Thank God I got the right advice right when I graduated
I remember my very first meeting with a financial planner. I was 25 years old, had just started my practice, and was making legitimate money for the first time in my life. The meeting started out with the two magic number questions.
MAGIC RETIREMENT NUMBER 1
“What’s your retirement number?” This was the amount of money that I wanted to have coming in each year at retirement, based on the total amount I had saved.
MAGIC RETIREMENT NUMBER 2
The next question was, “At what age do you want to hit that number?”
What followed were the many investment products this planner wanted to sell me with the assurance that if I kept investing in them, I’d have plenty of money to relax and play golf when I got old. The magic retirement questions and the subsequent advice are somewhat sinister. It’s not necessarily wrong to consider these inquiries, but the standard strategies utilized only guarantee the planner makes money. Even in a long-standing up market, many of my gains are lost to their fees.
When I graduated college, thankfully I was practically forced to go through a financial training series by several of my advisers. I knew enough to walk right out of that financial planner’s office and never look back.
Eventually, most of us want to cut back or discontinue working altogether. Thus, we should wonder if we’re saving enough of our income each month to provide for our lifestyle now and in the future.
3 BETTER MAGIC RETIREMENT NUMBERS:
1. When my son graduated college and got his first job, I immediately got him on the phone with my financial team. The first magic number I gave him was 10%. Before he paid his iphone bill, for Netflix, Hulu, AmazonPrime, Spotify, etc. (Uggh) 10% goes to the retirement account. (I believe 10% needs to go to tithing as well).
As I showed him, that 10% is going to make him a millionaire well before he’s even considering retirement.
Regardless of income, a study showed that contributing 10% starting in your mid-20s eliminated the risk of retirement poverty by 30%.
2. The second magic number is 100%. Investments in stocks, real estate, crypto, NFTs, bonds, new companies, etc. generate distributions. 100% of those distributions need to be re-invested and not spent in order to appreciate the miracle of compounding interest and allow your investments to pay off.
3. Miracle number 3 is “most.” Get rid of most of your bad debt. Sorry, this is a vague, non-number. To oversimplify, bad debt is any debt that is not currently leveraged or utilized to make you money. In most cases, bad debt just reverses the miracle of compounding interest, provides stress, and is making your poorer while you sleep. I wrote a previous article on how to deal with all types of debt, good or bad.
While in most cases paying off debt is a wise investment, getting rid of your home can come with risk. The situation is different for everyone. I can make a strong case for a 15 year or re-casted mortgage and how that can help make you wealthy, but here are some strong concerns against.
For most people, if they pay off their home it is now a radically disproportionate percentage of your net-worth. This throws the balanced investment allocation model way out of whack. Additionally, real estate markets go up and down. If you need to sell, want to move, or chose to take advantage of your equity – bad timing could make this impossible or have washed out all of the cash you’ve put into the house. Homes often don’t age well or have to compete with new homes and therefore, time may also not be on your side. The obvious issues is the opportunity costs. With the cash you have in your home eliminating a 4% mortgage, you may have missed out on the other allocations such as stocks, bonds, and additional real estate that may grow by 8% to a multiple of that. That 4% mortgage is also tax deductible, magnifying this risk by even more.
Getting your magic numbers down is something you have to get right. My most common email or phone call is from someone looking into this very late in the game and it would literally take magic or a miracle to catch up.
Have fun saving the world
Dr. Ben
