Financial (Il)literacy Month

Financial (Il)literacy Month

Welcome to the new Rich Dad blog. Each Tuesday, I’ll write a new blog post here touching on events of the week that interest me.

For this first post, I’m going to talk about something near and dear to my heart—financial literacy…or in this case, financial illiteracy.

I got a good chuckle out of the fact that that April is Financial Literacy month. As expected the big banks and fat-cat financial firms on Wall Street have some advice for you to prepare for retirement in honor of Financial Literacy month. Seems like everywhere I turn, I’m running into a financial article that’s celebrating the conventional wisdom of go to school, get a good job, buy a house, and invest in a diversified portfolio of stocks and bonds.

Take for instance an article on, “6 Biggest Retirement Mistakes”. The “mistakes” listed read like a page out of the big bank playbook for taking your money. Here they are in order, followed by my take:

Blowing your retirement savings early

Article’s take: Don’t take your money out of your 401(k) early, “A 401(k) distribution of $5,000 that's taken at age 25 can be worth about $75,000 assuming it earns 7% over the next 40 years.”

My take: This is pure lunacy. I’m howling with laughter as I read “assuming it earns 7% over the next 40 years”. How can they write that after the market recently lost nearly 50% of its value? Do you think the people holding on for an average return of 7% care about averages now? Even with the recent recovery, the market is still down 22% from its all-time high.

Averages don’t matter. Cycles do. Putting faith in averages is for people who are average or worse. And playing the stock market for your retirement is as good as gambling. You’re placing your bets on a good cycle, but what happens if you bet wrong? You get wiped out.

Turning down free money

Article’s take: Not contributing to your 401(k) is just like turning down free money because you’re not taking advantage of your employer’s match.

My take: How is money that should be yours to begin with free? The idea that your employer is giving you free money is just stupid. If you weren’t forced to use poor investing tools like a 401(k), that money would be part of what they would pay you. It’s your money. They hope you won’t put money into your 401(k) so that they can pocket your money as their own. Not to mention the article doesn’t talk to the fact that to earn your match, you must work as an employee for many, many years to be vested. So you better hope they don’t fire you before you’ve vested.

Saving without a goal

Article’s take: You need to find the magic number for your retirement. Then you need to set aside enough money every month to meet that retirement amount.

My take: Planning on living your retirement on a savings number is risky at best and financially ignorant at worst. You can’t possibly predict the amount of money you’ll need for retirement because you can’t know what you’ll need the money for—and you don’t know what the economy and the dollar will be like in the future. This is no more apparent than by looking at the next point in the article.

Forgetting about health care costs

Article’s take: Many people don’t take into account the cost of health care in retirement because they wrongly assume Medicare and Social Security will provide for things like retirement homes and in-home care. The average cost of healthcare in retirement could be $250,000.

My take: What this author doesn’t tell you is that the $250,000 number he throws out is up 56% from 2002 numbers! Here’s the quote from the article he linked to for the amount: “If you're retiring this year, you will need $250,000 in savings to cover your family's medical expenses during your retirement, Fidelity Investments announced on Thursday. That's up just more than 4% over last year and a 56% spike compared to 2002, when Fidelity first issued its Retiree Health Care Costs Estimate.”

How are you supposed to plan a number for your retirement when health costs and other costs can skyrocket in a short amount of time? If I had picked a retirement number based on the health costs from 2002, I’d be in serious trouble today. Planning a “magic” number is like believing in fairy tales. It doesn’t take into account the harsh reality of inflation.

Ignoring your investments

Article’s take: Keep an eye on your portfolio and continually rebalance it.

My take: How can you rebalance a portfolio that’s made up of one asset class? The reality is that most people are invested almost exclusively in paper assets—the worst kind of investments. Paper assets are for the financially ignorant because they require no financial knowledge. The idea that rebalancing a portfolio stuffed with stocks, bonds, and mutual funds is possible is a myth. Why? Because you have no real control over the investments. You don’t know what’s going on in the boardrooms of those companies. You’re an outsider. And by the time you make an adjustment, the insiders have long ago made their moves and skimmed most of the profits.

Waiting to start saving

Article’s take: The earlier you start saving, and the longer you save, the better off you’ll be. “For proof, look at the following example: Let's say a 25 year-old begins saving $3,000 a year in a tax-deferred retirement account, but stops after only 10 years. Over the next 40 years, he could expect that $30,000 investment to grow to more than $472,000, assuming an 8% return.”

My take: Savers are losers because the dollar is toast. My poor dad used to say, “A dollar saved is a dollar earned.” The problem is he didn’t know his monetary history. In 1971 Nixon changed the rules of money by taking the dollar off the gold standard. When he did that, the dollar ceased being money and became currency. Throughout time, all currencies have eventually crashed to zero. They have no value. Betting on the dollar is betting on currency—and that’s betting against history.

My rich dad understood monetary history. He taught me about the importance of understanding that our money is fiat money—money created out of thin air. He taught me that all fiat money fails and that smart investors understand that currency, just like an electric current, must move from one point to another or it dies. Putting your dollars in the bank is putting them out to die.

Also, did you notice that the author changed the rate of return from 7% at the beginning of the article to 8% at the end? That’s what I call fuzzy math.

If you’ve been around Rich Dad for long, you know that the rules of money in this CNN article are the old rules of money, something I talk about in my latest book, Conspiracy of the Rich: The 8 New Rules of Money. In order to truly be prepared for your financial future, you need to stop listening to the fat cats on Wall Street and the bank executives who want your money in their banks and mutual funds. You need to stop blindly following the financial lunacy being spewed during Financial (Il)literacy month.

Instead, invest in your financial IQ. Learn to take control of your own investments. And learn the new rules of money.

See you next week.

Original publish date: April 12, 2010