(And why we don’t believe in “financial plans.”)
Everyone loves certainty. They want to be told what result they will get if they take a certain action. Financial planning tries to offer this certainty. “Save $1,000 a month in your 401(k) and you’ll have a net worth of $X and a retirement income of $Y/year!”
However, financial plans tend to offer little actual financial certainty.
There’s nothing wrong with crunching numbers and estimating returns (my husband builds financial software that does just that!) Just be very cautious. Realize that financial plans are only a “best guess”—and guesses are almost always wrong.
Financial plans are only estimates made up by a financial planner and the client/investor to imagine:
- When they’d like to retire
- What lifestyle they’ll choose when in retirement
- How fast their investments will grow
- What the rate of inflation will be
- What future tax rates—and tax rules—will be
- What interest rates will be
- What they will desire (or require) for future income
- And what additional expenses (such as healthcare or long-term care expenses) may need to be considered.
That’s why I stopped doing “financial planning.” The math may be technically correct—and we can use calculators to estimate projected gains, inflation, etc. But ultimately, it’s a fool’s game to even try to predict all of the above factors with ANY accuracy!
The end result of a financial “plan” is inevitably this: A false sense of security.
That’s one of the themes of Financial Planning Has Failed, the first book I wrote with Kate Phillips. (It’s available as part of our complimentary Prosperity Accelerator Pack.) As I explain in the book, I had a crisis of conscience that led me to Prosperity Economics.
Still, people with financial plans and financial planners or advisors tend to do better than those with none. That’s because having some sort of a plan or strategy helps people get into action! So even if you realize that “financial plan” is a synonym for “wild guess,” it’s still better to aim at something than nothing.
In spite of our preaching to NOT rely on a financial plan… I get asked all the time, “What SHOULD I be doing?”
It’s a fair question that deserves an answer.
Here are 9 steps that will help most investors improve their results. (Of course, there’s no such thing as a “one-size-fits-all” strategy.) These steps will help you avoid common investing mistakes and make your way up the prosperity mountain with greater certainty!
A Prosperity Road Map
Step #1: Work longer.
This is perhaps the biggest mistake I see many people making… retiring too soon. Most people cannot afford to quit at age 65 (or thereabouts) with enough assets and cash flow to sustain themselves comfortably for another 25 to 35 years. (And if you’re not planning for the possibility of living to 100 or beyond… your time frame is too short!)
If working beyond 65 sounds like drudgery or torture, you probably don’t enjoy what you do! Find something you love to do to earn money, and do it for as long as possible. (Need help? Contact my sister Tammi of the BlueprintProcess—she is brilliant at helping people discover what they love to do!)
Even if you reduce work to seasonal or part-time, earn money as long as possible is one of the most important things you can do for your long-term economic health.
Step #2: Save more!
I encourage people to aim for saving 20 percent of their income. If you are at 5 or 10 percent now, aim to increase your savings rate. (Of course, more than 20 percent is fine, too!)
Get honest about your needs and wants. Make savings a necessity! And the next time your income increases due to raise, bonus, or windfall, raise your savings rate instead of just spending more.
Step #3: Build liquidity.
If you follow the common advice to “max out your 401(k)” as soon as you start earning money, you’ll skip an essential step: Building liquidity. Most people have been told the importance of an emergency fund, yet few have a fund of any size. Instead, most money is locked up in retirement accounts that cannot be accessed for DECADES.
Not surprisingly, when a financial crash happens, people raid their retirement accounts with disastrous results. According to Money.com, 30 million Americans tapped retirement savings for unexpected expenses in a single year after the Great Recession. Most withdrew money invested at a significant losses due to taxes, penalties, and market conditions.
When you have liquidity, you are protected against emergencies and you can take advantage of opportunities! Whether it’s an investment, a business opportunity, or a chance for a deep discount, opportunity comes to those with cash!
Step #4: Diversify asset classes.
Typical financial advice tells people to “diversify” assets by holding mutual funds and equities in various industries. However, that still leaves your money at risk in the stock market! To reduce the systemic risk of the stock market on your portfolio, put dollars in different asset classes.
- Cash (bank CDs, t-bills, life insurance cash value)
- Real estate (rental properties, bridge loans, equity positions, etc.)
- Whole life Insurance (especially dividend-paying whole life)
- Life settlements (the secondary market for policies)
- Single-premium immediate annuities (SPIAs) for those over age 70
- Alternative investments such as oil and gas, mineral rights, business partnerships and peer lending.
Many people keep some stocks or mutual funds in their portfolio or retirement account. If you do, take care that the majority of your assets are non-correlated to the stock market.
Step #5: Own your home.
Home owners have an average of 44 times higher net worth than renters: $231,400 vs. just $5,200, reports the recent Federal Reserve . The disparity is even greater for seniors.
Renting can be less expensive in the short term, but rents rise over time. So make sure you have something to show for the hundreds of thousands you’ll pay for housing over time!
While it’s not always a good time to buy a home due to market conditions and buyer readiness, you don’t want to rent too long. The average American pays about 35 percent of their monthly income for housing—too much to throw down the drain.
When you’re ready, buy a home with a fixed 30-year mortgage. Don’t max out your housing budget. You’ll want to keep saving and investing while keeping ample cash for home repairs.
Step #6: Resist prepaying your mortgage.
We don’t generally recommend a 15-year mortgage or paying down your principal faster. Just don’t spend the difference… save and invest the difference!
Now, why wouldn’t you prepay your mortgage when paying interest to the mortgage company? Two reasons. First, it usually makes mathematical sense to put extra dollars into investments on the side rather than prepaying your loan. Mortgage rates are very low right now, and at least a portion of the interest paid is often tax-deductible. You’ll come out ahead saving and investing your extra dollars instead of paying down your mortgage earning as little as 4 or 5 percent on your money. (Of course, if you earn more, you’ll be even further ahead!)
Second, liquidity and control. It is actually RISKY to prepay your mortgage if it means reducing your savings and liquidity. Too many people have discovered that if they lose their job or have another emergency, they can’t get back their prepayments. Putting your dollars in home equity actually “traps” your money in the walls of your home and can even put your home at risk!
Now, paying off your mortgage may make PERFECT sense from an emotional perspective. If you need to pay it off to sleep at night in retirement, please do so! (You could save and invest on the side until you have enough to pay it all off.) But please don’t prepay your mortgage for financial reasons!
For a more detailed explanation of why we recommend this, read Busting the Interest Rate Lies, where we run the numbers.
Step #7: Reduce taxes.
Over the course of a lifetime, one of the biggest drains on our wealth is the taxman. However, there are many ways to reduce your tax burden. Some tried and true favorites are: owning a business, investing in real estate or in oil and gas, and utilizing whole life insurance.
Owning a business allows you to convert many expenses to tax-deductible expenses. Love to travel? Find a way to travel for business. Attend a conference in Bali, London or Hawaii. Love fine dining? Take clients and prospects out to eat. Have kids? Put them to work! There are fantastic tax advantages to hiring your kids in your business.
There are many ways to reduce taxes using real estate. If you own a home or have lived in it for two of the last five years, upon sale, you can pocket $250k—$500k as a couple—of tax-free gains. 1031 tax exchanges allow you to trade one kind of property for another without paying capital gains upon the sale of the first. And now, you can invest in “opportunity zones” that allow for fantastic tax benefits. (More to come about this opportunity in 2020.)
Another investment with big tax benefits is oil and gas. Investors receive a sizeable tax break up front, as drilling and development costs are tax-deductible right away. (Contact us for further information.)
If you save money in a bank, your gains are going to be taxable. And while you might not be so concerned about the taxes on a measly one or two percent interest, what happens when rates go up or your nest egg grows? We’ve seen clients facing large tax bills that were completely avoidable.
This is one of many reasons why many families use high cash value whole life policies for their long-term savings. You won’t pay taxes on the cash value gains within your policy. And when the policy stays in force until a death benefit is paid, your beneficiaries will NEVER pay taxes on the gains!
Step #8: Raise your insurance deductibles.
This is a simple strategy that can make a big difference over time. Once you have adequate savings to handle a larger deductible, raise your deductibles as high as you can. This will lower your car insurance, home insurance, perhaps health insurance and other insurance bills each month.
Yes, you might occasionally have to pay a deductible, but odds are, you’ll save a LOT over the long term!
Step #9: Focus on cash flow!
Net worth doesn’t pay your bills or take you on vacation—cash flow does! And yet, the focus of most financial planning is on net worth. Many investors accumulate a large net worth only to discover it’s not easy to convert into cash flow—especially in the typical stock-and-bond-market environment.
As low rates continue to prevail, alternative investments are your best bets for cash flow. Bridge loans, real estate, peer lending and mineral rights leases can deliver more income than bank CDs or bonds. Single premium annuities work well for seniors over age 70. (Contact us for appropriate options.)
Unfortunately, you aren’t likely to hear about the best cash flow vehicles from typical financial planners. That’s because typical financial advice and plans often have an underlying goal to allow the planner, broker or money manager to create cash flow! This is done when the advisor/planner accumulates significant “assets under management” (AUM) and charges a management fee to oversee them.
But is this a good strategy for YOU? No, it is not!
Truly diversified alternative investments, real estate, life insurance, cash and business assets don’t generally count as “assets under management.” That’s one reason why some planners tend to focus so heavily on mutual funds and securities—in spite of the risks. Financial reps and broker-dealers are also limited in the types of assets they can offer.
Partners for Prosperity specializes in alternative solutions for storing cash, growing assets and creating cash flow. We saw that the typical financial planning model did not serve our clients well. It also wasn’t what we saw the most wealthy doing with their dollars! And that’s why we based our advisory firm in the 7 Principles of Prosperity Economics™.
We put our most detailed Prosperity Road Map in our latest book.
In our most recent book, Perpetual Wealth, Kate Phillips and I have an entire chapter on the 7 Phases of Prosperity. This is a much more detailed roadmap for the different phases of your life. After all, what makes sense in your 30’s may be a terrible strategy at 75!
For a very limited time, you can still download Perpetual Wealth at no cost as a PDF. (In 2020, the book will be released on Amazon and will no longer be available as a download.)
Perpetual Wealth is full of insights to cultivate generational wealth in your family. From life insurance and lessons from billionaires to family retreats and trusts, you’ll find ideas you can adapt to your family.