Sit back, relax, take life easy…really?
Before we drill down into HOW to get ready to retire, some CAVEATS:
· There is no substitute for starting young
· Time + Discipline = Wealth
· The sad truth is that when you are young and have the time you frequently don’t have the discipline and when we are older we have the urgency of discipline but are out of runway when it comes to time
‘In The Richest Man in Babylon a book by George Samuel Clason which dispenses financial advice through a collection of parables set in ancient times Babylon. Through their experiences in business and managing risk in household finance, the characters in the parables learn simple lessons in financial wisdom. By basing these parables in ancient times, but involving situations that modern people can understand and identify with, the author presents these lessons as timeless wisdom that is as relevant today as it was back then.’
‘The book began in 1926 as a series of informational articles and pamphlets. Banks and insurance companies began to distribute these pamphlets, and the most famous ones were eventually compiled into this book. It was reissued by Signet in 2004, and an updated version (using modern English instead of “King James” language) was issued by BN Publishing in March 2007. According to the 2002 edition book cover, more than two million copies have been sold.’ http://en.wikipedia.org/wiki/The_Richest_Man_in_Babylon_%28book%29
If you are not yet one of the two million, I suggest you rush out and spend the $5 or so that it will take you to get a copy.
In this classic, suggestions are given on how to get ready for the last of life.
· A part of what you earn is yours to keep
· Control your expenditures (live below your income) Remember the 80-10-10 rule?
· Put your money to work. Albert Einstein says that the greatest invention of modern man is compound interest. (More on that in a minute).
· Mitigate risk. Do your best not to make foolish or overly risky investments. You may not make great returns ON your money, but do your best to always ensure return OF your money
· Make your home a profitable investment…or don’t buy. Don’t buy more than you can afford and carefully examine the marketplace before you buy.
· Insure a future income by sending a portion of what you earn on ahead for the older person you will one day be.
· Increase your ability to earn, better education, new skills, multiple income streams, sound investments.
First, let’s look at two money principles and one classic example.
Rule of 72
For those of you not familiar with this principle, any two numbers that can be multiplied to equal 72 are the interest rate and number of years it takes to double your investment.
For example:
· An investment at 2% compounded annually takes 36 years to double.
· An investment at 3% compounded annually takes 24 years to double.
· An investment at 4% compounded annually takes 18 years to double.
· An investment at 6% compounded annually takes 12 years to double.
· An investment at 8% compounded annually takes 9 years to double.
· An investment at 9% compounded annually takes 8 years to double.
· An investment at 12% compounded annually takes 6 years to double.
Compound Interest
A dramatic example of compound interest is the classic illustration about taking a penny and doubling the amount in your hand every day for a month. With compound interest, your money works while you sleep.
That’s not possible in real life, but it does illustrate the value of compound interest.
The Wealthy Barber
‘The Wealthy Barber is a personal finance book by David Chilton. The book is structured around a story of three people in their late 20s visiting Roy, the title character, for lessons in financial planning. Each chapter of the book describes a different visit and a different element of financial planning. Each month along with their lessons the three students are required to start carrying out the actions prescribed by Roy. In addition to these individuals, Roy also shares his financial knowledge with the customers of his barber shop.’
‘The story is set primarily in Ontario Sarnia, Ontario, where Roy has been operating a barbershop for several decades. As a young man, Roy had planned to become a lawyer, but those plans are derailed. He ends up taking over his father’s barbershop. Worried about money, Roy visits Mr. White, one of the town’s wealthiest men, and asks for advice on financial planning. This advice paves the way for Roy’s accumulating wealth.
The basis of the book is Roy’s advice to “save 10 per cent of all that you earn and invest it for long-term growth.” In that, it draws from the advice first set forth in The Richest Man in Babylon. ‘
http://en.wikipedia.org/wiki/The_Wealthy_Barber
The story is about twin boys who begin their lives committed to save for their retirement. They launched their work lives immediately after they finished college at age 22.
The first twin decided he could not begin saving until he was 28 years because he was focused on investing heavily into his business to get it strong enough so he could afford to begin to save.
The other twin decided to exercise the discipline (there’s that word again) and started saving $2,000/year immediately upon graduation. That’s just $5.47/day or $166.67/month. He invested the money at 12% compound in a tax deferred IRA.
When the boys reached 28 years of age, the first twin decided it was time for him to begin saving for retirement and he began investing $2,000/year at 12% compound interest and he continued to do that every year for 36 years until he reached age 64.
The second twin reached 28 years of age (obviously on the same day) and decided that he was finished investing and would simply let his six years of investing at $2,000/year create his nest egg.
When the boys reached age 64, here’s a question for you. Which one had the biggest retirement fund?
Scroll down for the answer:
The first twin who deferred his savings until age 28 and continued his practice every year until age 64 had a pre-distribution value of a little over $1,074,000.
The second twin who only saved for 6 years and then quit came to age 64 with a nest egg of $1,085,000.
Can I get a witness here for STARTING EARLY??
I told you that TIME was a huge component of wealth unless you were born wealthy, won the lottery or are very lucky. Better bet on Time + Discipline if you want to retire wealthy.
So, how do you get there. It’s a bit like the mosquito at the nudist colony. You are now armed with the notion of what to do, just not where to start. So try these ideas on for size.
Corporate 401k/403B
If your employer offers a matching retirement account, start by maximizing your investment. At a minimum, invest the maximum for which your employer deposits matching funds, regardless of the amount of the match.
Take a moment to calculate the percentage of return you get each year based on their matching dollars. It’s hard to match that anywhere else.
Plus, that is deferred income on which you do not pay tax until you take a distribution when you decide to retire…presumably when your tax bracket will be lower.
CAUTION: Always, always read the fine print on your corporate retirement account. Get some advice on which of the investment options you will elect for the management of your funds and reexamine the performance and risks every year at the time of open enrollment for other company benefits.
In addition, whenever you leave the employ of a company, consider rolling over your 401K/403B to an appropriate IRA where you have more control over how the money is invested. You have 60 days from the time you remove your 401K/403B to place them with another custodian and plan.
My personal preference is to find a Registered Investment Advisor (RIA) who does two things: 1) invests his/her own money in whatever he/she invests for you, and 2) charges you a fee that is no more than 2% annually, paid at the rate ½% per quarter. If at any time your RIA starts making more on fees than you do on your portfolio, change advisors.
Investment management & Estate planning
Speaking about financial advisors, remember the advice earlier about interviewing banks who need to compete for your business? The same holds true for your financial advisors
· Get a list of at least 3 planners/advisors to interview
· Check credentials…I prefer someone who has successfully traded his/her own account for years and is knowledgeable in a large range of financial issues and products rather than someone who just wants to sell me a particular product type
· Pay a few bucks to somebody like Intellius and do a background check before you decide
· Ask to see your planner’s SEC ADV Form, Part II
· Check with your State’s Security Commission to ensure a clean record
· Ask what experience the advisor has
· Ask tough questions. Think of this as a job interview, and you are the employer this time
· What are your advisor’s qualifications
· What services does he/she offer
· What is the approach the advisor takes to financial planning
· Where does my money go in your system? Is it part of a large pool that some other analysts and money managers manipulate or are you actively involved in what happens to my money
· Will your advisor simply have system triggers to manage my money or will he or she be actively involved in watching the market for me
· Will your advisor be the only person working with you
· How will I pay for your services
· How will you communicate with me regarding the performance of my portfolio
· Will you be investing your own money in the same things you recommend for me
· How do you define success for a client
· How much do you typically charge
· Could anyone besides me benefit from your recommendations
· Ask, “Have you or your firm ever been publicly disciplined for any unlawful/unethical actions in your professional career”
· Ask for references, both professional and clients and call them
· Listen carefully to the questions the prospects ask you. If the planner just asks about your income and assets, be cautious. He or she should want to know far more about: your family, your goals, and your risk tolerance. You are looking for someone to hire to help you make your nest egg last in retirement
· Close by asking for these answers in writing.
One last word of caution, born out of bitter experience on our part. TGR and I invested a significant portion of our retirement funds with a Christian friend. I really hate it when someone who professes what I believe turns out to be a crook and a thief.
I’m a little ashamed to admit this, but I got taken badly. As one of the Assistant District Attorneys who helped us put the guy away said, “Don’t beat yourself up too badly, we call these bad guys con-men because they are very good at what they do.”
This wasn’t exactly a Bernie Madoff scam, but since we were involved personally and it was a big portion of our nest egg, it was a catastrophe for us.
The end of this story is that we finally got him convicted with jail time (after two other counties decided just to give him 10 years probation for similar violations in their jurisdictions). Hats off to the legal system in Collin County, Texas for standing up for the rights of a bunch of us who were swindled in a third party insurance billing scam. If you are going to pull these kinds of shenanigans, don’t come to Collin County in the Great State of Texas…we’ll put your butt in prison.
This is a guy I had known more than 20 years. He had been in our house and we in his many times. He talked the spiritual talk and wore a cross around his neck. He showed up 100 miles from our home at the funeral services for TGR’s mother on Christmas Eve a number of years ago.
If we were listing friends we thought we could count on, his would have been on the list.
When it became clear that the whole thing was a house of cards, scores of people were out several millions of dollars with no recourse.
Fortunately one of our fellow sufferers had a great private investigator who helped us amass a case that we finally got to trial.
The end of the trial came with the judge telling this man that he was the most dangerous man who had ever been in his court. The judge wished that he could have sentenced him to more than the 3 concurrent 99-year sentences and the 2 concurrent 20-year sentences.
That’s the good news. The bad news is that this son of a Siberian, seagoing, sheep shearing, sod-busting, side winding so-and-so was eligible for parole in 2013-2014. I have gone back each year to testify before the Board of Pardons and Paroles, and so far we still have him remanded to State custody.
If he gets out, I have no doubt he will prey on other poor folks once again with his slick tongue and glib story.
He hurt many families into high six figure losses, and some of those are 80-90 year old fixed income families including my 90-year-old parents.
Part of me wants him to rot in jail. BTW, we have prevailed with the Board of Pardons and Paroles in getting him remanded for a year at a time. This will be an annual event until we lose our request.
Now that I got that off my chest, there is a point here. As you invest…IF IT SEEMS TOO GOOD TO BE TRUE…it probably is.
So, start early, be consistent, have discipline, postpone some satisfactions, save for a rainy day, get good advice, eliminate debt, manage credit wisely, don’t be stupid about buying cars and houses, have a budget, make good agreements on how to manage your finances, live long and prosper.
