A Four-Step Retirement Plan
By John Del Vecchio
Ahhhh retirement! Most of us would love to be on a beach somewhere right now sipping a frothy Bahama Mama. But very few of us want to put in the right kind of effort to get us there. Retirement may seem way off in the distant future or even simply an unreachable destination. But, we can get there with just a few steps.
Step one is that you must know the magic formula. It’s really simple to understand, but not that easy to abide by.
Here it is:
Income – Expenses = Savings
See, it’s simple! No algebra required. The reason why it’s not easy to abide by is that we live in a culture obsessed with consumption. Consumption is 70% of the economy, after all. The average American has over 300,000 items in their homes. 300,000! All that stuff can’t even fit into our houses, and so the storage unit business is booming! We are a nation of hoarders, it seems. There are even TV shows about hoarders followed by TV shows of people buying storage lockers filled with stuff after those hoarders haven’t paid the bills.
Unfortunately, people don’t save. That’s just the cold hard truth. Statistics show that nearly 50% of Americans could not fund a $400 emergency. Scary!
So, step one is to ditch the consumption culture and save first rather than spend. One way to do this is to max out all of your retirement plans. Since I’m self-employed I have a particularly great plan that allows me to stash away both the maximum 401(k) contributions allowed and maximize profit sharing pre-tax. Then I also have my IRA.
Simply put, since this money goes from my corporate account into my retirement accounts I never see it. So, I pay myself first.
Then I save a portion of my after-tax money as well. That’s not to say I’m cheap and live like a pauper or anything like that. I’ve traveled the world and I enjoy life. But, I don’t have three stereo systems and five flat-panel TVs. Come to think of it, I don’t even own a car!
Step two is to own everything. In case you haven’t noticed from looking at my last name, I’m Italian. I think it’s in my DNA to pay cash for everything, so I use credit lightly. In the 23 years since I’ve had a credit card I have never paid one cent in interest. You don’t get rich paying someone else 15% a year to buy stuff you don’t need with money you don’t have.
Same goes for a house. Why is it good to have a tax deduction for your mortgage interest? Have you ever looked at an amortization schedule? All of the interest is billed up front. I paid off my first home in 11 years. What’s more, I lived in the same place for 15 years despite stretches where my income was more than 10 times higher than when I first bought it. I simply obeyed the magic formula. Just because I made more money didn’t mean I needed to blow it. My digs were plenty fine. Just be happy with what you have! There’s no need to keep up with the Jones’. They’re broke anyway.
Step three is to invest in yourself. Once you’ve saved more than you make and you own everything, a good way to ramp up your wealth is to invest in you! I don’t mean ripping through $100,000 on an online degree that won’t land you a job. I mean develop a skill. Do something other people don’t want to do but need.
My cousin Eldo once told me that if you want to learn how to do something, get an estimate. By that he means if someone tells you it costs $25,000 to paint your house, you’ll become quite handy with a brush in a short amount of time. That’s exactly what I did. I bought a home and renovated it for my Dad. The painters’ quotes were outrageous, and while painting a house is not as simple as filling up the roller with paint and slathering it on the walls, it’s not rocket science either.
By the time I was done, I became good enough to paint other houses. I did an analysis and determined I could make $100,000 annually working 3/4 of the time and undercut the local competition.
Of course, that’s just a fall back option. My largest gains have come from taking small bets on myself, such as developing a product or service and selling that to others. I have made gains far larger than in the public markets and I have never lost money betting on myself.
You can do it too! And it’s worth checking out what my colleague Charles has to say about collecting “automatic checks.”
One problem though is that I cannot compound this wealth. The cash flow needs to be invested elsewhere. That’s where the markets come in.
Step four is to invest in instruments that you can stick with consistently for the long-term. It may be all stocks. It may be a combination of stocks and bonds. Or, you might be an international explorer and find those markets more attractive.
Mine is a combination approach. Part of my process recognizes that I have no idea what’s going to happen in the future. Neither do you. Stocks are expensive but they could stay expensive. Interest rates are low but they can stay there. So, a portion of the portfolio should be in a few asset classes that over time should do okay if held long enough.
The second part of the approach is following trends. What goes up could continue to go up. What goes down could continue to go down. The trend is your friend until the end when it bends. So, by investing in some trends, you’re always in when the market is going up. But, you’re not always in the market. And while you may get whipped around, you most likely will be out when a huge smash occurs.
And the third part is sentiment and valuation based. When there’s blood in the streets, invest. When you attend your holiday parties and everyone is telling you how much money they made in the markets that year, call your broker the next day and reduce your positions or get out altogether.
Whatever you do, the portfolio must fit your personality. There’s four steps to investment success…
Step 1: Stick with your process.
Step 2: Stick with it through thick.
Step 3: Stick with it through thin.
Step 4: Stick with it through hell or high water.
If you can do all of that, you’ll be headed in the right direction to meeting your retirement goals. Bottoms up!
This article was originally published on the Economy & Markets Blog