How to Make Your Retirement Assets Last
A.K.A., how to lose at the game of money.
There is no doubt about it; America is facing a retirement crisis. As The Wall Street Journal reports, "Recent calculations from the Employee Benefit Research Institute show that roughly 44% of those born between 1948 and 1978—baby boomers and Generation X—won't have adequate retirement income..."
To put that into perspective, that's over 50 million people who don't have enough money to retire.
At the worst, that's over 50 million people who will either have to go back to work, rely on the charity of friends, or hope there's enough money for government handouts and food stamps.
At the best, that's over 50 million people who will drastically have to alter their standard of living in order to squeeze every last bit out of their retirement money.
For most people, no matter how they get there, the reality is that they will be poorer when they retire than when they were working. Given this reality, there's no shortage of "expert" articles on how to stretch your money once you retire. Case in point is the WSJ article mentioned above by Anna Prior entitled, "Making Your Retirement Assets Last."
In the article, Anna shares six points to make your retirement assets last. I thought it'd be helpful to go through and discuss each one from a Rich Dad perspective—because, as you know, the Rich Dad perspective is quite different than the conventional perspective.
Anna's point #1: Dedicate dollars for fixed expenses
"Many planners suggest putting funds to cover three to five years' worth of expenses into safe and liquid vehicles so the retiree has cash on hand, even if the market drops. ’That way you don't have to liquidate in a down environment,’ says Marty Leclerc, portfolio manager for Barrack Yard Advisors in Bryn Mawr, Pa," writes Anna.
Translation: savers are winners.
Rich Dad perspective: savers are losers.
What this piece of advice fails to take into account is that the dollar is dying. What happens if inflation spikes and you're stuck holding 3 to 5 years worth of cash? Your savings become worthless and you lose.
Rather than save cash, I like to keep my liquidity in assets that can be quickly liquefied and that hedge against inflation, not lose value with it. For me, that's gold, silver and oil. For you...you need to do your research and figure out what works best.
Anna's point #2: watch out for longevity risk
Anna suggests long-term care and/or longevity insurance.
"Some financial advisers say retirees should consider long-term-care insurance as a hedge against the future cost of nursing-home care, which has the potential to decimate even hefty nest eggs," and "’Longevity insurance is similar to an immediate annuity in that it allows holders to take a lump sum and convert it into a lifelong income stream. It is different in that it requires policyholders to pick a date in the future to start getting that income, typically at age 85,’ says Christopher Jones, chief investment officer at investment adviser Financial Engines Inc."
Translation: invest in your poor health and old age.
Rich Dad perspective: invest for cash flow.
In Anna’s scenarios, you must either be in such poor health that you can't take care of yourself or be so old that your meager savings have run out in order to reap the benefits of your investments.
Rather than hand your money over to an insurance company or stock it away at a near zero return for an old-age annuity, begin now to invest in assets that will provide the cash flow you need to cover your expenses as you grow older. This is smart because it makes your money work for you during your retirement. You get cash, and you keep your assets.
Anna's point #3: don't be too conservative—bonds aren't always your friends
"Advisers warn against falling victim to traditional wisdom: Portfolio protection through conservative investing in retirement could actually do more harm than good. With bonds not generating enough income, 'the math is scary,' says Mr. Leclerc. 'Retirees need a lot more money than they ever thought they would to produce simple income'... Some advisers suggest intermediate-term bond funds as a way to help mitigate interest-rate risk, while still getting more yield than what's available from short-term bond funds."
Translation: bonds are bad. Invest in different types of bonds.
Rich Dad perspective: invest in a truly diversified portfolio.
Anna’s perspective assumes that true diversification means spreading your money around to different types of paper assets. The only problem is that when you do that, you're not really diversified because you're moving your money around in only one asset-class. True diversification involves investing in as many of the four asset classes as possible: paper, real estate, commodities, and business.
As an investor, you should be in all four asset classes, and you should be specializing in one or two. Most people are only invested in paper assets, and they have no knowledge about what they’re investing in, so they listen to financial planners and hold a basket of paper assets for the long term, hoping the market goes up.
Anna's point #4: don't forget about inflation
”To protect themselves, retirees should add to their portfolios multiple types of assets that can keep up with or even beat rising costs. Still, many advisers maintain that the best way to combat inflation in a well-diversified portfolio is by investing in equities. 'It's the only asset class that will give them returns greater than inflation,' Mr. Gibney says."
Translation: "diversify" your portfolio by investing in other paper assets.
Rich Dad perspective: Again, invest in a truly diversified portfolio.
Mr. Gibney says that equities are "the only asset class" that can beat inflation. That's news to the ultra rich who've made their fortunes through assets that beat inflation in ways that equities can only dream of, such as real estate, commodities and more.
What Mr. Gibney really means is that equities are the only "safe" investment that can beat inflation. Of course, one can feel safe when treading water, but when you have to do that for more than a decade, you risk drowning. I'd rather be making headway.
Anna's point #5: use alternatives to help manage volatility
"To iron out some of the big ups and downs—and therefore quell some of the urges to swing too far to 'safety'—some advisers recommend constructing a diverse portfolio that includes a slice of alternative investments, including nontraded REITs, which are similar to traditional REITs but don't trade on exchanges, managed futures, which are futures positions entered into by professional money managers on behalf of investors, and long/short funds."
Translation: diversify by investing in "alternative" paper investments.
Rich Dad perspective: Again, invest in a truly diversified portfolio.
This is now the third point in a row that recommends moving your money into diverse paper options without a mention of other, asset classes. You'd think these "advisors" were getting a commission or something.
Anna's point #6: limit the tax man's bite
"Be aware that taking money out of a retirement account or selling securities at a sizable taxable gain—rather than pulling cash from a certificate of deposit, money-market fund, savings or checking account—could result in higher taxes on Social Security benefits if it bumps income above a certain threshold."
Translation: stay poor and lower your standard of living so you don't get taxed on your government handout.
Rich Dad perspective: Use taxes to your advantage.
The rich know how to invest in ways to pay little-to-nothing in taxes. It takes financial intelligence to invest this way. So, rather than spend your time figuring out how to move your money in a way that keeps you poor to avoid taxes, put in the time and effort to learn how to invest your money in a way that makes you rich and decreases your tax burden.
In the end, Anna's advice is good advice...if you're financially ignorant and want to be poor.
If you want to be rich, you need to put the Rich Dad perspectives into practice.
And to put into practice the Rich Dad way, you need financial education. And financial education the best investment you'll ever make for your retirement.
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