Section IV - Lesson 1
Investment Account For Immediate Needs
The purpose of your investment account will be to provide for your more immediate needs, both expected and unexpected. Some of the former could include money for a down payment on a home, for college expenses, and for wedding expenses for our kids. Some of the latter could include money for emergencies of all sorts, and for longer-term problems such as unemployment. And let’s not forget that much of our regular investment money will still be available to us, once we retire, to go along with our tax-deferred retirement money.
Let’s take a closer look at how wealth will build in this account, and how you’ll use it. Between now and the time you retire you’ll be automatically investing 6% of earnings into this account, and your ever increasing nest egg will be growing, over time, at an average rate of 10.5% per year. All of your dividends and capital gains in this account will be reinvested and will add to your accumulation.
Depending on your present age, you’ll be accumulating money for 20 to 30 years or so of your working life before you’re ready to retire. During this accumulation period, you’ll be tapping this account for money when you need it, and leaving your retirement account alone. If you can show even an average amount of discipline and restraint during the early years, you should have ample money available by the time the kids are ready for college, and still have plenty left over for retirement.
As I’m sure you've come to realize by now, the accumulation of wealth is an ongoing process. It doesn’t stop when you withdraw some money for college, or even when you start a regular, monthly withdrawal program to cover living expenses in retirement. Your pool of money absorbs the hits and keeps on growing. Properly managed, your accumulation grows even faster than you can take it out.
The way that you’ll manage your regular investment account will be quite different from the way your parents and grandparents were taught to manage money. You'll be invested in market index funds, which tend to appreciate in step with inflation.
These broadly diversified no-load products, which were not available until the 1970’s, are ideally suited to your purpose. Not only do they allow you to conveniently and effectively accumulate wealth while you’re working for a living, but they also allow you to conveniently withdraw your wealth whenever you’re ready to do so.
At retirement you’ll most likely stop contributing to these accounts and start withdrawal programs. You’ll simply instruct your mutual fund company to send you a check each month from your regular money account or IRA account, or both.
You’ll tell them how much, and you can raise or lower this figure, whenever and as often as you need to. Whenever you request money, the fund will sell however many shares are required of your market index fund and send you a check. There should never, ever be any fees for buying or selling your S&P 500 Index fund shares.
The really good news is that unless you set your monthly withdrawal amount unreasonably high, you should be able to draw on your accumulations for thirty years or more. Even at an 8% or 9% withdrawal rate, your balance could actually continue to grow for many years to come.
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