Financial Mentor Tue, 19 May 2015 16:25:24 +0000 en-US hourly 1 Todd Tresidder from the blog reveals unconventional wealth building advice and advanced investment strategy tips. Discover the next step in retirement planning and personal finance from a former professional hedge fund manager turned financial educator. If you are tired of the same old “buy, hold, and pray” and worn out frugality tips then this show is for you. Each episode teaches financial freedom for smart people by revealing what works, what doesn’t, and why. Todd has walked the path to wealth himself and coached hundreds of clients just like you to prove out every principle taught – no ivory tower theories or worn out platitudes. He’s organized the entire wealth building process into a cohesive, step-by-step system complete with specific action steps so you can produce measurable results. This isn’t just another “get-rich-quick” or “get out of debt” show. This is about carefully engineering your finances to take charge of your life so you can live the adventure you always imagined life could be. Todd R. Tresidder: Financial coach, wealth building strategist, author, investor no Todd R. Tresidder: Financial coach, wealth building strategist, author, investor ( Todd R. Tresidder: Financial coach, wealth building strategist, author, investor) Copyright CreateCorp Business Solutions Inc. DBA All Rights Reserved Worldwide. Take your retirement planning and wealth building to the next level with unconventional investment advice and financial planning tips based on proven research. Financial Mentor Reno, Nevada U.S.A. Bi-Weekly FM 021: Money and Relationships with Farnoosh Torabi Tue, 28 Apr 2015 21:37:31 +0000

Financial Freedom For Smart People

Your spouse can make or break you financially.

That’s no surprise, given how money is one of the leading causes of divorce.

But there is much more to the relationship and money question than just divorce or marital bliss.

Unless you plan on being single forever, this is an issue that should concern you. It’s important to know how to talk about money with your spouse, and it’s equally important to be on the same financial page.

Just think about all the important financial goals you share with your spouse and how they affect the outcome of your lives together:

  • Will you retire early by building a lifestyle focused on saving and delayed gratification?
  • What house will you buy and how much of your income will you dedicate to a mortgage?
  • Is your car for self-image, or is it just transportation?
  • Do you like to camp on vacation or stay in 5 star hotels?
  • Would you prefer to spend that money on an investment property so you can retire faster?

All of these decisions have long-term financial implications, and they’re much easier to accomplish when you and your spouse are working together as a team.

In addition, there is much more to this than just financial goals. Gone are the days where men are the sole breadwinners in society. Women are climbing the ranks, and that means learning how to overcome the traditional gender roles society has imposed on us for so long. This can cause marital stress if it isn’t handled properly.

That’s why I asked Farnoosh Torabi on as a guest for this episode of the Financial Mentor Podcast. Being a female breadwinner, and the author of When She Makes More: The Truth About Navigating Love and Life for a New Generation of Women, Farnoosh is able to share many valuable insights gained from her personal life and research from the book.

Listen in as we address the complex financial issues couples face today, and get her best tips and solutions to ensure your relationship is a happy and thriving one.

In this episode you’ll discover:

  • How to talk about money with your significant other in a constructive way.
  • The importance of understanding your own money story, as well as your spouse’s.
  • Why you need to be open and transparent about your financial habits.
  • How to foster a supportive dynamic in your relationship, regardless of who has the bigger salary.
  • How women and men can embrace female breadwinners in the family.
  • The critical importance of making your financial values conscious.
  • What to do when you’re in relationship with your financial opposite.
  • Why it’s actually not a bad thing to have differing financial viewpoints in a relationship.
  • Why you might want to think about bringing in a third party to mediate financial discussions.
  • The surprising research showing how women are becoming more successful than men.
  • How you can overcome the unconscious gender biases of our society.
  • How you can make sure you’re on the same financial page as your spouse.
  • Why disagreements about money aren’t always about dollars and cents – money issues go deeper than that.
  • Different techniques for how couples with disparate incomes can manage their money together… blissfully.
  • Why you should consider having separate bank accounts, and a joint account as well.
  • The harmful assumption that whoever earns more has more power in the relationship.
  • How Farnoosh and her husband manage their day-to-day finances – revealed.
  • How financial infidelity can be just as damaging to your relationship as “real” infidelity.
  • and much more….

Resources and Links Mentioned in this Session Include:

Money and relationships with Farnoosh Torabi

Help Out The Show:

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I read every review, and your support helps the show rank so more people find us and benefit from the message.

If you could spare a minute to leave a review on iTunes it would mean a lot to me. Thank you so much!

Click here to subscribe to the show on iTunes and leave a review…

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Get Episode #21 PDF Transcript – Money and Relationships:

Click here to grab the PDF transcript of Episode 21 where Farnoosh Torabi gives us actionable solutions to managing money and relationships.

[dont-hire-a-financial-coach-footer] ]]> 0 Your spouse can make or break you financially. That's no surprise, given how money is one of the leading causes of divorce. But there is much more to the relationship and money question than just divorce or marital bliss. Your spouse can make or break you financially. That's no surprise, given how money is one of the leading causes of divorce. But there is much more to the relationship and money question than just divorce or marital bliss. In this episode of the Financial Mentor podcast Farnoosh Torabi and I take taboo subjects and gender biases head-on so you can avoid the landmines hiding under the financial side of your relationship... Todd R. Tresidder: Financial coach, wealth building strategist, author, investor no 1:03:21
FM 020: How to Get Rich Slowly with J.D. Roth Thu, 23 Apr 2015 00:28:00 +0000

Financial Freedom For Smart People

Everyone wants to know how to get rich, but few ever get there.

The answer is surprisingly simple, but most people seem to have a passion for making things needlessly complicated.

The first step to achieving financial success is you need a rock solid financial foundation. Otherwise, you could have all the money in the world, but no clue on how you should manage it.

A poor financial foundation will cause you to get lost in debt, going through the motions in life without a clear goal, or ignorant as to how you can effectively use every dollar passing through your hands as a tool to build wealth.

That’s why I was excited to interview J.D. Roth, founder of Get Rich Slowly. In this podcast, he shares how bad financial habits and early mistakes put him in credit card debt at the beginning, and how good financial habits turned everything around so that he achieved financial independence at an early age.

You can do the same.

These lessons are simple and timeless, and are consistent with my teachings in both Step 1 and Step 2 of the 7 Steps to 7 Figures course I offer. They can work for you also.

Starting off on the right financial foot is crucial if you want to build wealth. You need to learn how to avoid consumer debt and manage your money like a business, because no one cares more about your money than you do.

In this episode you will discover:

  • The importance of mastering your emotions when it comes to finances.
  • How to manage your money as if it were a business.
  • How you can pay off your debt using the snowball method.
  • Why we need to define our own personal mission statement and goals.
  • The critical role that living consciously plays in achieving financial freedom.
  • How focusing on generating cash flow, and avoiding debt, will bring you financial success.
  • How boosting your savings rate can accelerate the time it takes to reach your objectives.
  • How you can retire quickly, even on a lower salary.
  • Why you should align your spending with your values.
  • Why tracking your numbers is essential to building wealth.
  • Why J.D. believes there’s no one set path to paying off debt.
  • How goals can set context for your decisions and guide you toward financial success.
  • Why you should focus on being proactive with your finances, as opposed to reactive.
  • Why educating yourself is the best thing you can do to improve your financial situation.
  • How to take responsibility for your situation, even if factors are outside of your control.
  • The reason you shouldn’t be aiming for wealth for the sake of having money.
  • How J.D. used several types of leverage to build Get Rich Slowly.
  • How J.D. came to the conclusion it was time to sell the blog and start enjoying life and the wealth he had accumulated.
  • J.D.’s definition of financial independence – is it different from yours?
  • How much money you need for financially independence.
  • How financial independence forces you to shed excuses and start living life on your own terms.
  • and much more….

Resources and Links Mentioned in this Session Include:

Want to learn how to get rich slowly? Build a rock solid financial foundation. Here's how.


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Leaving a review and subscribing to the show on Itunes is the best support you can give.

I read every review, and your support helps the show rank so more people find us and benefit from the message.

If you could spare a minute to leave a review on iTunes it would mean a lot to me. Thank you so much!

Click here to subscribe to the show on iTunes and leave a review…

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Click here to subscribe and leave a review from inside your iTunes account…

Get Episode #20 PDF Transcript – How to Get Rich Slowly:

Click here to grab the PDF transcript of Episode 20 where J.D. Roth explains the process of developing a solid foundation to building wealth.

[how-much-money-do-i-need-to-retire-footer] ]]> 0 The difference between debt and wealth is large in life, but small in terms of the life habits required to actually make the difference. J.D. Roth, founder of Get Rich Slowly, shares how he transformed his financial situation from debt to wealth in jus... The difference between debt and wealth is large in life, but small in terms of the life habits required to actually make the difference. J.D. Roth, founder of Get Rich Slowly, shares how he transformed his financial situation from debt to wealth in just a few short years by simply changing his life habits. These are principles everyone can implement to build a rock-solid financial foundation that will help you achieve your financial goals... Todd R. Tresidder: Financial coach, wealth building strategist, author, investor no 1:21:29
Five “Must Ask” Due Diligence Questions Before Making Any Investment Sat, 14 Mar 2015 23:15:14 +0000

How To Avoid Losing Investments Before They Cost You Money

Key Ideas

  1. Learn how to profit from the “business common-sense test.”
  2. Discover the most important question you should always ask first… before anything else.
  3. Get 5 extra bonus due diligence questions to protect your money.

Ignorance about investing isn’t bliss… it’s expensive.

What you don’t know about investing will cost you money.

But the cure is simple – due diligence.

Due diligence is the critical skill that separates professional investors from amateurs.

Amateur investors act irresponsibly by risking their hard earned dollars on hunches, articles they read, brokerage investment advice, or hot tips without first performing due diligence. This invites unnecessary and avoidable risk resulting in catastrophic losses.

Professional investors do the opposite by investigating all investments first before ever putting a dime of capital at risk.

Sure, it’s a pain and sometimes takes hard work, but getting answers to the tough questions up front can save you from expensive losses down the road.

There’s simply no substitute for investment due diligence because it’s what you don’t know about investing that will cost you.

Below are the five due diligence questions you must ask yourself before making any investment.

Investment due diligence separates the amateurs from the pros. Learn the five "must ask" due diligence questions to improve profits.

Due Diligence Question #1: How Can I Lose Money With This Investment?

This question is so important I’m tempted to throw away the remaining four questions and just repeat it over and over again until you get it in your bones.

You don’t know an investment until you understand all the ways you can lose money with it.

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” -Warren Buffett

I can’t overemphasize the importance of this question. You must first focus on the return of your capital, and only second concern yourself with the return on your capital.

The first question in my mind when analyzing any investment is to find all the ways I can lose money by identifying in advance all the major risks that can lead to losses.

Once these risks are fully identified, the second step is to pro-actively manage away whatever risks are manageable. I explain this two-step due diligence process in greater detail below:

The First Step in Risk Management is to Identify the Risk Profile

Your first job is to identify all the ways you can lose money with a particular investment. You do this by identifying and grouping the risks associated with that investment.

You may be surprised just how much risk is manageable.

With proper portfolio design and investment strategy, you can usually manage away every significant risk (except one or two) to acceptable proportions.

These one or two remaining risks define the specific, uncontrolled risk profile for that investment. It’s the leftover risk you must live with.

In order to manage away the risks of loss, you must first know what risks are inherent to the investment you’re considering.

Using the stock market as an example, there are almost a limitless number of risks, but for practical purposes, they can be profiled down to a few major categories:

  1. “Company specific” risks include things like accounting scandals, lawsuits, and mismanagement – anything unique to the company that’s not part of the industry. These risks are managed away by diversifying among multiple companies. Mutual funds and exchange traded funds (ETF) are great examples of simple, cost effective tools to diversify away company specific risk.
  2. “Industry specific” risks include a downturn in demand for widgets, changes in consumer tastes, disruptive technology changes, and industry law changes. This risk is controlled by not concentrating your portfolio in a single industry.
  3. A closely related risk is “investment style” risk such as value vs. growth, or large cap vs. micro cap. The market will vary how it rewards or punishes different investment styles over time. For this reason, you should manage this risk by not concentrating too heavily in any one specific investment style like micro cap, value, or growth.
  4. “Market” risk is associated with a general downturn in investor’s appetite for stocks, causing an overall reduction in the valuation level of equities. This risk is manageable through a sell discipline, hedging, or by diversifying into non-correlated markets such as real estate, commodities, cash, or international equities rather than solely domestic equities.

Again, the above risk profiles are designed to illustrate stock investing. However, the same principles can (and should be) applied to every asset class in your portfolio.

“All of life is the exercise of risk.” -William Sloane Coffin, Jr.

For example, if you invest in real estate, you wouldn’t want over-concentrate in one property, or one city, or one type of property. It’s wiser to diversify away those risks that can be managed, rather than concentrate them.

The Second Step in Risk Management is to Create a Controlled Risk Profile

Once the risk profile for an investment is fully understood, your job as risk manager is two-fold:

  • First, you must design ways to manage away whatever risks can be eliminated.
  • Second, you must accept only investments where the remaining uncontrolled risk profile doesn’t overlap with other investments in your portfolio.

The end result is a minimization of the total risk for the entire portfolio, because it’s composed of mostly uncorrelated, managed-risk investments.

Why bother with all this? Because lower risk means losing less money when you’re wrong. That’s important because losing less when you’re wrong results in making more when you’re right.

“Often the difference between a successful person and a failure is not one has better abilities or ideas, but the courage that one has to bet on one’s ideas, to take a calculated risk – and to act.” -Andre Malraux

Your ability to manage risk is limited only by your knowledge and creativity.

The critical point to understand is that each investment has unique risk management tools available that are directly related to the unique characteristics of the investment and the market it trades in.

For example, one of the largest risks to income producing real estate is a change in interest rates, since mortgage interest is one of your biggest expenses. This risk can be managed by locking down long term, fixed rate, fully amortizing financing.

You can also limit your loss in real estate to the amount of your down payment through the use of non-recourse financing, thus controlling the risk of widespread capital losses impacting your entire portfolio should one property turn into a loser.

Notice that these two financing tools for managing risk are unique to real estate and aren’t available to investors in business or paper assets (the other two primary paths to wealth).

Each market has its own unique characteristics for managing risk, and the paper asset markets are no different.

For example, most securities markets offer high liquidity and low transaction costs, making them a natural candidate for cost effectively managing many risks through a sell discipline.

In fact, many mutual funds have zero transaction costs and daily liquidity through their commission free exchange privilege.

However, using a sell strategy in real estate to control downside capital risk doesn’t make sense compared to paper assets because of the prohibitively high transactions costs, and possible low liquidity during tough market conditions when you would want to sell.

In short, each market has unique characteristics that can be exploited to effectively manage the risk inherent in that market. What works in one market to lower risk may not apply in another market.

Due Diligence Image

In summary, your first due diligence question is to uncover all the ways you can lose money with an investment.

  • The first step in this process is to profile what the risks are inherent in that investment.
  • The second step is to develop strategies to control losses that match the unique character of that asset should the worst come to pass.

This is the essence of active risk management.

“And the day came when the risk to remain tight in the bud was more painful than the risk it took to blossom.” -Anais Nin

After you have managed away all risks that can be eliminated, you’re left with a specific, uncontrolled risk profile for that investment. This leads to your final risk management step, which is to make sure the remaining risk profile doesn’t correlate with other investments in your portfolio.

For example, when I purchase apartment buildings, they are financed with long-term, non-recourse debt to control both interest rate risk and to minimize total risk of loss should Murphy’s Law prevail.

In addition, each building is located in a different geographic market to assure the uncontrollable risk profile associated with location doesn’t correlate to other assets in my portfolio.

The risk of loss on each apartment building similarly has no correlation to the risk inherent in my paper asset portfolio or my business. Each risk profile is unique to the asset.

This excessive focus on risk might seem pessimistic to many, but my experience is quite the opposite. All it really does is bring balance because investing is by definition a game of greed.

The objective is to make money so the game is naturally played offensively by looking for the profit. By disciplining yourself to look for the loss, you’ll balance offense with an equally strong defense to create a winning team.

Stated another way, the hallmark of great investors isn’t just strong positive returns, but consistent returns through all market conditions.

This can only be achieved by focusing on controlling losses through disciplined risk management.

Due Diligence Question #2: How Will This Investment Help Me Achieve My Personal and Portfolio Objectives?

The portfolio objective for most investors is to maximize profit with minimum risk.

You achieve this goal by building a diversified portfolio of non-correlated, risk managed, high mathematical expectation investment strategies that capitalize on a competitive advantage in business, real estate, and/or paper asset investing. (Sorry, I know it’s a mouthful. Read it twice. There is a lot of meat in that sentence.)

But it’s not enough to just have a portfolio objective – you must also have a personal objective.

Your personal objective for investing is to achieve your portfolio objective in a way that honors your personal values, skills, and interests.

You’re a unique human being who must travel his own path to success. After all, there’s no point in climbing the ladder to success if it’s leaning against the wrong wall.

“Success with money, family, relationships, health, and careers is the ability to reach your personal objectives in the shortest time, with the least effort and with the fewest mistakes. The goals you set for yourself and the strategies you choose become your blueprint or plan. Strategies are like recipes: choose the right ingredients, mix them in the correct proportions, and you’ll always produce the same predictable results: in this case financial success.” -Charles J. Givens

Investment success is a lifelong process, and humans aren’t robots. The only way you’ll stay the course long enough to succeed is when your investment strategy fits your interests, skills, goals and resources, thus providing emotional satisfaction.

Stated another way, one of the biggest obstacles to success is getting distracted by the endless opportunities that will cross your path.

There are many ways to make money investing, but I recommend you find the one or two that are going to work for you, and not get diverted by all the rest. You must stay the course long-term until you succeed.

For example, I’ve worked with successful real estate investors in single family homes, commercial real estate, mini-storage, office parks, mobile home parks, notes, apartments, and more. Yet, seldom do I meet successful investors who are actively working more than one of these investment niches at any one time.

The smorgasbord approach to investing doesn’t work because each investment specialty has its own twists and turns that require specialized expertise.

Each niche has its own network that you must plug into for success. Each niche requires its own specialized skills and competitive advantage.

Nobody can (or should) be a master of all investment strategies because any one offers more than enough opportunity to reach financial freedom.

For that reason, you must determine which niche has the inherent characteristics that best fits your interests, investment goals, and risk tolerance because that’s where you’ll discover wealth, happiness and fulfillment.

Not every investment alternative is suitable for every investor. Your job is to find the one uniquely suitable for you.

For example, every investment has an “active” and “passive” component to it. If you don’t want to be a “hands on” real estate investor, then professionally managed apartment complexes make more sense than single family homes.

Even greater passivity can be obtained through paper asset investing if that fits your objective.

“Success is the progressive realization of worthwhile, predetermined, personal goals.” -Paul J. Meyer

However, if you’re age 55 and just starting to build for retirement, then beware of investment advice pushing you toward passive investments like paper assets. Your situation may require the leverage only available in business and real estate to allow you to make up for the late start and still achieve your financial goals.

In summary, if you want to succeed with investing, you must make sure Step 2 of your due diligence process analyzes each investment for congruence with your personal and portfolio objectives.

Below is a summary of the key points in the second due diligence question:

  1. Each paper asset investment strategy must have a positive mathematical expectation, and each business or real estate investment strategy must have a competitive advantage or exploitable market edge to place the odds for profit in your favor. This is the source of your investment return.
  2. The source of investment return must persist long enough into the future to be reliably exploited (adequate sample size).
  3. The investment strategy must be consistent with your personal skills, interests, values and abilities.
  4. The investment strategy must be consistent with your portfolio objectives.
  5. You must follow the investment strategy long enough to benefit from the competitive advantage without being distracted by other investment alternatives.

When your investment passes these tests, then it’s worth putting your hard-earned capital at risk to try and reach your personal and portfolio objectives. Your financial coach can be particularly valuable in clarifying these principles and how to apply them because he has no conflict of interest biasing his investment advice since he sells no investment products.

Due Diligence Question #3: What’s My Exit Strategy?


You should always have your exit planned before acquiring any investment.

Why? No investment is appropriate forever.

Times change, market conditions change, and your objectives change.

You have a reason for acquiring an investment, and when those reasons are violated, it’s time to exit without delay. By knowing your reasons in advance, there’s no confusion or hesitation with the sell decision.

The reason it’s important to sell is because your portfolio is a living entity. Selling is to your portfolio what pruning deadwood is to a tree – it makes room for new growth to occur. It’s healthy.

You should never marry your investments.

Polaroid was once a darling blue chip stock that got decimated by technology changes. The rust belt was a real estate boom at one point, and the railroads were the king of transportation … but not anymore.

Everything changes, and you must change your portfolio to be congruent with the times.

There’s no such thing as a “permanent investment”. I’ve never met an investment I wouldn’t sell given the right circumstances. My job as the manager of my portfolio is to understand what those circumstances are, so that I’m ready to take action when conditions warrant it.

“Affairs are easier of entrance than of exit; and it is but common prudence to see our way out before we venture in.” -Aesop

I must know the assumptions and premises under which I enter an investment so that I can exit as soon as they are violated. Wherever possible, I must pre-define exit points in terms of price to control losses when things go wrong.

For example, I was a partner in a company that invested in real estate tax liens. We developed an entire business model to acquire valuable real estate for little more than back taxes. Yes, we actually purchased valuable real estate free and clear for pennies on the dollar of what it was really worth.

However, despite it being profitable, we exited the business because we learned how a legal assumption critical to the success of our model was simply wrong.

Once we uncovered the false premise of our model, we exited with our profit and moved on to greener pastures. We knew the reasons behind our model, and we knew when that model was invalidated.

Some would question our logic because the model had previously been profitable, but we knew it was just a question of time until the invalid assumption would bite us in the rear.

Similarly, when I enter equity positions, I pre-define the point at which I’ll exit based on price behavior that would prove my decision was incorrect.

In summary, you must always pre-define your exit strategy because the first loss is usually the best loss.

You must conserve capital when the inevitable mistake arises so that you’re prepared to invest in the next opportunity. By consistently pruning your portfolio of troubled investments, you’re making room for new growth to occur.

“A prudent question is one half of wisdom.” -Francis Bacon, Sr.

Due Diligence Question #4: How Does This Investment Make Business Sense?

Investing is ultimately about business, so every investment must make business sense.

What that means is the earnings, valuation, and return on investment must be congruent with the competitive advantage and barriers to entry possessed by the underlying business.

Let me clarify this idea with a little bit of Economics 101.

The world of business and finance is competitive. Above market returns and excessive valuations can only be supported if a significant competitive advantage coupled with barriers to entry for future competitors exists.

Otherwise, the high valuations and returns will attract competition until returns and valuations are forced down to market level. In plain language, that means your investment loses money – which is a bad thing.

For example, when the NASDAQ indexes were selling at over 200 times earnings in 2000, it didn’t take a genius to figure out this made no sense. How could a broad equity index representing a claim on the earning power of many companies in competition with each other be worth 200 years of earnings?

The truth is it wasn’t, and prices declined accordingly.

Similarly, when looking at various Southern California apartment deals in 2005, it didn’t take a genius to figure out they made no business sense when they were selling at prices so high you couldn’t service the debt with zero vacancy, no operating costs, zero taxes or insurance, and the lowest interest rates in the last 40 years.

There isn’t a valuation model in existence that can make business sense out of such inflated prices except the greater fool theory.

In summary, you can use the business common sense test to help you avoid dangerous investment manias and speculative bubbles that can lead to losses.

Investment Questions Image

Investment Advice: How To Avoid Fraud With The Business Common Sense Test

But the business common sense test isn’t just limited to avoiding investment manias and speculative bubbles, because you can also use this same test to sniff out potential frauds.

For example, a common fraud I see is the classic “Ponzi” scheme where someone is offering you outrageous interest rates on your money and “guaranteeing” your principle to invest.

The business idea supporting the investment usually sounds plausible on the surface, but is often laced with techno-babble terminology to intimidate the novice from asking the following necessary and obvious questions:

  1. How does it make business sense for the promoter to go through all the headaches of soliciting many small investors, when a legitimate business could attract all the capital needed from professionals with one phone call and at lower interest rates? (Answer: It probably isn’t legitimate, and a professional would figure that out with due diligence – amateurs don’t do their due diligence.)
  2. How are the exorbitant returns being promised adequately earned by the underlying business, and what are the barriers to entry that will keep those returns from being competed away (assuming the business is legitimate)?
  3. What’s really behind the “guarantee” and what’s really being guaranteed anyway? (Investment advice: the more somebody “guarantees”, the closer you should look at the guarantee and what you’re being guaranteed from.)

Knowledge is the nemesis of the con man, and an informed investor who’s willing to ask questions is his worst enemy.

The way you learn is by asking questions and listening – that’s what due diligence is all about.

Amateurs want to hope and believe they found an easy road to wealth so they don’t ask questions and don’t want to know the truth. The result is usually expensive.

I see investment fraud cross my desk with remarkable regularity. They’re out there, and if you invest, you must apply business common sense and do your due diligence to flush this stuff out.

I’ve saved many clients hundreds of thousands of dollars just by coaching them on how to ask the right questions … and I can help you, too.

“Just wanted to thank you for your advice about the (name withheld for legal reasons) investment. I recently cashed $220K out of his deals making over 20%. The money was over a month late but it arrived. A real estate lawyer thought it was the worst contract he had ever seen; from the first sentence he knew it was bogus. Working with you really helped. I got an education and learned to do my due diligence and let the numbers be the basis for my decision.” -Name Withheld For Legal Reasons

(This scam was later uncovered by the S.E.C. – investors who didn’t get out early lost everything.)

Always remember that your investment represents a claim on either the assets or earning power of the underlying business. Whether it’s debt, equity, or real estate, you must ultimately be able to make business sense of the return you’re being promised.

If it doesn’t make business sense, then it probably isn’t real.

Remember, if it sounds too good to be true, then it probably is. That’s just common sense investment advice for a competitive business world.

Due Diligence Question #5: How Does This Investment Affect The Risk Profile And Mathematical Expectancy Of My Portfolio?

For the statistically or financially trained, what we are talking about here is efficient frontiers and modern portfolio theory. For the rest of us, I’ll try to translate into plain English.

You should never add an investment to your portfolio unless it either lowers your portfolio’s risk, or raises its return. Preferably, you should get both.

How do you do this?

Let’s say you have an investment strategy in stocks that returns 8% compounded over multiple cycles in the market, but loses money during bear markets. If you add an inversely correlated asset (something that zigs when the other asset zags) with a return expectancy of 12%, you’ll lower the risk of the whole portfolio while increasing the return.

Examples of assets with low or negative correlation to domestic stocks include commodities, gold stocks, real estate, and certain alternative investment classes like hedge funds.

All investments should first be analyzed for their risk profile (under what conditions they will zag), and their mathematical expectation (how much they should return over time).

In Summary …

In summary, the game of investing is won or lost on the due diligence battlefield.

You must ask questions until you have the answers you need to make an intelligent decision. A quick review of the five “must ask” due diligence questions follows:

  1. How can I lose money with this investment?
  2. How will this investment help me achieve my personal and portfolio objectives?
  3. What’s my exit strategy?
  4. Does this investment pass the business common sense test?
  5. How does this investment affect the risk profile and mathematical expectancy of my portfolio?

My intention is for the above list of due diligence questions to serve as a basic starting point for your own due diligence process.

I don’t pretend this list is exhaustive because a whole book could be written on the subject. Other due diligence questions to consider include:

“The key to wisdom is knowing all the right questions.” -John A. Simone, Sr.

  1. How realistic is the expected return?
  2. What are the assumptions and drivers behind the expected return?
  3. How dependent is the historical return on the time period analyzed?
  4. What are the tax consequences of this investment?
  5. What’s the background and history of each principal involved?
  6. And many, many more.

My goal with this article was to arm you with some of the more important due diligence questions that can help you avoid the most obvious and expensive errors on the road to retire early and wealthy.

I hope it helps you.



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Why Most Wealth Building Systems Fail Wed, 04 Mar 2015 02:58:27 +0000

Learn The Cause And Effect Chain That Builds Wealth So You Can Discover Which Broken Link In The Chain Has Held You Back… Until Now!

Key Ideas

  1. Explains how most approaches to wealth building are half-truths.
  2. Why you’ll only be as successful as the weakest link in your “wealth chain.”
  3. Reveals how to avoid breaking links so you can build your wealth faster.

Why do most wealth building systems and programs taught by financial experts fail?

To understand this problem, lets begin with a story.

It’s a famous Indian folktale about three blind men and an elephant.

In this story, each blind man is asked to walk up to the elephant, feel it with his hands, and describe what an elephant is.

The first blind man puts his arms around the leg and decides the elephant is sturdy and strong, like a tree.

The second blind man grabs the swinging tail and defines the elephant like a rope.

The third blind man holds the ear and believes the elephant is like a giant fan.

Each man is partly right, but dangerously wrong. None has grasped the bigger picture because the truth of the elephant is far more complex than any one blind man’s narrow experience can convey.

The same is true when building wealth.

Many people teach fragmented pieces of wealth building strategy – half truths – but they’re blind to the bigger picture. They don’t understand the entire elephant.

If you aren’t working all parts of the wealth building elephant together, then you’re setting yourself up for financial disappointment. You want to understand the whole elephant to put the odds of success on your side.

Wealth Building Systems image

The Three Schools Of Wealth Building

Most wealth education can be broken into three schools of thought:

  • The manifesting school: prosperity consciousness (laws of attraction)
  • The productivity school: work hard
  • The “how-to” school: developing skills.

Each school teaches a partial truth about wealth building.

The thought manifests as the word; The word manifests as the deed; The deed develops into habit; And habit hardens into character. So watch the thought and its ways with care… – The Buddha

The manifesting school teaches prosperity-abundance-laws of attraction by emphasizing your thinking process. The underlying premise is when you change your thoughts, then success will follow, because success in the external world is a mirror reflection of your internal thoughts. It’s a new-age approach to wealth building. Your success, or lack thereof, is all in your head.

The work-ethic, productivity school teaches that your actions are what create results. It’s a salt of the earth, brick and mortar approach. You create your wealth by working hard to achieve it. The more you work, the more you make. Your success, or lack thereof, is all because of your actions.

The how-to skills school teaches the latest tricks and techniques to build wealth. The underlying belief is if you just knew what to do, then you would actually do it – all you need is better technique. This approach focuses on how-to skills and strategy. Your success, or lack thereof, is all because of what you know.

The reality is each school is a dangerous half-truth.

The wealth building systems they teach in their books, seminars and workshops are only partially correct, just like a blind man holding the tail of an elephant is only partially correct in defining the elephant as a rope.

Unfortunately, partial truths are also partially false. The elephant isn’t like a rope, and building wealth isn’t as simple as any one of these schools teaches. There is a subtle complexity to the process.

Building wealth with half-truths is like trying to build a house with only a hammer. Where are the saws, levels, punches, chisels, and blueprints?

The reality of home building is a more complex question than any one hammer can solve, and building wealth is more complex than any one school of thought can address.

You’ll grow your wealth with minimum resistance and maximum speed when you learn how to integrate all three schools into a single, cohesive cause and effect model. Building wealth isn’t an either-or situation where you learn certain skills, you manifest prosperity, or you become industrious any more than building a house is solely about a hammer and nails.

Each school of thought offers valuable tools for solving specific problems, but none is a stand-alone, complete solution. Each is just another tool in your toolbox.

Why short-change yourself and take the risk of working with only one tool?

Put the odds of success on your side by integrating all the schools of thought into one cohesive, simple cause and effect model. Give yourself a complete toolbox because the whole is far greater than the sum of the parts.

Overview – The Cause And Effect Model For A Complete Wealth Building System

The financial coaching programs at Financial Mentor blend all three separate schools of wealth building into an inseparable continuum of cause and effect.

Wealth is just an effect, and the cause is a three link chain where your probability of success is only as strong as your weakest link. Below are the links:

  • Link 1: Your thoughts determine your actions (manifesting school).
  • Link 2: Your habitual actions determine your results (work ethic school).
  • Link 3: Your results are limited by the effectiveness of the plan you implement (how-to school).

In other words, what you think determines what you do (link 1): what you do and how you do it determines your results (link 2): and your results are only effective at attaining a goal when they are focused and directed by a plan based on proven principles that actually work (link 3).

It all has to work together or it doesn’t work at all. That is a key point to understand.

Each link is essential because the chain of cause and effect is an inseparable continuum.

Unfortunately, almost none of the seminars, workshops, or coaching programs available offer this complete solution. Instead, they teach half-truths as if they were the whole truth, like the blind man defines the elephant based on his limited experience.

They are self-deceived.

Breaking The Cause And Effect Wealth System


Multiple studies prove only a small percentage of the population retires wealthy.

How does this happen in a world where most people desire financial security, and are inundated with offerings for educational seminars, workshops, books, and coaching programs teaching wealth building ideas?

Certainly, it’s not from lack of information.

Instead, lack of wealth can nearly always be traced back to a break in one or more of the three links in the cause and effect wealth chain. Let’s look at how that happens…

The first link is broken when you don’t believe you deserve wealth, ignore financial issues, or falsely conclude wealth isn’t really possible for you in this lifetime.

Thinking negatively about yourself, wealthy people, investing, or financial issues breaks the connection between link one (prosperous thoughts) and link two (action).

When you criticize any aspect of wealth, it only serves to separate you from having it. The content in your brain will determine the context of your life, and limiting thoughts about yourself and wealth will naturally limit your ability to reach the goal. It’s simple cause and effect.

There is never a shortage of time. Instead, there is a confusion of priorities. – Unknown

The second link in the chain is broken when your action is insufficient to create the desired result.

If you procrastinate, act inconsistently, or don’t follow through on your wealth building plans, then link two is a problem for you.

Maybe other life issues besides financial security are a higher priority for you, or maybe your daily actions aren’t based on your highest priorities due to a lack of clarity. Whatever the reason, your action is inadequate, which means your results will be as well.

The final link, link three, requires you to develop a plan to achieve wealth based on proven success principles. This link is a problem for you if you have no real plan to achieve wealth, your plan is poorly designed, based on incorrect assumptions, or is out of congruence with your resources and abilities.

A properly designed wealth plan helps you do the “right thing” rather than just “anything”. It keeps your actions focused and directed so that you reach your goal in less time using less effort.

This cause and effect chain explains why so few people achieve wealth. All it takes is for any single link to break, and that’s enough to slow or stop all progress toward building wealth.

Breaking only one link in the chain can set you up for financial failure, and that is why so few people actually succeed at building wealth.

Fixing The Cause and Effect Chain To Wealth

How does this play out in real life?

Based on coaching experience, most people need help developing more than one link to balance and complete their wealth building plans.

Most clients are typically strong in one link, and need help in the other two. This is because we all have natural tendencies based on our personality that make us strong at one link while weaker at others.

For example, analytical types are good at planning (link three), while driven types are strong action takers (link two). Visionaries and creative types are good at manifesting (link one). Very rarely is someone naturally good at all three types.

Few personalities are sufficiently balanced without coaching and other personal development work to excel in all three categories.

There is no expedient to which a man will not go to avoid the labor of thinking. – Thomas A. Edison

That is why you should be careful with all the courses, workshops, seminars, and coaching programs that claim to teach a stand alone solution to the wealth building elephant, but are limited in scope to just one of the links in the chain. Building wealth simply doesn’t work that way: it requires a complete solution.

The danger is you’ll be attracted to and want to purchase educational information that is congruent with your personality type (we like what is most like us).

Analytical personalities will be drawn toward how-to courses, creative types will believe in manifesting knowledge, and the hard driving worker bees will believe the solution is to become more productive.

You’re attracted to what you already know because it’s easy and comfortable, but it’s the direct opposite of what you should be doing to achieve success.

If your goal is financial success, then you should strengthen your weakest links. Don’t play to your strengths, which is the natural tendency and comfortable thing to do. Instead, find your weakness and develop it into strength. Build on the links that are broken by doing what is uncomfortable. Your wealth depends on it.

Below are just a few examples to illustrate what can go wrong when your wealth plan has broken links.

Here's why most wealth building systems fail, and how you can overcome the obstacles.

Link One: The Tricks And Traps Of Prosperity Consciousness

Our subconscious minds have no sense of humor, play no jokes and cannot tell the difference between reality and an imagined thought or image. What we continually think about eventually will manifest in our lives. Unfortunately most of us are completely unaware of this fact, and we don’t monitor our thoughts with the care needed so that we can create in our lives the results we say we want. Since the great majority of people don’t feel worthy and deserving of abundant good fortune, radiant good health and total success in all areas of their lives that overriding thought pattern controls the results people get. The first order of business of anyone who wants to enjoy success in all areas of his/her life is to take charge of the internal dialogue they have and only think, say and behave in a manner consistent with the results they truly desire. – Sidney Madwed

Some wealth seekers might be tempted to dismiss the laws of attraction, prosperity consciousness, and abundance thinking as “airy-fairy” or irrelevant.

However, this school teaches the valid principle that when thinking is focused on building wealth and awareness is increased, the result will be improved actions.

The more you focus on building wealth, the more wealth you’ll create. Your thoughts become your reality.

With that said, however, it’s equally important to understand that thought alone isn’t going to cut it in the wealth building game. Your heightened awareness must translate into improved actions to create reliable results, because action is where the rubber meets the road.

Thought is the first link, but it must connect to the second link (action) or the chain is broken. A broken chain means disappointing results.

For example, one trap I’ve noticed is “magical thinking”, where people falsely believe wealth and financial security will somehow take care of itself as if it were solely a matter of faith. They think this belief will magically manifest itself in reality.

When pressed for their plan or asked what actions they are taking today and tomorrow to make it happen, there is usually silence. Belief, when used as a rationalization to avoid concrete action and planning, violates the chain of cause and effect. It’s dangerous to your wealth.

You must do something to solve your money problems and build wealth – you must take action. Anything less is irresponsible. Everyone is worthy of wealth, but no one is entitled to it – it must be earned.

Trying to think the problem away or magically manifest financial security is like trying to build a house with blueprints but no tools. Not a lot of progress will be made. Why short-change yourself?

Conversely, those who lack a working understanding of prosperity consciousness often fall victim to their own limiting thoughts. They are also missing essential tools. The limiting thoughts act like a ball and chain, making the journey to wealth laborious, hard work.

Building wealth is a painful process when you’re missing the first link, and it flows much easier when the first link is functioning.

Courage and perseverance have a magical talisman, before which difficulties disappear and obstacles vanish into air.– John Quincy Adams

The value in prosperity consciousness is it helps you release the brakes on your journey to wealth. The laws of attraction reduce friction and open up possibilities.

If you’re stuck in your thinking, have negative beliefs around yourself or money, limiting self-esteem issues, or can’t imagine yourself wealthy, then prosperity consciousness and the laws of attraction may be an appropriate next step for you.

Use prosperity consciousness to remove obstacles to wealth so that you’re motivated to greater action and develop strategic plans. Use it as a refinement to action and planning, but never use it as a substitute for action and planning.

Nobody is entitled to wealth, and no amount of positive thinking and manifesting can ever be a substitute for quality planning and action.

Link Two: The Tricks And Traps of Getting Into Action

Action is the most important link in the wealth chain because it’s the center link.

It’s the bridge that connects your thinking to your plan to produce results.

You may envision extraordinary financial success and develop genius plans to achieve it, but what you actually get done is what really matters. Results tell the truth.

Bad habits are like a comfortable bed, easy to get into, but hard to get out of. – Unknown

The trap with link two is to falsely believe more action equals more wealth. “The harder you work, the more you make” isn’t a prescription for wealth, but instead is a prescription for an out-of-balance life.

Hard work will likely be involved in building wealth, but what is really required is working smarter.

Countless people work very hard to get ahead, but rarely do they achieve the goal. That’s why links one and three are essential. They help you work smarter.

For example, if your plan for wealth is based on trading time for money, then you’re doomed before you begin. No matter how many hours you work or how much you earn per hour, you’ll still fail at building wealth because your plan is fundamentally flawed (link 3 is broken).

Trading time for money lacks leverage, and leverage is an essential part of any plan to become wealthy. Trading time for money might earn you a nice lifestyle, but it can never make you wealthy. You need a better plan.

Similarly, you may work real hard executing a brilliant plan to build wealth, but get sidetracked in your progress by messing up one or two critical decisions.

Building wealth is governed by Pareto’s law where 80% of your results come from 20% of your decisions. Clients with negative thoughts about themselves and wealth (link one broken) are far more likely to botch up the critical 20% of decisions that can make or break financial success. The result is working too hard for too little wealth.

Link two is most effective when it’s used to convert healthy financial consciousness and well designed plans into material reality. In other words, don’t get too heavy into action until your plans and your thoughts are proven out first.

Test small and keep risk to a minimum until you have a proven formula – then roll it out with maximum action for maximum gain. That’s the smart way to build wealth.

Don’t fall prey to the trap of believing wealth is just about working harder – because it isn’t. You may have to work hard to implement your thoughts and plans, but just working hard isn’t enough.

You must work smart.

Link Three: The Tricks And Traps Of Your Wealth Plan

Your wealth plan is what brings purpose, focus, and consistency to your actions and thoughts. It provides the filter through which action and manifestation are processed.

Without a plan based on proven success principles, your actions will be diffused, disjointed, and possibly even pointing in the wrong direction. A well designed plan can help you achieve your financial goals with less effort and faster results.

Below are just a few of the principles that must be included in a successful wealth plan:

  • Leverage
  • Risk Management
  • Asset class growth limits
  • Personal skills, interests, abilities
  • Life Cycle of Wealth
  • Habits of self-made millionaires
  • Business Systems
  • and much more

When your efforts are consistent and congruent with proven success principles, then you’ll produce reliable results.

A frequent trap of wealth builders is to master their thinking (link 1) and take great action (link 2), but fall short of achieving the goal because their plan pointed them in the wrong direction.

For example, I coached a client whose goal was time freedom. He was mentored by a “half-truth” school to accumulate single family homes as his wealth plan. The result was he made plenty of money, but was unhappy.

He felt as if he had invested himself into another job and was no freer than before he began. The problem was he broke link three because his plan was incongruent with his goals and values. He climbed the ladder to success, but the ladder was leaning against the wrong wall.

Another trap with link three is the “get ready to get ready” syndrome. In this trap, planning becomes a substitute for action.

You can’t get wealthy by attending seminars and reading books – you must take action. You can’t just intellectualize the process – you must make it happen.

There is a fine line that differentiates the practice of preparing a well thought out plan from the practice of analysis-paralysis. Action (link 2) must connect to planning (link 3), or the chain is broken. Balance is the key.

All science is concerned with the relationship of cause and effect. Each scientific discovery increases man’s ability to predict the consequences of his action and thus his ability to control future events. – Lawrence J. Peters

A final trap with link three occurs when contradictory principles are taught as part of link one and two.

For example, I’ve attended prosperity coaching programs and workshops that incorrectly encouraged people to purchase flashy cars or designer clothes so they could feel abundant and attract additional wealth from that positive state of mind. This is a flagrant violation of fundamental wealth building principles.

In fact, collapsing wealth and abundance thinking with material goods is one of the primary causes of debt and poverty. Making wealth about the pursuit of stuff instead of the pursuit of freedom is a vicious cycle that must be broken, otherwise spending grows as income grows, causing true wealth to remain forever elusive.

It’s the opposite of what actual millionaires practice, as evidenced by studies such as “The Millionaire Next Door”. Spending your way to prosperity may feel temporarily abundant, but your financial statement knows the truth. Nobody ever spent their way to financial freedom.

These are just a few examples of how half-truth teachings offered in isolation from the complete cause and effect chain may contradict what really works in practice to build wealth.

Putting It All Together Into One Wealth Building System

There are four key principles to take away from the cause and effect wealth chain:

  1. Building wealth is a big elephant to understand. Beware of single-link half-truths sold as complete solutions.
  2. Your odds of succeeding at building wealth are only as strong as the weakest link in your chain.
  3. Few people are good at all three links. Your job is to balance yourself by converting your weakest links into personal strengths.
  4. Up until now, no one has offered a complete solution that integrated all three schools of thought into one cohesive model. The result was unnecessary expense, wasted time, and wasted energy, as genuine wealth seekers fell into various traps on their journey to financial security.

“Seven Steps to Seven Figures” is a step-by-step wealth building system that integrates all three schools of thought into one cohesive financial coaching program.

Steps Two and Four work together to overcome the obstacles in your thinking that keep you from consistent and persistent action. Step three teaches you proven wealth building principles and shows you how to build your personalized plan to grow wealth so that your actions are efficient, laser focused, and purposeful.

Shallow men believe in luck. Strong men believe in cause and effect. – Ralph Waldo Emerson

When you add the financial steps in 1, 5, & 6 you have a complete wealth building coaching program so that none of the links in your cause and effect chain are weak or broken.

When you master the cause and effect wealth chain, you’ll know how to sidestep the tricks and traps that have stopped so many before you from successfully building wealth.

You’ll be actively working all three links so that your chain is strong and powerful. The result will be more wealth more consistently, with fewer problems.

It’s simple cause and effect.

[how-much-money-do-i-need-to-retire-footer] ]]> 10
Build Wealth With This Goal Setting System Mon, 23 Feb 2015 13:48:26 +0000

Reveals the Personal Goal Setting System That Helped Todd Retire Early And Wealthy… So That You Can Do The Same.

Key Ideas

  1. You may think you already know all about goal setting, but results probably prove otherwise.
  2. Discover the 5 ways that written goals give you a wealth building advantage.
  3. Reveals the exact 7 step goal setting system I personally used to build wealth.

Success is a choice.

You alone decide what you want and how you’ll achieve it.

If you don’t set goals, then you’re implicitly handing your life over to divine fate and betting on luck to provide for your needs.

When you set goals, you’re pro-actively choosing a life path with self-responsibility and playing an active role in your destiny – and that can make the difference between success and failure.

Additionally, if you aren’t writing your goals down and reviewing them regularly, then you aren’t setting yourself up to win. You are shortchanging yourself and your financial future.

Without goals, your life is like a sailboat without a rudder: it’ll just spin in circles. Without goals, your daily life is as purposeless as driving a car without a destination in mind. Goals are the focal point that gives your life direction and drives successful forward momentum.

In order for you to realize your potential as a human being, then goal setting is as necessary as breathing.

I like to think of the time spent writing and reviewing my goals as an investment in my future. It doesn’t cost me time: it saves me time by eliminating waste.

The process creates amazing results, and nobody will charge you a dime for it. Where else can you risk nothing and get a huge potential reward? It’s a no-brainer: everyone should do it.

Yet, surprisingly few people take advantage of this free and proven formula to success. In fact, Harvard Business School conducted a study on goal setting and found:

  • 83% of the population doesn’t have clearly defined goals.
  • 14% have goals but they aren’t written down.
  • Only 3% have goals that they commit to in writing.

After a 30-year follow up, the conclusion was the 3% with written goals earned an astounding 10 times the amount of the 83% group. Impressed?

Well, other studies have shown people with written goals also tend to have better health and happier marriages. Do any of those results motivate you to write out your goals?

The bottom line is proper goal setting is essential to your success, yet few people do it.

Shocking, but true.

If you want to retire early and wealthy and be part of the 5% who create financial security in their lives, then you’ll make maximum use of this free and incredibly valuable tool.

Use this 7 step goal setting system to secure your financial future.

Five Ways Goal Setting Helps You Build Wealth

Your life is an endless series of daily choices, and how you manage those choices will determine the outcome of your life.

Yet, most of our decisions are made subconsciously.

By setting goals, you set a context from which you are consciously making your daily decisions. You’re applying the resources of your mind to accomplish a specific outcome. As a result, your life moves toward the goal.

“In absence of clearly defined goals, we become strangely loyal to performing daily acts of trivia.”– Unknown

The reason goal setting works so well is because specific changes occur in your mind as a result of writing out your goals. Your awareness is affected in five different ways, each giving you a competitive advantage over others who do not set goals:

  1. The first advantage develops from your mind asking questions about how you’ll achieve the goal. Asking the right questions is more than half the battle to achieving the goal in the first place because it focuses your attention. Forming a goal and asking questions about how you’ll achieve it actively engages your mind in resolving the discrepancy between where you are now in life, and where you want to go.
  2. The second competitive advantage results from focusing your attention on where you want to go. Without goals, your mind is in a vacuum and has nothing to focus on. Negative focus creates negative results, while no focus creates random results, and goal oriented focus creates the results you desire most. Goal setting lifts your objective up from underneath the bottomless pile of possibilities that exists in the world, and puts it in the forefront of your mind.
  3. The third competitive advantage results from forming a compelling vision in your mind representing all the reasons why you want the goal. This helps motivate you to put forth the effort to achieve the goal, much like putting a carrot in front of a horse will draw him forward to take step after step to reach his goal. Desire is a powerful motivator.

“More men fail through lack of purpose than lack of talent.” – Billy Sunday

  1. The fourth advantage occurs when your personal competitiveness begins to work in your favor as you strive to achieve your goals. You don’t want to let yourself down, so you compete against your own standard of acceptable performance. This can sometimes escalate into an internal race to achieve, because the competition can motivate you to excel and work harder just to prove that you’re capable.
  2. The fifth competitive advantage of goal setting is your mind begins to notice opportunities to achieve the goal that might have otherwise been overlooked. This is because of the front-of-the-mind awareness resulting from setting the goal. For example, have you ever noticed when you want something that it suddenly appears everywhere when before, you never noticed it? It’s as if a beacon got turned on in your mind that illuminates everything in the outer world that can help you achieve your inner goal.

I had that experience recently when I decided to buy a Lazy Daze brand motor home and started noticing them everywhere. I never noticed the Lazy Daze brand before, but my eyes were guaranteed to pick that particular brand out from all other vehicles on the road. I didn’t notice other brands of motor homes or other vehicles; I only noticed what my mind had set its sights on acquiring.

Your mind works the same way with wealth and investing. You’ll see possibilities and solutions you never would have noticed had you not set the goal and committed to it.

Creating a heightened awareness around your financial objectives by setting goals prepares your mind to recognize opportunity when it appears.

“Penicillin was indeed the product of accidental discovery, but the discovery was made, and the knowledge developed, because certain scientists had definite goals in mind. ‘Chance,’ Pasteur wrote, ‘favors only the prepared mind.’” – Saturday Review

You can think of setting goals as planting a seed in your mind.

When you develop a plan to achieve the goal and practice daily habits congruent with achieving the goal, it’s like giving the seed water, sunlight and nutrition.

With this nurturing, the seed becomes a tree with a good strong trunk, full of branches. In the fullness of time, it will produce delectable fruit and a lifetime of happiness and meaning.

The same will happen with your wealth building goals if you set them in writing and nurture them every day.

Goal setting works: it’s worth the effort.

But how do you do it?

Build Wealth Image

My Seven Step Annual Goal Setting System to Build True Wealth

After years of trying and discarding many different goal-achievement techniques, I have settled on a relatively simple annual process that just plain works.

It integrates the best practices from many different sources and adds a few twists and turns of my own to form a repeatable habit you can follow for a lifetime.

The key point to notice as you learn my annual cycle for goal setting is that it’s designed to be a habit.

This is extremely important because goal setting is another one of those things that’s incredibly important to do, yet easy to procrastinate or forget about. Everyone knows they should set goals and review them regularly, but judging by results, few people actually do it.

“A year from now you will wish you had started today.” – Karen Lamb

The Harvard study cited earlier found only 3% of the population actually walked the talk, and other studies have come to similar conclusions. As is so often the case, we may know what to do, but seldom do we actually do it.

So what about you? Are you regularly setting goals and reviewing them? Are you walking the talk? Remember, to know and not do is to not know at all.

The information in this article may sound “old-hat” to a lot of readers, but the very same people who are yawning probably aren’t walking the talk.

Four of the most dangerous words in the English language are “I already know that”.

You may know it intellectually, but if you aren’t already setting and achieving goals habitually, then it would pay for you to follow closely below so that you can begin using this valuable tool to its fullest potential.

Step One: Begin The Goal Setting Process In January

We begin our annual goal setting cycle in the weeks surrounding New Year’s Day. Why? Because it’s virtually impossible to forget or avoid this annual holiday event.

The New Year is a natural time to reflect on achievements from the prior year and start thinking about what we want to achieve in the coming year. In short, it’s a perfect time to begin a goal setting cycle.

Your first task is to review your written goals from the prior year and compare them to your actual results.

“No one can cheat you out of ultimate success but yourself.”– Ralph Waldo Emerson

Inevitably, your results will exceed expectations in some areas, and disappoint in others. The critical point here is to not judge yourself because you’re not your results.

Instead, I suggest positive reinforcement by rewarding yourself for all that you did achieve in the prior year. Take the time to celebrate your wins because you deserve it. Also note areas where you came up short, as that is honoring reality.

What are your results telling you? If you came up short on a goal, then what was the cause?

After all, if you said you wanted a goal, but didn’t achieve it, then there is opportunity for learning.

  • Did something change?
  • Did other goals take a higher priority
  • Did obstacles get in your way?
  • Maybe you’re just not committed to that goal, and should drop it or change it.

You don’t get to be right or wrong during the review process, as that won’t serve you well. There’s no value in belittling yourself for missing a goal because that will just take away from honoring your successes.

The purpose is simply to get clear on what worked in the prior year and what didn’t. Just notice the facts and make conscious what happened, but don’t judge yourself.

“When defeat comes, accept it as a signal that your plans are not sound, rebuild those plans, and set sail once more toward your coveted goal.”– Napolean Hill

Where did you meet with success, and where did you come up short? Your objective is to learn from experience and improve your goal setting for next year based on what you discover.

You’re creating an active feedback loop so you can correct and adjust your goals every year to get what you want out of life.

This correct and adjust process works much like rocket guidance systems. When a rocket is launched to a faraway destination, it’s traveling off course more than 80% of the time. Yet, the same rocket will hit its target with pinpoint accuracy. The key is correcting and adjusting.

The rocket knows its goal and is constantly correcting its trajectory during flight until it arrives at the destination. You can do the same thing by reviewing your goals each year and learning from your successes, as well as your failures.

Step Two: Prepare Financial Statements


The next step during the annual review process is to compose a “quick and dirty” income statement and balance sheet.

This task is particularly easy around the turn of the year because annual tax statements must be prepared showing your assets, income and spending.

When you prepare these statements you are treating your personal finances with the professionalism of a business. You’re respecting your money.

I also suggest plotting your net worth and residual income on a chart so you can track your progress toward your goal of financial freedom. This is very important if you’re working toward the goal of financial independence or retirement security.

The person who makes a success of living is the one who sees his goal steadily and aims for it unswervingly. That is dedication. – Cecil B. DeMille

Once you’ve updated your financial statements and reviewed your past goals, you’re then complete with the feedback loop portion of the process.

You now have a solid foundation on which to build your new goals. You have a current snapshot of your financial picture, and you understand what worked from the prior year, what didn’t, and why.

Step Three: Ask The Right Questions

The next step in your annual goal setting process is to decide what you want to create with your life moving forward by asking yourself some questions:

  • What do I want this year?
  • What will it take for this year to rate as a 10 on a scale of 1 to 10?
  • If failure was not a possibility because I’m guaranteed success, then what would I do? How would I play the game of life differently?
  • What values do I hold dear that I would like to honor in the New Year?
  • What’s frustrating or dissatisfying about my life, and how would I like to change it?
  • If I graded the various parts of my life (relationships, business, money, health, recreation, etc.) on a 1 to 10 scale, what grade would each receive, and what do I want to do this year to create the grades I really want?
  • What objectives would make the biggest, most profound difference in my life?

Step Four: Compile And Prioritize Your List Of Goals

After I’ve answered these questions, I get together with my wife to create a combined goal sheet for the family. She follows a similar process independent of me and creates her own agenda.

We then compare lists and create a combined family agenda for the year that’s broken into two categories: the first list has business and financial goals, and the second list has our personal and family life goals.

It’s important to note that we don’t just add the lists up to create one summation list. Instead, we negotiate the goals knowing that we must focus to succeed.

Less is more, and this is critical to note. More goals doesn’t equal more success, but more focus on just a few goals that make the biggest difference will equal more success.

We compare our goals to the “10 Keys To A Winning Goal” checklist found in Step Two of the Seven Steps to Seven Figures course that this article is excerpted from, and we put on the back burner those goals that don’t make it to the top.

After years of practice, we have learned to enjoy greater balance and happiness by focusing on just a few critical goals and actually achieving them, rather than setting ourselves up for disappointment by getting spread too thin with too many goals.

What amazes me about this process is how powerful it is while being deceptively simple.

It never fails to redirect our thinking.

It creates clarity and cohesive focus for both of us to operate as a team, and helps us create a more satisfying and fulfilling life for our family.

It redirects our lives and keeps us from drifting aimlessly or living day to day.

Discover how this 7 step personal goal setting process can help you systematically build wealth and develop personal and financial freedom. Reveals strategy...

Step Five: Get Into Action To Achieve Your Goals

Once you’ve set your goals, you now have a whole year to achieve them. But how are you going to do that? What is your next step? My suggestion is to divide and conquer.

Keep things simple by picking from the list only those goals that are the most exciting and juiciest of all, so you can focus your limited time and energy resources on them.

What’s your top priority for the year? What’s the most time sensitive or immediately compelling goal on your list?

“The big secret in life is that there is no big secret. Whatever your goal, you can get there if you’re willing to work.” – Oprah Winfrey

Once your goals are prioritized, then you can pick either of the two strategies from below to begin executing your plan of action.

I offer two different strategies because each is appropriate for different situations, depending on conditions. Certain goals and personality types work best with one or the other approach. Which of the following approaches is best will depend on your personal style and the particular goal you are pursuing.

  • Next Step Approach: This is a forward looking approach where you just pick the next step to achieve your goal, complete it before figuring out the next step, and so on until your goal is realized. You don’t worry about the big picture with all the planning issues (which might bog you down because too much is unknown, or the whole process is too big to grasp). Instead, you just determine whatever the logical next step is, and trust it’ll take you to the next step until the path becomes clear. You’re like the rocket that’s correcting and adjusting its flight path. This also helps you avoid the “get ready to get ready” syndrome so that you can get started right now and not get stuck in procrastination excuses.
  • Reverse Engineering: This approach requires you to start with the whole plan in mind from the beginning by reverse engineering it into smaller tasks to complete. You then further subdivide the tasks into additional actionable steps, while continuing to break it down until you have daily actions that will take you to your goal when completed. The advantage to this process is it breaks big tasks down into digestible bite size chunks, making the whole process very easy to grasp. It’s most effective for analytical personality types, or situations where the entire path to the goal can be understood and mapped out in advance.

Both of these approaches help you succeed by reducing the intimidation and confusion that is sometimes associated with larger goals that take us into unfamiliar territory. They reduce your fear factor by transforming goals that are too large to grasp into actionable items that you can easily execute.

Each strategy answers the question, “where do I start?” and “where do I go next?” so that you don’t get stuck in procrastination.

Step Six: Persist Until You Achieve Your Goal

“Let me tell you the secret that has lead me to my goal. My strength lies solely in my tenacity.” – Louis Pasteur

Once you have picked your goal and developed your plan to achieve the goal, then the rest of the game is simply a matter of getting started and not stopping until you reach it.

Every time you complete an action step, you’re one small step closer to your big goal.

Just keep on correcting and adjusting until you get there with rocket-like accuracy.

Enough said?

Step Seven: Maintain Focus By Reviewing Goals Regularly

Finally, the last part of this annual cycle is you must create a habit of refreshing your goals throughout the year. This means you must review them regularly and rewrite them as necessary.

The purpose of this step is to maintain your focus throughout the year as life’s clutter attempts to distract you from what’s important.

By reviewing your goals regularly, you’re counteracting all the forces outside of your control designed to sideline your plans.

Some people like to post them on their wall, keep a copy on their desk, or post them in their Day Timer or smart phone. Whatever is convenient and will remind you on a regular basis about your goals so that you maintain front of the mind awareness is what’s important.

“It matters not what goal you seek
Its secret here reposes:
You’ve got to dig from week to week
To get Results or Roses.” – Edgar Guest

In summary, the seven step process you just learned is designed to do one thing: make goal setting a habit. You must habitually create and refresh your goals to gain all the value from this incredibly effective tool.

By following a habitual goal setting process, you’ll become part of the 3% that outperforms the other 83% by a factor of 10 to 1. You’ll also put yourself firmly on the road to retiring early and wealthy.

It truly works.

Goal Setting System Key Points

There are three major points you should take from this article:

  1. Practicing goal setting and reviewing your goals is necessary to live the greatest version of yourself in this lifetime. Not using goal setting technology to the best of your ability is simply wasteful. It’s the equivalent of flushing opportunity down the toilet.

”You must have long-range goals to keep you from being frustrated by short-range failures.” – Charles C. Noble

  1. Goal setting engages your mind in five different ways to achieve your goals. This gives you a distinct competitive advantage over others who don’t regularly set and review their goals. This competitive advantage can make the difference between retiring early and wealthy, or living a lifetime of financial mediocrity.
  2. The most effective way to get all the value out of goal setting available is to make it a habit. Set your goals at least annually, and review them at least monthly. Build a regular cycle out of the process so that it becomes an integral part of your life. If you set goals in a random or irregular fashion, then you will get random and irregular results. If you set and review your goals regularly, you will move them to the forefront of your mental awareness, which will create more consistently profitable results.

The bottom line is if you want to retire early and wealthy, then regular goal setting must become an integral part of your life practice. Financial coaching is a great tool to add accountability, support, and additional insight to not only setting goals, but also following through long enough to actually achieve them.

Let us know how we can help.

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Simple, Free Investment Advice Can Cost You A Fortune Tue, 20 Jan 2015 06:08:11 +0000

Discover How The Inherent Complexity Of Investing Makes Over-Simplified And Free Investment Advice Your Most Expensive Choice.

Key Ideas

  1. Why investing is complex, but personal finance is simple.
  2. How “buy and hold” is a special case, investment half-truth dangerous to your wealth.
  3. Reveals why ambiguity and complexity are an investor’s best friend… seriously!

We desire simplicity and comprehensibility.

We wish things worked the way they’re supposed to.

We long for black to be black and white to be white.

Why do we want these things? Because it gives us confidence in the outcome. It creates a sense of certainty in an uncertain world.

It feels secure.

That’s why we want investment advice that’s succinct, conclusive, accurate and understandable. We don’t want to muck around in financial mud.

The human mind wants security in financial affairs and is uncomfortable with exploring all the subtle shades of gray inherent in a complex, uncertain investment world.

“Illusion is the first of all pleasures.”– Oscar Wilde

Unfortunately, reality doesn’t care what you want: it just is.

The future is unknowable, investment decisions are complex, and risk management is subtle shades of gray. That’s reality. Sorry.

If you want to invest profitably, then your strategy must be congruent with reality regardless of how you wish things were. Investing based on how you want things to be, rather than how they actually are, can be a very expensive indulgence.

Simple, Free Investment Advice Costs You A Fortune

Why Simple, Free Investment Advice Is The Most Popular

The investment marketers and media give us simplistic, free investment advice because that’s what sells best. It’s what people want regardless of whether or not it’s profitable.

Investment marketers and media are focused on their profits … not yours. This isn’t some big conspiracy theory, it’s just business common sense.

For example, visit your newsstand and review the cover articles in the financial magazines. Notice the sizzle in the headlines designed to capture you attention:

The headlines will vary, but the formula remains constant. Each article promises a powerful benefit delivered in a brief and easy to digest format.

No research or specialized knowledge required. The implication is you can unlock the vault to profits for very little effort. Nonsense.

“To read a newspaper is to refrain from reading something worthwhile. The first discipline of education must therefore be to refuse resolutely to feed the mind with canned chatter.”– Aleister Crowley

Their job is to sell magazines, and they know darn well that very few people are going to rush to the checkout counter for factual headlines like the following:

  • “Ten Funds with an Unpredictable Future”
  • “Bull or Bear? Your Guess is as Good as Mine”
  • “Five Stocks with No Better Odds of Doubling than Any Other Stock”

Would you pay for that kind of information? Probably not. Why? Because there’s no promised benefit and no allure.

Accurate titles don’t motivate people to take action and purchase the product. People need a benefit to drive them to action – whether or not it’s true.

That’s the way marketing and sales works so the media responds by promising that benefit. Their job is to sell you on consuming their product – whether it’s good for you or not.

“The man who reads nothing at all is better educated than the man who reads nothing but newspapers.”– Thomas Jefferson

Numerous studies have analyzed the value of such advice, and the results are universally unimpressive. Sure, there’s an occasional accurate forecast, but a broken clock is correct twice a day, and you wouldn’t be foolish enough to use it to tell time. Why should sound-bite investment advice be any different?

Maybe I’m naïve, but I want investment advice that maximizes my profits and not the vendor’s. I want investment advice consistent with reality even if reality is complex. For that reason, I don’t want sound-bite investment advice if it’s incongruent with the reality of investing.

What about you? What do you want from your investment advice?

The Thin, Gray Line Dividing Fraudulent Investment Advice From Deceptive Half-Truths.

Suppose someone came to you and claimed you could earn 100% guaranteed every six months following their simple, proven, investment advice. Just plunk down the cash and watch your money grow.

Would you take the bait and invest? Probably not.


A smart investor would investigate deeply and perform thorough due diligence before risking a dime because above market returns, guarantees, and “something for nothing” are all red flags signaling potential investment fraud.

They’re marketing tools designed to make your greed glands salivate so that caution and common sense are forgotten.

Simplistic, one decision investment advice is just one step removed from the above scenario. It’s the same thing, but it’s less obvious because it’s less extreme.

It’s designed to appeal to the same human weaknesses of wanting simplicity when complexity is the rule, wanting certainty when risk is unavoidable, and wanting something for nothing.

Simplistic investment solutions should serve as a red flag triggering greater due diligence on your part because it’s out of congruence with the inherent complexity of a competitive investment world.

Examples of such simplistic investment advice include:

  • Buy and hold for the long term.
  • Buy stocks on splits for immediate gains.
  • Stocks outperform bonds.
  • Stocks outperform real estate.

All of these statements are partially true and all of them are partially false: they’re investment half-truths.

To understand how they can be both true and false you have to dig behind the simplicity and unmask the inherent complexity of the underlying subject matter … investing.

“Buy And Hold” Is An Investment Advice Half-Truth

“The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge.”– Daniel J. Boorstin

For example, “buy and hold for the long term” is simple, actionable investment advice that’s so widely believed to be true that it approaches religious dogma within the retail financial community.

What’s amazing, however, is that the very people who preach this investment advice don’t walk the talk. Mutual fund companies have average annual portfolio turnover rates of 107% for U.S. stock funds according to a study by the Wall Street Journal.

John Bogle, founder of Vanguard and champion for the mutual fund industry, admits the average mutual fund turns over its portfolio roughly every eleven months. This is hardly “buy and hold” for the long term.

Why do the very people who preach buy and hold as a simple, one decision investment model, do exactly the opposite? Because the issue is much deeper and more complex than they lead you to believe.

Here are some facts they aren’t telling you when they deliver this sound-bite investment advice…

The Hidden Statistics Behind Buy And Hold Investment Advice That Nobody Ever Told You … Until Now.

Buy and Hold Fact 1:

Based on U.S. historical data, a 20 year “average holding period” is required to be confident that you’ll eventually profit from buy and hold investment advice. Historical holding periods of 15 years or less have resulted in capital losses for U.S. data and holding periods in excess of 30 years have resulted in losses on international data.

In fact, both Burton Malkiel and Jeremy Siegel (buy and hold proponents) show that after adjusting for taxes and inflation, the 15 year period from 1966 to 1981 would’ve actually showed negative returns for stocks.

If you wanted to beat bonds for the same time period, it would’ve taken many more years. If you wanted additional return to compensate for the added risk of stocks, you’d need to wait even longer. If you included international data, you would have waited longer still.

Other periods in history show similar results. The point is: buy and hold for the long term is really long term.

“If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he’s offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence. The origin of myths is explained in this way.”– Bertrand Russell

Buy and Hold Fact 2:

A 20 year “average holding period” (necessary to be statistically confident of a profit) is so hard to achieve for the average investor, it’s statistically meaningless unless you wear diapers and watch Teletubbies on television.

That’s because “average holding period” is very different from how long you invest.

Most people think that if they invest for thirty years, then they’ll have an average holding period around thirty years, but it’s much shorter.

The bulk of most people’s savings occurs later in life, and they often begin spending principal upon retirement, causing their average holding period to equal a small fraction of their total investment career.

What this means is most investors are being led into a strategy that has a much higher risk of loss than they expect because their holding periods are much shorter than statistically required to assure a profit.

Buy and Hold Fact 3:

The often quoted expected returns from buy and hold are meaningless averages. The likelihood your return will equal the average is close to zero for two reasons:

  • Your actual mathematical expectation for buy and hold is a function of the overall valuation level of securities at the time you begin your holding period. All times are not created equal. To expect average returns, the market would have to be valued at the average when you began your “average holding period”. Higher valuations offer lower mathematical expectation, and lower valuations offer higher mathematical expectation.
  • Even if valuations were average when you began your holding period, the reality is average returns are a statistical fiction that rarely occur in practice, and they shouldn’t be expected. Nassim Taleb, author of Fooled by Randomness, determined the average return for the Dow Jones Industrial Average from 1900 to 2002 to be 7.2%; however, only 5 of the 103 years had returns between 5% and 10%. The bottom line is, you shouldn’t expect anything close to the average return you’re quoted over any time period as meaningful to the average investor.

I could continue on and on about all the statistical fictions and half-truths used to support buy and hold as a simple, one decision investment strategy, but that’s not my purpose.

(Ed. Note – Make sure you don’t miss my super-long comment below responding to Telsaar with much more information about buy and hold problems seldom discussed…)

My point is to show the inherent complexity that hides behind even the simplest investment advice. Probably less than one in a thousand buy and hold investors really understand the risk and variability of returns associated with their investment strategy; yet, they’re staking their financial future on it.

“Reality is that which, when you stop believing in it, doesn’t go away.”– Philip K. Dick

Why Two Top Experts Can’t Even Agree On The Simplest Investment Advice…

Buy and hold is so complex despite its surface level simplicity that two highly educated, very intelligent, well-reasoned experts can study the topic and come to diametrically opposed conclusions despite having access to the same data and statistics.

At the 2004 New Directions for Portfolio Management Conference, Jeremy Siegel, a professor at the University of Pennsylvania and author of “Stocks for the Long Run,” squared off directly opposite Rob Arnott, a hedge fund manager and editor of “The Financial Analysts Journal”.

These two learned and respected authorities had the same data and research at their disposal, and arrived at opposing conclusions about the long run prospects for stocks. Their only significant agreement was to agree to disagree.

If two highly credentialed experts immersed in extensive research on the subject can’t agree, then what does that imply about the validity of your broker’s opinion?

“As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they don’t refer to reality.”– Albert Einstein

I believe buy and hold provides an adequate risk/reward ratio only under certain specific market conditions, and even then is only appropriate for investors with certain risk tolerances and objectives.

It’s not an investment strategy appropriate for the masses at all times as it’s commonly marketed, and it may be totally inappropriate for you.

Does this answer sound more complex than the sound-bite investment advice fed to you by the media, mutual funds, or your financial adviser? Probably.

But remember, my job is to help you retire early and wealthy by teaching you what works, what doesn’t, and why.

Albert Einstein provided sage advice when he recommended keeping analysis as “simple as possible, but no simpler.” Why? Because simplicity can deceive when the subject is inherently complex, and Albert should know a thing or two about simplifying the complex.

Profitable Investment Advice Is Reality – Not Simplicity.

In case you think that over-simplified investment advice is limited to buy and hold, I’ll lampoon one more sacred cow to make the point that this problem is pervasive.

Studies are occasionally published claiming to prove which investment class offers superior returns: stocks or real estate. The analysis appears conclusive on the surface. Simply compare price changes in each investment class over long periods of time to see which one grew more.

Usually stocks come out on top depending on the time period analyzed.

“I believe in looking reality straight in the eye and denying it.”– Garrison Keillor

Unfortunately, this is pure rubbish. The real question is not percentage price change, but return on investment net of taxes and expenses. By oversimplifying they’re asking the wrong question.

Stocks are customarily purchased for cash, so return on investment is a combination of dividends and price change.

But real estate is very different. It’s usually purchased with financial leverage, magnifying price changes five or ten times over a cash purchase. In addition, it has significant tax advantages not available to stocks, further adding to total return.

Any analysis comparing stocks to real estate that doesn’t account for these differences is oversimplified and meaningless.

In short, there is much more complexity to analyzing return on investment than simple price changes. Once again, real world investing differs markedly from simplistic, sound-bite investment advice.

How Is Personal Financial Advice Different From Investment Advice?

It’s important, however, to complete this discussion by contrasting the complexity of investment advice with the straightforward simplicity of personal financial issues like savings, insurance, tax strategy, and personal record keeping.

Discover the half-truths behind free investment advice.

Investing is complex; personal finance is simple by comparison.

Personal financial advice can be safely generalized into black and white truths that fit into sound-bites. Below are some examples from my Seven Steps to Seven Figures course:

  • Lifestyle should lag income so that you can invest the difference for long term financial security.
  • You should only insure what you can’t afford to lose.
  • Run your personal financial life like a business … because it is.

So why can personal financial advice be safely simplified, while investment advice is inherently complex?

Common sense provides the answer. Investment results are determined by a competitive, free market. You’re not in control of the outcome of your portfolio – the market is.

Additionally, the future for the markets is unknowable and determined by an infinite number of forces outside of your control.

“To succeed at anything you need to have passion for it and devote yourself to it – not be constantly looking for ways to cut corners.”– Unknown

You may want investing to be black and white, but the truth is subtle shades of gray. Investing is filled with risks and unknowns that are unpredictable.

The markets are dynamic and constantly evolving. Simplistic investment advice is incongruent with that reality.

Contrast investment markets, where you have no control, with your personal financial affairs where you’re solely in control. Nobody but you determines your savings rate, debt, or which mortgage and insurance you buy.

The principles of successful savings, insurance and record keeping have changed little in decades. It’s a relatively static and stable environment that’s not transacted in competition like investments are.

The competitive, free market, uncontrolled nature of investing is the difference. Investment advice can never be black and white because if it was, then everyone would do the obvious, causing the obvious to no longer work. That’s the nature of supply and demand in free markets.

Any competitive advantage that can be exploited by the masses through simplistic investment advice will be exploited into non-existence.

Bummer, but that’s the way it works.

How Quality Investment Advice Creates Ambiguity

Sigmund Freud described the neurotic nature of most investors when he stated: “neurosis is the inability to tolerate ambiguity.”

I believe you can’t understand an investment until you reach the point of ambiguity.

In fact, in my own investing I’ve found my confidence and clarity are inversely correlated to my results. Typically, the more confident I am at the point of decision, the more likely I’ll be wrong.

Why? Because my confidence is a symptom of my ignorance to reality. It means my depth of knowledge is insufficient to know all the ways I can lose money with that particular investment.

Gaining that missing knowledge offsets blind confidence and creates ambiguity. Yet, ambiguity is what most investors avoid because it makes them feel uncomfortable. They want clarity and simplicity.

I’m not alone in these thoughts. Robert Rubin once observed that some people are more certain of everything than he is of anything. Excessive confidence in investing is dangerous because you don’t reassess flawed conclusions.

Nobody can know all the facts, yet some people see the world full of certainties when in reality, it’s only probabilistic.

“What is important is to keep learning, to enjoy challenge, and to tolerate ambiguity. In the end there are no certain answers.”– Martina Horner

When you embrace probability, then reality appears as subtle shades of gray rather than black and white, and most people don’t like that. It’s psychologically difficult. People prefer certainty because it breeds confidence… even if it’s wrong.

Uncertainty can be paralyzing because you only know enough to know how little is really knowable. You recognize that everything beyond the limits of your understanding represents risk – risk of loss. Simplicity fades away and is replaced by complexity.

However, the advantage of uncertainty is that it motivates due diligence. You realize you can’t ever really know, thus you gain as much knowledge as possible in pursuit of the unattainable goal of eliminating all doubt.

I encourage you to embrace ambiguity as investment truth. Seek it as the antidote to ignorance. The future is unknowable. Life is uncertain.

Only when you reach the point of ambiguity are you fully informed and capable of balancing risks with rewards to make consistently profitable investment decisions.

This may feel uncomfortable at first, and it certainly isn’t the simple answer, but it’s congruent with reality.

In Summary…

You need to learn how to sort what works in investment markets from what doesn’t. Your financial security depends on this skill.

“A lie told often enough becomes the truth.”– Lenin

You’ll be confronted with every kind of investment advice you can imagine on your path to retire early and wealthy. The sources of this advice will appear confident, qualified and knowledgeable.

Despite this air of expertise, the quality of the advice will range from great to garbage.

One way to separate good investment advice from bad investment advice is to know whether or not the advice is consistent with the inherent nature of the subject matter.

That’s why I created the distinction between personal financial advice and investment advice.

  • Investing is a complex subject filled with subtle shades of gray. For every point, there is a counterpoint. For every truth, there is an exception. Every investment strategy has its Achilles Heal. Even the supposed experts frequently fail miserably at investing because of the competitive nature and complexity of the game; therefore, simplicity and sound-bite investment advice should be viewed with caution.
  • Personal finance issues, on the other hand, are relatively simple by comparison. Truths can be distilled down to simplistic rules that’ll hold up in practice. While few experts will agree on best investment practices, most experts will agree on how to manage debt or save for college.

You must be clear on this distinction because without it, you’re prone to fall prey to simplistic sound-bite investment advice when it’s inappropriate or inaccurate.

Nobody can give you the how-to’s of investing in a single article, book, or worse yet, sound-bite interviews on television. Yet, that’s exactly what you see in the financial media every day. Don’t let it influence your decisions.

The people who profit from selling you stocks want you to believe equities are superior to real estate because they can’t sell you real estate.

They want you to believe you can profit from simplistic models like buy and hold because then you’ll invest your money with them.

If the salesman can make it sound simple, then he’s far more likely to get the sale. Complexity breeds indecision and is the nemesis of the investment marketer.

This is not some big conspiracy theory. It’s just the way business works.

It’s reality, and your job as an investor is to learn how to profit from it.

I hope this helps.

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Top 26 Warning Signs Of Investment Fraud Wed, 07 Jan 2015 00:17:05 +0000

How To Uncover Even The Best Disguised Investment Fraud Before It Costs You Money.

Key Ideas

  1. Learn the key to safeguarding your portfolio.
  2. Why you’ll likely be a victim if you don’t know these warning signs.
  3. Discover 5 easy-to-remember principles for quick protection.

You can’t judge a book by its cover.

Appearances can deceive when trying to protect yourself from investment fraud.

Sharp looking companies with trustworthy facades are used by con-men to instill confidence in their victims.

Rented office spaces, receptionists, professionally designed brochures, impressive web sites, and more, are all tools used to create the appearance of legitimacy.

That’s because the con artist knows he must gain your trust to get your money so he will do everything necessary to appear reputable.

For that reason, you must let go of any preconceived notions or Hollywood expectations about how a con-man should appear. He could be a friend-of-a-friend, a kind voice on the phone, an authority figure on the internet, or a business person in a perfectly tailored suit.

Additionally, the con artist can use any of the traditional communication channels to commit investment fraud. Besides the telephone, mail, and internet, investment fraudsters may advertise in well-known publications to appear legitimate.

Just because you learn about an investment through a reputable channel does not imply the investment itself is legitimate.

You also can’t trust an investment just because someone you know made big profits. Con artists will often pay the first few investors large returns so that they will refer the investment to their friends.

Many investment frauds spread like a virus because self-deceived investors “talk up” their great returns at social gatherings. Don’t be deceived.

“Never value the valueless. The trick is to know how to recognize it.”– Sidney Madwed

The reality is investment fraud can look perfectly legitimate in all the ordinary ways which begs the question, “How can I protect myself from investment fraud, and what are the tell-tale warning signs to tip me off before I lose money?”

To answer that question, below are the top 26 most common symptoms of potential investment fraud.

When you notice any of these warning signs, always remember that it doesn’t necessarily mean you’re faced with investment fraud; however, it should put you on notice to be extra skeptical and perform more detailed due diligence than normal.

Remember, a dollar saved is a dollar earned.

In order to protect your assets, you should be aware of these 26 warning signs of investment fraud.

Top 26 Danger Signs of Investment Fraud:

  1. Be skeptical of unexpected and unsolicited phone calls, emails, letters, or personal visits from strangers offering investments.
  2. Never trust anyone who promises a high return in a short period of time. Above market return is the number one characteristic of investment fraud. It’s the bait designed to hook you.
  3. Low risk, no risk, or a guarantee is the second most common characteristic of investment fraud. Watch out for track records so consistent they appear almost guaranteed. The truth is, every investment strategy has an Achilles Heal, making “no risk” incongruent with reality. The more you are guaranteed, the more you should examine what you are being guaranteed against.
  4. Your investment account should be held with an independent, third party custodian that is regulated and monitored by regulatory agencies. Avoid giving custody and possession of invested capital to the investment manager.
  5. Your investment account should be held separately in your name by the third party custodian. Avoid commingling or aggregating your assets into a pool with other investors.
  6. Hang up or walk away from high pressure sales tactics. When a salesperson demands you invest on the spot that is a red flag. If the salesperson is trying to make you feel guilty, stupid, or intimidate you into making a decision, then leave immediately. Investments must be understood fully before accepting risk. Legitimate investments that are good today are still good tomorrow. Never tolerate sales pressure when investing.
  7. Beware of a broker who has “special connections”, “secrets”, or “inside” information not available to the general public. Making money on inside information is illegal, and there are no “secrets” to good investing.
  8. Beware of invitations to join exclusive investment organizations and become part of a select group of active investors and financial experts. Exclusivity often points to potential investment fraud.
  1. Be careful of opportunities to get in on the ground floor of the “next big thing” or “once in a lifetime” deal. Similarly, claims of unverifiable formulas, patents or new technologies that will revolutionize the industry are a warning sign that necessitates deeper due diligence.
  2. Think twice about investment strategies explained with sophisticated terminology and fancy phraseology instead of commonly used words. A legitimate salesperson will simplify the complex to help you understand. Investment fraud may complicate the simple in order to intimidate you from looking deeper behind the facade. Never buy into the idea that you are too old, young, or financially inexperienced to understand an investment. If you don’t understand, it then don’t invest in it.[investment-fraud]
  3. Watch out for sophisticated investments marketed to unsophisticated, smaller investors (under $100K initial investment). If the risk/return was legitimate, the organizer could access all the money he needed from institutional investors at a much lower cost, and with far fewer headaches. The reason unsophisticated investors are targeted for investment fraud is because they rarely perform due diligence, whereas sophisticated investors always perform due diligence.
  4. Beware of any investment offered from an overseas location.
  5. Think twice when the sales appeal includes rhetoric about how the U.S. Government is keeping these investments away from the little guy so that it can be the secret of the rich. Conspiracy theories about the government and “secrets of the rich” are a warning sign of potential investment fraud.
  6. Be wary of seminars and salespeople representing schemes to defer or hide money from the U.S. Government in tax shelters, trusts, or offshore accounts.
  7. Be cautious of any investment without a prospectus or offering memorandum. Walk away from any salesperson who dismisses the importance of disclosure documents required by law as mere “formalities”.
  8. Watch out for any investment that cannot be verified through the Securities and Exchange Commission (SEC), your state securities regulator, or the National Association of Securities Dealers (NASD) registration process.
  1. Be extra careful of any investment sold by people unregistered or unlicensed to sell securities, or those working for an unregistered or unlicensed firm. Certain independent insurance agents are a common example. Similarly, verify all registrations with regulators when dealing with unfamiliar persons or companies.
  2. Be wary of any investment salesperson who doesn’t want you to get a second opinion.
  3. Walk the other way when an investment salesperson encourages you to invest on the basis of trust. Similarly, be careful of promoters preying on your membership in a certain group (church, professional organization, social club, etc.) to establish trust with you.
  4. Watch out if you have trouble cashing out. Delays when withdrawing money may point to illegitimacy. Only fixed-term securities such as CDs, hedge funds with periodic redemption rights, certain partnership interests, and other liquidity constraints agreed to in writing prior to investing should limit your ability to access your cash when it comes time to exit.
  5. Beware of any investment salesperson that encourages you to put your life savings into a single investment. Such practices are contrary to a prudent investment strategy. Similarly, no legitimate investment salesperson should ever fail to clarify your past investment experience and risk tolerance before recommending an investment. A con-man may skip this essential step in the sales process.

“A danger foreseen is half-avoided.” Cheyenne Proverb

  1. Be skeptical of newsletters touting investments that don’t specifically disclose who pays them, the amount paid, and the type of payment for promoting any specific investment. The disclosure should be prominently placed in the article and not buried in fine print elsewhere in the newsletter. Financial Mentor never touts any specific securities or investments in its newsletter, web site, or publications. Mixing investment advice with financial education is a conflict of interest.
  2. Be wary if the salesperson encourages you to borrow money or cash in your retirement accounts to make the investment.
  3. Never invest if the salesperson encourages you to falsify information on your account application.
  4. Avoid investments where the salesperson requests your bank account number, and other unnecessary personal information, so he can “facilitate the transaction”. Additionally, you should not send money to a post office box, and if the salesperson offers to send a personal courier to pick up the check, it may very well be to avoid Federal mail fraud charges.
  5. Watch out for investments accompanied by unprofessional contracts. Misspellings, careless wording, and vague or imprecise language in the agreement can point to more serious problems with the investment.

Five “Easy to Remember” Principles Of Investment Fraud

If the top 26 danger signs are too hard to remember, then rest assured there’s a simpler way. Nearly all of the 26 symptoms can be reduced to five broad principles that are easier for your brain to retain.


Because most investment fraud follows a proven formula to separate you from your money, it’s pretty hard to sell a fraud without invoking one of the following four principles:

  1. Sales Appeal: The hook designed to lure you in is get rich quick without risk or hard work. Above market returns, guarantees, low or no risk, and no effort required are all hallmarks of investment fraud. Investment fraud intentionally appeals to the basic human emotions of fear, greed, and wanting something for nothing, so that you’ll make an irrational decision. Be wary of any salesman who draws out your emotions as part of the sales process. Due diligence is how you remove the emotion and base your decision on facts.

“Let the fear of danger be a spur to prevent it; he that fears not, gives advantage to the danger.”– Francis Quarles

  1. Obfuscation and Misinformation: Fancy words and successful images are designed to win your trust by creating a façade of sophistication. Techno-babble is designed to intimidate you into not looking behind the façade. Multiple postings on the internet under various aliases are designed to create the appearance of many people involved. Professional images are designed to create trust. Always ask, “Where’s the beef?” Never trust the façade, but instead look deeper to find real substance. Due diligence is how you look behind the veneer of obfuscation and misinformation to see if there is any real meat.
  2. Unverifiable Claims: Secrets of the rich, technological breakthroughs, patent pending formulas, government conspiracy theories, and inside information are all examples of things that are either hard to verify, or not verifiable at all. Never invest based on hollow words alone. Verify all statements and claims with independent third party information. Assume nothing is true until confirmed through due diligence.
  3. Manipulative Sales Practices: Intimidation, inadequate disclosures, non-traditional payment choices, inadequate diversification or improper asset allocation, encouraging you to invest based on trust, or rushing you into a decision with high pressure sales tactics are all examples of manipulative investment sales practices that deviate from proven professional standards of conduct. Never rush a decision or invest based on emotion. Due diligence will slow down the sales process sufficiently to offset manipulative practices.
  4. Lack Of Transparency: All investment accounts should be registered separately in your name with an independent, third-party custodian. All transactions in your investment accounts should be fully visible to you on a daily basis either through independent account statements, or the custodian’s web site. Avoid commingled, pooled funds where the manager has custody and possession, and/or account activity statements are generated only by the manager, and not by an independent third-party.

Your job is to make life difficult for con artists by investigating all investments thoroughly, educating yourself about fraud, and reporting any suspicious activities to regulators.

Due diligence is your antidote to the manipulative and deceitful sales practices used to commit investment fraud.

Always remember that it’s usually easy to invest in a fraud, but it’s far more difficult to get your money back out. Walk carefully and cautiously by completing your due diligence before ever committing a dime.

Forewarned is forearmed.

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How To Retire Early: 6 Essential Strategies You Must Know… Thu, 20 Nov 2014 16:46:56 +0000

If You Want To Know How To Retire Early, These Strategies Can Make Or Break Your Financial Security.

Key Ideas

  1. Discover the three best paths to build wealth for early retirement.
  2. How you can tame the inflation monster.
  3. Reveals 3 rules for creating perpetual retirement income you can never outlive.

Early retirement planning is identical to conventional retirement planning with one big exception – time.

You have less time to achieve your financial goals, and more time that your money must last after retiring.

What this means is you have a shortened, accelerated financial preparation phase, and an extended, post-retirement spending phase when you retire early.

Changing the time-frame will also change many other aspects of retirement planning – but not everything. It’s important to understand the differences.

In other words, think of how to retire early as conventional retirement planning on steroids.

All of the conventional information about retirement planning throughout this site still applies to early retirement planning. You still need to learn all the other stuff first. It is the foundation on which your financial security stands.

However, certain aspects of retirement planning are magnified by the compressed time-frame, and the purpose of this article is to focus exclusively on those factors affected by accelerating time.

So get the foundational principles of retirement planning right first so that when you step on the accelerator pedal with the ideas in this article you won’t incur excessive risk.

Remember, the unique twist to early retirement is all about time – less time to build wealth, and more time to enjoy it. With that said, let’s begin…

How to retire early image

Early Retirement Requires You To Build Assets Faster

Traditional retirement planning emphasizes traditional financial concepts like saving and passive investment strategies – otherwise known as the slow and secure path to wealth.

It’s the same old stuff you’ve heard repeated ad nauseam: max out your 401(k), and invest the savings in a properly diversified portfolio using buy-and-hold.

This works okay when applied judiciously over a 40 year career to finance a 30+ year retirement, but early retirees have shorter careers and longer retirements. That means they have less time to save and need more money to spend once retired. The traditional approach will only work if you pursue extreme frugality to reduce the savings and retirement income required.

The problem is passive investment portfolios only grow so fast – not nearly fast enough for those seeking early retirement at regular spending levels. Depending on the data and time period analyzed, long-term returns vary from low to middle single digits net of inflation – hardly a rate to grow wealth fast enough for most early retirements.

Additionally, contained within this long-term data are 15 year periods where real returns are actually negative for a diversified, passive portfolio. That’s a mathematical disaster for someone seeking early retirement. (See the buy and hold myth section of this web site for more information on passive investment limitations or here for investment alternatives.)

In other words, if you want to save and passively invest your way to an early retirement at current spending levels, then think again, because there won’t be enough time to compound the growth of the assets in a meaningful way. It’s just math.

Losing compound growth as a wealth building tool due to the shorter time-frame of early retirement requires you to add a non-conventional dimension to your plans. You must apply one or more of the following three principles:

  1. Extreme Frugality: This is defined as being an extraordinary saver with low expenses relative to income. Some people have been known to save more than 70% of their earned income to retire in 7-10 years. It’s possible, but it’s not everyone’s first preference, so let’s look at two other alternatives.
  2. Active Investing: This is defined as adding a skill component to your investment strategies, which creates an additional return stream above and beyond passive returns. The higher investment return amplifies and accelerates the compound return. You can learn more about active investing here.
  3. Leverage: This is defined as expanding your resource base beyond your own limitations. Leverage allows you to replace less time with more resources, thus multiplying what you can achieve in the same amount of time.

“Give me a lever long enough and a place to stand and I will move the entire earth.”– Archimedes

For example, I retired early at age 35 the hard way. I saved the bulk of my earnings (frugality), which I then leveraged with specialized knowledge in investing (see Step 5 – Expectancy Investing), to increase the returns beyond passive buy and hold returns.

This is a rare and difficult path to early retirement that few succeed with. It requires both personal finance and investment skills – something few people with regular careers choose to develop.

A more common path to early retirement is real estate, because it offers financial leverage, business leverage, and tax advantages. The learning curve is also very reasonable. There are many specialized strategies in real estate that shorten the time to build wealth by offering returns greatly in excess of passive investing.

The common formula for these strategies is to find unusual value and/or add value using skill, while magnifying the returns using the financial leverage inherent in mortgage financing.

“When a man tells you that he got rich through hard work, ask him: “Whose?””– Don Marquis

Another common path to early retirement is leveraging other people’s time through business ownership.

Again, business ownership offers several forms of leverage and tax advantages not available to the passive investor. You can either follow your passion by building your own business, or you can become an owner of the company you work for through option and stock bonuses.

In summary, there are three paths to wealth – paper assets, real estate, and business – but only two of these paths offer leverage (real estate and business) suitable to early retirement without extreme frugality.

The conventional retirement planning approach uses the only non-leveraged asset category – paper assets. That’s why it is the slow path. It is also why it is the most popular path – the financial institutions can profit by selling it to you.

If your objective is to build wealth for a secure and prosperous early retirement, then the message is clear: the mathematics of saving and passive investing through paper assets is too slow.

The traditional path requires more time than someone seeking early retirement can afford (unless extreme frugality is your thing). That means you need an accelerated path to financial security using active and leveraged asset accumulation strategies to reach your early retirement goals faster.

And if you are really in a rush, then try combining all three tools – extreme frugality, active investing, and leverage – to really put your early retirement plans into hyper-drive.

Inflation Is The Number One Enemy Of Early Retirees

Once you’ve built your assets, it’s time to examine the issue of protecting your assets.

Inflation is an insidious cancer that eats away at the purchasing power of your savings. It’s a nearly invisible tax on wealth that can destroy your financial security if you don’t plan appropriately. For early retirees, this is particularly important, because inflation has more time to do more damage when you retire early. This makes it your number one enemy.

A mere 4.5% inflation will cut in half the purchasing power of your money every 16 years. That means you must double your money during the same time period just to break even.

A couple retiring in their 40’s (with at least one partner making it to their 90’s), can expect their purchasing power at 4.5% average inflation to get cut in half three times during their retirement. One dollar today would be worth little more than a dime when you are infirm and dependent. That’s a very big deal.

If you think this example is far-fetched and can’t apply to you, then think again. According to Charles Ellis in “Winning the Loser’s Game”, $100 of goods in 1960 would’ve cost $500 in 1995. That’s a 4.8% annual compound inflation rate that destroyed 80% of your purchasing power.

A retiree in 1960 would have to grow his portfolio and retirement income five-fold just to break even. That doesn’t even include making up for the erosive effects of spending principal to support living expenses, while paying taxes on all the capital gains along the way. To learn more about the impact of inflation, try our free inflation calculator here.

If that weren’t bad enough, the unweighted stock market went the opposite direction during part of the same time period (late 1960’s to early 1980’s), and lost roughly 80% of its value when adjusted for inflation. How’s that for passive investment returns?

Or consider how the Dow Jones Industrial Average in 1993 was equal to its inflation adjusted level in 1928 – not exactly a real wealth builder in terms of purchasing power. In short, inflation isn’t just a problem – it’s the problem.

Nominal growth in assets deceives. The only growth that counts over the long run is increasing purchasing power. Unfortunately, much of the passive return from investing is little more than asset inflation showing up in higher security prices.

As an early retiree with a long time horizon, you must be very careful. Inflation is a tax on assets and the longer your time frame, the more damage it can do to your real wealth – and “real wealth” is the key here.

Fixed annuities and pensions that don’t adjust adequately to compensate for inflation are a long-term recipe for disaster. Early retirees must structure their portfolio and income sources to grow and offset inflation’s erosive effects.

Examples include income producing rental real estate, equities, and fixed income sources with adequate cost of living adjustment provisions.

The message couldn’t be more serious. Inflation is your number one financial enemy when trying to figure out how to retire early.

Early Retirement Spending Issues

Traditional retirement planning relies on spending to decrease over time as you age. The reason is because studies show spending is proportional to activity level (emergencies and health issues aside), which decreases over time due to diminishing health and energy.

[how-much-money-do-i-need-to-retire]This decrease in spending with age largely offsets the impact of inflation, providing a relatively stable spending picture for traditional retirees.

Early retirement is different.

Studies of early retirees show spending often increases and remains high due to an active lifestyle and greater health. Early retirees can’t rely on decreased spending near the end of life to offset inflation like traditional retirees.

This means early retirees must fit into one of the following categories to achieve financial security:

  1. Begin retirement with excess wealth beyond what’s necessary to support current lifestyle, so that you have an appropriate cushion.
  2. Earn above market investment returns to overcome inflation and lifestyle costs during retirement.
  3. Supplement retirement income with earned income.
  4. Change lifestyle so that expenses decrease.

Most early retirees combine one or more of these four choices to make ends meet.

Early Retirees Must Remain Self-Reliant Until They Qualify For Social Security and Medicare

The traditional retirement three-legged stool for income that included pensions, savings, and Social Security, is often reduced to one or two legs for early retirees. The missing leg, of course, is Social Security and Medicare, as most early retirees are too young to qualify.

Eliminating government retirement programs from the early retiree’s financial picture places an increased burden on savings and other sources of income. Early retirees can’t rely on Uncle Sam to help with their retirement – at least for a few years.

That means you must budget for lower income in the early years until Social Security kicks in, and you must plan on higher expenses to self-insure your health until you qualify for Medicare.

In short, the time gap between early retirement and traditional retirement poses an additional financial burden that must be carried by the early retiree – both in terms of decreased retirement income, and additional health insurance costs.

Early Retirement Requires Perpetual Income Without Spending Principal

Financial planning for early retirement requires a nearly perpetual income stream that you can’t outlive. The reason is simple math.

There’s a good chance a couple retiring in their 40’s will have at least one spouse surviving into their 90’s. That’s 50 years of life to support. Even if you started retirement in your 50’s, you’re going to need to plan for 40+ years. That’s a lot of time.

To understand how this extended time in retirement affects spending investment principal, imagine a traditional 30 year mortgage. The early monthly payments contain very little principal, and the later payments are nearly all principal.

The same thing is true when living off your assets in retirement – the early payments can spend very little principal, but the later payments can spend lots of principal. The only problem is, you never get to know when the last payments will be until it’s too late.

Unlike a mortgage, your longevity is unknown in retirement. You have no choice except to assume an extended life, because the alternative would mean running out of money when you need it most.

Most retirees are more afraid of outliving their money than they are of dying – and rightly so. Nobody wants to end up elderly and indigent. Therefore, your monthly spending for an early retiree should leave principal intact until the end, and by the time you know it’s the end, it’s too late to spend it anyway… so who cares.

What this means is a 30 year time horizon (traditional retirement) allows very little principal to be spent, and a 40 to 50 year time horizon (early retirement) needs to be, for all intents and purposes, a perpetual income stream that can increase over time to offset inflation. But how do you do that? Traditional retirement planning doesn’t offer a solution.

As it turns out, the process for perpetual income planning is even simpler to figure out than traditional retirement planning, although it is harder to accomplish. The various assumptions and estimates required by all the traditional models become unnecessary and pointlessly complicated when planning an early retirement. (For a complete explanation of how much money you need to retire please download this book – below is a brief excerpt…)

Simplifying your life can help you reach early retirement sooner.

For example, I’ve been financially “retired” since age 35, in the sense of not earning income to pay living expenses. How can I do this safely when I can’t possibly estimate my investment returns, life expectancy, spending patterns, or inflation, with even the faintest degree of accuracy over a 60+ year future?

It would be an impossible task using the traditional models, but it’s actually rather simple to accomplish using a simple three rule system I developed.

(1) The first rule is you must build an investment portfolio sufficient to throw off residual income in excess of personal expenses. Please note this doesn’t refer to total return, but only to residual income. You can only spend the income thrown off by the assets, but the assets themselves can never be touched. This distinction is critical.

When the cash flow from your portfolio is more than you spend on living expenses, then you are infinitely wealthy. No complicated math required. At this point, your life expectancy is irrelevant because you can never outlive your income, making the expected lifetime assumption irrelevant.

(2) The second rule is you must manage your assets so that growth (total return-income) is greater than the inflation rate. This takes care of the inflation monster.

For example, if your income comes 100% from a laddered bond portfolio, then your growth is zero because total return and income roughly equal each other over time. This means that over the long-term, the inflation monster will likely eat your all-bond portfolio for lunch when you live off the income. Not a good thing.

Alternatively, if your cash comes from appreciating assets like properly valued dividend paying stocks, and positive cash flow rental real estate, then over time, those assets are likely to grow with inflation and your income should likewise grow.

As long as the difference between your total return and the income from your assets exceeds the rate of inflation, you can remove any need to estimate future inflation from your calculations. It becomes a non-issue.

(3) The third and final rule is your residual income must come from multiple, non-correlated sources. A reasonable mixture of dividend paying stocks and income producing real estate would satisfy that requirement.

It’s also possible to mix in some passive business income, fixed annuity income, royalty income, social security income, and pension income.

What you don’t want to do is retire based on one source of income. For example, many airline employees retired solely on their pensions which got decimated when certain airlines went through bankruptcy and restructuring. They had no fall back position and had to cut their lifestyle, and/or go back to work.

“There can be no real individual freedom in the presence of economic insecurity”-Chester Bowles

(4) A fourth bonus rule also exists, but it isn’t necessary. Think of this bonus rule as an insurance policy against the unknown factors in life ruled by Murphy’s Law.

Don’t begin early retirement until your passive investment cash flow exceeds what you spend. This will ensure you have money left over to reinvest.

This provides the last added measure of insurance to cover against unexpected surprises, lost income due to default, catastrophes, excess inflation, etc. Reinvesting excess revenue allows you to compound your way to recovery over time from any adverse circumstance.

There you have it – four simple rules, with no arcane assumptions or calculations, that simplify how perpetual financing for early retirement works. (Again, to get the whole story explaining how much money you need to retire, get the book here.)

It doesn’t matter how early you retire or how long you live. As long as you adhere to these four simple rules, perpetual financial security should be yours throughout retirement.

Money Is The Means To An Early Retirement, But It’s Not The End

What are you going to do with the 2,000+ hours currently spent working each year after you retire?

If you think a fulfilling early retirement is all about the pro-leisure circuit, reading novels, playing golf, and stuffing your face with popcorn while watching daytime television, then think again. For most people, the joy in that lifestyle is short-lived.

Like it or not, humans are goal seeking, social, productive creatures by nature – at least, most of us are. Anyone with enough drive and brains to succeed at building an early retirement will bore quickly with full-time leisure.

The studies prove it, and my personal experience is consistent with that conclusion. It’s a mistake to retire early with only some vague notions around recreation, freedom, flexibility, spending more time with family, and “sticking it to the man.”

When you choose the goal to retire early, it should be motivated by moving toward a new lifestyle that is more compelling than your current lifestyle.

You need a passion or activity that stimulates you. You’ll need to find an interest congruent with your values that is exciting to wake up for, and gets your creative juices flowing.

For example, I’m building a financial mentoring business because I’m passionate about personal finance, investing, and helping others achieve the life of their dreams.

This specialized knowledge has allowed me to retire early, and I enjoy sharing it with others. This business is fulfilling, and it’s the next step in my life’s journey.

“The greatest use of life is to spend it for something that will outlast it.”– William James

What will be the next step in your life’s journey? Some retirees blend part-time work, stint work, volunteering, the arts, launching new businesses, and any number of other occupations to add depth, human connection, and productivity to their day.

Other retirees spend more time at the gym, exercising to improve their health. Still others use the extra time to convert a previously loved hobby like flying, travel, or art, into an occupation.

None of these are mutually exclusive: you can combine them in any way that suits you. Whatever makes you happy is good enough.

There’s no right or wrong answer to a fulfilling early retirement – different strokes for different folks. You just need a compelling reason to wake up each day that is bigger than your personal self-absorption.

If you want to know how to retire early here are the 6 essential strategies that can make or break your financial security. Build assets faster and plan...

You’ll want to participate in the world, be creative, and remain connected. You’ll want an active social network, excellent health, interests, and the money to enjoy it all.

Don’t make the mistake of thinking full time leisure is what retirement should be all about – that’s a myth. Also, don’t make the mistake of thinking money is what retirement planning should be all about – it’s much bigger than that.

Retirement planning must include life planning too, because in the end, retiring early is all about enjoying a fulfilling and complete life experience.

Early Retirement Planning Issues Summary

So there you have it, six critical issues that can dramatically impact your early retirement planning. Below is a quick review:

  1. You can’t rely on passive compound growth to build your assets for early retirement because there is not enough time. You’ll want to apply one of the following three principles to step on the accelerator pedal and grow your assets faster: extreme frugality, active investing, or leverage. Combine all three to supercharge your asset growth and retire even faster.
  2. Inflation is the number one enemy of early retirees because it destroys assets over time – and early retirees have lots of time for the government to devour their savings through inflation. You must design your portfolio so that it’s protected from the ravages of inflation.
  3. Early retirees typically have different spending patterns from traditional retirees because they lead a more active life. You must budget appropriately to compensate for this higher expected spending level.
  4. Early retirees face a period without the base support provided by Social Security and Medicare. They must plan a “bridge budget” to compensate for this time period where income will be lower, and expenses higher.
  5. Early retirement requires you to build a perpetual income stream; your assets must last so long that essentially no principal can be spent – only income.
  6. Early retirement is all about lifestyle – not budgeting, income planning, and investing. Make sure you get a life beyond the pro-leisure circuit, because you are going to be living it for a very long time.

In summary, early retirement is one of my favorite subjects. It was my life dream that I have been living real-time since 1997.

All the lessons shared above are based on my personal experience from walking the talk.

If you share this life dream, then maybe it’s time you consider early retirement coaching with someone who understands the subject intimately. You’ll be able to accelerate your progress and shorten your learning curve in achieving this very desirable goal.

Let me know how I can help…

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The Ten Commandments Of Wealth Building Wed, 27 Aug 2014 23:30:30 +0000

Discover the Ten Key Principles to Build True Wealth (Surprise! It’s about a lot more than just making money)

Key Ideas

  1. How you can build wealth automatically with the least amount of effort.
  2. How “environments” and habits can literally pull you toward your wealth goals.
  3. 6 different types of leverage to build your wealth.

True wealth is about a lot more than just growing your net worth.

Yes, it’s true that financial independence is all about money, but living a wealthy life isn’t. This distinction is critical.

We’ve all seen rich people who are miserable, and poor people who are happy. Research even shows the relationship between money and happiness is small.

Below are the key ten principles that will help you achieve true wealth — both financially and personally.

1st Wealth Building Principle: Get Deeply Motivated

Money is a shallow motivator — too shallow to drive you deep enough to achieve success.

The problem is financial wealth is an external goal with benefits limited to the world outside of you. Money buys things, but money doesn’t buy happiness. It can build you a prettier prison, but it can’t get you out of prison.

The inherent limits of external goals (fancy houses, cars, and big bank accounts) similarly limits how motivated you will be when pursuing them.

To succeed in building wealth, you want to be driven by internal goals deeper than just the external trappings of wealth.

You want a cause that will bring transformation to your life and drive you deep enough to overcome all the obstacles that stand between you and financial freedom.

Internally-driven goals that might focus your attention long enough to succeed include the following:

  1. Freedom: Break loose from the shackles of daily labor so that you have more time to grow, create, and live to your fullest potential.
  2. Charity: The more you have the more you can give. Charitable foundations created by wealthy families often provide the financial muscle to empower great social and environmental causes.
  3. Growth: When you have financial freedom, you also have more time to pursue personal freedom. The wealth in your external world becomes a mirror to the wealth in your internal world. The principles that lead to financial wealth can also lead to true wealth by affecting other areas of your life.
  4. Leadership: Grow your own wealth ethically and joyfully so that you can lead by example for friends and family to rise above the bonds of financial mediocrity and follow in your footsteps.

The reason deeper causes are essential is because building wealth isn’t easy.

You will encounter many problems that must be overcome along your journey to financial freedom. You will pay a price to reach your goal.

To stay the course long enough to succeed, you must be motivated by a commitment that runs deeper than just the lifestyle that money can buy.

2nd Wealth Building Principle: Give More Value Than You Take

Adding value to the world by giving more than you receive makes everyone better off. That’s how you build true wealth. You improve others lives by improving your own.

Sure, history is replete with people who have amassed financial empires by exploiting others or the environment, but taking value can never lead to happiness or fulfillment.

Exploitation may bring riches, but giving value brings happiness and fulfillment as well as riches — and that’s true wealth.

By giving more value than you receive, success becomes a measure of how much you’ve given. The wealthier you become, the more you are giving to others.

It’s a rewarding way to live.

“From what we get in life, we make a living. From what we give, we make a life.” – Arthur Ashe

3rd Wealth Building Principle: Live With 100% Integrity

Never do or say anything that wouldn’t make your Mother and Father proud.

Don’t cause harm, encroach on others property, violate moral law, or damage the environment. Don’t lie, insult, or cheat in pursuit of financial wealth.

Heck, don’t even stretch the truth. It just isn’t worth it.

The rule is simple: if it doesn’t feel right then it probably isn’t. If you don’t feel comfortable telling your spouse, children, and parents what you are doing, then you probably shouldn’t do it.

Never choose expediency over integrity because no amount of financial wealth can replace a good night’s sleep, a clear conscience, and a peaceful mind.

4th Wealth Building Principle: Be Courageous

Humans are social animals which makes us cautious to venture independently. Yet, wealth doesn’t come from following the crowd. It results from doing what others won’t so you can have what others never will.

It takes courage to be a self-starter and be self-responsible. It takes courage to walk new paths and develop new skills. It takes courage to stand out from the crowd. It takes courage to put out the extra effort when others don’t.

In short, it takes courage to build wealth.

It may be true that the nail that stands up is the nail that gets hammered down, but it’s equally true that the nail that never got driven is the nail that didn’t fulfill its purpose.

Live with courage so you can live fully and experience true wealth.

These 10 Commandments of Wealth Building will help you achieve financial success and true wealth.

5th Wealth Building Principle: Be Disciplined

Wealth is the cumulative result of many little things added together and compounded over a lifetime. That means your daily habits will make or break your success.

Saving, investing, reinvesting, and growing your financial and business intelligence are all essential wealth building habits that require persistent and consistent effort.

In other words, wealth building requires discipline.

Without discipline, you risk falling prey to the number one wealth killer: procrastination. You must begin the right habits today without delay. It takes discipline to overcome procrastination by starting today and persisting tomorrow.

Another obstacle to disciplined, daily habits is “magical thinking.” This is the false belief that financial security will magically appear out of thin air without a specific plan or action causing it.

Wealth happens because you do what it takes to make it happen. The appearance of “instant wealth” actually stands on the foundation of years of disciplined, daily habits. Luck comes to those who make their own breaks.

6th Wealth Building Principle: Avoid Conspicuous Consumption

The illusory carrot for building wealth is the attraction of a “more, better, different” lifestyle.

This myth is perpetuated by brokerage ads filled with sailboats, European vacations, and perfectly manicured golf resorts. The problem is consumerism causes your limited resources to be directed toward lifestyle and away from building wealth.

They are competing demands for the same scarce resources – and only one can win the battle.

“Seek freedom and become captive of your desires, seek discipline and find your liberty.” – Frank Herbert

The reality is wealth is a form of delayed gratification. Wealth builders live modestly by spending less than they can afford (in money, time, and energy), so they can invest the difference for greater value in the future.

They understand happiness doesn’t result from the material trappings of wealth, because that would only keep them from fulfilling the deeper cause that drives them to success.

Every day you make a choice between consumption today or wealth for tomorrow.

The only way to embrace delayed gratification as the most fulfilling alternative without any sense of sacrifice is to have a motivating cause deeper than your desire for lifestyle. If lifestyle is your cause, then consumption becomes the priority — making wealth eternally elusive.

7th Wealth Building Principle: Build Supportive Environments


If building wealth was easy, then more people would achieve it. Yet, few succeed in their pursuit of financial freedom even though anyone can put together a reasonable plan to become wealthy.

The difference is consistent, persistent, focused action. Life provides an endless stream of distractions to sidetrack your plans for wealth.

The solution is to create a support system that keeps you focused, on track, and literally draws you toward wealth.

Your family environment, relationships, work environment, financial habits, daily rituals, and more must be proactively designed to literally pull you toward wealth by supporting and reinforcing your plans.

You must structure your life to support a wealthy outcome. It’s the path of least resistance.

Financial Mentor’s coaching and educational products can help you re-design your life to achieve financial freedom. You can either direct your daily life to achieve your goals, or you can passively allow your days to be filled with alternatives.

You either get the results you choose, or you get the results that are given to you. Which path will you follow?

8th Wealth Building Principle: Apply Leverage To Build Wealth

Leverage is the essential success principle that builds wealth. You won’t get wealthy by trading time for money, and you can’t do it all yourself.

Building wealth requires you to work smarter rather than harder by applying the following principles of leverage:

  1. Financial Leverage: Other people’s money so that you’re not limited by your own pocketbook.
  2. Time Leverage: Other people’s time so that you’re not limited to 24 hours in a day.
  3. Systems and Technology Leverage: Other people’s systems and technology so that you can get more done with less effort.
  4. Marketing Leverage: Other people’s magazines, newsletters, radio shows, and databases so that you can communicate to millions with no more effort than is required to communicate one-on-one.
  5. Network Leverage: Other people’s resources and connections so that you can expand beyond your own.
  6. Knowledge Leverage: Other people’s talents, expertise, and experience so that you can utilize greater knowledge than you will ever possess.

Leverage allows you to build more wealth than you could ever achieve alone by utilizing resources that extend beyond your own. It allows you to grow wealth without being restricted by your personal limitations.

Leverage is the principle that separates those who successfully attain wealth from those who don’t. It’s just that simple.

If you aren’t using leverage, then you’re working harder than you should to earn less than you deserve — and that isn’t going to make you wealthy.

9th Wealth Building Principle: Treat Your Wealth Like A Business (Because It Is)

You wouldn’t build a business without a business plan. Why should building wealth be any different?

Design your wealth plan based on proven business principles that lead to success. These principles include competitive advantage, leverage, accurate record keeping, and accountability– just to name a few.

Run your money like a business, because that’s exactly what it is: a personal financial management business.

Additionally, your personalized wealth building plan should take into account your unique skills, interests, and resources while incorporating the Ten Commandments to Wealth, successful investment principles, and much more.

When complete, your wealth plan will be tailor-fitted to your unique life situation, while honoring the proven success principles that no wealth plan is complete without.

Run your money like the business it is. Anything less will slow your journey to wealth.

10th Wealth Building Principle: Steward Your Wealth

“If a man is proud of his wealth, he should not be praised until it is known how he employs it.” – Socrates

Wealth is your servant, and you are a servant to your wealth. Money is little more than a tool that comes with a responsibility to use it wisely.

The rich man is a fool who dies without arranging his affairs to assure that his wealth does good during his lifetime and after his passing.

Through your legacy of wealth, you have the opportunity to bless yourself and your family’s life now and in the future. And you can go beyond that by expanding the circle to include the lives of all who follow you.

As a successful wealth builder, you’ll be in the unique position to organize charities that can do great social good. The fact that you can’t take it with you means wealth is a gift to be given.

Always understand that wealth isn’t something you possess, but a flow which has found a temporary parking place under your stewardship.

Eventually this stewardship will move to others as all things must pass (including you). The wealth builder’s solemn responsibility is to use this temporarily gifted power wisely so that it creates maximum benefit for all those who are touched by what you created in your lifetime.

Follow these 10 commandments of wealth building to become financially successful.

In Summary…

There are ten key wealth building principles that lead to true wealth, not just monetary wealth. The objective is not just to become rich, but to build a balanced, fulfilling, wealthy life.

These ten key principles will help keep you on track:

  1. Build Wealth For A Deep Cause: Money alone is too shallow a goal to motivate you to overcome all the obstacles that stand between you and wealth. When you find a deeper goal like freedom, growth, creativity, or charity, then you’ll have the internal motivation to persist and succeed.
  2. Give More Value Than You Take: When you give value then your financial success becomes a measure of how much you have given to the world. It’s a satisfying way to live.
  3. Live with 100% Integrity: Integrity is non-negotiable because no amount of money can replace a good night’s sleep, a clear conscience, and a peaceful mind.
  4. Be Courageous: Wealth results from doing what others won’t so you can have what others never will.
  5. Be Disciplined: Life will conspire to distract you from achieving your goal. Only the disciplined will stay the course with consistent enough action to get results.
  6. Avoid Conspicuous Consumption: Nobody ever spent their way to financial freedom. Every day you make a choice between consumption today or wealth for tomorrow.
  7. Build Supportive Environments: The path of least resistance to wealth is paved by supportive environments that literally pull you toward the goal.
  8. Apply Leverage: Leverage is what separates those who achieve wealth from those who don’t. You can’t reach the goal by trading time for money, and you can’t do it all yourself. You need leverage.
  9. Treat Your Wealth Like A Business: As a wealth builder, you’re in the personal financial management business and must manage your net worth just like an executive manages a successful business.
  10. Steward Your Wealth: Money is little more than a tool that comes with the responsibility to use it wisely. It’s not something you possess, but something that passes through you and must be given back.

After all, isn’t life too short to settle for anything less?

“Say what you will about the Ten Commandments, you must always come back to the pleasant fact that there are only ten of them.” – H.L. Mencken

[how-much-money-do-i-need-to-retire-footer] ]]> 1
Are Safe Withdrawal Rates Really Safe? Tue, 26 Aug 2014 22:47:51 +0000

Discover The Little-Known, But Highly Dangerous Risks Hiding Behind The 4% Rule, And The Simple Solutions to Correct the Problem

Key Ideas

  1. Reveals the hidden dangers behind the 4% Rule that every future retiree must know.
  2. Learn how supposed “safe” withdrawal rates can allow you to run out of money before you run out of life.
  3. Get the 4 step process that safeguards your retirement savings against potential errors.

What do retirees in 1921, 1966, and 2010 have in common?

Very little… and that’s the problem.

Each faced a different life expectancy and invested in a different economic climate with varying inflation expectations, interest rates, and market valuations.

The truth is these dates weren’t chosen at random: One had the highest safe withdrawal rate in recorded history, the other the lowest, and the third barely survived the ravages of inflation.

Each of these three retirees lived through dramatically different economic times. Yet, according to conventional wisdom they all share the same safe withdrawal rate in retirement – roughly 4%.

It doesn’t make sense.

How can a static, one-size-fits-all solution to a problem as varied and complex as knowing how much money you need to retire be correct?

How could retirees in 1921, 1966, and 2010 share the same safe withdrawal rate when market valuations, interest rates, inflation expectations, and expected lifespans were completely different?

It’s impossible. It’s wrong.

Yet, that is the conventional wisdom in the financial planning profession. It is known as the “4% Rule,” and it is widely considered “the truth” in safe withdrawal rates for retirement.

The problem is it’s not the truth and every day people risk a lifetime of retirement savings on it. There are better solutions.

In this article I will reveal the problems hiding behind the 4% Rule and provide you with practical solutions you can implement for your retirement security.

Are safe withdrawal rates really safe? Learn the truth about the 4% Rule here.

Why Safe Withdrawal Rates Are Critically Important

Retirement income is an inherent conundrum.

How do you convert a volatile pile of assets into a stable income stream you can never outlive?

Every new retiree needs to answer the same critical question: What is the maximum retirement income I can withdraw from savings without running out of money before I run out of life?

It’s the single most important question I get from retirees and near retirees.

The reason is because safe withdrawal rates impact every aspect of retirement planning – from the lifestyle you can afford to the amount of savings needed to fund it.

Small errors in safe withdrawal rates multiply over many years, which causes huge financial impacts. Consider these:

  1. Lifestyle You Can Afford: Few people realize that a mere 1% safe withdrawal rate change makes a big difference in spending during retirement. It seems counter-intuitive because the number is so small. However, a 1% variation from the industry standard 4% assumption will increase (or decrease) your income in retirement by 25%. That can make the difference between a world traveler lifestyle or living at home on hot dogs. In other words, it pays to calculate your safe withdrawal rate as accurately as possible. Small changes in the numbers equal huge changes in the lifestyle you can afford.
  2. Savings Required: The amount you can spend each month from savings and the amount of savings you must build to support your retirement are different sides of the same coin. One implicates the other mathematically. For example, the “4% safe withdrawal rate” is mathematically equal to the “Rule of 25” (you need 25 times your first year spending in savings). Similarly, a 3% safe withdrawal rate equals roughly 33 times your first year retirement spending in savings. Using the two examples above, a mere 1% change in safe withdrawal rate when spending $100,000 per year in retirement is the difference between building a nest equal to $2.5 million vs. $3.3 million – obviously a big deal. Conversely, knowing you can safely spend 6% would knock the savings requirement down to $1.7 million. That’s why it is so important to figure an accurate safe withdrawal rate. It can change the amount you need to save for retirement thus shortening the time it takes for you to reach your financial goals.
  3. Risk To Financial Security: If you withdraw just 1% more than your actual safe withdrawal rate you will go broke before you die. It ‘s a mathematical truth. A mere 1% less would have allowed your nest egg to last a lifetime. That’s why accuracy is critical – because the razor thin margin between 1% too much and getting it right is literally the difference between poverty and financial security.

Like Goldilocks, there’s a sweet spot in retirement spending somewhere between “too much” and “too little” that is “just right.”

In an ideal world, you would exhaust your last penny from retirement savings as you exhaled your last breath. That’s the theoretical objective of safe withdrawal rates.

It’s a high-stakes game where the quality of your life during retirement is dependent on getting the answer right. For that reason, there is probably no question more important in retirement planning.

Unfortunately, the conventional wisdom can be dangerously misleading.

Lesson Learned: Withdrawing the right amount of money from savings is one of the most important retirement planning questions you will confront. Take too much and you blow up: take too little and you leave lifestyle on the table. You need to get as close to the right amount as possible. It’s worth the effort – and it’s worth reading this long article to understand the issues.

A Quick History of Safe Withdrawal Rate Research

[the-four-percent-rule] The state-of-the-art knowledge in safe withdrawal rates has progressed dramatically since the early 1990s. What began as a naïve exercise in simple amortization has progressed to sophisticated regression analysis and Monte-Carlo research.

You may want to skip straight to the results and conclusions instead of learning the research history behind safe withdrawal rates first – but it’s not that simple.

The 4% rule became the sacred cow for a reason, and a new generation of research is teaching important principles that can make big differences to your financial future.

It pays to learn this stuff. It sets the context for the rest of the discussion that follows and is essential to your making smart decisions with your money.

To keep these ideas accessible I’ve organized them into three distinct generations of knowledge:

Generation 1:

The first generation in safe withdrawal rate research was naively based on mortgage amortization – but in reverse. Rather than pay down a mortgage (like your home), you would draw down an asset account (like your retirement savings).

The idea seemed intuitively correct even thought it was fatally flawed (due to volatility and returns sequencing risks as shown below).

Even the venerable Peter Lynch (1995) succumbed to the intuitive appeal of the mortgage-style model when he falsely stated a 7% withdrawal rate would be prudent for an all stock portfolio.

He was forced to retract this obviously incorrect statement when 2nd Generation research proved conclusively how such a withdrawal rate could land you in the poor house.

Generation 2:

Bengen (1994) ushered in the second generation of safe withdrawal research when he published a groundbreaking Journal of Financial Planning article that still sets the basic framework employed by most research to this day.

He used historical simulations of long-term U.S. securities index data to define “Safemax” as the highest withdrawal rate, expressed as a percentage of the account balance on the first day of retirement, and adjusted for inflation annually, that allowed for a minimum of 30 years of withdrawals over all rolling historical periods in the database.

Bengen concluded the maximum safe withdrawal rate was about 4.1% for stock allocations between 37%-67% and later upgraded that amount to 4.5% when small cap stocks were included in subsequent research.

Cooley, Hubbard, and Walz (1998) took the 2nd Generation model to the next level in an effort to overcome the sequencing risk in data (as defined below).

They showed a 95-98% chance you won’t run out of money if you applied a 4% withdrawal rate. This study, dubbed the “Trinity study,” and popularized by Dallas Morning News columnist Scott Burns, was updated in the April 2011 Journal of Financial Planning with similar results.

Other 2nd Generation researchers have come to similar conclusions depending on assumptions applied. Results vary slightly from study to study based on asset allocation, data sources, whether or not fees are deducted, frequency of portfolio rebalancing, and much more.

The key point defining all 2nd Generation research is that each study applies the same basic premises thus producing extraordinarily consistent results.

This consistency caused the 4% Rule to become conventional wisdom and be mistaken as “truth” when it is really just a product of the research premises.

To understand the problems with 2nd Generation research we need look no further than the amazing breadth of dubious assumptions behind the results:

  • Safe withdrawal rate research was based on U.S. securities data history. No foreign market data was included.
  • The research typically assumes a static allocation to stock and bond indexes as the only viable asset classes. Alternative assets are not included.
  • It assumes 30 years of retirement spending regardless of expected longevity.
  • It assumes no investment expenses by using historical index data – obviously not true for any real-world investor.
  • It assumes a fixed spending amount that grows with inflation and does not adjust based on changes in portfolio value or age – not true for most retirees.
  • It seeks to determine the highest beginning spending amount that can be adjusted for inflation without ever running out of money that works across all time periods in the database. It’s sort of a least common denominator concept.
  • All data periods are created equal with no adjustment for valuations or interest rates at the time you retire.
  • You must have 30 years of subsequent data to know if the withdrawal rate was actually safe, meaning retirements beginning after 1985 were unknown and theoretical because they were out of sample.  (This was written in 2014.)

While these assumptions make for expedient research, there’s a clear sacrifice of accuracy when compared to the real-world retirement you will face.

Below, I’ll examine each of these assumptions in detail to show you the implications. Then, you can decide how relevant 2nd Generation research conclusions (The 4% Rule) are to your retirement planning.

Generation 3

3rd Generation safe withdrawal research has attempted to correct the assumption limitations outlined above to provide a more accurate picture of how safe withdrawal rates might apply to real-world retirees like you and me.

In essence, the 3rd Generation models stand on the shoulders of the excellent research that came before it by recognizing the limitations, correcting the flaws, and producing more accurate models. The 4% rule has serious problems and 3rd Generation research seeks to correct those errors.

Rob Bennett was an early pioneer in 3rd Generation modeling by advocating (through various online forums) that withdrawal rates must be adjusted for market valuations consistent with research by Campbell and Shiller (1998).

Also, Wade Pfau (2010 – 2011) broke new ground by applying safe withdrawal rates to international market data with shocking results. He also applied valuation, interest rate, and inflation metrics in regression analysis to form a dynamic and robust safe withdrawal rate model.

The key point illustrated by 3rd Generation research is that a deeper level of complexity underlies the sacred cow “truth” known as the 4% rule. It was the best answer for its day, but those days are gone. It is a 2nd generation model whose shortcomings have been proven well enough that it must be retired.

With that said, the 3rd generation research is in its infancy and has only corrected certain shortcomings from the 2nd Generation model. There are many remaining assumptions you must still individually answer to determine your personal safe withdrawal rate.

For that reason, we’ll examine each of the shortcomings of the 2nd Generation models below and use 3rd Generation research to demonstrate viable solutions where they exist.

In the process, I’ll explain all issues remaining unresolved and point you toward viable answers to consider. The result will be a safer withdrawal rate than the simple rule-of-thumb provided by conventional wisdom.

Lesson Learned: Safe withdrawal rate research has been through 3 generations of growth and sophistication in a very short time. However, the 2nd Generation model, known commonly as the 4% Rule, is unfortunately locked in most expert’s minds as “truth” when 3rd Generation research has already discovered more robust and accurate models. Regardless of the model used some underlying assumption problems remain that must be adjusted for.

Let’s dive into the underlying issues built into 2nd Generation safe withdrawal research so we can see why they pose a problem.

Backcasting – Data Sampling Problem

Data limitations are one of the most obvious problems with all safe withdrawal research.

2nd Generation models have been tested exclusively on U.S. data – sometimes as far back as 1871. While that is a solid long term study it completely ignores international data.

The implied assumption is the future should be no worse than the past as evidenced by U.S. asset price growth.

But is that really true?

The U.S. was the prom queen of the economic world for the last 130 years. She led a privileged life that likely introduces an overoptimistic bias to research based exclusively on her data. Consider the following:

  • U.S. stock market capitalization grew from 22% of world total in 1900 to 54% in 2003.
  • The U.S. stock market grew at 6.3% real compounded and never had a losing 20 year period. This compared to an average growth of 5.4% for other developed countries with only 3 providing all positive 20 year holding periods.
  • U.S. stocks compounded at a higher rate than all but 3 other countries.
  • U.S. stocks had lower volatility of returns than all but 4 other countries.
  • Australia was the only country that had both lower volatility and higher returns than the U.S.
  • U.S. bonds had higher real compound returns than all but 3 other countries and lower bond volatility than all but 2 countries.
  • Only Switzerland had both higher bond returns and lower bond volatility than the U.S.
  • Only 2 countries experienced lower compound annual inflation than the U.S.

Because the U.S. enjoyed the highest returns with lowest volatility for stocks, bonds, bills and inflation, it’s simple math to conclude any research into safe withdrawal rates based on this data would likely provide some of the most optimistic outcomes of any data set.

This isn’t opinion. It is just the way the math works. It’s a fact.

The U.S. led a charmed existence with all the right connections and resources to bubble to the top of the economic heap. Her experience is not representative of the rest of the world, and it’s highly questionable the U.S. will repeat her performance during your retirement for many reasons including the following:

  • Interest rates (as of this writing) are below U.S. historical averages, dividend yields are below historical averages, and P/E ratios are above historical averages. All of these facts imply less than average investment returns (see next section on valuation models).
  • The last 100 years were built on cheap oil and plentiful natural resources. The U.S. used a disproportionate share of those resources to fuel its economic growth and consumption demands. Maybe technology will solve these problems, or maybe natural resource limitations will inhibit overall economic growth.
  • The U.S. also enjoyed a stable political environment with no destructive wars on its soil compared to its developed competitors.
  • The world economy has become more homogenized. The degrees of separation have diminished. U.S. companies sell and manufacturer world-wide while their competitors do the same. It’s truly a global economy in ways that didn’t exist historically.
  • U.S. debt levels have ballooned by every measure compared to economic history placing a serious question mark around the stable inflation assumption of the past.

Are you willing to bet your financial security on the charmed economic stats of the prom queen when she was in her prime compared to how the world is a changed place today? Should you bet on the prom queen returning to the podium or is it more realistic to expect some kind of mean reversion that could lower asset returns to average expectations?

This is more than a cute analogy. Your financial security in retirement depends on it.

Wade Pfau (source for much of the data cited above) was the first to put this idea to the test. He applied a research methodology similar to Bengen but with the critical change of using historical international data instead of U.S. data.

The results were alarmingly different.

In other words, similar methodology as 2nd Generation models + different data = dramatically different conclusions.

Using 109 years of data for each of 17 different developed countries, Pfau determined that a 4% withdrawal rate with a fixed 50/50 asset allocation would have failed in all 17 countries. Yes, a 100% failure rate.

You would have run out of money before you ran out of life using the conventional assumptions on foreign country data.


Lesson Learned: The 2nd Generation models used to prove the 4% Rule showed a surprising failure rate when applied to international data. Basing your retirement expectation on results from U.S. data alone is the economic equivalent of basing your expectations for the High School Prom on the prior 10 years prom queen’s experience. It is overoptimistic. This can be proven either by comparing U.S. economic statistics to the rest of the world or by actually running the models on the actual asset price data. They both point to the same conclusion – if you bet your retirement on becoming the prom queen you stand a good chance of being disappointed.

The Dramatic Impact of Sequencing of Returns on Safe Withdrawal Rates

In the last section, you learned the critical role that data assumptions play in safe withdrawal rates by seeing how international data indicated a potentially lower return expectation than U.S. data.

In this section, you’ll discover how safe withdrawal rates are actually dynamic – not static as commonly taught.

You’ll learn how the sequencing of investment returns and inflation during your early retirement years will make or break your financial security.

The sequencing of returns problem is best illustrated in this example from William Bernstein:

Assume you have a $1,000,000 portfolio with an average return of 10% split evenly between 15 years at +30% and 15 years at -10%. This would give you a compound return of 8.17% (compound is less than average due to volatility effects).

More importantly, when you vary the returns sequences you get something truly shocking:

  • If you are unlucky and start your retirement with 15 straight losing years you can only withdraw 1.86%. Same annual returns, same average return, different sequence of returns, different result.
  • Conversely, if you are lucky enough to start your retirement with 15 straight winning years you can safely withdraw 24.86%.

These are astounding results!

Sequencing risk causes your safe withdrawal rates to vary from a low of 1.86% (in this example) to as high as 24.86%. This variation is solely caused by the exact same returns occurring in a different order.

Nothing else changed. Amazing!

Sequence of Returns 4% Rule & Safe Withdrawal Rate

As shocking as these numbers are, it’s really just common sense when you think about it.

Imagine 15 years of no net investment gain (not hard to do with the stock market’s inflation adjusted performance since 2000), while still withdrawing 4% per year for spending. Even without inflation adjustments, you would wipe out 60% of your account just in spending alone.

When you add inflation and investment losses to the equation, the overall destruction to equity would be the retirement equivalent of death by strangulation.

By the way, this is not some strange statistical mumbo-jumbo that has no bearing on your retirement. This is real-world stuff that is critical to your understanding.

It can make-or-break your financial security. Real people retired in 2000 applying the conventional 4% wisdom and destroyed their nest eggs in the process because of this exact problem. It’s totally real.

Sequencing of returns risk is a huge factor in explaining why actual safe withdrawal rates on U.S. historical data vary from the 3% range at the low end to over 10% at the high end (depending on assumptions and the date chosen to begin retirement).

Sequence of returns is determined by the date you retire, cannot be known in advance, and will be one of the most significant factors affecting your financial security in retirement.

It’s a big deal.

The truth is safe withdrawal rates are all over the map depending on what date you retire and what happens to your investment returns in the early years of your retirement.

Pfau (2010) concludes that retirement success is highly dependent upon early investment returns showing that wealth remaining after 10 years of retirement combined with cumulative inflation during those 10 years explains 80% of the variation in safe withdrawal rates. This is very similar to Bernstein above.

The importance of this issue cannot be overstated.

The problem is your next 10 years investment returns are unknowable. You don’t get to know the sequence of returns until after the fact. The future can’t be predicted with any accuracy (and it certainly isn’t dependent on the last 100+ years of U.S. average historical data!).

Lesson Learned: Your real safe withdrawal rate for 30 years is highly dependent on the first 10 year’s sequence of returns and inflation rate. One size does not fit all. The 4% conventional wisdom is a static, least-common-denominator approximation, but actual safe withdrawal rates are highly variable. It is one reason why retirees in 1921, 1966, and 2010 face such dramatically different safe withdrawal rates.

What’s a near-retiree to do? As it turns out, all is not lost. There are answers provided in the next section below.

(But they are not the same as conventional wisdom would lead you to believe!)

Market Valuations and Safe Withdrawal Rates

2nd Generation research assumed all time periods were equal regardless of market valuations, interest rates, and inflation. According to conventional wisdom a retiree in 1921, 1966, and 2010 should all withdraw the same percentage of savings even though history proves this assertion is patently false (with perfect hindsight, of course).

3rd Generation research concludes differently by attempting to show that safe withdrawal rates vary widely depending on economic conditions on the date of retirement.

Let’s set the stage for this argument with the obvious logic first. Everyone intuitively understands that investment returns are a primary determinant of safe withdrawal rates.

The more your portfolio earns during retirement the more you can afford to spend during retirement. That much is clear.

The argument isn’t whether investment returns affect safe withdrawal rates. Everyone agrees that’s true.

The problem is guesstimating what investment returns will be since you only know in hindsight and your withdrawal rate must be chosen in advance. That’s the problem.

This problem is why 2nd Generation models chose to define the highest withdrawal rate that could survive all historical data periods. The assumption was the best and worst performing periods couldn’t be determined in advance so the only safe choice was the lowest common denominator that survived all time periods.

Fortunately, that assumption is false. Future investment returns are not “luck” or random as many would guess.

As it turns out, market valuations at the time you begin your investment holding period are inversely correlated to the return you can expect over the following 10-15 years.

Notice how this 10-15 year time period is identical to the critical time period identified by Pfau in the research on sequencing of returns risk cited earlier. That’s no coincidence.

Campbell and Shiller (1998), Hussman, Easterling, and many others have documented the effect of valuations on subsequent investment returns. It’s a well known phenomenon that’s valid across data samples and is something you can apply in your own retirement planning.

Is it statistically perfect? No, nothing is. Is it robust enough for me to bet my own retirement on it? Absolutely yes!

The implications are startling. It means the 2nd Generation safe withdrawal rate models were well intentioned but somewhat misguided.

Retirees don’t need to know the historical “least common denominator” withdrawal rate that survived most data samples (as the 2nd Generation models taught). They need to know the forward-looking investment expectation given the actual data that exists on the day their retirement begins (which is what 3rd Generation models teach).

These are completely different questions.

Michael Kitces considered the valuation effect alone by testing both optimal asset allocations and safe withdrawal rates based on Shiller’s P/E 10. He concluded 4.5% for P/E 10 above 20, 5.0% when P/E 10 is between 12 and 20, and 5.5% when P/E 10 is below 12 were all safe.

These are not revolutionary variations from the conventional 4% Rule, but they point a clear direction: valuations matter.

In other words, the higher the market valuation, the lower the safe withdrawal rate. Rob Arnott (2004) asserted similarly that sustainable withdrawal rates are not a fixed number but evolve with changing market conditions.

Similarly, Rob Bennett provides a safe withdrawal calculator based on regression analysis by John W. Russell that varies output using valuations at the start of your retirement. The key difference between Bennett and Kitces, however, is Bennet’s conclusions are more dramatic with a safe withdrawal rate at the 2000 peak in market valuations using a large allocation to stocks of only 2%.

This is half of what conventional wisdom would claim. Yikes!

More recently, Wade Pfau created a robust model using regression analysis and 3 valuation metrics — PE 10 (price divided by average real earnings for previous 10 years), dividend yield (dividends divided by stock price), and interest rates (on 10 year government bonds) — to explain variation in safe withdrawal rates across time periods reasonably well.

It wasn’t perfect, but most of the results were within 1% of being accurate (which is far more accurate and informative than blindly following historical averages).

For example, our theoretical retiree in 1921 enjoyed an astounding 10.42% safe withdrawal rate largely because of historically low market valuations when he retired. Our 1966 retiree faced a difficult future with high valuations and rising inflation causing a 3.53% safe withdrawal rate. This is a difference of 3 times the spending capacity from the same nest egg simply because of the date you retired!

And if that isn’t shocking enough, our 2010 retiree is looking at a 1.8% safe withdrawal rate according to Pfau’s research.

No, 1.8% isn’t not a misprint. But it sure is far below the conventional wisdom of 4% based on historical research.

It’s caused by the one-two combination punch of persistently overvalued markets and razor thin interest rates that simply don’t exist in the historical data.

What this means is 2010 retirees have serious cause for concern when you consider a healthy couple at 65 has decent odds of one spouse outliving the 30 year lifespan assumption. And don’t forget, none of the models thus far include administrative or transaction fees (both of these issues are explained in detail below, and they both lower the safe withdrawal rate even further).

Suffice it to say, 2010 is a tough year to begin retirement. The conventional “wisdom” could dangerously mislead you to overspend, which would put you at risk of running out of money long before you run out of life.

Lesson Learned: Safe withdrawal rates vary with market valuations, interest rates, and inflation at the time you begin retirement. This connects to the previous lesson because valuations are a strong indicator of subsequent 10-15 year investment performance. When you put these two facts together you have a dynamic model that is more accurate and can be adjusted based on your actual retirement situation.

The safe withdrawal rate you must use is not a fixed number like conventional wisdom claims that can be neatly packaged into a simple rule-of-thumb.

It’s not the same across all time periods in all conditions. One size does not fit all.

It’s a dynamic number dependent on economic conditions and asset valuations prevailing at the time you retire. This is completely contrary to the static 4% rule taught elsewhere.

The Understated Problem with Inflation

In the previous section, we discovered how our 1921 and 2010 retirees faced a more than 5 fold difference in expected safe withdrawal rates because of market valuations and interest rates.

In this section, we look at our 1966 retiree to learn how inflation affects safe withdrawal rates so we can begin assembling a more complete picture.

The key concept to understand about inflation is how it multiplies its pain in two ways through retirement income planning

  1. First off, withdrawal amounts are adjusted annually to reflect cumulative inflation. This forces a progressively larger annual withdrawal from savings to maintain real purchasing power which progressively taxes your savings.
  2. Secondly, periods of high inflation are correlated with lower asset returns (see Unexpected Returns: Understanding Secular Stock Market Cycles).

The combined effect is to increase your annual withdrawals from savings while simultaneously reducing your investment returns. This is a very difficult situation for any retiree to face.

It’s the worst of both worlds all at one time, because your retirement savings are getting squeezed from both ends simultaneously.

The best historical example illustrating the ravages of inflation included the period from 1966-1996. Surprisingly, it was harder on new retirees than the Great Depression.

Inflation caused the annual withdrawal amount to rise from 4% to above 10% of savings within 15 years of retiring. This also coincided with a nominal return on the S&P 500 of 6.81% roughly equaling the inflation rate and putting the real return at roughly zero.

Numbers like these are unsustainable and spell financial destruction.

The only reason these retirees survived was because Paul Volcker wrenched down inflation thus setting off one of the greatest bull markets in history beginning in 1982. The subsequent outsized investment returns offset the outrageously high withdrawal rate that had been caused by inflation in the preceding 15 years, thus bailing out a near-death experience for 1960s retirees.

Consider the 1960s a warning shot over the bow because the next round of inflation may not end so gracefully. Men of Paul Volcker’s caliber seem in short supply these days, and record breaking bull markets, by definition, are extremely rare occurrences and should not be relied upon to repeat.

The other insidious fact about inflation is that it’s not predictable. PhD economists routinely miss their forecasts just one year into the future.

The idea of a 30+ year inflation forecast (the duration of your retirement) is an absurd joke.

In short, inflation is an incredibly dangerous beast: it can’t be forecast accurately and it multiplies your spending while reducing average investment returns.

Lesson Learned: Taking inflation adjusted withdrawals over a 30 year period is only realistic in a stable inflation environment otherwise your withdrawal rate grows to an unsustainably large percentage of savings. The bulk of U.S. economic history has seen stable inflation so there is little historical precedent to judge the seriousness of the problem. Foreign history includes bouts of inflation and the effects indicate safe withdrawal rates below 4%. Given the unprecedented government debt levels you should carefully reconsider any safe withdrawal rate that blindly increases spending during inflation.

How a Long, Healthy Life Is a Financial Problem

Longevity is a key idea when spending principal from savings (as most safe withdrawal research assumes).

Research shows (based on U.S. historical data – see above caveats) that safe withdrawal rates for 10 year retirements approach 10%. 20-25 year retirements push 5% and 30 years or more dip under 4%.

The rule is simple: the longer your money has to last, the lower the percentage you must withdraw. It’s inherent in the mathematics of amortizing a fixed pool of capital — in this case, your savings.

Now that we know the math, let’s look at the problem: people are living longer.

Remember our 1921 retiree? He had a life expectancy of little more than 65 years. When Social Security was created they set the retirement age at average life expectancy. It was never intended to fund 30+ year retirements.

Since that time, average life expectancy has increased by roughly 1/3 of a year for every year thus increasing by 30 years in the last 100.

Our 1921 retiree didn’t need a lot of savings because he could spend a large chunk of principal every year. Our 2010 retiree doesn’t have that luxury.

Today, a healthy couple retiring at 65 has a good probability of at least one spouse living into their 90s. That means today’s retirees must budget for 30+ years and be extremely careful about any strategy that amortizes their savings by spending principal.

Additionally, this average life expectancy is a moving target expected to increase by the time your date with destiny arrives. If history provides any guide, it’s reasonable to expect the average to rise another 10 years over the next 30 moving our 2010 retiree into a 100+ year lifespan.

This may sound extreme, but with developments in biotechnology and nanotechnology, it may actually prove to be a conservative estimate.

Finally, understand that all this discussion is about averages, but half the population outlives the averages. Already the 95% confidence interval life expectancy is over 100 years (and rising).

The risk has never been higher that you could outlive your savings. Extremely long retirements exceeding 30+ years are entirely reasonable to plan for; yet, all safe withdrawal research to date is based on the premise that you spend your assets to zero at 30 years. Yikes!

This could be very dangerous.

For many people this assumption could cause you to run out of money long before you run out of life.

Lesson Learned: Both 2nd and 3rd Generation research into safe withdrawal rates has assumed 30 year retirements as the maximum. Trends in human longevity and developments in medicine make that a dubious assumption at best and dangerous at worst. The longer your life expectancy the lower percentage you can withdraw from savings.

The bottom line is a safe withdrawal rate that spends principal is an oxymoron when longevity expands beyond 30+ years. Any spending of principal is not safe over very long time periods.

You should adjust your investment strategy and withdrawal rate accordingly.

The Zero Fees and Expenses Assumption

How many of you invest with zero fees and expenses?

Not too many hands raised…

Amazing, then, that most safe withdrawal rate research supporting the consensus 4% rule assumes zero fees and expenses.

This is another example of an assumption made for the purpose of expediency in research, but having no real-world application.

Real-world withdrawal rates must be reduced compared to theoretical research to reflect real-world investment management and transaction expenses.

This issue may seem small, but it is not.

Imagine you’ve invested your portfolio with an adviser who charges 1% management fees while investing in mutual finds with 1-2% total expense ratios. That is 2-3% of annual expenses when compared to a 4% withdrawal rate. The difference is huge.

Safe withdrawal rates are based on research that's well intentioned but also misguided.

Fortunately, you don’t have to subtract the expenses directly from the theoretical withdrawal rate because the math doesn’t work that way. (It’s a common mistake.)

Instead, you subtract expenses from the investment return first and then calculate the sustainable withdrawal rate. The reduction in withdrawal rate is significantly less than the actual expenses.

For example, Pfau adjusted his 3rd Generation research results for administrative fees of 1.6% for stocks and 1.2% for bonds (similar to recent Morningstar averages). After he did so, he reduced his safe withdrawal rate by only .66 percentage points – far less than the nominal expenses.

Lesson Learned: If you invest in low cost ETF’s without additional advisory fees then you may be able to ignore the investment expense issue since its impact should be limited. However, if you invest with an advisor in expensive mutual funds then this issue is a serious consideration that could reduce the amount you can withdraw each month by 10-20%. It is an important issue to consider that few advisors will explain to you… for obvious reasons. Learn more here…

Humans Are Rational… Sort Of!

The final 2nd Generation research assumption built into the 4% Rule that makes no sense is the idea that you withdraw a fixed percentage of your savings adjusted for inflation (but nothing else) each and every year.

This is nonsense! Nobody lives this way.

In real life we adjust our spending based on the success or failure of our careers and the income they produce. Why should retirement be any different?

If your assets got hammered by inflation and bad investment performance during the first 10 years of retirement, causing the percent withdrawal to rise above 10%, are you going to march like a lemming to the cliff of financial destruction?

Of course not! That would be foolish.

You would reduce your spending based on adverse circumstances in your early years of retirement. It’s the prudent, common-sense thing to do (but it is not included in the research because it’s difficult to model).

Similarly, do retirees consistently spend more each year as they get older? No, quite the opposite occurs. Retirees reduce spending as they age.

Why, then, do safe withdrawal models plan for ever increasing spending? It’s not how real retirees manage their money.

The point is that a 4% withdrawal rate on the first year of retirement that is adjusted every year for inflation has no real world applicability. It’s a fiction of academic research.

Real world retirees increase spending when their assets have a good run and cut back spending when assets get clobbered. They spend more in the early years of their retirement when their health is strong and world travel beckons, and they reduce spending as their energy and health decline with age.

Flexible spending opens up many possibilities not modeled in the 2nd Generation research:

  • You could spend more in your early years and then reduce spending (or forego inflation increases) in later years when you don’t need as much money.
  • You could spend more in the early years and ratchet your spending down if you are unfortunate enough to endure an adverse returns sequence in the first 10 years.
  • You could start at 4% and increase spending if your first 10 years enjoy high investment returns and/or low inflation.

These are just three of many possible variations on how to approach withdrawing money. The bottom line is you don’t have to be a lemming and mindlessly follow the 4% rule into a financial abyss.

Such blind obedience could leave a fortune on the table or risk unnecessary financial ruin. Instead, be smart and adjust your spending based on the actual results you experience.

It’s just common sense.

Lesson Learned: There are many possible spending alternatives that offer real-world practical solutions to the fixed academic model of blindly increasing withdrawals based on inflation each and every year. You can’t determine the risk of ruin for rational retirees from a model based on irrational behavior.

Risk of ruin is just as dependent on retiree behavior as it is on market dynamics – something not considered by the research and certainly ignored by the 4% rule. You must remain flexible during retirement and use your brain.

Correct and adjust your spending based on the growth or decline of your portfolio. Be rational and your risk of running out of money will be reduced.

Putting It All Together

We’ve covered a lot of ground by examining the 3 generations of safe withdrawal rate research and the various problems associated with the 2nd Generation safe withdrawal models.

The reason I focused on the 2nd Generation model is because it has been elevated to the status of “truth” in the financial planning industry. The 4% Rule is quoted regularly in the financial media and used as a benchmark by which all other retirement planning models are compared.

The problem is it’s not really safe. The 4% rule could cause you to leave a fortune on the table or run out of money long before you die. The 4% rule is a static conclusion in a world that is dynamically evolving.

In summary, there are specific assumptions built into the research supporting the 4% model that must be seriously questioned:

  • 4% safe withdrawal rates are based entirely on U.S. investment data covering a time period when the U.S. was the prom queen of the economic world. Research by Pfau on long-term international data shows U.S. results optimistically on the high side of world estimates, and found material risk of failure when the same model was applied to international data.
  • 4% safe withdrawal rates fail to account for rational retiree behavior in response to adverse (or positive) returns sequences.
  • 4% safe withdrawal rates are a least-common-denominator approach to finding a static answer. In other words, the 4% Rule is the highest withdrawal rate that survived most data, but that doesn’t mean it is the highest withdrawal rate that might be safe for your situation. It doesn’t take into account market valuations, interest rates, or inflation at the time you retire. Wade Pfau demonstrated such factors can provide dramatically different safe withdrawal rates (both higher and lower) when compared to the 4% rule.
  • 4% rule cannot account for out of sample data. This was first identified by Wade Pfau using international data and surfaced again in regression analysis on the record breaking market overvaluation and low interest rates of the last 10 years. Both situations produced expected safe withdrawal rates well below 4%. In addition, it can’t possibly account for the potential for out-of-sample inflation that might occur in the future due to government financial mismanagement and excessive debt levels. Don’t believe that 100+ years of U.S. economic history is as bad as it can get. The past isn’t the future.
  • 4% safe withdrawal rates usually exclude investment management fees and transactions costs. This is not a big deal if you self-manage your portfolio using low cost ETF’s but is a very big deal if you use professional advisors and invest in mutual funds. Adjust accordingly.
  • 4% safe withdrawal rates assume 30 year life expectancy. The problem is average life expectancies hold no relevance for your particular date with destiny. You could live much longer. In addition, a 95% confidence interval for a healthy couple at 65 pushes the number beyond 30 years, and increasing longevity combined with medical research breakthroughs can extend this number even further. Budgeting for 30 years may cause you to run out of money before you run out of life.
  • 4% safe withdrawal rates assume conventional asset allocation to U.S. stocks and bonds and cannot be extrapolated to include less conventional investment approaches. Skill based investment strategies (active management), commodities, TIPs, and real estate can imply dramatically different conclusions.
  • 4% safe withdrawal rates assume irrational retiree behavior. A rational retiree who adjusts spending based on actual results can significantly decrease his risk of ruin – even at higher initial withdrawal rates.

[how-much-money-do-i-need-to-retire] The truth is your actual safe withdrawal rate will likely be very different from the 4% rule depending on when you retire, your spending patterns, and your investment strategy.

The 4% rule is promoted as a one-size-fits all answer to the question of “how much can you spend in retirement?” Unfortunately, the exact opposite is true.

The answer is dynamic – not fixed. It is dependent on all the factors discussed above.

One size fits all is naïve and dangerous.

Don’t believe it… even if it is conventional wisdom.


So what should a retiree do? If the 4% rule isn’t the answer, then what is?

Unfortunately, no simple “plug-and-play” model has surfaced to replace the 4% rule (which probably explains why it has persisted despite inaccuracy).

Below I will provide you with a four step process to serve as a guideline in determining a reasonable approximation for a safe withdrawal rate.

It includes various adjustments you can make to determine a reasonable withdrawal rate for your retirement situation.

Longevity: Decide first how long you need your money to last. I’m personally budgeting for a 100+ year lifespan because anything less is financially risky (see longevity assumption above).

When your retirement time horizon extends to 30+ years then spending principal isn’t safe. As your time horizon shortens (i.e. you get older) then spending principal becomes viable again.

Build these facts into your safe withdrawal rate.

Market Valuations: The next step is to assess market valuations at the time you retire to determine if you are in a high risk or low risk period. (You can reference Wade Pfau’s research or Rob Bennett’s calculator for benchmarks.)

In periods of record high market valuations, the low safe withdrawal rate (under 4%) indicated by 3rd Generation research may make alternative asset mixes to the traditional stock/bond portfolio at least temporarily prudent and allow a higher withdrawal rate.

For example, during periods of high asset valuation you might consider…

  • Limiting your spending to the premium over inflation on Treasury Inflation protected securities.
  • Investing in inflation adjusted fixed annuities and leave the worry to the insurance companies.
  • Limiting your spending to the dividend income from an internationally diversified dividend stock portfolio.
  • Or you can choose to invest in alternative assets that aren’t governed by the same investment return limitations as traditional paper assets. For example, some retirees live off the positive cash flow from directly owned real estate.

Conversely, in periods of low market valuations you may be able to prudently increase your withdrawal rate above the 4% rule and allocate a higher percentage to stocks.

In summary, the second step is to assess the risk level inherent in market valuations so you can decide an appropriate asset mix and withdrawal rate given your longevity expectation and the economic environment.

Refine: Now that you have a benchmark withdrawal rate consider subtracting for other factors discussed above.

For example, if you pay investment adviser fees and invest in high cost mutual funds then, you may want to reduce your withdrawal rate accordingly. The same with other assumptions described above that fit your situation.

Correct And Adjust: Once you’ve picked your investment strategy and withdrawal rate, don’t make the mistake of setting it and forgetting it. Remember that 3rd Generation research by Wade Pfau showed how the bulk of your financial “blow-up” risk is determined by the sequence of returns and inflation during the first 10 years.

You may need to adjust your strategy based on actual results. You certainly shouldn’t blindly increase the amount you spend every year by the inflation rate as the 4% rule would indicate.

Revisit you plan every few years so that you never spend too large a percentage of your savings in any one year regardless of what the research tells you. You may even want to consider employing some alternative spending models:

  • You can replace the “4% rule” with the “3% rule” during times of excessive market valuations thus increasing your safety… but lowering your income.
  • You can eliminate or reduce the annual inflation adjustment factor so that your spending is fixed in nominal terms, but declines in real terms as you age (something most retirees do naturally anyway). One idea to consider is only increasing your spending by inflation during years when your portfolio grows in value.
  • You can change your withdrawal strategy to a fixed percentage of principal which virtually eliminates risk of failure, but causes variability in income based on portfolio fluctuations. As your assets rise you will withdraw more, and as your assets fall you will withdraw less. Whether or not your spending keeps up with inflation would be determined by the growth of your assets.

The key point is to use common sense.

That means use the research and calculators as guidelines only. Don’t apply static models based on blind faith just because they have become conventional wisdom and everyone says they are true.

Your retirement is too important to incur that much risk.

Your retirement will be different from your grandfather’s. Your expected longevity has made any strategy that spends principal in the early years questionable. Financial markets are more volatile and interest rates are at record lows making fixed stock/bond allocations questionable.

In addition, inflation could look completely different from historic norms due to unprecedented government debt levels.

In short, the premise that all 2nd Generation research is based upon – that the future should be no worse than the past 100+ years of U.S. economic history – is extremely dangerous.

Already the last 20 years has produced a period of record market overvaluations and low interest rates not seen in the historical data. This produced a theoretical safe withdrawal rate less than half that indicated by the 4% rule. Never mind the possibility of out of sample inflation in the future making things even worse.

Don’t blindly trust something as important as your retirement security to computer models. No one has a Crystal Ball (least of all economic researchers) and that is why you have to use your brain and not rely on oversimplified rules-of-thumb.

They are useful guidelines to teach important principles, but they aren’t scripture set in stone.

Hopefully the 4 step model outlined here, while admittedly more complex, will help you navigate the journey and find fulfillment and financial security in your retirement.

Please let me know how this article has impacted your thoughts in the comments below.

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