Where to get an 8% annual return

Dear Liz: You suggest that wealth can be accumulated by regular savings and earning an average rate of return of 8%. Where can a safe 8% return be found?

Answer: The same place leprechauns hide their gold.

There is no truly “safe” investment. Investments that have no risk of principal loss, such as federally-insured bank accounts, typically offer such low returns that they expose you to “inflation risk” — in other words, your deposit’s buying power is eroded over time.

If you want to stay ahead of inflation over the long run, you need some exposure to the stock market because that’s the only investment class that’s consistently outperformed inflation over time. According to Ibbotson Associates, the stock market has returned at least 8% on average annually in every 30-year period, starting in 1928. So even if you invested on the eve of the Great Depression, you could have knocked out an 8% return if you just hung on long enough.

Want to get rich? Read these books

Dear Liz: I’m doing all the right things: accumulating an emergency fund, contributing to retirement funds and paying down the mortgage. I currently save about $12,000 of my $90,000 annual salary. Beyond this, how do I take the right steps to large wealth accumulation, as in $3 million to $5 million?

Answer: You’re already on your way. If you bump up your retirement contributions by at least the rate of inflation each year and earn an 8% average annual return over time, you should hit $3 million in about 35 years.

If you want to accumulate your fortune faster, you should save more, achieve a better-than-average investment return, or both.

If you’re serious about accumulating wealth, get a copy of “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko. The authors outline how people really get rich in the U.S.: by living well below their means and making saving and investing a priority. Many of them also have their own businesses. The risk of failure for small businesses is high, but those who succeed keep more of the upside than those who work for someone else.

Stanley and Danko repeatedly make the point that the millionaires they studied were more interested in building wealth than in displaying high-status trappings. They tend not to drive fancy cars, wear expensive watches or spend a fortune on clothes. In his most recent book, “Stop Acting Rich,” Stanley makes the point that millionaires also tend to spend modestly on homes: Few have more than one, and most choose houses and neighborhoods that are easily affordable, rather than a strain on their finances.

These books can provide you a road map for your own path to wealth and provide inspiration for the journey.

Keep track of grace periods

Dear Liz: If I’m given a 10-day grace period for making a payment and pay the bill on the last day of the grace period, will it still be treated as an on-time payment on my credit reports?

Answer: Typically, yes. In fact, most creditors won’t report you to the credit bureaus as overdue until your payment is 30 days or more overdue.

That’s not to say you should treat due dates casually. Missing the due date (or the end of the grace period, if that’s different) will typically trigger a late fee and could lead to higher interest rates.

You would be smart to make sure your payment reaches your creditor a day or two before the end of the grace period. Using electronic payments rather than the mail can help you time your transactions more precisely. Online or automatic payments also leave an electronic trail that can prove when you paid.

Uninhabitable apartment allows you to break the lease

Dear Liz: Our apartment was infested with bugs, had a leaky bathroom faucet that was never fixed after numerous requests, and then our ceiling fell in because of a roof leak that was not repaired. We had to make other living arrangements before vacating the apartment, and now they are saying we’re responsible for $1,800 for terminating our lease early.

Answer: In every state except Arkansas, the law requires landlords to provide “fit and habitable” housing, said attorney Janet Portman, the managing editor of legal self-help publisher Nolo and author of “Every Tenant’s Legal Guide.” “Fit and habitable” typically means the housing is waterproof and free from vermin infestation. The housing also must have heat, lights, water, functional plumbing and a working kitchen.

If the housing isn’t fit and habitable, you legally can break the lease if you didn’t cause the problem yourself and you gave the landlord a reasonable amount of time to fix the problems.

Fixed means fixed, by the way; you can break the lease if your apartment is still infested, even if the landlord has treated the infestation repeatedly, Portman said. You can consult Portman’s book and a local tenants’ rights organization for more information.

Guaranteeing income for life is no easy feat

Dear Liz: I have a brother-in-law who has a very hard time finding employment because he has frequent seizures. He is 59 and needs about $40,000 a year for living expenses, including high health insurance premiums because of his condition. Thanks to a recent inheritance and some good investing when he was younger, he has about $1.3 million in assets. However, he has little chance for further meaningful employment, so he needs to live off of his investments. What is the best way for him to stretch his assets? Would a fixed annuity be a wise thing for him to invest in? Would a mix of an annuity and regular investments be a better bet? Or should he look at just a mix of fixed income and equity investments?

Answer: Any of those options could work, or could be a disaster, depending on the details of his financial situation.

A fixed annuity, for example, could give him a monthly check for life, with inflation adjustments if he chose, but he would have to commit a big chunk of his available funds to get the kind of return he needs. He also would be buying the annuity when interest rates are quite low, which means he would get a smaller payment than if he bought when rates were higher.

Investing outside an annuity would give him more flexibility, but no guarantee he’d get the kinds of returns he would need to last him for life.

His best bet is to consult with a fee-only financial planner who can review his options and suggest the best course for him. He can get referrals to fee-only planners from the National Assn. of Personal Financial Advisors at www.napfa.org or to fee-only planners who charge by the hour from Garrett Planning Network at www.garrettplanningnetwork.com.