I recently happened on a thought-provoking article by, Paul Merriman, in Advisor Perspectives. He called it “Ten Retirement Lessons from the Smartest People I Know”.
From my unique vantage point as a financial advisor, financial radio talk show host and financial mentor to thousands, I too have the good fortune of knowing and watching a lot of really smart people. Of course, I also get to learn from others’ mistakes, as well their successes.
Based on my experience, here is my take on five of Paul Merriman’s ten lessons plus a couple lessons of my own.
Lesson One: Happiness in later life is not a direct function of how much money somebody has.
Successful execution of a financial plan, in and of itself, will not make you happy. Successful execution of a life plan, of which a financial plan is only one part, might.
Action: If you haven’t already, create a life plan. There are as many ways to do this as there are people. If you would like an example of how I did mine, download Chapter Four of my book, How to Be the Family CFO.”
Lesson Two: Wealth comes from choices people make, not chances they take.
The key to financial success is in balancing what you want today with what you need tomorrow. Our brains are inherently flawed when it comes to understanding risk. Hope and luck are lousy financial strategies.
Action: I find it is far easier to make good choices when I can see the long-term consequences of the choices I am making. That means an interactive tool that extends your financial situation out into the future so you can do what-ifs. For this, I recommend our free web application, My Financial Plan.
Lesson Three: Those who plan also prosper.
Have this one tattooed on your forearm so you can look at it every day. A plan is a way of bringing the future into the present so you can act on it in a meaningful way.
Without a plan, you are just a leaf, drifting in the current, content to let circumstances dictate your course and fate. A plan is your paddle. With it, you can affect course, speed and destination.
At Snider Advisors, we have a saying, “Manage risk and returns will take care of themselves.” In a similar vein, I might suggest, “Work your plan and prosperity will take care of itself.”
Lesson Four: Don’t wait to start saving.
Albert Einstein is commonly quoted as saying compounding interest is “the most powerful force in the universe.” While he didn’t really say that – it is an urban legend – the legend likely persists because compounding is so simple and so powerful, we can easily imagine he might have.
When it comes to money, time can either be your biggest ally or your biggest enemy. When you pay interest, it is the enemy; When you earn interest, time is your best friend.
Action: The easiest and most effective way to save is in an employer sponsored retirement plan like a 401(k), 403(b), SIMPLE or SEP. If you are unsure where to contribute your savings to get the biggest bang for your buck, this flowchart can help.
Lesson Five: Retirement belongs to those who are still with us.
The point here is that your health is an important asset. Being unhealthy is expensive and no fun – especially as you get older. If you view retirement as a period of time in which to really enjoy life, you don’t want your health to be a limitation.
I once read something from sociologist who said, if we conducted every aspect of our life as if we knew for absolute certain we would live to be 105, no matter how long we actually live, our quality of life would be much improved as a result.
Action: What mental and physical health items you have been neglecting? Get them checked out or checked off you list.
If you would like to read the other five lessons from Paul Merriman, check out the full article on Advisor Perspectives. Here are some of mine:
Lesson #1: Insure the risks you can’t afford to take. Never insure the others.
I am constantly amazed at the crazy decisions people make regarding insurance. I recently watched a millionaire buy trip insurance on an $8000 vacation. I know for a fact that same person has a history of debilitating illness in his family and does not have long-term care insurance.
I, myself, made one of the classic mistakes when it comes to insurance. Years ago, I was struggling financially and fell prey to the “It’ll never happen to me syndrome.” Well … it did happen to me. That is when I learned a valuable lesson about insurance – when you think you can least afford it is when you need it most!
The smartest people I know are completely rational about the insurance they buy, how much and for how long. They understand insurance is not a luxury. It is one of the four legs on which any solid financial plan must rest.
Action: If you cannot be dispassionate about your insurance needs, find a trusted advisor who can be.
Lesson #2: Only use debt to buy appreciating assets.
Smart people understand there are two kinds of debt: bad debt and better debt. Better debt is debt used to buy an asset that is expected to appreciate over time. This includes your primary residence, business and other investments. Everything else is bad debt.
Better debt contributes to your financial well-being. Bad debt slowly sucks it away. Smart people only incur better debt.
Action: If you have bad debt, make a plan for getting it taken care of. If you don’t know where to start, this article, on getting out of debt, can give you a plan of attack.
Lesson #3: Don’t pay off your house.
Yes. You read that right. Don’t pay off your house. Unless you have no other constructive use for your money.
I used to be a believer in a paid-off house. Over the years, I became convinced that idea was outdated.
The smartest people I know make their money work hard. Money tied up in your house is lazy money. Your house may appreciate over time, but historically, in most parts of the country, you are lucky if your house goes up by 3% – 4% per year. That is not enough.
Money tied up in your house is not liquid. When you need it most is when it is going to be hardest to get out. I have a friend who is in financial trouble. He has $500,000 of equity in his house. He can’t get a home equity line of credit because he is in financial trouble and he can’t declare bankruptcy because he has too much equity in his house!
Money tied up in your house produces no cash flow. I am all about cash flow. It makes the problem of markets and economies that go up and down over time much more manageable.
Money tied up in your house is not diversified. For most of us, the value of our home represents too much of our net worth to be tied up in a low return, illiquid, non-cash flow producing asset.
Finally, people cling to the quaint idea of a paid for house as security. No one can force me out. At least I’ll have a place to live. It’s mine. I own it. It’s paid for.
It’s also wrong.
The smartest people I know don’t pay off their house or even make extra payments on their mortgage unless they have more than enough money to meet all other financial objectives.
Action: If you are making extra payments on your primary residence, find a better use for that money.
What about you? If you were going to write an article entitled, Ten Retirement Lessons Learned From the Smartest People I Know, what would be on your list? Share them on my blog or by sending me an email at email@example.com.