Are You Ready for Retirement?

Are You Ready for Retirement?

This week's weekend edition of The Wall Street Journal featured an article entitled "Boomers Find 401(k) Plans Come Up Short". Here was the second line in the article:

The 401(k) generation is beginning to retire, and it isn't a pretty sight.

Here are some interesting quotes from the article that explain why retirement for the boomers is so ugly:

"The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement."

As I wrote in Conspiracy of the Rich: The 8 New Rules of Money the government changed the rules of retirement in 1974 with the passage of the Employee Retirement Income Security Act of 1974 (ERISA). This eventually became referred to as the 401(k) act because it paved the way for that retirement investment vehicle.

The problem with the 401(k) is that it requires people with no financial education to be in charge of their retirement investing. Because people had no financial education, a whole new industry was created—financial planning. The problem with financial planners is that they're sales people, not investors. They push the products of their employers, usually paper assets.

The 401(k) is a defined contribution plan (DC), meaning that you put money into it for your retirement. Prior to that, most people had defined benefit plans (DB), meaning your employer paid for your retirement and your healthcare for the rest of your life.

While the rules of retirement changed in 1974, most people's mindset didn't. They still played by the old rules of money, choosing to save money for retirement, thinking putting a little aside in a 401(k) would be enough. Unfortunately, they did not understand the powers of inflation, taxes, and debt; and how market works. Many people have lost a lot of money in their 401(k) plans because they had no control over their money, giving it to financial planners, former teachers, plumbers, waiters, etc., who became sales people for the financial industry.

Today, the result of this financial ignorance is a devastating realization that retirement is not an option—at least not at the standard of living many expect.

"Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings…Facing shortfalls, many people are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making sacrifices they never imagined."

We have a very real retirement crisis happening right now. If people don't have enough savings to retire even with a 401(k), Social Security, a pension, and savings, they are more financially unintelligent that I imagined.

The real problem is that people live paycheck to paycheck, buying more liabilities as their earned income goes up. Though they know the old advice of live below their means, people do not follow it. Instead, they have so many liabilities that they cannot retire, and are forced to live below their means, making cuts they never hoped to make and selling properties they thought were assets but found out the hard way were liabilities.

As you know, Kim and I don't believe in living below our means. We think that crushes our spirit. Instead, we buy assets that pay for our liabilities. The difference between Kim and I, and the people struggling at retirement is that those people play by the old rules of money, relying on savings and 401(k)s for retirement. The problem is that people are living longer, healthcare is more expensive, and those savings are not enough—yet, they have no other way to have money come in besides going back to work and making cuts in expenses.

Kim and I, on the other hand, invest in assets that cash flow like real estate, oil wells, business, and more. Each month, cash pours into our accounts from these investments, covering our expenses. We never say, "We can't afford that." We always ask, "How can we afford that?" We then find an investment that will pay for our standard of living. The difference is our money works for us, not the other way around.

"In the stock-market collapses of 2000-2002 and 2007-2009, many people were over-invested in stocks. Some bailed out after the market collapse, suffering on the way down and then missing the rebound."

This is a tragedy. As I mentioned earlier, ERISA forced people who had no financial education to become investors. Then con-men and crooks swooped in, taking the form of trusted financial advisors, and sold people on the stock market. The problem is that these financial advisors and planners are not investors either; they are employees of the financial industry. They push their company's products.

During the booms, many planners pushed people into the stock market, collecting fees and commissions. People poured their money into the market at the peak, turning it over to the "experts". Then the market crashed. "Invest for the long term, hold steady," the financial planners said. Finally, in a panic, as the market collapsed, people moved their money into bonds and other "safe" investments.

Then, leery of the stock market, they watched helplessly as the market climbed back up again and bonds paid some of the lowest returns in history. The problem is that people were investing for capital gains, not cash flow. They were hoping to time the market right and cash in on rising prices. That is not investing. It's trading.

Now, at retirement age, these amateur investors who invested for capital gains, hoping they could time the market with no education, are forced to keep working, having lost all their money.

"Recently, Vanguard has begun urging people to contribute 12% to 15%, including employer contribution, because of the stock market's weak returns and uncertainty about the future of Social Security and Medicare."

This is financial insanity. As you know the definition of insanity is doing the same thing over and over again and expecting different results. The peak of financial ignorance would be to put more money into your 401(k) just because Vanguard tells you to, especially since by their own words the stock market has weak returns.

A more financially intelligent move would be to invest in your financial education, take back control of your money instead of giving it over to Vangaurd and other mutual fund companies who collect fees whether the fund goes up or down, and begin investing in assets that produce cash flow.

Unfortunately, for many people it is too late. They do not have the time to build their ark, and I'm afraid that more and more people from my generation, the boomers, will have to work well into their 70s and 80s, sell their houses and cars, and move in with their kids.

So, the question today is: Are you ready for retirement?

Now is the time to begin building your financial ark to survive the coming retirement storm.

P.S. - I'm finishing up the final edits on my new book Unfair Advantage. In that book, I go into great detail, using real-world examples, on how Kim and I print our own money and how we build our financial ark for retirement. Keep on the look out for that book.

Original publish date: February 22, 2011

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