Below is an excerpt from the book Downsize Sooner than Later – 18 Rules for Retirement Success available on Amazon.com.
If you have done all the things discussed leading up to this rule, you will be in a unique position.
Accepting you will always have bills to pay (Rule 1) dispels any illusion that someday life gets “paid off”. It doesn’t. You may pay off a house or a car or other similar artifact but relentlessly, as the sun rises each morning, the bills keep coming.
So, what’s a person to do?
Walk away from the status quo.
Analyze your life and choose to live deliberately (Rules 2, 3, and 4). Define what matters most and set your sights on it. Clean up and remove costly mental, emotional, and financial clutter from your life. Doing so opens the door to more focused living and frees up space for the things that matter most. Such restructuring also gives you better control of your expenses.
From there, because no one knows how long he or she will live, arrange your affairs so that your most important ongoing bills will be paid with guaranteed income from pooled income sources (Rules 5 and 6). In this way, your fundamental security is protected regardless of how long you live and regardless of what happens in the investment markets.
After all this, then what? Once your core financial security is established, the next objective is growth. Consider the following metaphor that illustrates the power and importance of growth.
The Mighty Oak
People love oak trees. There’s nothing quite like a big sturdy oak in your yard. In the summer, it offers shade; in the fall, its leaves turn to beautiful colors. Oaks are robust, long-lived, and can bestow natural beauty for a lifetime.
If you planted an oak sapling today, how tall do you think it would grow in 25 years?
Assuming you take reasonable care of it – including not cutting it down, pulling it up by its roots, or carelessly trampling it over – it should grow roughly 80 feet tall with a trunk well in excess of two feet in diameter. By anyone’s estimation, a formidable tree.
By following the rules presented earlier in this book, your ability to increase your sense of financial wellbeing and grow your wealth can be just like growing that oak tree.
As mentioned earlier, after attacking your expenses, nest egg funds are separated into two parts. The first part, as discussed in the last rule, is used to solve for lifetime income. The second part is set aside as an investment and wealth fund. Your wealth fund, which henceforth, we’ll call a “money tree,” is planted just like the oak in our example above and left to grow.
Planting the sapling of a money tree at age 65 – 70 and leaving it to grow can allow your wealth to increase substantially even during your senior years.
But this means not recklessly cutting off its branches to pay monthly bills or tearing it up to “trade” for other trees in the hope of promoting faster growth or pulling it out of the ground in fear of future storms.
Left undisturbed, a money tree can be there for you and your spouse in later age:
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- A mature money tree offers protection from inflation. How? By your mid-to-upper-80s, money tree funds will have been positioned to benefit from decades of compounded growth. If you need to boost your income to offset rising prices, liquidating a small portion of funds from your money tree offers a solution. Where suitable, this can be used to purchase supplemental income in the form of a fixed life income annuity. As a bonus, such annuities are less expensive to purchase at older ages.
- A money tree offers funds for legacy. This is money to leave to children and grandchildren, for education, for charity, and for cherished causes.
- A money tree offers increased independence, dignity, and peace of mind in later age.
- A money tree provides the opportunity to grow financially throughout your senior years. As a result, the psychological benefits it bestows are far reaching. Simply knowing that regardless of your age, you remain positioned to accumulate value and grow in wealth will make you feel more confident and secure.
The reality is, you have been working to grow your whole life. This includes growth in knowledge, wisdom, experiences, relationships – and yes, in finances. Just because you retire doesn’t mean this has to stop. If, with relative ease, you could maintain – or even increase – your capacity to grow financially into your late senior years, wouldn’t you want to?
If your answer is yes, the easiest and most reliable way to continue financial growth throughout retirement is to plant and grow a money tree.
How to Plant a Money Tree
The first step to planting a money tree is finding the “sapling” or the initial funds you’ll need for it. Here are a few possibilities:
1. IRA-based/pre-tax funds. It may be possible for you to sequester some portion of your IRA nest egg and allow it to grow. Complicating this are the required minimum distributions or “RMDs” from such accounts, as well as tax implications relating to IRAs that are left for inheritance or legacy. Depending on your circumstances, IRA funds may be better suited for focusing on income planning. Immediate fixed life annuities purchased to provide income with pre-tax IRA dollars are known as “qualified” annuities.
2. Non-IRA/taxable funds. These are dollars outside of an IRA or other pre-tax retirement vehicle. Taxable funds, when invested, generally incur ongoing tax liability due to interest, dividends, realized gains, and/or as a result of internal rebalancing of holdings. However, when structured properly, such expenses can be minimized. Sources for taxable funds may be personal non-IRA savings, severance funds, after-tax proceeds from the sale of a home, property, or business, received life insurance death benefits, and after-tax inherited funds.
3. Future income. If you stay economically productive during retirement – even on a part-time basis – this can be a great way to fund a money tree. For those who have not been able to save as they wished throughout their working years, this may be their primary option. Others may want to “split” the money they continue to earn between funding a money tree and paying for extra expenses, such as travel and recreation.
In my opinion, options 2 and 3 above are the best candidates for funding a money tree. I challenge you to find non-IRA funds to “plant.”* Such funds can be left to grow with minimal disruption and complication. Consider, as well, that while most wealthy people do have IRAs, the lion’s share of what actually makes them wealthy is generally held in other places.
Once you have decided on the funds that make the most sense for funding your money tree, the next consideration is where to plant it.
Countless books have been written about investing, but I’ll keep it extremely simple: For most people, investing money tree funds in “low-cost, broad-market stock index mutual funds” will offer the easiest and most cost-effective option.
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- A broad-market stock index fund is a fund that holds investments mirroring a large segment of the overall stock market. Participating stocks are generally determined by an independent index, such as the S&P 500Ⓡ, Russell 2000Ⓡ, Wilshire 5000Ⓡ, etc.
- Index investments are available through fund companies like Vanguard, Inc., Charles Schwab, Inc. and Fidelity, Inc. or as stock exchange traded shares called ETFs (i.e. “exchange traded funds”). Two examples of broad-market stock index ETFs are “VOO,” which represents Vanguard’s S&P 500Ⓡ Index Fund and “VTI,” which represents Vanguard’s Total Market Index Fund.
- Owning such investments does not require expensive management fees or high brokerage commission costs. Fund shares can be purchased and held either directly through a fund provider or as ETF shares through a reputable online broker such as E*TRADE, Inc., TD Ameritrade, Inc., Charles Schwab, Inc., etc.
Disclosure! I am not paid to mention any of the companies named above and, as of this writing, am personally a satisfied E*TRADE customer. My wife and I also own ETF shares of VTI and VOO, as well as direct index fund shares from Vanguard, Inc.
Broad-market index funds are as close to a “set it and forget it” investment as one can find.
They are low cost, easy to access, and incur minimal fees due to management. They are tax efficient because they experience less frequent trading over time. They are also easy to buy and sell, and they are diversified because they spread investment over a broad array of underlying stocks. If all that weren’t enough, low-cost broad-market index funds also have a strong track record of outperforming more costly “managed” mutual funds with much higher fees.
I once heard a former hedge-fund manager on a podcast say, “The only people who make money in the stock market are people who buy and hold forever.” Assuming this is true, if there were ever an ideal “buy and hold forever” investment instrument, broad-market stock index funds are it.
If you need even more proof on the virtues of index fund investing, take a moment to do a search online of “Warren Buffett quotes on index funds.” This search reveals a deluge of articles on the wholesome goodness of long-term, broad-market index fund investing.
Still, with the stock market, there are no guarantees. With any investment, risk is inevitable. Even in the best case, on its long-term trend toward going up, the market goes both up and down. To protect yourself, you must embrace the right mindset. What do you think the chances are that there will be a major market correction or significant downturn over a multi-decade retirement? It seems sure to happen at least once, if not several times.
When these moments occur, your outlook must be that you are an investor and are in it for the long haul. Would you tear a young tree out of the ground due to the threat of a coming storm? Of course not. To grow to its fullest potential, it must stay in place and fully weather future storms. It may survive; it may not. That is the way of life. One thing we know for sure, though, is that an unplanted or uprooted tree will never grow.
So, accept it and let go. Plant wisely and you can take comfort in knowing you have done the best you could.
Separate Income from Growth
By following the earlier rules, you will have separated your income from your wealth. This means that even if the market goes down, you will still get a check in the mail each month regardless. Your basic security remains intact. You can ride out market peaks and valleys with little or no disruption.
Some advisers will shudder at encouraging the continuance of growth-based investing for seniors. They will exclaim: “How can you suggest such ‘risky’ equity ownership for people at later ages? They may not have time to recover from downturns! They must actively manage! They must reallocate! They must fly to safety!”
Warnings such as these are the continued expression of weakness and anxiety embodied in the portfolio-based retirement income model. Downward pressure on either stocks or bonds are an ever-present danger in the portfolio-based income world. Palatable remedies for resolving such concerns – beyond retreating or cashing out – are few and far between.
The central flaw with the portfolio-based income model is that growth and income are incompatibly mixed.
As a result, increased exposure to stocks to achieve future growth – especially when times get tough – has the synchronous effect of increasing one’s overall risk of ruin. If markets crash, the foundation for future income and security crashes along with them.
These difficulties are made even worse, like pouring fuel on a fire, when you are forced to make income withdrawals from your portfolio to pay bills during times of market stress. Such withdrawals amplify a risk known as “Sequence of Returns,” which accelerates the path to catastrophe.
Far too many retirees find themselves trapped in a portfolio-based income model with no escape when markets are in peril. Monthly bills continue to arrive and must be paid. These bills do not care if the market is up or down. Liquidating assets to pay expenses during a down market makes it more difficult to recover nest egg funds in the future. This is because the more your nest egg shrinks, the higher the returns you will need to get back to normal.
But it doesn’t have to be this way.
If you have ordered your life such that:
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- Your expenses are simplified and under control.
- Your critical bills are covered by high-quality pooled income.
- You have a sufficient liquid emergency fund (six months to a year of income in liquid savings).
…you will have built a firm foundation upon which to stand. From such a position, you can afford to put additional funds to work for growth in the form of a money tree which will expose you to far less personal and fundamental risk. It follows that, because you don’t need the funds from your money tree to pay ongoing bills, your investments can weather the ups and downs of future markets without negatively impacting your day-to-day security.
The Secret to Building Wealth
I own a company that invests in commercial real estate. You may be surprised to learn; I have never taken a single dime of spendable income from that business. Investing, reinvesting, and leaving investments to grow undisturbed in this manner, is how people build wealth.
Stated succinctly:
Wealth is created by owning assets that accrue value to you, that you do not simultaneously consume.
Like a snowball rolling down a hill, such investments are free to expand and grow. This is how wealth sparks to life and increases in size over time.
Much has been made in the media about those who have little or no retirement savings and who will be forced by necessity to live on Social Security alone. Implied is that these millions of individuals have lost financial hope and face irrevocably dark and distressing financial futures living on dreaded “fixed incomes.”
To this, I say, “Poppycock!”
For most people – especially Baby Boomers – there is still time to fight!
Given the length of modern retirements, the opportunity to build at least some wealth is open to just about anyone. All things are relative, but even a person with no retirement savings could follow the rules we have discussed so far and still accumulate significant value over time. The key is arranging your affairs such that you can safely invest funds that will be left alone to grow. The surest path to doing so is to control your expenses, cover your ongoing bills with pooled income, and plant a money tree that you do not disturb.
If you will do this, you can build equity and security for yourself and those you love.
Questions or comments?
I can be reached at this link – contact Ted Stevenot.