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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Saving and investing during your lifetime can be separated into four distinct phasesProtect Your Wealth! America needs a solution. This is one step in the right direction. It is the goal of this book to educate people on how to accumulate more wealth through saving and investing. Hopefully, if you follow the advice in this book, your retirement woes will be greatly reduced. In addition, touches on a wide range of topics, including tax issues, home ownership, estate planning, withdrawal rates in retirement, health and life insurance, and Social Security. Not all of these issues are discussed in detail, so you will need to do more research and read many more books. If you are an experienced retiree, the material in this book will help prepare your family to make financial decisions on your behalf when you are no longer able to. is a combination of book research and years of personal experience helping and talking with concerned people every day about these issues. To make the material relevant to all readers, this book differentiates people into four categories: Early Savers, Midlife Accumulators, Pre-Retirees, and Retirees, and Experienced Retirees. The chapter for last category, Experienced Retirees, is mixed with helpful information for older individuals and for their adult children who are acting on their behalf. All the people I meet and talk with professionally are different, but their financial needs are essentially the same. Their first concern is accumulating enough wealth so that the income generated during retirement will cover all expenses. The second concern has to do with not outliving their money. The third concern is staying healthy enough to enjoy it. While I cannot do anything about the third concern, the ideas of this book will help you manage your wealth so that you can take care of the first two. In pursuit of these objectives, the book is divided into three parts. Part One: Saving, Investing, and the Mistakes We Make The first part of the wealth accumulation puzzle is about saving. As a nation, we do not save enough. Despite numerous tax-advantaged retirement savings accounts set up by Congress, only about 50% of us are participating to any degree. Perhaps we have a false sense of security because we believe government programs are going to take care of us in our old age. Or perhaps a winning lottery ticket is in everyones future. From a practical standpoint, a regular savings program is essential to building a nest eggand the earlier you start to save, the better off you will be. The second piece of the secure retirement puzzle is investing the money we save. Unfortunately, as a nation, we are not doing a good job investing our personal wealth. When investing money, people tend to make three basic mistakes. First, we think there are ways to predict when to buy and when to sell. The recent bull-and-bear market has proven this idea to be fallacy. The markets look the best and attract the most suitors at the time they are the most dangerous. The second mistake we make is chasing hot investment fads. People tend to go for glitzy and invest where the returns have recently been high. If an investment has already made a lot of money, it is usually time to sell, not to buy. Finally, people tend to pay much too much for advice, especially since most advice is mediocre at best. There are high-cost ways to invest and low-cost ways. Every dollar you save in commissions and fees expenses goes right to your bottom line. Are people to blame for these and other investment mistakes? Yes and no. Many bad ideas originate from mediocre investment advisors. There are several reasons why bad advice has proliferated on Wall Street. One is the lack of training, which is a chronic problem with most stockbrokers and financial advisors. Most commission-oriented financial firms do a poor job of educating their salespeople about the basics of investment management, and these brokers have little encouragement or incentive from their firms to educate themselves. The second reason for all the mediocre advice coming out of financial advisors is the large number of conflicts of interest that exist in the industry. For example, stockbrokers are paid larger fees to recommend high-commission mutual funds over low-cost substitutes, many financial planners steer clients into costly insurance products that they may not need, and financial publications get paid large advertising dollars to write articles expounding the merits of second-rate investment products. In the financial services industry, it is very hard to discern how much pushback advisors get for recommending one strategy over another. One of the best ways to improve your investment performance is by being very selective about where you get your advice and knowing how your advisor is getting paid and how much. Part Two: Building Blocks to Success Part Two covers the fundamentals of accumulating wealth, focusing on how to save and invest. Before investing your savings, you must decide where to invest. Perhaps you work for an employer that has a 401(k) or similar savings plan. This will allow you to automatically save and invest pre-tax. Ideally, your employer may have a match, meaning they will put in a certain amount of money for every $1 that you invest, up to a maximum amount. A match is wonderful because it is free money. Other types of savings plans do not include an employer match, but the tax benefits are just as generous. After a savings account has been funded, then you need to make the investment selection. Typically, the investment choices include several stock and bond mutual funds. The selection process can be intimidating and confusing, but the information in Part Two covers the basics. The most important feature to look for when selecting a stock or bond mutual fund is a low fee. That is why the book is a big advocate of index mutual funds. These market-matching investments have the lowest fees in the fund industry. In addition to stocks and bonds, other retirement investments are covered in a chapter discussing homes, real estate, small business, and stock compensation. Once you decide which investments have potential, you need to put a portfolio together based on the concept of asset allocation. There is an entire chapter covering asset allocation and how it works. Finally, you will want to know what your expected return on your new portfolio should be. This is never an easy question to answer, but I take a stab at it in the chapter on forecasting market returns. Part Three: A Lifelong Saving and Investing Guide Saving and investing during your lifetime can be separated into four distinct phases of life. Each one of these four phases has a chapter devoted to it in Part Three. The four phases are Early Savers, Midlife Accumulators, Pre-Retirees and Retirees, and Experienced Retirees. Early Savers are young people who are just getting established in their careers and in their lives. Their vision of retirement is vague at best, so the tools used to assist them in saving and investing must be very flexible. A consistent savings program is the key in the Early Saver years. Midlife Accumulators are well into their careers and their lifestyles. In addition to saving for retirement, they are buying braces for their children, larger homes, and second and third automobiles and trying to put a little away for a childs education. The bills are piling up, but savings cannot be neglected. Retirement plans begin to form at this stage, which means greater detail can be added to the long-term financial plan. The tools used in this phase are more powerful and more precise than in the Early Saver years. Pre-retirement starts about five years prior to calling it quits. At this point, detailed financial plans are needed to map out expected income and outflows during retirement. This part of the book explains how to adjust a portfolio to create the income needed to replace a missing paycheck. It is also a time of practicing risk avoidance in a portfolio, which means reducing the amount of equity in retirement accounts as soon as possible. Once in retirement, retirees will deal with issues involving Social Security benefits, Medicare, Medigap insurance, the possible sale of a home, etc. This chapter is enlightening for those not yet retired, but thinking about it. The last chapter of is very special because it deals with Experienced Retirees. The issues discussed in this chapter concern getting an estate in order and asking an adult child for help managing affairs. Elderly retirees need assistance with their money matters and it is beneficial to select the right person to assist well in advance. Typically, that person is a son or daughter, but it can also be a relative or professional trustee. Protect Your Wealth offers an investment guide for these trustees to ensure the investment portfolios continue to be handled properly and to ensure the estate is ready to pass to the next generation. Two Ways to Read This Book This is my third book on personal financial management and, in my opinion, it is my most important contribution so far to the field. Naturally, I would like you to read this entire book from cover to cover. That way you get the complete message. But, I am not naive. About 90% of readers will get less than halfway through the book and then put it on the shelf with their other dozen or so half-read investment books. If you are in the 10% who will read the book through, then start with Part I and read through to Part III. However, if you one of the 90% who will get halfway through the book, start reading Part Three first and then use Parts One and Two as reference material. Just to make sure this message comes across clear, here it is again: If you have time to read only part of this book, read Part Three. While reading this book, please remember two important points. First, there is no perfect plan for saving and investing. This book is intended as a guide so that you can discover for yourself the best plan of action that fits your needs. A good plan put into action is better than a perfect plan that is never developed. Action speaks louder than words. Second, is one book among several that you should read about managing your money. It is one course in a lifelong self-study program where the diploma is financial security. Appendix C has a partial list of other great books that I encourage you to read, understand, and incorporate in your personal plan of action. Acknowledgments Hundreds of people directly and indirectly helped with this book. I would first like to thank all of my fine clients, who will remain nameless, for giving me the priceless insight into their lives that was needed to put experience onto paper. In addition, thank-you to all the dedicated people who manage and monitor the Morningstar conversation boards, especially Taylor, Mel, Adrian, Jared, Alex, and the other fine folks who are regulars on the Vanguard Diehards site, www.diehards.org. In addition, thanks to John Bogle, for reviewing the manuscript and for being a role model by tirelessly promoting business ethics in an industry that has trouble differentiating between right and wrong. Thanks to Larry Swedroe, Bill Bernstein, Michael LeBoeuf, and Bill Schultheis, whose ideas and writings always impress and inspire. Karen Norman, CPA, a member of The Garrett Planning Network, provided expertise on several financial planning issues. Thank you, Catherine Dassopoulos of McGraw-Hill, for pushing the deadline back three times. Thanks to Dennis and Barb of Greaney Photography, Inc. for their excellent work. Many thanks to my business partner, Scott Salaske, for his tireless proofreading efforts. Finally, a special thanks to my wife, Daria, for her unending support and for not being too upset when the power cord to my laptop melted the cigarette lighter in our new car. Well, we didnt need that lighter anyway. |
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