9. When you have nothing to do, follow The Interesting Turn Rule.

The Interesting Turn Rule is the invention of my wife and me after countless days wandering new cities. It works like this:

1. Step 1.) Just start walking. Literally anywhere you are.

2. Step 2.) Every time you reach an intersection, look in all directions and turn to walk in the direction that looks most interesting.

3. Step 3.) Repeat.

You will inevitably bump into cool things that aren’t in the guidebooks. Interesting neighborhoods, awesome bars, unusual exhibitions, and all kinds of things you would never think of. Stop and visit whatever strikes you!

Ps. This makes for a fun day in your home city, too. I often do this in San Francisco in parts of the city I’m less familiar with.

10. Travel deeply in places you like & revisit.

The well-traveled Tyler Cowen put it well: “Get to know some of your favorite places truly in depth, most of all major cities that are easy to reach and often are connected to free or paid invitations. For me, that would imply more trips to London, Paris, Tokyo, Berlin — you get the picture. Under this view, the returns to variety are diminishing. And have I ever regretted stopping in on those places?”3

It’s especially fun to go back and find that amazing gelato place in Rome you've been thinking about, or your favorite Kebab in Berlin, or that adorable wine bar in Paris. You get to relive your favorites while building new memories and experiencing things you missed the last time.

Rules that save you money

A big life doesn’t have to be extravagantly expensive. There are ways to save more that make the travel better. The following rules do both.

11. Human-powered transportation is the most fun.

Bike, walk, paddle, and ski between places as much as possible. This is more doable than you might imagine, especially in denser, public transit-friendly places like Europe and Japan.

I am a big fan of the bike rental kiosks that are now in many cities as a way to do your own tour. In an afternoon on a bike, you easily see most of the major sights of, say, Paris. Maybe it’s just me, but biking is the perfect pace for experiencing a new place. You can cover a lot more ground than walking, but don’t fly by things like you do in a car.

12. Good weather is overrated.

Shoulder seasons are great for a lot of reasons. There are way fewer tourists, fewer holiday closures, and often more local events. Fewer tourists also means cheaper accommodation.

This is especially true for big cities which are fun year-around.

13. Don’t worry about being in the trendiest neighborhoods.

Of all of the people I’ve met from London, none live in Covent Garden or Soho. So forget Soho and stay where the normal people live. It’ll be cheaper, you’ll get a better feel for what the place is like, and it will be much more memorable. I often let serendipity choose my location by going wherever I can find a home exchange or a cool Airbnb. That’s led to interesting and unexpected neighborhoods.

14. Take advantage of other food options beyond restaurants.

After being away from home for long periods, it becomes expensive and heavy to eat out three times a day. Delis and butchers in many countries are great options to fill in for restaurants when you don’t want to cook. In France, they have “traiteurs” who sell already prepared meals that are more like home cooking and generally high quality. You can buy salads, lasagna, paella, and roasts that require minimal reheating.

I hope you found some of these rules valuable. I expect that my list will continue to grow and evolve as I get to try them out in new places. I can’t wait.

I’d love to keep learning from you all about your rules, tips, and tricks for maximizing the benefits of your travel experiences. Please share yours in the comments and enjoy the adventure!

Appendix - How do you find the time & money to travel?

The two big reasons that hold us back from traveling, particularly long-term traveling: time and money. Here’s how you can manage them.

Obstacle A: Time

How do I get away for weeks or months at a time?

There are more and more ways to make long-term travel a reality today, thanks to the rise of remote work and a shifting culture around work-life balance.

You don’t even need to be fully remote. Many companies now have policies that allow employees to work remotely for a certain number of weeks. If you combine 2 weeks of vacation with 3 weeks of remote work, for example, that opens a lot of travel options.

Sabbaticals and career breaks are becoming increasingly common. LinkedIn now has a feature to show career breaks in your work history. I’ve met families that have moved with their kids to attend school in Japan for a year. Couples who have taken a 1-year round-the-world honeymoon. And families doing worldschooling.

Even without sabbaticals or remote work options, it’s still possible if you’re willing to work at it and go against the cultural grain.

In the 1990s, long before remote work, my mom took off for six weeks at a time to take the family on RV adventures. We drove from California to New York. From California to Florida. We followed the whole Oregon Trail once.

It wasn’t simple for my mom to step away from work. She had to negotiate with her boss to make it happen, but she was a top performer, she hit her deadlines, and was willing to take time off unpaid when needed. It’s possible if you’re willing to work for it.

Obstacle B: Money

Surprisingly, long-term travel doesn’t have to be more expensive than a vacation. I have been in France and Italy for a month and spent less than I spend on average living at home in the Bay Area. Even factoring in everything I spent that month, including mortgage, utilities, and expenses back home. I accomplished that by using Rules 11-14 above. They help you reduce costs while also making the experience better.

Lastly, if Travel is important to you, use mental accounting to your advantage. Save for it in a dedicated space. More on that here.

Keep reading to check your retirement readiness. At the end, you will find a 10-minute self-quiz.

Preparation unlocks freedom

I’m writing this at the end of a nine-week mini-retirement where I completely stepped away from work. Wow, life can be so fun and so free!

Part of my mini-retirement was big adventures. I did a two-week safari with my wife, biked across French wine country with old friends, and backpacked in the Yosemite backcountry with my brother. The rest of the mini-retirement was quiet days at home with no schedule at all. The control of my time was priceless.

A career break was right for me at this point in my life. I’m not ready to fully retire yet for quite a few reasons (including #1 below).

Still, even this sabbatical took serious planning. Whether you want to take a career break, to scale back, or to fully retire, it’s all possible with a clear plan.

The SHORE Framework

This framework covers the 5 essential areas that everyone needs to build into their retirement plan.

• Sufficient savings

  • You have enough in your portfolio, including any income streams

• Healthcare plan

  • You have a plan for healthcare up to and through Medicare.

• Outside interests

  • You have something to retire to and a community to share it with.

• Risk Protection

  • You protect your portfolio, particularly in the early years.

• Efficient taxes

  • You have a plan to optimize taxes through withdrawals, Roth, and RMDs.

So, how do you know if you are ready in these areas? Here are 5 ways to check.

1) Savings and Income. You’ve funded spending with a safe withdrawal rate.

You are ready when you have fully covered your annual spending with income and a safe withdrawal rate on your portfolio.

The safe withdrawal rate (SWR) is the percentage of your retirement portfolio you can withdraw each year without running out of money.

Your withdrawal rate should allow you to fund the life you want to live in retirement - including changes to spending. If you plan to spend retirement slow-traveling through Europe while trying to find which cafe has the absolute best terrace for people watching, that sounds fun. But it’s probably going to cost more than spending retirement taking long walks with your dog and writing your book. Which also sounds great.

Check your situation

1. Calculate Core Annual Spend, which is all of your costs, including any changes expected in retirement (like health insurance).

2. Subtract any reliable income you will have right away, such as rental cash flow or a pension.

3. Target a withdrawal rate of 3.5% for early retirees aged 45-60

   1. If you are of traditional retirement age of 60+, use 4% withdrawal rate.

4. Look up your total portfolio of savings and investments.

5. Multiply your total portfolio by your withdrawal rate. You want this amount to exceed your spending. That’s it!

Example

• Your Annual Spend = $90,000.

• And you have $15,000 per year in income from a rental property.

Which means you need to withdraw $75,000 per year ($90,000 - $15,000)

• Your portfolio is $2.5M.

• $2.5M * 3.5% = $87,500. That is the amount you can safely withdraw each year. That exceeds $75,000, so your spending is covered!

Many retirees can be too conservative here. By withdrawing significantly less than 3.5% you could be underspending and underliving. It’s a problem I wrote about here.

2) Healthcare insurance for retirees. You have a bridge to Medicare.

Healthcare is often the single biggest unknown for early retirees. You need coverage that you can afford, that your doctors accept, and that will support you through surprises.

Bridge options to 65: COBRA, ACA, spouse plan

You need a bridge from your last day of work to Medicare at 65. That can be built from a few options, usually COBRA for up to 18 months, an Affordable Care Act (ACA) Marketplace plan, or a spouse’s employer plan.

Your decision is not only about premiums. There are different networks, deductibles, and out-of-pocket maximums, and then price the total for a typical and a bad-case year.

If you use ACA plans, your income drives any subsidies, so your withdrawal plan and your health plan must fit together.

HSAs can be a useful tool here. If you fund them now, while you’re still working, then spend tax-free on qualified costs later. Put real numbers to these choices, then make the coverage switch part of your retirement timeline.

Check your situation

• Choose your path: research COBRA, ACA Marketplace, spousal plan, or employer retiree plan if offered

• Price two ACA plan tiers in your state, determining what the income threshold is for any subsidies

• Decide on an HSA strategy if you have one

• Then research dental and vision

Example

• COBRA for 18 months, then ACA silver plan until 65.

• Your total spending includes your expected premiums, deductible, out-of-pocket max, and routine care.

3: Outside interests. You have passions and hobbies to retire to.

These last two weeks of my career break have been eye-opening because I had absolutely nothing on the calendar. I’ve finished the big adventures. I am home and giving myself space before I jump back into work.

It was my first stretch with no schedule in a long time. What do I do after making breakfast? It’s a cloudy day, so I guess I’ll have a soak in the hot tub. That was nice, OK, now what? I have since cleaned up the yard, done several house projects I’ve been putting off, and even repainted a wall. I’m starting to run out of to-dos…

The structure, purpose, and social contact a job provides is enormous. In retirement, you have to build those intentionally.

Weekly schedule and “time buckets” exercise

So, how do you want to spend your non-working time? One framework I like is Bill Perkins’ “time bucketing” from Die with Zero. Many experiences have expiration windows and diminishing returns. A bike trip through French wine country in your 40s is a very different experience from one in your 70s. If you wait too long, you may miss it altogether.

Time bucketing is simple. List the experiences you want and place them in the decade when they will mean the most to you. Maybe a big family vacation in your 50s, a cross-country RV trip in your 60s, and quieter travel in your 70s. Pair that with a simple weekly template so your normal days feel the right amount of full without being busy.

And if you want to continue working in some capacity, think through what that will look like. Write down what you will do, how many hours, and the boundaries that protect your time.

Check your situation

• Write one typical weekday and one ideal week.

• Choose three experiences or goals per decade for how you envision spending your retirement.

• Decide if you want zero income or transition to part-time, consulting, seasonal work, or a passion project where you will have light income.

4: Risk Protection -> You can avoid running out of money in retirement.

The first years after you leave work are the most risky. A cash and short-term bond buffer reduces the risk that a stock market decline forces you to sell your investments at a loss.

Just about the worst thing that could happen to your retirement financially is a stock market crash soon after you quit. If that happens, you have to pull from your investments when they are down, depleting your nest egg even further. Your portfolio may never be able to recover, and you could run out of money.

Remember, financial freedom also means freedom from worrying about your finances! What’s the point of finally having full control over your time if you are so worried about it that you can’t enjoy it?

Having 3-5 years in very safe investments can reduce stress and give you peace of mind. It’s even more important when stock market valuations are as high as they are today, and returns may not be too hot in the next 10 years.

Check your situation

• Are you holding 3 to 5 years of annual spending in very safe investments, primarily cash and short-term bonds?

• Example target: 2 years in cash savings plus 1 to 3 years in short-term Treasuries.

Example

• Annual Spending = 90,000.

• Buffer target 4 years. $90,000 x 4 = 360,000. We split $360,000 into $180,000 in cash for years 1-2 and $180,000 in short-term bonds for years 3-4.

5: Efficient Taxes. You have a plan for a tax-advantaged retirement account

The first decade after you leave work sets up your lifetime tax bill. Without a plan, you can trigger penalties, push yourself into higher brackets, or lose valuable credits, like the Affordable Care Act. With the right plan, you turn low-income years into an opportunity to do Roth conversions, which can lower your taxes over time.

Roth conversions, Rule of 55, 72(t), order of withdrawals

You have some useful tools available to you to make sure you don’t overpay in taxes. Broadly, those tools are:

• The accounts you use, like Roth, Traditional, HSA, and Taxable

• The order of withdrawals

• The special rules that unlock accounts.

For example, the Rule of 55 allows penalty-free 401(k) withdrawals if you separate from service in the year you turn 55. A 72(t) SEPP can create structured IRA income. Roth conversion ladders can move pretax balances into Roth while you are in lower brackets and make the deposits accessible within 5 years, even before age 59½.

Design the withdrawal plan to minimize your lifetime taxes. Aim at a target tax bracket, watch Medicare thresholds and ACA subsidy cliffs, and harvest gains or losses when it helps. The goal is to fund spending without penalties and reduce taxes. If you create a well thought out plan that leverages all the tools available to you, you will often save thousands or even tens of thousands.

Check your situation

• You understand and have a plan for which of these you will use and in what order:

  • Taxable brokerage

  • Roth conversion ladder to move pretax funds into Roth during low-income years

  • Harvest capital gains within lower brackets where possible

  • Employer plan Rule of 55 if leaving work in or after the year you turn 55

  • 72(t) Substantially Equal Periodic Payment (SEPP) plan for structured penalty-free IRA withdrawals

• Put your plan onto a map between your retirement date and when Required Minimum distributions start at age 73.

An example sequence might look like this

Remember that everyone’s situation will be different, and this is just one example. Notice there is an overlap where, in some years, this person is drawing from multiple accounts. That’s not unusual.

• Years 1 to 5: taxable brokerage plus dividends and interest. Drawing down taxable accounts first will reduce taxable gains and tax on dividends.

• Years 2 to 6: annual Roth conversions up to a chosen bracket. In retirement, our tax brackets are often lower, and Roth conversions allow us to utilize those lower brackets to mitigate future taxes.

• Year 5 onward: blend Roth, traditional IRA, and taxable to stay within target tax brackets.

10-Minute Readiness Quiz

Give yourself a score of 0 to 2 for each line.

0 = not done, 1 = partial, 2 = complete.

1. I can list my annual spending by major category.

2. I’ve included all new and lumpy costs in retirement in my annual spending.

3. I have any additional income in my withdrawal plan.

4. My portfolio funds cover my spending at 3.5 percent.

5. I hold 3 to 5 years of core spending in cash and short-term bonds.

6. I have a year-by-year plan for withdrawals and conversions up to RMD age.

7. I know exactly how I will get healthcare until 65 and what it costs.

8. I have a clear first year and weekly plan that excites me.

9. I have at least three experiences or goals per decade for how I want to spend my retirement.

10. My partner, if any, agrees with the plan.

17 to 20: You’re just about there! Close any of the final gaps and start getting excited! Keep reading educational materials like this blog. If you are stuck, consider getting some direct help to solidify your plan.

13 to 16: Dig into the areas that are not done or partial to move them more along. If you want help in any of these areas, consider getting help from a financial professional or further investing in your retirement financial education.

12 or below: Keep building. Focus on spending clarity and building your portfolio to cover your spending first. Consider getting help from a financial professional or investing in your retirement financial education. You don’t have to figure it all out on your own!

Want more resources or support?

If you want expert support to ensure you have a retirement plan that covers you from all angles, you can join the waitlist for our upcoming Freedom to Retire course. As a Founding Member, you’ll get access and bonuses that will only be available this one time.

I love following the blogger Root of Good. He was an early adopter of the early retirement movement. He is awesome because he publishes all his family’s finances every month, sharing exactly how much money he has and how he spends.

His family seems to live well while spending very little. They do extended travel, often on discount cruises, and have been all over the world since I've been following him. So kudos to him and his ability to hunt for discounts and use credit card points.

I find his numbers fascinating. They illustrate a challenge that many diligent savers and investors contend with.

Last year, he spent $40,000. That’s about $3,300 per month.

To be able to spend $40,000 per year, you need $1M invested (based on the 4% rule). That's close to what he had when he retired ten years ago.

And how much does he now have? $3.6M.

He could now literally triple his spending to $120,000 per year and still have some margin for safety.

He keeps spending so little that his portfolio is growing faster than he can spend it down.

I respect his ability to live so cheaply. But he really doesn’t need to. He has an extra $80,000 per year. I bet we can all think of ways we could spend that on something meaningful.

While he is an extreme example, he is not alone. I want to talk about why this happens and what we can do about it.

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The Psychology Behind Retirement Underspending: Why Retirees Hoard Money

Take a moment to think about the last time that you spent a large enough amount of money that your net worth went noticeably down. You may have bought a car, renovated a bathroom, or splurged on a big trip. How did it feel to spend like that?

Now think ahead. How would it feel to spend like that regularly for all the years of your retirement? How easy or hard would you find it?

Why Some Retirees Never Touch Their Savings

There’s a growing body of research that many retirees aren't drawing down their retirement portfolios. They are opting instead to live on Social Security, dividend income, and minimum required distributions.

After almost 20 years in retirement, most current retirees still have >80% of their pre-retirement savings, according to research from BlackRock. Consider that most retirement plans are designed to last 30 years1.

If these people plan to spend the remaining 80% in their last decade or so of retirement, they will find it difficult. Research also shows that spending tends to decline as we age, even when factoring in health care costs2.

Why does that matter for someone who is working?

In our working years, most of us are so focused on accumulating more money that we don't think about how we will eventually spend that money.

That can lead to over-saving, putting off our goals, and working more than we need to.

Loss Aversion and Mental Accounting: The Psychology of Retirement Spending

The evidence shows this pattern clearly. A study by Wolfe and Brazier found that most retirees match spending to income, much like they did when working and accumulating assets for retirement.

That’s because we view income from guaranteed sources like pensions, Social Security, and dividends like the income from our paychecks. Over the decades, we built a habit of spending only our income and not our savings.

We don't have the habit of selling shares or drawing down savings to fund our lifestyle.

Spending our savings and investments feels like taking a loss. And losses are more psychologically painful than wins. And that phenomenon seems to get larger in retirement. “Retirees display ‘hyper-loss-aversion’ and are up to five times more loss-averse than the average person.3”

That loss aversion is exacerbated by what psychologists call the Endowment Effect. Once wealth is "yours," we don’t want to give it up. We want to keep what we have.

Worrying about spending in retirement affects our decisions leading up to retirement and leads us to work longer than we need to. This happens so often that there’s a name for it: One-More-Year Syndrome. As in “I probably have enough now, but I’ll work just one more year to be sure.”

Practical Worries That Amplify Caution

Being cautious and conservative makes a lot of sense up to a point. Longevity uncertainty tops the list of concerns for many retirees - we don't know if we’ll live to 85 or 105. The uncertainty of outliving our savings makes us hold back on spending.

Healthcare and long-term care fears also loom large. Many retirees are holding a significant portion of their assets to self-insure against the risk of high medical, long-term care, and death expenses. That’s also good thinking as long as it’s not taken to extremes.

How to Overcome Retirement Spending Worry

There are a few ways you can prepare yourself for this challenge that just about every saver will have to contend with.

Die With Zero Mindset: Spending Money for Maximum Life Value

Having some mental models that help us shift our mindset can be helpful here. The best thinking I’ve seen in this area comes from Bill Perkins' book "Die with Zero" where he provides a few practical frameworks to help you spend more once you are able.

Perkins points out that many experiences have expiration dates. For every experience, there’s a curve of diminishing returns. A hiking trip through Patagonia is going to be totally different at age 45 than at 75. If we wait too long, we can miss out on experiences entirely.

He advocates for doing an exercise called "time bucketing.” You identify which experiences you want to do in which decades based on when they'll deliver maximum enjoyment for you. It’s like a bucket list organized by your age. Maybe you want to take your extended family on vacation in your 50s, do a cross-country RV trip in your 60s, and do quiet cruises in your 70s.

Thinking deeply about how you want to spend your money and having a concrete plan can make spending feel strategic and less like a loss.

Safe Withdrawal Rates and Bucket Strategies for Retirement Spending

Tactical spending money management strategies can also provide a practical approach to helping be comfortable spending down assets.

One strategy is dynamic spending. In dynamic spending, you set up guardrails to adjust your spending based on market performance. Set boundaries - for example, spend 3-5% of your portfolio annually, but never below $60k or above $100k. When markets go up, you can do more. You could book a nicer hotel, redo your bathroom, or splurge on an expensive restaurant. When markets are down, scale back.

Another strategy is often called money bucketing, where you set up separate buckets of money based on when you will need it. For example, keep a short-term bucket of 3-5 years of expenses in cash for immediate needs. Keep a medium-term bucket of bonds and income assets for mid-term goals. And keep a long-term bucket of stocks and growth investments. As one bucket empties, use the next one to refill it.

Are Annuities Worth It? Creating Your Personal Pension for Guaranteed Income

The last approach I want to share is the most controversial and least understood = Annuities. Even by financial advisors, annuities are not always well understood4.

In the simplest form, an annuity is a contract with an insurance company. You give them money up front, and they promise to return monthly payments to you in the future, often for the rest of your life. You can think about it like buying your own pension.

Annuities carry baggage in personal finance circles, often deservedly. Many products have high fees and confusing terms. Inflation can eat away at the income. The sheer variety makes comparison difficult. And you have to accept the opportunity cost of not investing that money elsewhere. All of these are significant downsides.

Annuities are often thought of as insurance for living an extra-long life. They are useful for that. But they have another overlooked upside. Research shows that good annuity products solve real psychological barriers that prevent us from underspending throughout retirement.

Retirees with guaranteed income sources spend roughly three-quarters of their income, while those relying on portfolios spend only two-thirds. Annuities can help us get over the psychological barriers that lead to underspending.

There are many different types of annuities with a range of options and technical specifics. A Single Premium Immediate Annuity (SPIA) starts income now and is usually the simplest. A Deferred Income Annuity starts later and hedges very old age. Fixed indexed annuities protect principal but cap upside. Variable annuities invest in funds and fees can be high, especially with riders.

When evaluating annuities, generally favor simple products. Consider the tax impact on you over the life of the annuity. Compare quotes from multiple insurers. The complexity can make working with a financial professional who is a fiduciary worthwhile to evaluate the options.

How Much Will You Need in Retirement?

If you are still in the saving stage of your journey, retirement may still feel off in the distant future. Recognizing these psychological barriers now can help you build a better financial plan and prevent working years you don’t have to, while reducing worry and anxiety. To summarize:

• Have a plan for what you want to do and experience.

• Use dynamic spending rules or bucket strategies to manage your funds.

• Consider guaranteed income sources like annuities to cover your baseline needs, freeing up portfolio money for discretionary spending.

Need help thinking through your specific situation? Have questions about any of these strategies or want to discuss how they apply to your goals? Email me at jamesdbaldwin@substack.com - I respond to every message and love helping people think through these decisions.