I’m back! I’m been on a hiatus for the past 4-5 months, nose to the grindstone writing Learning Spring Boot. But I turned in my last rewrite about two weeks ago, and after a bit of decompression, am more stoked than ever to write!
I was spurred to comment about cash and cash flow based on what I heard on the radio. I listened as someone talked about how to get out of debt and move forward with reducing costs. The person calling in was stuck with student loan debt. They had already tackled some other things like credit card and auto loan debt.
As I listened, I kept hearing the same things. Get rid of debt, get rid of debt, and more git rid of debt. On the face of it, it make sense. But I kept thinking, what happens when they get past all this debt? What then?
Consumer debt is a menace. Many people take on too much. They don’t budget well. Translation: we all make more than enough to get by. Because we don’t manage our money well, we end up spending too much on things we don’t need. Get it under control, and you can go far. But at that stage, people start stuffing their spare change into 401K plans and IRAs. They don’t realize how much they are shooting themselves in the foot.
401k funds have shown a 20-year history of performing at or below 4% annualized growth. How bad is that? Inflation is slated to be around 3%. This means that if you get the average (and don’t tell yourself you’ll beat the average), you are barely ahead of inflation. How good is that?
When you consult a financial advisor, they will talk to you about how this fund and that fund are performing. That may be true, but there are some innate biases built in that aren’t obvious. First of all, the funds that exist today aren’t the same funds that existed ten years ago. When funds perform poorly and people dump their holdings, brokerages houses end up closing things out. Those that are left, get transferred into another. And the next year, if you were to ask for the brokerage house’s average performance, the closed out fund isn’t part of that picture.
Another factor not mentioned is that funds don’t invest; people do! People buy funds. People buy stocks. People buy real estate. Hence, the question you should ask an investment advisor is how has his clients performed? What is his client’s average annualized growth rate? What is the average/minimum/maximum life he has held clients? A good investment advisor that is making his people wealthy should have long standing clients. Their annualized growth rates should be high. Measuring the performance via a prospectus is the wrong focus and won’t reflect how clients are doing. In other words, it won’t show how YOU will do.
So if you realize that 401K funds aren’t the answer, the next question is: what DOES work? What are you willing to do to get there? I invest in real estate, stocks, and EIULs. And being cash flow positive with no consumer debt, I am willing to take on debt. The caller on this radio show sounded unready for anything like that. I fear they will clear out all this debt and then be unready to entertain borrowing money to invest in real estate. Instead, they are going to go with the host’s plan of buying up mutual funds. Things will really sizzle, because they won’t be hampered by car payments, student loan payments, and credit card payments. And they will make it to retirement, perhaps saving up $1MM.
And that is when they will discover that it’s not enough. Their financial advisor will tell him or her that they can start withdrawing NO MORE THAN 4%, i.e. $40,000. Then Uncle Sam will ask that they submit $4000 in taxes. (I’m being gracious and assuming that landing in a lower tax bracket results in an effective tax rate of 10%). At the end of the day, this person that tackled small bits of debt thirty years earlier, is now raking in $36,000/year. That maps to $3000/month.
Can you comprehend living on that tiny amount of money? Do you see cruise trips or spending a month in France on that kind of cash? Was slaughtering the beast of debt and not considering future loans to buy cash flowing real estate worth it? Not for me. I plan to reach retirement with MUCH more than $1MM, because it takes much more than that.
Stay tuned for more discussions about building retirement wealth.