Why Bother Learning Rule #1?

Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week!
by Phil Town

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I can't reiterate this enough: The first reason you should bother to learn The Rule is that you can make 15 percent a year or more with very little risk, and that'll change the way you and your family live forever. You can't do that in real estate, in a mutual fund, or by randomly picking stocks out of a hat. The second reason is that when you invest by The Rule, it almost doesn't matter what amount of money you start with; in 20 years you can retire comfortably. Take a look at this chart:

Amount to start: $1,000
Monthly savings (additions to account): $300
Amount in 20 years: $470,000
Annual income in 20 years: $70,000

Amount to start: $10,000
Monthly savings (additions to account): $300
Amount in 20 years: $650,000
Annual income in 20 years: $97,000

Amount to start: $50,000
Monthly savings (additions to account): $300
Amount in 20 years: $1,450,000
Annual income in 20 years: $215,000

Similar to what we just went through in comparing Rule #1 returns to real estate returns, if you could retire with a permanent income of $70,000 a year 20 years from now, starting today with just $1,000, would you want to learn to do that? It's possible, as we've seen, if you accumulate money for 20 years and from then on consume only the gains, leaving the principle untouched. So if you start with $1,000 your principle is almost $500,000 in 20 years, and if you continue to make 15 percent a year, you have $70,000 a year to live on - without ever touching that half a million. If you start today with $50,000, your principle in 20 years will be $1.45 million, allowing you to live off a $215,000 (15 percent) gain each year. Think you can handle that kind of retirement? The key is to bank 15 percent or more returns a year from all that you've amassed over those initial 20 years (and beyond), which will beget ever higher returns. And if you don't think you have 20 working years left before your targeted retirement date, you can still generate a decent amount of money following The Rule, and make that money continue to work for you in retirement.

Meet Doug and Susan Connelly

Let's look at an overall picture of Rule #1 investing in the real world.

It's 2003. Doug and Susan Connelly are a couple in their late forties with two kids in high school. They live on a combined income of about $60,000 a year. Doug works as a salesman for a small business and Susan is a teacher in a private school. They listened to me speak at a motivational seminar and decided to learn The Rule.

What's driving them to invest on their own is the simple fact that they must if they want to have a decent retirement. At this point they have only $20,000 in an IRA, although their $200,000 home will be paid for by the time they're ready to retire. They think they can add about $5,000 a year pre-tax to their IRA. Here's the problem: They know that if they put the $20,000 plus $5,000 a year into a bond at 4 percent, they'll have only $190,000 to live on if they retire in 20 years. The $190,000 in their IRA at 4 percent will provide them with about $650 a month pre-tax. Add in Social Security and a paid-for house and they think they can squeeze by, but it isn't the life they want. They want to travel, eat in restaurants when they desire, and drive a car that won't break down. Doug likes to play golf, and it isn't getting any cheaper. Susan would love to go to New York and see a Broadway show once in a while, but at $100 a seat, dinner at $100 per person, and a hotel at $250 a night, she knows that kind of outing is too pricey on their probable income.

And even more important to Doug and Susan is being able to cover their medical bills. They know health care is getting more and more expensive and insurance doesn't cover it all. They read an article in Newsweek that featured interviews with retirees who were paying $600 a month out of pocket for medicine not covered by either their health insurance or Medicare. The Connellys don't want to burden their kids, and they don't want to lose everything they have or be forced to finish their lives in some government nursing home because of an unexpected health problem. They know they need more money.

They got excited about Rule #1 investing because of the math: If The Rule can get them a 15-percent-a-year return in their IRA where they don't pay tax, they'll have more than $840,000 in their IRA for retirement in 20 years instead of $190,000. Second, they can continue investing while retired, compounding the $840,000 at 15 percent. That'll give them more than $10,500 a month to live on pre-tax, plus Social Security, without touching the $840,000. That's significantly better than the $650 they can expect from a bond. They've decided it's well worth learning The Rule to secure that better life.

Retirement Strategy Chart:

Retirment Strategy: Playing it "safe"
Year 2005 retirement capital: $20,000 plus $5,000/year
Year 2025 retirement capital: $190,000
Year 2025 income to supplement Social Security: $7,700 annually

Retirement Strategy: Rule #1
Year 2005 retirement capital: $20,000 plus $5,000/year
Year 2025 retirement capital: $840,000
Year 2025 income to supplement Social Security: $126,000 annually

Copyright © 2006 by Phil Town.

About the Author

He isn't your typical Wall Street guy. An ex-Green Beret and former river guide, Phil Town is a self-made millionaire several times over and America's most widely sought-after speaker on investing. In his new book, RULE #1, he describes the Rule #1 personal financial strategy in detail so that anyone, even first-time investors,can get - and stay - rich.