In last week’s blog I documented the true depth to which our retirement system has failed most Americans, the greed and utter incompetence of the Financial Services Industry and their allies in the Financial Media, and the tremendous damage its caused most Americans. I showed that you should not trust your retirement savings to this broken system, that the stock market is not the answer it is hyped to be, and that if you entrust your financial future to a financial advisor that history shows that over 95% will do nothing but lose you money.
Now let’s cover what can you do and how you can see to it that your retirement and your future are good. Not all the solutions I will discuss will work for everyone, much depends on your personal circumstances, skills and interests. So, apply what fits.
Here are the actions for successfully managing your money, including your retirement savings:
1. Eliminate all debt except a first mortgage No investment is ever likely to match this move, both from a return on investment and a quality of life perspective. I’m talking all personal debt, from credit cards to car loans–all of it. Right now, average family credit card debt is about $16,000 at an average interest rate of 14%. That’s a bleeding money loss of $2,240 a year. Investing that payment at an average return of 5% will give you $29,000 in found money in 10 years and $76,000 in 20. Invested tax deferred and assuming a tax rate of 35%, it’s $44,000 in 10 years, $116,000 in 20. If you normally carry a car loan or perhaps a home equity line, well that’s all the more money just sitting there waiting for you.
You absolutely can live below your means and save the money you need for retirement. Tens of millions of people do. If you have debt, I urge you to get serious about taking action today.
2. Spend a lot smarter and save a lot more Most people do not really get their money’s worth and the impact really adds up, with average savings of $5,000-$6,000 a year and more per family. Invested at 5% per year, $5,000 a year becomes $171,000 in 20 years. Invested tax deferred and assuming a tax rate of 35%, it’s $99,000 in 10 years, and $260,000 in 20. Are you among those that are sitting on such an opportunity? Why not invest 10 minutes of your time and find out?
3. Invest in yourself If you’re like most people, you are likely to be your best investment. Ask yourself what can you do to get better raises going forward, improve your value in the job market, or maybe switch to a better career.
If you have 20 years left to work and you make $50,000 a year, you will earn another million dollars before you retire. If you can increase that by 10%, pay 35% in taxes on it and invest what’s left at a 5% return, that’s an additional $111,000 in 20 years. Invest that money tax deferred at a tax rate of 35%, and you’re once again talking $99,000 in 10 years, $260,000 in 20. Think about how that much extra money can change your life in the future.
A point of caution, however. Don’t get sucked into paying for education for a job that won’t be there. Pick something you both like and have reason to believe will be needed in the real world in the years to come. In fact, do some research on the likelihood of your new skills being in demand before starting anything new.
4. Start a business or invest in someone else’s Over the last 200 years, 2 things have consistently created the majority of all millionaires: starting a business and investing in real estate. That’s a heck of a message. Personally, except for the stock market of the 1990s, I’ve concentrated my focus on these two areas and time and again it’s paid off. If this is something you are interested in, be sure to do your homework really carefully!
5. Do not depend on the stock market for your financial future Should you have even the slightest doubt about this, go read or re-read last week’s blog. The only thing I will add is my best estimate that the future of the world’s stock markets, for about the next 10 years or so, does not look good. That does not bode well for an investment that has done nothing but lose money for the last 30 years for over 85% of those that invested in it.
6. For any money you do invest in the stock market, invest only in index funds When it comes to the stock market, most people should invest in broad-based, no-load (no commission) index funds only. Over the long run, this one simple type of stock market investment has been proven to outperform all others. For more, here is a blog article I wrote explaining the why’s and how’s of index funds: How to Invest In the Stock Market… Index Funds
As for investing in individual stocks, I recommend you don’t do it, because you’ll probably end up underperforming the index funds just like the pros. To make matters worse, the truth is that the game is just too rigged against the individual investor. Your former financial adviser (you fired him right?) would of course disagree with me, but perhaps we should listen to the advice of the two greatest investors in stock market history:
Peter Lynch:“(Most investors would) be better off in an index fund.”
Warren Buffet: “The best way to own common stocks is though an index fund.”
What this means is don’t ever invest in individual stocks and especially not in managed mutual funds, which is what the experts are always trying to sell you. Fund underperformance, combined with their commissions and other hidden costs, will drain your profits away. To understand just how awful these investments have performed, revisit last week’s blog.
In summary, the first step to successfully planning for retirement is to reject the current system and replace it with one that works. Millions of people just like me have refused to participate in the disastrous system being sold to everyone and avoided the losses involved. The reason you haven’t heard about this is because, unlike the system that’s been sold to everyone, the people that are doing things right don’t have a vested interest in spreading the word and telling you what to do. People that know how to make money go and do it, they don’t usually feel the need to tell everyone else how.
Finally, remember that time can be your best friend or your worst enemy. If you haven’t already done the things you know you need to do, start today. It’s your life, your retirement, and your future, so see to it that it’s a good one.