Student Question: If Fully Invested in Index Funds at the 2000 Peak, Can You Still Retire Safely?

Student question: [If you invest entirely in index funds and buy at the 2000 peak, can you still retire safely?] Easy Investment Chat CLEC Investment Channel. Post date: May 19, 2020

Reply:

To avoid consecutive market bubbles, this is why we recommend retirees prepare sufficient funds.

If you prepare $3 million and spend only 3% per year, meaning $90,000 per year, even if you invested at the 2000 peak and went through the 2000 and 2008 bubbles, you would still have enough assets to live on today.

Preparing enough retirement money is very important. Know the maximum amount you can spend per year. Even after the two harshest bubbles in past market history, your money still never runs out.

So we cannot know how the market will fluctuate, but preparing enough retirement money is necessary for retirees. Some people think their retirement money is enough when it is actually not. A sufficient retirement amount is annual expenses multiplied by 33. Buy U.S. indexes QQQ and SPY with these funds, and you can retire peacefully. No matter how the market fluctuates, the money will never run out. This is more insurance than any insurance product.

Even if you bought at the 2000 peak and went through the 2000 and 2008 bubbles, it has still grown 1.55 times so far, as shown in the attached chart. $3 million would have grown to $4.65 million. Annualized return is 4.8%, plus 1% dividends, so the annualized return is 5.8%.

So even with the worst buying timing and the worst 20-year market, you would still make a lot of money.

So do not keep thinking about other very stable investments. Buy index funds and hold them long term. This is the pure market return that gives you the safest and highest return.

Do not think too much about taxes before investing. If you have $1 million and invest in an index with 10% annualized return, after 20 years you will have $6.72 million. Even after deducting 40% tax, you still have $4.03 million. If you try to avoid tax and your return is only 5%, after 20 years your assets will be only $2.65 million. Think about it: one index investment leaves more than $4 million after tax, while the other avoids tax risk by investing in low-return targets and insurance, and even with no tax leaves only more than $2 million. Which is more worthwhile?

Seek high returns first, then think about whether there are ways to avoid tax issues. In U.S. investing, foreigners do not pay capital gains tax. U.S. tax residents have tax-free personal capital gains when income is within $50,000, and couples have tax-free capital gains when income is within $100,000. Amounts above that are separately taxed at 15% for capital gains. Estate tax has a $13 million exemption per person. These tax rates are already relatively low for wealthy people.

We should follow the advice of the richest person, Buffett: buy the U.S. index, hold long term, and become wealthy. Any investment advice about products, insurance, or financial products from people who still have to struggle for their own living is not worth trusting.