Saving won’t help you avoid the struggle, but we know what will.
My father struggled financially all his life. It started when he was a graduate student at the University of Hawaii. Out of our family of six, five of us went to the hospital for one reason or another—and the bills came piling on. He had dreamed of becoming a college professor, but with the pressure of the debt he faced, he took a job as assistant superintendent of schools in Hilo instead. He had to borrow money from his dad so we could make the move.
By the view of most people, my father had a successful career. He eventually became the superintendent of education for the state of Hawaii, a prestigious administrative post, though not his dream job of teaching at the university level.
Eventually, he decided to run for lieutenant governor. He lost. At the age of 50, he was unemployed and soon after my mother died. He never recovered.
In his later years, my father struggled mightily financially. He chased a number of bad deals, trying to get rich quick to make up for lost time. He often said things like, “I dedicated my life to educating the children of Hawaii, and what do I get? Nothing. My fat-cat classmates get richer, and what do I get? Nothing.”
A few odd jobs and Social Security barely kept my father afloat. If it weren’t for those, he probably would have moved in with one of us. A few months before he died at the age of seventy-two, my father pulled me close to his bedside and apologized for not having much to leave his children.
The retirement ticking time bomb
I’m reminded of my father’s story as I read a troubling set of articles on the state of retirement in the US this week.
According to a “USA Today” article entitled “Almost Half of Americans Die Nearly Broke,” 69% of Americans only have $1,000 or less of savings in the bank, and 34% don’t have anything saved at all. The article also states that according to a study from the National Bureau of Economic Research, 46% of retirees die with savings of $10,000 or less.
That’s a lot of moms and dads crying with their children at the end of life, sorry they don’t have much to leave them. But as the article points out, the problems are much deeper than that.
Rather, it points to a frightening degree of financial vulnerability during retirement. If seniors are passing without much in the way of assets, it means that in the years leading up to their death, they’re ill-equipped to handle a major unexpected expense, such as a significant medical bill. In fact, in that same GoBankingRates survey, only 37% of seniors 65 and older claimed to have $1,000 or more in the bank.
Another article from “Quartz”, entitled, “The world is sitting on a $400 trillion financial time bomb”, pulls no punches about the potential for economic disaster the retirement time bomb presents:
The World Economic Forum (WEF) predicts that by 2050 the world will face a $400 trillion shortfall (pdf) in retirement savings. (Yes, that’s trillion, with a “T”.) The WEF defines a shortfall as anything less than what’s required to provide 70% of a person’s pre-retirement income via public pensions and private savings.
The US will find itself in the biggest hole, falling $137 trillion short of what’s necessary to fund adequate retirements in 2050. It is followed by China’s $119 trillion shortfall.
There’s no denying it, the US—and the world—are facing a true looming crisis when it comes to baby boomers retiring.
Saving is the answer?
The answer to this problem, according to both articles, is the same as it always is—people should save more.
If you’ve followed Rich Dad for anytime, you’ll already know this is not the answer. In fact, savers are losers in the new economy.
Take the story of Carl and Mindy, who I wrote about over at the Rich Dad blog in April (“Retiring on $1 Million is Not Enough”).
In their early 40’s, the couple saved $1 million and retired. They live on $30,000 a year and follow a rule called the 4% rule, assuming that if they take out 4% of their $1 million savings per year, they won’t run out.
As I wrote, “Perhaps this makes sense for them now in their 40s while they are relatively young. But what will happen when they get older and require more medical attention? Or what if their property taxes go up significantly over the next twenty years? Or what if inflation continues to grow over the next forty to fifty years at 2% a year? Or what if they get tired of living so frugally after all?
Without significant income, they won’t be able to stay afloat. They may enjoy life at $30,000 a year right now, but it will not be sustainable for their entire retirement.”
You must be prepared for the unexpected
Much like my father found out, life comes at you fast, and personal financial crisis can happen in the blink of an eye. The problem is that as you get older, they are almost assured to happen as health deteriorates.
Now let’s revisit that fact that most people don’t have $10,000 in the bank, and a good portion, nothing at all. If $1 million won’t be enough for Carl and Mindy, how does the advice to simply save more money help people? It doesn’t. For one, the likelihood of being able to save that much before retirement is very low given most people’s current financial state. Secondly, even if they do reach that milestone, it might not be enough to live on—and especially not to live on at their current lifestyle.
What is required then is something entirely different to address our retirement crisis.
Back to Rich Dad basics
You often hear the term back to basics. For most financial gurus, this means paying off debt, cutting back expenses, and saving money. For years at Rich Dad, we’ve preached that this conventional financial wisdom is actually folly. And we stand by that.
At Rich Dad, we have our own financial back to basics, and they include using debt to get rich, figuring out how you can afford something rather than saying you can’t afford something and investing in cash-flowing assets that provide passive income each month.
Let’s do a simple compare and contrast of why this system is better.
A tale of two retirement approaches
Let’s assume that rather than save $1 million like Carl and Mindy, a person was able to save $500,000. Using the 4% rule, they could pull out $20,000 a year. Couple that with Social Security and some odd jobs, they might squeak by, but it won’t be fun. And each year, they’ll see their savings dwindle little by little. Let’s hope they make it to the finish line before it runs out.
Now compare this with a common investment that you can do through someone like Rich Dad Advisor Ken McElroy.
By investing $500,000 in one of his apartment properties, you can enjoy a 7% preferred return on your money annually while it is in use as capital for the project—that’s $35,000 a year, already better than the $30,000 Carl and Mindy chose to live on (a little shy of 4% of their $1 million).
Next, any cash flow realized in the property itself will also go out to the investors. So, let’s say there is $100,000 a year in operating cash flow and your $500,000 invested is 5% of the equity that was required for the property purchase. You would receive an additional $5,000 a year from cash flow. That now equals $40,000 a year. That means you’re effectively living the 4% rule as it would apply to Carl and Mindy’s $1 million in savings, while only investing half the money.
Now, once Ken and his team have completed upgrades and renovations on the property, they are able to refinance, pay back all the investors, and still payout from cash flow. For simplicity sake, we’ll say the numbers remain constant with the new debt but higher income. So, you would get your $500,000 back and still collect $5,000 a month in cash flow income, effectively an infinite return since your original investment is returned to you. You can now reinvest that $500,000 into a second property or cash-flowing investment.
Finally, Ken and his team may sell the property and divide the return among the investors. Let’s say they realized a $20 million return in this case. You’re 5% would be $1 million—a 100% return from your original $500,000. You now have $1.5 million in the bank, have collected incomes over the years from your 7% preferred return and your cash flow, and are most likely invested in yet more cash-flowing assets.
Meanwhile, Carl and Mindy are living on $30,000 a year and watching their $1 million in savings go down and down and down.
How to Avoid the Coming Retirement Crisis
This is a very simple example, but it requires financial intelligence to both find and execute on a deal like this. Yet, anyone can do it. That is why the Rich Dad Advisors exist; to help people just like you both gain the knowledge and find the expertise needed to invest like the rich do.
There’s no doubt about it, a retirement crisis is coming. The question is, will it be coming for you? Change your mindset about money and investing and you should experience smooth financial sailing.
– Robert Kiyosaki