WHY THE POPULAR GET-RICH-SLOWLY-BY-SAVING IDEA (PROBABLY) WON’T WORK FOR YOU There is good reason to be skeptical of the get-rich-slowly-by-saving doctrine—mainly that it is useful only for those with a lot of working years ahead of them. In The Millionaire Next Door (Longstreet, 1996), for example, most of the millionaires Thomas Stanley studied were ordinary working people who diligently saved for 35 or 40 years—a full lifetime of working. Likewise, in The Automatic Millionaire (Broadway, 2003), David Bach often uses 35 and 40 years to calculate the power of compounded interest: Let’s say that tomorrow you started having 10 percent of your gross income, before taxes, automatically taken out of your paycheck and put in a pretax retirement account. As a result of that simple, automatic process, you would eventually accumulate more wealth than 90 percent of the population. . . . Let’s use the example of someone who makes $50,000 a year. If that’s your annual salary and you took 10 percent out of each paycheck before the government got its bite, by the end of the year you’d have put aside $5,000. Now . . . [if you put that] in a retirement account that earned an annual return of 10 percent, what would you have? The answer is that you would have more than 1 million dollars. Actually, a lot more. The exact figure is $1,678,293. There is nothing inaccurate about Bach’s calculation. In fact, the amazing power of compounding is even more startling when it is applied to people with more years ahead of them. I’m speaking about children here. In his Seeds of Wealth program, Justin Ford makes this point very powerfully: If your children average just over $1 a day in savings through the pre-teen years and a little more than $2 a day through the age of 21, they can end up with anywhere from $335,854 (at 13.2% returns) to $855,279 (at 18.8% returns) a generation from now. What’s more, as they continue practicing those lifelong good money habits, it’s very possible they can achieve a fortune in the millions of dollars during their 30s or 40s—even if they never make a great deal of money in their chosen careers. And while your child is quietly and methodically securing his or her financial future, he or she will be mastering life-long money skills that will enable them to further grow that nest egg into over a million by age 38 . . . and between $9 million and $10 million by the time they’re ready to retire at 55! When you have so much time to save, you can easily acquire great wealth by being frugal. Stanley’s millionaires live in 40-year-old homes, have their shoes resoled, get their furniture reupholstered, use a shopping list when they buy groceries, and buy household supplies at bulk warehouses. This sort of lifestyle—this commitment to saving—is exactly how David Bach believes wealth can and should be accumulated. He calls it the latte factor: One day . . . in an investment course I was teaching, a young woman . . . raised her hand and said, “Your ideas are good in theory . . . but in reality it’s impossible . . . to save. . . . I’m living paycheck to paycheck. . . . How can I possibly save five to 10 dollars a day?” With just about everyone else in the class nodding in agreement, I threw out my lesson plan and decided to devote the rest of the time we had left to answering [her] question. Bach questioned the young lady on her daily spending habits and discovered that she spent $3.50 a day for a nonfat latte, another $1.50 for a nonfat muffin, $4.45 for an afternoon protein drink, and $1.75 for a power bar. That gave her a total daily snack budget of $11.20. Let’s say . . . that today . . . you started to save five dollars a day . . . in a retirement account . . . that equals $150 a month, or almost $2,000 a year.
HOW MUCH WEALTH DO YOU NEED? Most books on the subject of wealth answer this important question in terms of a concept called retirement. And in today’s world, you need a lot of money to retire well. Even people who had their retirement money safely tucked away in the stock market and thought they could look forward to a secure future are now in trouble. Take Martha Parry, for example. The New York woman sold her insurance company and thought she had it made. According to a Time magazine cover story, she had $1 million in the stock market and was looking forward to a retirement of golf, travel, and good times. Then the stock market crashed. And now, at 65, she has only $600,000 in her retirement account. And instead of playing golf and traveling, she’s still at the office earning her living. And she’s one of the lucky ones. Another woman that I read about had to be put on medication for severe depression because a year after being downsized from her job, she learned her nest egg had plummeted from $1 million to $250,000. And many victims of the stock market crash have been left in even worse shape. Tim and Kay Plumlee saw their retirement fund plunge to a mere $60,000 after a broker recommended they put their life savings into a Figuring, say, a 10 percent annual return, which is what the stock market has averaged over the last 50 years, how much do you think you could save by the time you’re 65? The answer was, again, over a million dollars. But the young lady with the question was 23 years old. That’s 42 years of savings. Again, there is nothing inaccurate about this argument. But, chances are, you’re not 23 years old. My guess is that very few 23-year-olds will be reading this book. If you are one of them, and if you take my advice seriously, congratulate yourself. You’ll be richer than Midas well before you are 65. But if, as is more likely, you can’t (or don’t want to) work full-time another 30 or 40 years, my Automatic Wealth program is a much more realistic approach for you to take. In a few year’s time, people saw their life savings slashed by a quarter to a half—some lost much more. And despite the recent market rally, the fall of the dollar, the exportation of jobs to India and China, and the cost of the war on terrorism are likely to keep the 79 million Americans who call themselves baby boomers in jeopardy.
FINANCIAL SECURITY IS A BABY BOOMER PROBLEM . . .AND IT’S GOING TO GET WORSE FOR MOST Like Martha Parry and the Plumlees, aging baby boomers all over America are realizing that there is very little chance that they will be able to retire at 55 or 65. A recent USA Today survey revealed that 35 percent of American workers over 55 admit that they are not financially prepared to do so. How poorly prepared are they? Another study showed that 40 percent have an investable net worth of less than $50,000, 60 percent have less than $100,000, and 80 percent have less than $250,000. If you figure on making 10 percent on your money, this means fewer than one out of five Americans who are nearing retirement age have the wherewithal to enjoy a passive retirement income of more than $25,000.
How well could you live on $25,000 a year? Let’s see. First we must deduct taxes (national, state, and local). Then we have to consider the erosive effect of inflation. What you end up with is a take-home income of less than $1,500 a month—barely enough to keep you in a cheap, two-bedroom apartment. Most baby boomers are going to get poorer as they get older. Not only will their earning power decrease, taxes will likely go up. Add to that the probability of rising inflation, a significant stock market deflation, a flattening of real estate prices, and increased medical costs . . .
WHAT ABOUT SOCIAL SECURITY? If you are thinking that Uncle Sam will step in to take care of you in your golden years, you’re going to be bitterly disappointed. Uncle Sam is trillions of dollars in debt, and Social Security and Medicare are going broke. Here’s why . . . Until now, the amount of money drawn into the Treasury from Social Security taxes (withheld from your pay as FICA and Medicare) has exceeded the outgoing payments made by the Social Security Administration (SSA) for these programs. But by 2017, the SSA will be paying out more in benefits than it collects. In their 2003 Trustees Report, the SSA itself said, “If Social Security is not changed, payroll taxes will have to be increased or massive transfers from general revenues will be required.” Neither of these things is likely to happen. Young people won’t allow their payroll taxes to be increased for the benefit of baby boomers who squandered the funds while they were running the government. Additionally, there are so many boomers retiring (as compared with the number of people who are working) that any tax increase would have to be enormous to have any real effect. And there are certainly no surpluses to be found in general revenues these days. Something has to give. The first cuts will be subtle. Cost of living adjustments (COLAs) will disappear. Then benefits will have to be cut. If not, the debt will become so large that the government will need to inflate our currency— which will result in a devalued dollar and diminished purchasing power. Either way, you’ll end up with less. And the outlook is even worse for Medicare. The Annals of Internal Medicine recently reported that older Americans with health problems are getting the care they need just 52 percent of the time. Can you imagine what will happen when Medicare starts paring back because of dwindling resources? In addition, we’re living an average of 10 years longer than in the 1940s, and the costs of health care continue to increase with no real end in sight. The future of Uncle Sam’s retirement program looks grim. Very grim. But your future doesn’t have to be. You can separate yourself from the crowd of baby boomers who are following their Pied Piper financial leaders into the river of personal debt and misery. With my Automatic Wealth program, you can create your own retirement plan—a personal, financial reparation project that will take you from wherever you are now to relative wealth and comfort in 7 to 15 years. You can live out the second half of your life in ease and comfort . . . but not if you are counting on the government. Take charge of your future now by following the recommendations in this book, and you’ll never have to rely on anyone else, now or in the future, to take care of your needs.
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