I marvel at how many people that I meet on a weekly basis and when the topic of retirement planning or wealth building comes up, how many REALLY bad plans are out there. In fact, I think the default ‘no choice, no options’ plan of “save 10% of your income each year for the next 40 years” (which I am not a fan of) starts to sound quite compelling in the face of what I am hearing nowadays.
A bad plan IS worse than no plan
For starters, the ‘go to’ plan as of late seems to be the all or nothing approach of starting much later in life and then swinging for the fences when you get there. I call this the ‘Crypto-NFT’ plan. Essentially these individuals believe that they don’t need to do anything about wealth building or retirement planning until sometimes in their late 40’s or so and then when they get there there’s going to be this miraculous investment or wealth building vehicle…today’s version would be the Crypto or NFT craze…and then they’re going to invest themselves back into a solid financial situation.
Who’s to say that this might not happen? I personally can’t say that to them with certainty BUT here’s what I can tell them. Even though that ‘could’ happen, the probability of that event happening is not only an unknown it might well be an improbable unknown. That in itself sounds like a horrible plan to me.
The ‘later on’ plan
Another ‘plan’ that I hear pretty regularly nowadays is that “later on when I get into my late 40’s, I’m just going to buy some income generating rental property”. If it was only that easy. Even though I LOVE real estate as a wealth building vehicle anyone who is looking at that particular strategy is still going to have to put a 20 to 25% down payment on each property for starters.
On a $200,000 property that works out to having $40,000 cash on the barrel head for each deal. Whereas each property might generate $1,000 a month in income, as a starting place 5 of those properties is going to cost $200,000 just for the down payments alone. Where is that money going to come from?
We’ll just live like paupers later on
Yet my favorite financial plan that I just can’t get enough of is the “when I turn 50 we’ll just start to cut our expenses to the bone and invest everything else in the stock market”. No problem. These high spenders are just going to somehow magically just change their bad financial habits that they’ve been refining all their lives on their 50th birthday and miraculously become frugal.
More interestingly is that they don’t realize the crushing debt that they’ll be taking into their later years such as having to service extended vehicle payments, a big mortgage, credit card debt and sometimes large equity loans taken out against their primary residence to fund excessive consumerism.
To make matters much worse, these same people simply don’t realize that starting to invest at 40 or 50 years of age takes away the benefits of compounding interest and the ability to weather through economic downturns.
Time is your best friend…IF you use it correctly
A great example is if your 50 years old right now and haven’t started investing, of course it’s the BEST time to start if you haven’t already done so, but the truth is with a bear market upon us it’s going to make the math exceedingly difficult to meet your goals of a full funded retirement.
And the bad financial plans go on and on and on. After a couple of decades of interacting with a lot of people and having had the privilege of working with hundreds of high net worth individuals, a pattern as to what made a good financial plan became strikingly obvious to me and it’s what I teach on a daily basis.
The corner stone to this plan is Time. No matter how you look at it, time gives you the opportunity to invest small amounts, not have to bet on winners and even make some mistakes along the way and STILL allows you to meet financial goals. Time is obviously the twin sister to compounding interest. Without time, compounding simply doesn’t work but with time, it works like magic!
The other aspect of time is that it takes away the need to be smart. How so? Well, for the most part having time doesn’t force you into making risky financial moves and lets you simply take part in overall market movements such as participating in a broad index such as the S&P 500.
For those of us who don’t want to be in a position where we have to pick winners, or even have to follow the market closely for that matter, having time allows us to simply go along with what will hopefully be an upwardly moving market.
Start yesterday, start today but start
The other aspect of time is that if you have a lot of it, it allows you to invest a lot less each year and still come out where you need to be. We all heard this one back in high school…if Mary starts out investing $10,000 a year at 21 but stops at 35 years old and never invests another dime but Mark starts investing at 35 years old, how much will Mark have to invest in order to have the same amount of money as Mary at 55 years of age?
It’s crazy to believe that even at a 6% annual rate of return Mary will have about $1,1 million dollars when she reaches 55 years old simply by investing $10,000 a year for 16 years for a total of $160,000 invested. Time does the rest.
On the other hand, Mark would have to invest roughly $25,000 a year each and every year starting at age 35 and not stopping until he hits 55 years old to have roughly the same amount of money as Mary, or $1.1 million dollars.
Here’s the craziest part of all this. Mark would have to invest a total of $525,000, or roughly 3.3 times as much as Mary did in order to have as much as she does simply because he started 14 years later! Now THAT’S the premium that time demands as part of the wealth plan.
Commit to a higher investment rate
Another element of a good financial plan is that you have to commit to a higher than normal savings and investment rate. The popular ‘save and invest 10% of your income annually’ locks you into 40 or more years of working for income and provides no flexibility of your time.
Most individuals look at me dumbfounded when I say this but we’re looking for people to invest at least 50% of their income on an annual basis. Investing 10% takes too long to compound and if you don’t start at 21 years of age or don’t have the 40 years or so that you’d need, that particular equation is just not going to work.
Saving and investing 50% of one’s income allows for a couple of things; the first is that if you start a bit later than 21 years old you’ll have a good chance of still meeting your retirement needs. Secondly, investing at this level annually allows you to miss a few years should something happen. Lastly, investing at this rate would allow you to possibly retire early or even stop investing altogether at some point if you can calculate that your investment goals would be met with what you’ve already invested.
I work with a young couple who at the ripe old age of 28 years of age, each wouldn’t have to invest one more red cent into their retirement if they didn’t want to and each would conceivably have potentially $1 million dollars each at the age of 65. This is because they saved roughly 50% of their incomes each year starting at age 21.
Conclusion
So what’s the basic take away from all of this? The most basic element is that you need a realistic financial plan that takes advantage of time so that compounding returns can work on your behalf. In order to do this, you must start as early as you can regardless of how much you have to invest. That’s borne out in the example above with our friends Mary and Mark.
The first take away is that you MUST start investing as soon as you can…in fact, immediately. When you don’t have the ability to make several hundred thousand dollars each year in the last years of employment…and most of us certainly don’t…TIME is what we have to use to our best advantage. Remember, it truly is only math and one of the components is how much money you have to invest…another is time invested.
The other take away is that you need to invest a higher than average amount of your annual income each year towards investments. I would suggest saving and investing everything you can but no less than 50% annually.
As previously indicated, this gives you the best opportunity to take advantage of time and compound interest, while providing some optionality along the way in case life should get in the way of your financial plans.
As usual, building wealth is simple but not easy and above all else, it takes commitment.
