by Anthony Obey
It came without a revolution. It came without as much as a whisper. It came as discretely as the wind comes – you know something’s happening but you never saw it coming with your naked eyes. What am I talking about?
That day in 1974 when Congress passed the Employee Retirement Income Security Act, better known as ERISA. Contrary to its name, ERISA began the process whereby the burden and risk of providing retirement income shifted away from employers and onto you, the employee.
Yep, They Changed the Rules Without Asking Your Permission
ERISA began the inexorable shift away from a sure, if modest, retirement income toward an uncertain future based on high-risk stock market investments in 401(k) plans and IRAs.
This act single-handedly shifted the full weight of responsibility for your retirement off the shoulders of your employer and onto YOUR shoulders.
That’s why we teach people to become their family’s CFO – because we understand – whether you realize it or not, that’s what Congress appointed you as when passing ERISA over 40 years ago. But in an age of extremely volatile and increasingly complex markets, it’s critical for you to learn how to ride the waves to secure a solid retirement for you and your family.
To do this, you must employ a strategy that’s simple, easy-to-learn, easy-to-use, and most importantly, one that’s proven to work in the real-world.
Let’s Put the Puzzle Pieces in Place
Determining an investment’s suitability is critical to make sure you end up at the right spot when it’s time to reap the rewards of your investment labor. To determine suitability we must consider your
- Objective – Since you’re reading this article on our site; you’re likely a person who’s interested in generating income, month after month, for a financially secure retirement.
- Risk Tolerance – Most people rightly become less tolerant of risk as they near retirement age, however, tolerance also has a personal, internal and emotional aspect to it. Generally speaking though, most people should switch gears from more volatile investments to more stable ones as they near retirement, when you need ‘Income Replacement.’
- Time Horizon – How long is it before you need to start using the money you’re investing? And, how long will you need the investment to last when you start using it? There are the questions you must ask yourself when considering your time horizon. Unfortunately, when it comes how long you will need it, i.e. how long you will live, you don’t know the answer. That is why you must plan for a long retirement.
Quite simply, most people want to build wealth! But what exactly is wealth? If you are a traditional capital appreciation investor, it’s the market value of your portfolio at any given point in time. Your goal is to keep that number growing. The day-to-day and month-to-month fluctuations in your account value translate directly into the amount of wealth you have.
But this approach ignores what matters most to most individual investors. Rob Arnott, former editor of
Financial Analysts Journal, and highly respected investment manager, explains:
“Unless you’re planning to spend the money right away, what really matters to most people is what kind of spending their portfolio can sustain over their time horizon. If you’re a 50-year-old, it’s how much could you spend annually for 30 or 40 years. If you’re a 20-year-old, your time horizon is longer, and if you’re 70, it’s shorter…. People all too often think of their wealth as the value of their portfolio, which is a very simplistic and incomplete definition.”
– Arnott, Rob, interview with Kim Snider
So then, according to this perspective, real wealth is not merely the number at the top of you account, but the inflation-indexed income (i.e. 20 years into retirement, your portfolio is able to buy the same basket of goods and services it buys today) your portfolio can generate monthly to pay your bills and maintain your standard of living indefinitely in retirement.
In other words, the true definition of wealth is the ability to support a given standard of living indefinitely into the future.
A Few Assumptions
The goal is to build a portfolio that replaces your current income by generating enough income that paces inflation, sustains growth and enables a reasonable standard of living. To do this, we need to pursue a double digit annual yield.
Keep in mind that most traditional investment advisors expect you to live on a mere 4% withdrawal rate, but I’ll show you why that’s a bogus idea and why you must pursue a higher withdrawal rate.
Here are some basic assumptions:
- Your retirement will last 30 years, the joint life expectancy of a 65-year-old, non-smoking couple
- Inflation will average 3.5 percent annually over that 30 years
- The 4% traditional financial advisors expect you to live on in retirement
- Your marginal tax bracket will be 25 percent
- Stock market returns average roughly 10% and bond market returns average 5%
To figure your required rate of return, add your withdrawal rate to the rate of inflation, divided by 1 minus your marginal tax rate. This is what the formula looks like:
(w + i) ÷ (1-t)
I encourage you to whip out a calculator and participate in this quick little math lesson. Some readers know this equation well, but for most, this will take you back to the good old days of school.
When you plug in the numbers from the assumptions above, you get a gross average annualized return of 10 percent ([4 + 3.5] ÷ [1 – 0.25] = 10).
The traditional retirement portfolio of 60 percent stocks and 40 percent bonds has a targeted rate of return of 8 percent, which means there’s a gap between what we need and what most retirement portfolios are set up to provide!
The above stated equation is REALITY, not the land of Make-Believe I mentioned in Part 1 of this series when talking about the fallacy of the Traditional Capital Appreciation Investment model.
The GAP of Frustration Must End Here
To summarize the above, that ‘gap’ between 10% and what traditional investment approaches deliver is the same result that the gap between reality and expectations deliver…frustration!
Worse than mere emotional frustration though, this gap means that you will either get to retirement and realize that you simply can’t afford to retire, must work longer, or your lifestyle in retirement will be below your normal standard of living. Today, more and more people who are 65 are now working full-time till aged 70 or longer.
We don’t want to see this happen to you, which is why it’s imperative that you take on the responsibility of being your family’s CFO squarely upon your shoulders and act wisely.
Once you accept this responsibility, the next step is to get educated on what you must do in order to best prepare for your financially secure retirement. You can put an end to your potential frustration with your investment activities by becoming financially literate and empowered.
With the right help, you can achieve the goal of a financially secure retirement that sets you free to truly enjoy every minute of your Golden Years of life. That’s why we invite you to take advantage of the offer below.