The Game Plan
Save at least 15% of your salary from age 25 into a 401(k) plan, an IRA, or a taxable account. Put equal amounts of that 15% into three buckets:
- A US total stock market index fund
- An international total stock market index fund
- A US total bond market index fund
Because the three funds will grow at different rates, rebalance them once per year. Prefer to do this in a tax-advantaged account to avoid capital gains taxes.
Social Security will be there when you retire. Expect around 75% of your promised benefit. However, the conventional “defined benefit” pension plan, which provides a steady and reliable stream of income for as long as you live, is disappearing.
Social Security Quick Calculator . For a $150K salary, retiring at 62 has a monthly benefit of $2,640 in today’s dollars. That’s not a lot.
Furthermore, non-citizens living outside the US have additional conditions, e.g., benefits stop after the 6th calendar month outside the US.
Hurdle #1: If you can’t save, you’ll die poor
No matter how much debt you have, always max out the employer match on your contribution retirement plan, since the “return” on this money is usually between 50% and 100% – higher than even the worst credit card interest rates.
The long-term investment nominal return on your retirement savings will be ~5%. Eliminate your debt starting with the highest interest first, e.g. credit card debt, car loan. Educational loans tend to have rates higher than 5%, so tackle them too.
Income-driven payment plans that forgive after 10 years in public/non-profit service make this more nuanced than “if your student loans' interest rates are higher than 5%, pay them off.” See Repaying Student Loans .
When thinking about retirement, use “real” rates (adjusted for inflation), instead of “nominal” rates (the value shown in your brokerage statements). Assuming that your salary increases at least by the inflation rate, your +15% contribution should increase in dollar value every year.
The Federal Reserve uses monetary policy to keep inflation at/near the annual target of 2%. Over the last 5 years:
| Year | Inflation rate YOY | Federal funds rate | GDP growth | Events |
|---|---|---|---|---|
| 2019 | 2.30% | 1.75% | 2.2% | |
| 2020 | 1.40% | 0.25% | -3.4% | COVID-19 |
| 2021 | 7.00% | 0.25% | 5.9% | COVID-19 |
| 2022 | 6.50% | 4.50% | -2.1% | Russia invades Ukraine |
| 2023 | 3.40% | 5.50% | +4.9% as of Q3 2023 | Fed raised rates |
Kenya’s inflation rate averaged 7.577% from 2005 to 2023. The Central Bank of Kenya targets an inflation rate of ~5%.
A plumber making $100k per year was far more likely to be a millionaire than an attorney with the same income, because the latter’s peer group was far harder to keep up with.
Hurdle #2: Understand finance clearly
From the investors' perspective, an ownership stake (a stock) is much riskier than a loan to your business (a bond), and so the stock deserves a higher expected return than a bond. Bond ownership has no upside beyond the full repayment of interest and principal, so it needs to be safe; stocks need to have their potentially unlimited upside to entice investors who must endure their high risk.
A company’s stock holders, and not the bond holders, get to vote in the company’s affairs. For this reason, corporate bonds are in general a bad deal; confine your bond holdings to government offerings.
Stocks are risky. During the Great Depression, stocks lost, on average, ~90% of their value. In the 2007/08 financial crisis, they lost ~60%.
Kinds of investors: those who don’t know where the market is headed; those who don’t know that they don’t know; those who know they don’t know, but whose livelihoods depend on appearing to know.
Estimating long-term returns is more tractable. A 30-year inflation-protected security (TIPS) currently has a real 1.4% yield and return of real principal, both of which rise over time with inflation. Assuming the real return of stocks is the sum of current dividend yield and the dividend growth rate, domestic stocks have 2% + 1.5% = 3.5%, and foreign stocks have 3% + 1.5% = 4.5%.
Hurdle #3: Those who ignore financial history are condemned to repeat it
Biggest profits are made by buying at the lowest prices, and stocks only get cheap when bad economic news abounds; therefore, the highest returns are earned by buying when the economy is in the toilet, and vice versa.
This is pretty regressive in terms of socio-economics. During tough times, only the wealthy can afford to invest and thus gain a lot.
The ability to recognize excessive market optimism or pessimism doesn’t mean that you can “time” the market. Rather, it should be an emotional stabilizer against buying high and selling low.
Maintaining a fixed allocation, e.g., the 33/33/33 portfolio, is an effective form of market timing since you end up buying more stocks after significant market falls, and selling some stocks after prolonged and dramatic price rises.
Hurdle #4: We have met the enemy and he is us
People tend to be comically overconfident, e.g., ~80% of us believe that we are above average drivers. We tend to extrapolate the recent past indefinitely into the future, e.g., inflation will never occur again.
Most importantly, we tend to perceive relationships where none exist. 95% of what happens in finance is random noise, yet investors constantly convince themselves that they see patterns in market activity.
Hurdle #5: The financial services industry wants to make you poor and stupid
They exist to make profits for their owners, not you. Many stock brokers call themselves “advisors” and are not required to act as fiduciaries. Fund company revenues flow proportionately from assets under management, not on your returns, though the linkage between the two is tighter in a mutual fund.
The “expense ration” listed in the prospectus is often exceeded by the “transactional costs”, i.e., adverse prices changes that result from moving around millions of shares.
References
- If You Can: How Millennials Can Get Rich Slowly. William J. Bernstein. efficientfrontier.com . 2014. ISBN: 978-0988780330 . Accessed Jan 23, 2024.
- U.S. Inflation Rate by Year: 1929–2023. www.investopedia.com . Accessed Jan 23, 2024.
- Inflation Rates | CBK. www.centralbank.go.ke . Accessed Jan 23, 2024.
- Thirtieth Bi-Annual Report of the Monetary Policy Committee. www.centralbank.go.ke . 2023. Accessed Jan 23, 2024.
- FZROX - Fidelity ZERO ® Total Market Index Fund | Fidelity Investments. fundresearch.fidelity.com . Accessed Jan 3, 2026.
- FXAIX - Fidelity ® 500 Index Fund | Fidelity Investments. fundresearch.fidelity.com . Accessed Jan 3, 2026.
- SSA Payments Outside US | International Programs | SSA. www.ssa.gov . Accessed Jan 3, 2026.
A lot of the conventional advice mentions S&P 500 instead of a total stock market index. Maybe that’s because of the brand name? Fidelity’s total stock market index has netted 13.80% in its lifetime compared to its S&P 500 tracker’s 14.81% .