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What Are Your Financial Assumptions
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Professional negotiators know that one of the most important watchwords in any negotiation is the word assume. When I was just beginning my business career, and was actually negotiating for real money, rich dad would always re-mind me to watch my assumptions . . . as well as tune into the other person's assumptions. To rich dad, the word assumption was not a word to be taken lightly. He often would accentuate the word assume in this way: ass-u-me. In business today, this punctuation tells a fairly common story of warning and if you have not yet heard what ass-u-me means, then ask around. I am certain someone close to you knows exactly what ass-u-me means.

Dr. R. Buckminster Fuller, one of America's most accomplished citizens, having many patents in his name, had this to say about the word assume. He said, “You cannot question an assumption you do not know you have made.” As a student of his, it took me a while to begin to understand how profound that statement is. In business and investing, I have noticed many people lose and lose badly because they did not know they had made certain assumptions. In other words, it was their unconscious assumptions that cost them dearly ... assumptions they did not even realize they had. For example, an attorney friend of mine told me of a couple who lost everything because they bought their dream piece of land and assumed it was clean. Three years from retire-ment and after holding the land for fifteen years, they found out the land was once used as a toxic waste site and the people who had owned the land were long gone. The couple was sued by the federal government and ordered to pay for its cleanup . . . at a cost of millions of dollars. Naturally they fought the lawsuit in court and even won a few concessions, but the legal battle cost them everything they had saved. My attorney friend said, “The couple later said, ‘When we looked at this beautiful piece of wooded land, we just assumed it had never been used for anything or by anyone.' ”

When I lived in San Diego, I read about a local couple who decided to take the family to Disneyland. Due to conflicting work schedules, the husband and wife agreed to travel separately in two cars. When the couple met at the hotel, neither parent had brought the children. They had both assumed the other would be driving with the kids. Since it was an assumption they did not know they had made, they never bothered to ask if the other was going to bring the children. That is why Dr. Fuller emphasized the need to ask ourselves what assumptions we have made that we do not know we have made.

In business today, I often ask my attorney and my accountant to check the contracts. I never used to do this, but today, I realize I need to have other eyes look over my agreements to check for anything I may have missed. I of ten ask them to question my assumptions or lack of assumptions in the pro cess. I have learned a lot about myself by questioning my assumptions . . . especially those assumptions I do not know I have made.

I have found that many legal fights are not over the main point of the contract but often rest upon simple assumptions no one realized were made. Recently I was in a disagreement with a holiday lighting company who put up some holiday lights on my property. The owners, a couple, came over in early December and gave me a quote for putting the lights up, and then put them up a few days later. Once the lights were up, I paid the bill in full. We shook hands and I was very happy with the great job they did . . . a far better job than I could ever do.

After the holidays, when I called to ask them to take the lights down, the owner said, “We said we would put them up. We never said we would take them down.” Because I did not have a written agreement, the discussion became a heated disagreement on what was said and who said what. Finally, I hired someone else to take the lights down. Needless to say, I doubt if I will use that company again even though they did do a good job of putting the lights up. I assumed that any company that put lights up would also take lights down . . . but obviously I made an assumption I did not know I had made. You can be certain that with the next company I hire, I will have a writ ten contract stating that the price includes taking the lights down as well as putting them up. That is another case of ass-u-me.

As you can see from these examples, assumptions are very important in many different facets of life, but rich dad was especially cautious of assump tions when it came to money, business, and investing. He said, “More money has been lost, more friendships have been destroyed, more people have been hurt, more accidents have happened, and more people have gone to court because someone failed to question their assumptions.” So the ques tion is, how does the word assume apply to retirement, the coming stock market crash, and the advice people are receiving?

To answer that question, all we need do is go back to the question asked by the seventy-year-old retiree in the December 2, 2001, issue of the Miami Herald. The retiree was seeking advice, but was the advice wise?

Check your mutual funds and make sure they're solid and leaning more to the conservative growth and growth income funds. Aggressive funds tend to be more volatile. Instruct your custodian to send you your required minimum distribution monthly by selling shares of your funds. This is called a systematic withdrawal and it works like a charm.

So here are some test questions. From the financial planner's answer, how many different assumptions can you pick up? How many assumptions can you not pick up? How can the assumptions be right and how can the as-sumptions be wrong? What happens if this retiree follows the financial planner's advice but the advice is based upon faulty assumptions? What assumptions need to be questioned? What assumptions has the financial planner made in handing out this advice? What other questions does the financial planner need to ask before handing out any financial advice?

Before I give you my answers, I would suggest you sit around with some of your friends and have a discussion on the number of assumptions found in this answer. Just take the planner's answer, read it out loud or give everyone a copy of it and then ask your group to find as many assumptions as possible. I think you will find the process enlightening, educational, and possibly frightening. It may even inspire you to ask yourself about your own personal financial assumptions. All you have to do is question the assumptions found in the answer and you might greatly improve your financial IQ. The first assumption I would question would be “If ever there was a time to stick with the plan, it's now.” Obviously, the planner assumes this retiree has a plan or knows what the plan is. While many people do have plans, most are ignorant of the laws behind the plan.

The response of, “I feel your pain, but 2 percent CD's and no growth aren't going to cut it,” I find interesting. The financial planner assumes this retiree knows nothing about investing and is most likely thinking about putting money in 2 percent CDs . . . which the retiree never said he was considering. I suspect that the reason the planner mentioned the option of 2 percent CDs is because that is all the planner knows. For all he knows, this seventy-year-old retiree could be the best hedge fund trader in the world, capable of taking his retirement and gaining a 100 percent leveraged return every thirty days in the futures markets. I realize this is doubtful, but the point is that the planner assumes this person knows nothing . . . even less than the planner.

If I were the planner I would ask, “What is your investment experience? Do you have a portfolio of assets outside your retirement plan? Have you in-vested in other assets and done well? What investments do you feel comfortable and confident investing in? In other words, I would first ask questions before handing out advice based upon the assumption that this retiree knows nothing about investing . . . which many financial planners assume.

After assuming the retiree knows nothing, the planner then swings the advice around to this statement saying, “Check your mutual funds and make sure they're solid and leaning more to the conservative growth and growth income funds.” First, the planner assumes this retiree knows noth-ing but then he assumes this retiree is savvy enough to know how to check out mutual funds to make sure they're solid. The question I raise is how does anyone know what mutual funds are solid? I sure don't. Besides, a mutual fund may be good one year and bad the next year. If you check the facts, many of the mutual funds people thought were solid turned out to be disasters during that last downturn. In 1999, there was one famous and well-promoted fund that was the darling of many financial advisors. It was definitely considered a solid mutual fund and it still is. But by 2001, this fund family had lost nearly 60 percent of its value. It will take years for this fund to return to its 1999 level.

The facts are that, today, there are more mutual funds than there are public companies whose shares the mutual funds buy. If this retiree could tell which of the approximately twelve thousand mutual funds was the most solid, and what's the next winner, then maybe he should come out of retirement and make a fortune advising the millions of people who are today wondering which mutual funds are solid. I find it absurd that this planner first assumes this retiree knows nothing about investing and in the next sentence assumes this retiree is far more financially sophisticated than most people in the market.

There are many more assumptions and contradictions I could get into from this financial planner's advice. My point is this: I do not know how anyone can offer any kind of financial advice knowing so little about the special conditions of the person seeking answers. Yet the facts are, millions upon millions of people are being given what rich dad would call “white bread financial advice.” He called it that because it was financial advice for the masses. It was financial advice that followed a formula . . . a formula repeated by tens of thousands of financial advisors who are simply repeating sales pitches they are taught to say by the company selling the financial products.

Rich dad also called it “fast food financial planning.” When you look at the health problems of millions of people today, many are suffering because they are eating fast food that tastes good, is extensively advertised, well pack aged, and easy to buy. Rich dad's concern was that the Western world would not only have a health problem, a health problem caused by too much fast junk food, but we would also have a wealth problem, a problem caused by too much fast junk investments.

He said, “Any food or investment that is too easy to buy, overly advertised, wrapped in convenient attractive packages, with sales offices and salespeople on every corner, is probably not good for you.” Rich dad went on to say, “Just as some of the best-tasting, healthiest, and best-value food I have found has been in tiny out-of-the-way restaurants, some of the best investments I have found have been in tiny obscure places run by true artists and gifted geniuses . . . not big corporations.” He would remind his son and me of this saying, “Great food and great investments are found in similar places in every part of the world. The trouble is, bad food and bad investments can also be found in such places. If you want to find great food and great invest-ments you first have to know what great food and great investments are. Just because something is convenient, looks good, sounds good, is affordable, and everyone else is buying it, does not mean it is good for you.” Obviously, I could go on finding and challenging more of the assumptions found in the financial planner's answer. That is not the point of this chapter. And in defense of the financial planner, the people in that profes-sion have a massive job with millions of people to serve, so many times, all they can do is give fast, quick, prepackaged words of advice. I have several friends who are financial planners and they often say, “If a person does not have at least $250,000 in cash to invest, I cannot afford to spend much time with them.” In other words, if you don't have much money, most financial planners cannot afford the time to give you much advice. They too need to earn money so they can feed their family and invest for their retirement. The primary assumption in the newspaper article I challenge is the statement that goes, “This is called a systematic withdrawal and it works like a charm.” The reason I challenge this assumption is because it is the underly-ing assumption of much of the financial planning industry. So in this case, I am not going after the financial planner; rather, I am questioning the assumption of the industry. Much but not all of the financial planning industry runs on the assumption that the stock market always goes up. So when this financial planner said, “it works like a charm,” a more accurate statement would be, “it works like a charm as long as the stock market goes up, if you have chosen the right funds, and if you have enough money in your portfolio.” To me, that would have been a more truthful and accurate answer. Any professional investor who has taken the time to study the history of markets knows that all markets go up and all markets go down. A true pro-fessional investor would never bet their future on the assumption that markets only go up . . . yet that is what millions of people are doing. In book number three of the Rich Dad series of books, Rich Dad's Guide to Investing, I included charts of different market booms and busts. The following chart is the chart of the 1929 stock market crash on Wall Street. Applying the assumption of the financial planner's statement, “This is called a systematic withdrawal and it works like a charm,” to the actual numbers following the 1929 crash, this is what working like a charm would look like.

These numbers are provided by Ibbotson Associates and these are the assumptions applied to the following numbers. Let's say you follow your “systematic withdrawal” advice and you take out 8 percent of the balance of your account per year, leaving the rest to grow “so you'll never be poor.” By the way, that's another part of the financial planning industry assumption.

Let's say that at age sixty-five, you have $1,000,000 and you stay invested in the S&P 500 Index—a group of large, stable companies. The market behaves exactly like the market did in 1929. The following is what would have happened to your DC retirement nest egg, adjusted for inflation, in the years following the 1929 crash:

Year End Value Change Ending Value Cash to Live On

(in dollars) (in dollars) (in dollars)

1929 just retired 1,000,000 80,000

1930 (461,840) 487,719 39,017

Before going on, I thought I might explain the meaning of these numbers, just in case they may be confusing. The 1930 numbers reflect a loss of $461,840 (parentheses around a number in accounting means it is a loss, not a gain), which means the remaining balance in the account is $487,719, down from the starting 1929 value of $1,000,000. This means that this person has $39,017 (8 percent of $487,719) to live on in 1931.

1931 (294,797) 169,976 13,598

1932 (10,946) 162,166 12,973

1933 63,407 211,441 16,915

1934 (3,307) 187,389 14,991

1935 98,267 262,941 21,035

1936 145,144 382,564 30,607

1937 (291,789) 58,391 4,671

1938 25,678 81,632 6,531

1939 (601) 74,884 5,991

1940 (13,503) 54,826 4,386

1941 (10,592) 36,334 3,242

1942 10,864 40,530 2,935

1943 18,644 54,205 4,336

1944 23,887 72,196 5,776

1945 70,339 133,795 10,704

1946 (39,389) 70,858 5,669

Summarizing these numbers, if a baby boomer with a DC plan has $1,000,000 at age sixty-five, and the market follows the exact path the market followed after 1929, this baby boomer would have lost over 90 percent of the $1,000,000 by age eighty-two. Instead of living on $80,000 annually, by age eighty-two this baby boomer would be trying to live on $5,669 per year, which would be tough to do.

That is why, when the financial planner said, “This is called a systematic withdrawal and it works like a charm,” it will only work like a charm if the as sumptions hold true (meaning that the market keeps going up). But what if the assumptions do not hold true? What if the market does not respond ac cording to predetermined assumptions? Then what would you say to that re tiree in ten to twenty years?

Many of the financial planning formulas assume that things will work out—based on the assumption that the market continues to go up. For the sake of millions of people, I hope these assumptions hold true. Yet most pro

fessional investors know that in the real world, markets move in three basic directions. Markets move up, which is called a bull market. Markets move down, which is called a bear market. And markets move sideways, which is called a channeling market.

The problem with most retirement portfolios is that they are based upon the assumption that markets ultimately move up in the long run. That is why they always say “Invest for the long term.” To compensate for market volatility, that is, the up, down, and sideways movements of markets, financial plan ners advise diversification as the solution. Again, this could work if the investor does invest for the long term and the investor does not happen to retire just at a market peak, leading to a market crash. If that happens, as you can see by the tables, all assumptions are off.

You may notice from the first table above that the market was very high in 1936, even higher than the 1929 peak. Yet, if the retiree had followed the law and continued to withdraw each month, the retiree would have had far less money with which to take advantage of the boom in 1936. This points out an unintended flaw in the law . . . the flaw being that the retiree has unlimited downside protection, and due to systematic withdrawals has only limited upside potential when the market does happen to move up. As a professional investor, that scenario is far too risky to the downside and far too limiting to the upside.

Since markets move in three different directions, and most portfolios are filled with investments that do well only in up markets, that means that most portfolios of the average investor will only do well in one out of three market directions. Rich dad once said to me, “Most of us have heard of Russian roulette. That is where a person takes a revolver with six chambers and puts one bullet in one of the chambers. They then spin the cylinder, put the gun to their head, and pull the trigger, hoping that the hammer lands on one of the five empty chambers. In other words, the odds are five to one in their favor. With most retirement plans loaded with mutual funds, a person is spinning a cylinder with only three chambers and two out of three chambers are loaded. In other words, your chances of losing are two out of three. Talk about risky.

The truth is, diversification will not necessarily protect you from a flawed system—a system with unlimited downside risk and limited upside poten tial. That means your retirement plan may not deliver what you need to live on, if things do not go as planned . . . or assumed.

While it is true that the market did eventually rally and come back up after 1929, the facts are that the market was for all practical purposes down for nearly twenty-five years. While that may be a short period of time in the overall history of the markets, bear in mind that when the market plunged from 1929 to 1932, it wiped out 80 percent of most people's portfolios. Losing 80 percent of everything you spent a lifetime saving would have made those two years into two very long years. So even if the averages state that the markets tend to go up, living through years of successive down markets and watching your portfolio slowly diminish might cause you a few sleepless nights . . . even if you knew that markets eventually do go back up again . . . as the assumptions assume.

More Flaws

Before concluding this chapter on assumptions, I think it important to re view some of the flaws already stated, as well as new flaws not yet covered . . . flaws caused by assumptions assumed . . . and not yet questioned. Some of the more apparent flaws rich dad saw are:

1. The law has a mandatory withdrawal mechanism. This flaw will cause major problems around the year 2016. In the year 2016, it is estimated that there will be 2,282,887 people turning seventy years of age in America. In 2017, the number of people turning seventy years of age jumps to 2,928,818. The jump is caused because the first of the baby boomers begin turning seventy. That is a jump of nearly 700,000 more people turning seventy than in the year before and the number increases from there on. In one year there is a jump of nearly 30 percent. That may give you an idea of the effect this baby-boom generation will have on DC pension plans and the stock market. As stated earlier, it's tough for a market to keep going up if people are required by law to sell what they own. It's like trying to fill a bathtub while more and more holes are punched in the tub. Pretty soon people do not want to fill the tub.

When people ask why there is a mandatory withdrawal, the answer is simple. The answer is taxes. It appears that when this law was passed, the Internal Revenue Service wanted to know when they were going to get paid. Since the money in a DC plan is contributed tax free and grows tax free, the question was, When will the government get its share, when will the money be taxed? So the government provided the answer: at seventy and a half years of age.

2. The law failed to require the education system to provide the proper fi nancial education. A high financial IQ is mandatory for anyone who is seri ous about investing. When ERISA was passed, no one told the schools to start teaching financial literacy, and financial literacy is the basis of a person's financial IQ. Most people think investing is risky, when it does not have to be, simply because they have never been trained in the basics of financial matters. As rich dad said, “Anything is risky, even crossing the street, if no one has ever taught you how to do it.”

3. No one is questioning the assumptions. The assumptions of the law are based on just that . . . assumptions . . . not facts. What happens if a retiree finds out that at age sixty-five, the assumptions his financial planner used forty years earlier were wrong? Does the retiree have any recourse? Advisors are simply handing out financial advice and people are buying investments without either asking many questions . . . that is until the Enron scandal forced them to.

4. There are too many mutual fund companies. Today, there are more mu tual fund companies than publicly listed companies . . . which makes it hard to figure out which funds are good and which funds are bad. That also means the chances are good that the average investor may choose the wrong funds . . . a group of funds that does not provide the gains required for a financially secure retirement.

5. The cost of retirement keeps going up. Having more and more mutual funds chasing only a few real stocks from real companies causes the price of these companies' stock to be overinflated, which means the cost of retire ment keeps going up.

6. A DC plan does not protect you after retirement. The stock market may crash after the person retires, wiping out the retiree's nest egg and financial security. Out of a job and out of time, it would be tough to rebuild that nest egg if the funds were lost. That is what happened to many of the Enron employees—they had all their eggs in one basket, Enron, which is why diver-sify, diversify, diversify is an essential strategy for anyone who has a limited financial education. The problem with diversification is that it is still a risky and poor choice.

7. Many employees are not contributing to their retirement plans. I have seen figures that range from 50 percent or less to 20 percent or less to 10 percent or less of all baby boomers having enough money set aside for retirement. That means an extra financial burden for the generation that fol lows the baby boomers . . . specifically, your kids.

The May 5, 2002, article in the Washington Post “For Many 401(k) Catch Up Won't Be an Easy Game” reads:

Data on the size of workers' retirement saving—401(k)s, IRAs, and IRA rollovers—are scarce, but the information available suggests that many people have reason to worry. Forty-four percent of 401(k) balances in 2000 were less than $10,000, according to EBRI, the benefit research institute. Ranking second, at 14 percent, was the

$10,000$20,000 category.

Later in the same article:

So, if a worker fails to contribute to the account, or if the investments do poorly, there is a risk of running out of money in retirement.

And that appears to be happening, according to another study, re leased last week by the liberal Economic Policy Institute. This study, by New York University economics professor Edward N. Wolff, found that the “retirement wealth” of all but the wealthiest workers nearing retirement (households headed by someone between 47 and 64 years old) actually declined between 1983 and 1998.

One of the reasons workers are not contributing to their DC pension plans is because their taxes are high, the cost of living is high, the cost of raising and educating children keeps going up, and many workers simply do not realize that time, investing for the long term, is essential for the plan to work. If workers do not begin setting money aside early, the next flaw in the system takes priority.

8. A DC plan may not work for older workers. If a person is forty-five years of age or older when they begin setting money aside for retirement, a DC pension plan may not work. There is simply not enough time for the plan to work. That means if a person begins setting money aside at forty-five or older and has little to invest, or they lose their retirement and must start over again as many of the older Enron workers now must do, the DC strategy may not work.

The May 5 article referred to above includes the following observation:

But consider this: Suppose that a person retires with a $600,000 nest egg and decides he needs $3,000 a month to live on and wants to maintain that level of buying power (meaning he will withdraw in creasing amounts to keep up with inflation). If he lives 20 years—to age 85—he has about a 3-in-10 chance of running out of money, ac cording to calculators devised by T. Rowe Price.

Many of the baby-boom generation are only today finding out what they should have found out twenty-five years ago. And the truth is, many of them will have nowhere near $600,000 put away for retirement. It seems that millions of baby boomers are out of time because DC plans are not get-richquick plans. If a person is out of time, all the diversification in the world will only make their financial problems worse. Diversification is a defensive investment strategy, and if you are out of time, a defensive strategy won't delay the inevitable.

9. Too many noninvestors are handing out investment advice. Many investment advisors educating the public are not really investors . . . they are salespeople. On top of that, many financial advisors do not really know if their advice will stand the test of time through the ups and downs of financial markets. Many investment advisors do not really know if the person they are advising will be able to survive on the advice and products they are selling. Most investment advisors are required to only sell their company's financial products, which limits their objectivity. On top of that, most advisors only know one category of investments, investments such as paper assets, or real estate, or businesses. Very few have a well-rounded education and are qualified to talk on the synergy of these different asset classes. Or as Warren Buffett says, “Never ask the barber if you need a haircut.”

10. Can you afford to stay alive after you retire? As more and more baby boomers begin to retire we will see the real test of the assumptions of a DC plan. While this act focuses on retirement, I wonder if a DC plan will provide for something more important than retirement . . . and that is health care. The question I ask is, “After retirement, will a retiree be able to afford health care for as long as they live?” A person can scale down and live frugally after retirement, but the price of health care is only going up. In the year 2000, the cost of health care and prescription drugs reportedly jumped by 17 percent. In other words, while the rest of the economy was deflating, the cost of health care was inflating. My concern is that in the near future, whether a person lives or dies will be a matter of whether they can afford medical care or not. My concern is that millions of people will not have enough money inside their DC pension plans to afford that medical care.

What about Medicare and other forms of socialized medicine? Well, if the statistics are correct, American socialized medicine may already be bankrupt. If socialized medicine is to be a national right, then taxes will go through the roof, and if taxes go up, businesses will leave the country . . . aggravating an already overtaxed population.

If a person wants to plan for retirement in a DC pension plan, they must start early, put a lot of money away, enough money to not only afford retire ment living but also medical survival. In the coming years, many retirees may need to liquidate their portfolios to pay for medical care to extend their lives. My question is, when that financial planner said to the seventy-year-old re tiree, “This is called a systematic withdrawal and it works like a charm,” was the cost of this retiree's long-term health care factored into that answer? In other words, what were the assumptions behind the financial advisor's an swer? Did her assumptions include health care?

In just a few years, not only will the market be hit by millions of baby boomers beginning their systematic withdrawals, the market will also be hit by millions of baby boomers needing money for medical expenses. Using a hypothetical crystal ball, let's say a seventy-five-year-old retiree with a DC plan with $500,000 in assets in his portfolio has limited medical insurance and suddenly needs $150,000 for life-saving cancer surgery. Do you think this retiree will choose to save money and not have the surgery or will he sell $150,000 worth of mutual funds to cover those expenses? My guess is that there will soon be millions of retirees selling large portions of their portfolios, and not following the plan of systematic withdrawal, in order to cover medical expenses. If that happens, what happens to the stock market? Will it continue to go up?

Many financial advisors are handing out financial advice that no one can yet prove will work. But sometime in the near future, we will find out if the assumptions of pension reform were right. Soon we will also find out if the assumptions that the financial planning industry uses can withstand the financial tests that real life after retirement will present . . . assumptions based upon the idea that the stock market, on average, always goes up.

Are the Assumptions Valid?

Some people have referred to ERISA as a modified Ponzi scheme. Ponzi was a con man who had people give him money on the promise of high interest payments. He would then find a new group of people and promise them the same thing. He would take the money from the second group and give it to the people in the first group. The first group would tell all their friends and then their friends became the nucleus of the third group, which gave the high returns to the second group. The whole Ponzi scheme might have worked if someone had not figured out what Ponzi was doing. So instead of being the name of a hero, the name Ponzi today is infamous. When someone says that someone was caught in a Ponzi scheme that means someone or a group of people were gullible enough to believe in what they knew was too good to be true . . . and the scheme did turn out to be too good to be true.

I suspect that many of us have a part of us that wants to believe in things that are too good to be true. We like believing in magic, fairy godmothers, the Easter Bunny, and good spirits looking over us. That is why when a fi-nancial advisor says, “This is called a systematic withdrawal and it works like a charm” people believe it because they want to believe it, even though deep down they know it may not be true. Ponzi knew this about people and that is why there will always be new Ponzi schemes even though Ponzi is long gone. Now I am not saying that ERISA is a Ponzi scheme . . . but I am saying that people do like believing in the idea that things will work like a charm. And things will work like a charm as long as the assumptions come true. If they don't come true, then the word assume turns into ass-u-me.

On a Positive Note

In theory, rich dad thought ERISA was built on some excellent ideals and values. The problem was the theory part of it. As we all know, there is often a very wide gap between theory and reality.

Upon researching the act, rich dad found that one of its ideals was to give the worker a piece of the action. Up to that point, a worker with a DB pension plan may have had financial security after retirement, but the worker had no real asset base to pass on to his or her heirs. For example, if a worker retired at sixty-five and died at seventy-five, his benefits often ceased and the investment assets remained with the company. By utilizing a DC pension plan, if a worker passed away at age seventy-five and there was still something left in his portfolio, then the remaining assets in the retirement plan would be passed on to the family.

My poor dad had a DB pension plan so he had very little to pass on to his kids. He had a teacher's pension, a small government pension which provided him some degree of financial security each month, but when he died, he really had nothing to pass on. In other words, a DB pension plan is not a plan you pass on to your heirs. On the other hand, if my dad had a DC pension plan, his kids would have inherited the remaining assets in the portfolio, if there were any, less of course death taxes. In theory a DC pension plan has some great benefits that the DB pension plan did not.

So a very positive point of DC pension plans was that it was an attempt to help spread the tremendous wealth of America and the world into the hands of the workers. And in theory, the DC pension plan should work because there is so much wealth that every person could have a small piece of it. After all, there is plenty of wealth to go around.

But of course, that is a great idea that is great only in theory. The reality

is, 90 percent of the wealth is held by only 10 percent of the people . . . and there is a reason for that . . . and that reason will be further explained in the next chapter, a chapter about the biggest flaw of all . . . the flaw that will trigger the biggest stock market crash in history, the same flaw that causes the wealth of the world to remain with only 10 percent of the people.

The good news is that if you understand the next flaw, and can overcome it, you have a better chance of becoming part of that 10 percent that does control 90 percent of the wealth.

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