Introduction

In 2018, Amazon founder Jeff Bezos became the richest person in history, according to one accounting. But in one important way, he is no different than you or me. Every year, he wants income for his personal use—just as we do. Granted, his ambitions are different than ours. Each year, Bezos funds his rocket company to the tune of one billion dollars. He buys big houses, hundreds of thousands of acres, even a nationally prominent newspaper—The Washington Post—and any other great stuff that catches his eye.

The first thing to know about his finances, however, is that he does not pay for any of those remarkable things by taking a big salary. His Amazon paycheck hasn’t budged from $81,840 a year for the last twenty years. No raises for the guy who started it all!

The second thing to know—and the crucial one, for the approach to funding retirement I present in this book—is that he is not getting that income by having Amazon declare a dividend for its shareholders, which he could easily do. If he did, every one of his shareholders—perhaps you are one of them—would get an Amazon dividend check each and every quarter. Because Bezos is by far Amazon’s largest shareholder, he would get by far the biggest dividend. But he did not take that path, for very sound reasons: It could have slowed the growth of his company and lowered the value of Amazon shares each time the company paid out dividends. It could also have imposed income on shareholders who had no desire for it—and collectively cost them millions in taxes. Instead, each and every year, Bezos directs Amazon to reinvest all its cash into new opportunities to grow the business. As the value of the business grows, the stock price tends to appreciate with it. That leaves Bezos in a great position. When he needs income, he simply sells shares of Amazon.

The graphic below shows the effect of his income strategy on his personal holdings over the past twenty years. He went from holding 117 million shares of Amazon to holding 57.5 million shares—a reduction of more than 50 percent. Yet at the same time, the value of his investment in Amazon went from $1.8 billion to over $100 billion.

Data source: SEC Edgar Database

To say this approach has worked well is a spectacular understatement. Look at the benefits he’s getting from this strategy:

1. He has total control over how much income he takes and when he takes it;
2. He pays less taxes than he would if he received the same income by dividends; and
3. Despite selling shares, his principal is growing exponentially.

You might ask, how is all this possible? The answer: The price of his stock is appreciating at a faster rate than he is selling shares. In 2001 Amazon sold for $15.56 a share. When trading closed on Dec. 31, 2019, it sold for $1,847 a share. The stock was appreciating at 28.5 percent per year. At the same time, Bezos was selling about 3.7 percent of his stock per year. So, in spite of selling billions of dollars in Amazon stock, the value of his investment in the company continues to grow and grow. His ownership percentage of the business goes down every year, but the value of his principal continues to go up.

Before I continue, let me assure you I am not writing this book for—or about—billionaires. But I am going to start with billionaires, because the principles they use to handle their finances can inform you about how to handle yours.

Not Just for Billionaires

Bezos is not the only billionaire to fund his lifestyle this way. In January of 2010, Larry Page and Sergei Brin, the founders of Google, disclosed plans to sell five million shares apiece over the following five years because like Amazon, Google pays no dividends. Let’s look at Larry Page as an example. You might think well, okay, he’s selling off about 17 percent of his holdings, so he may be reducing his principal and the value of his holdings. But let’s see what happened:

• Holdings as of January 2010: 29.1 million shares at $550 price per share, for a value of $16 billion
• Holdings as of January 2015: 24.1 million shares at $1,084 price per share, for a value of $26.1 billion

So what happened in these five years? First, Page generated roughly $3.5 billion in income by selling 3.4 percent of his stock per year. Second, the value of his principal increased by 63 percent, adding an additional $10 billion to his net worth! He didn’t lose ground, he gained it. And just like Bezos, he’s getting the income he needs simply by selling shares.

Mark Benioff, the founder of Salesforce, takes the same approach, with much the same result. Salesforce has never paid a dividend. When he needs income, he sells shares of his company. But he’s selling from growth, and his total holdings are worth more over time because, you guessed it, his stock price is appreciating faster than he is selling shares. He takes income when he needs it, keeps his taxes down versus taking dividends—and indulges his interests. In 2018, Benioff bought Time magazine for $190 million with cash from proceeds of stock sales—the same way Bezos laid down $250 million to buy the Washington Post five years before.

These billionaires practice taking “income on demand.” If you are nearing retirement, or are already there, and if a combination of good work and good fortune has left you with assets of $1 million or more, you can do the same in your retirement—sell from the appreciation in the value of your assets to get income only when you want it. The power of this approach isn’t limited to a handful of billionaires. You can apply the same principle that’s worked for them to your own portfolio and receive the same benefits. The dollar values these billionaires are taking may be far larger than yours, but the principle of “income on demand” is the same.

This is not a new approach, and I did not invent it. Nor is it a radical strategy. And yet it is not commonly followed. The status quo, the road more often taken, is a dividend-based strategy: focusing on investments that pay dividends now and are expected to continue increasing those dividends in the future. While a dividend-based strategy may be easier for financial advisors to sell to investors, that doesn’t mean it will deliver better results. It’s like the tale of the fisherman who goes to the local store for bait. The fisherman notices a glittery lure for sale. “Hey mister,” he asks the shopkeeper, “do fish really go for this lure?” The shopkeeper looks up at the fisherman and says, “Mister, I don’t sell to fish.”

In the pages to come, I will demonstrate the drawbacks of the dividend-based approach and the strengths of the total-return strategy I advocate—one that generates returns more from price appreciation than from dividend income.

I will also unfold a way of thinking—and a series of decisions—that can set you up for success with an income-on-demand strategy. My goal is to offer three primary benefits:

First, help you earn more money for yourself and your beneficiaries. I will illustrate how investing your assets in index funds can help minimize the fees you pay and better align your returns with the overall market. This is important! While the overall market (as reflected in the S&P 500) over the past fifty years has returned roughly 10 percent per year with dividends reinvested, investors as a whole have not received that 10 percent due to fees, manager underperformance, and unnecessary taxes.

Second, reduce your tax bill. The income-on-demand strategy may significantly reduce your tax bill compared to the traditional dividends-based strategy. I will also demonstrate how positioning your assets in the right way and drawing on them in the right order can help minimize your taxes—potentially saving up to 1.85 percent of your portfolio value per year.

Third, provide you with peace of mind. I will help you gain confidence in your future through creating a financial plan. I will also help you overcome fear and anxiety about market downturns by sharing four key strategies for maintaining peace of mind through all markets.

From Fairway to Finance

I don’t come from a family of financiers. I graduated from a Jesuit high school, Brophy College Prep, in Phoenix, Arizona, and went on to attend a Jesuit college, Creighton University in Omaha, Nebraska. I mention my education not because it made me a financial advisor—I graduated from Creighton with a degree in philosophy. Instead, I mention it because my philosophy degree taught me how to think—specifically about the power of “why” questions that other people don’t ask.

That habit of thinking didn’t lead me directly into finance either. When I graduated from Creighton in 2010, the economy was in the tank. We were mired in the midst of the Great Recession, and I needed a job.

One day my father phoned with a suggestion. “JD,” he said—my middle name is David—“I just took this trip to a golf resort called Bandon Dunes. That might be a great place to work.” My dad had taught me the game of golf as I grew up. I took his advice. I made the call—and they hired me as a caddy.

The Bandon Dunes Golf Resort sits on a rugged stretch of the southern coast of Oregon that you might mistake for Scotland:...