The American economy was booming in the years following WWII. It was a time when working hard and saving diligently was enough to prepare for a decent retirement. Since then, the financial world has changed greatly and strategies once considered financially wise are now recognized Wealth Traps.
This week on the Epic Wealth podcast Matt shares a new approach to building wealth – passive streams of income through real estate investing. Learn why you should ignore conventional financial advice to save, save, save and build systems for cash flow instead. Avoid the Wealth Traps!
What You’ll Learn:
- How your retirement outlook changed in 1971 when the rules of money were altered
- Why the antiquated approach to building wealth is no longer useful
- How to react when our money is worth less and less
- Why retirement costs are increasing and how it affects your financial future
- Why you are better served focusing on earning more rather than pinching your pennies
- Common Wealth Traps disguised as financial wisdom
- More Wealth Traps to be aware of as you build cash flow
- Why trusting Uncle Sam to safeguard your financial future is a big mistake
- Three MAJOR concerns with 401k investments
Read the Transcript
Today's episode is sponsored by the Epic Wealth experience. A live event that presents a revolutionary philosophy for understanding the building of wealth through real estate. You know how some people want to get involve in real estate investing but they don't have the time, they've already got a full time job, they've got family obligations, and/or they're running their own business already. You know how some people want to get involve in real estate investing, but they don't have a know-how, they don't know where to begin, they don't know what market to invest in, they don't know what type of properties to invest in, and you know how some people want to get involve in real investing but they don't have the money. I mean, they're already living paycheck to paycheck, they think they're max out on their credit, their monthly overhead is just so high there's nothing left at the end of the month, and with all that really comes down to is fear. When any of these conditions are present for someone, fear sets in and it stops them dead in their track, and they do nothing, and tomorrow is the same as it was today.
At the Epic Wealth experience, there's a system in place that helps people get involve in cash flow investment properties from all across the country. There's also a system in place where an expert will hold you by the hand and walk you through the process from beginning to end. There's also a system in place that kind of arrange for people cash flowing investments of zero to no money down. What these systems do is give people the confidence and the ability to move forward and create multiple streams of income so that they can escape the rat race once and for all, living a life of options. I mean, imagine waking up each and every morning getting out of bed because you want to, as oppose to you having to. That's the type of life the Epic Wealth Experience can create for the busiest of people. Go to EpicWealthExperience.com for more information, and to reserve your seat for the next event. EpicWealthExperience.com. Go to EpicWealthExperience.com
And now, back to creating your Epic Wealth.
Alrighty, we're back. Today we've discussed all kinds of great and fun and exciting new ideas, right? We've discussed how to or why to shift your focus from saving piles of cash to creating extremes of cash, on how that can increase your journey to financial freedom by ten. What we're going to do is getting into certain traps -- I mean you make that shift and you are on your way, but there are certain traps that you need to avoid, these wealth traps.
So the first trap, big one, is saving money. That's a trap. It absolutely is a trap. After World War II, America boomed. Many of the returning soldiers, they return in better health with better education than when they left. In the men's absence, women had learned new valuable workplace skills, and our manufacturing sector had become robust, right? We're booming. Medical technology advanced rapidly, improving the health and increasing longevity of people, jobs were plentiful, the suburbs were blooming. I mean optimism was in the air, you could smell it. The US was looked on favorably by the rest of the world, do you remember that? We have helped save the day. The American people were on top of the world.
Now Europe, they're picking up the rabble, they're rebuilding their infrastructure and economies. They couldn't compete with the US in technology or finance. Germany's Science was had been lured to the US to work here, and Japan limp along with a crippled economy. China was still largely a backward in nation. Russia had lost over 7 million of its citizens. The American economy boomed for decades without competition, and with it's powerful work ethic. I mean, it wasn't too hard or difficult during these boom times to get a decent return on in exchange of time for your dollars. Prosperity abounded, and the trappings of prosperity, they were apparent. I mean we had telephones, washing machines, televisions, beautiful giant cars, airplanes, rocket ships -- the sky was the limit. What we had learned from previous generations about saving money seemed more sensible than ever. I mean this tried and true financial wisdom was simple and effective.
Exchange your time for money in a job with a great company, and religiously save a portion of those earnings. Buying a house and paying at office as fast as you can made a lot more sense in this era. You worked a job for 30 to 40 years, you saved up a great big pile of money, you paid in the social security and perhaps -- you know, even we're blessed with a pension one year, our working days were done, this plan worked, worked for a long time, and most Americans did well with this advice until 1971. In 1971, everything changed. There were a series of economic measures in that year dubbed the Nixon shock. They were enacted by President Nixon and the rules of money, they had changed forever. There were some good things and bad things about the Nixon shock measures, but one thing was certain, saving money. Saving money now became a lot less profitable, however, this truth was never really communicated to the American people. People just kept to ride on with that old outdated traditional -- really, just antiquated advice, as a means to provide for their future.
Now, the main policy that struck a blow to our savings was leaving the gold standard. Prior to 1971, a US dollar was directly convertible to gold. Now since gold is a rare tangible product, it holds it's value. When currency is backed by gold, called commodity currency, inflation -- it's held in check. Now, to the contrary, or in contrast I should say, fiat currency, is simply banknotes are printed by the government. It's not fixed in value by any objective standard because there's nothing backing it other than the belief of the people that are using it. Fiat currency, therefore, it's much more prone to inflation. It's value is significantly eroded over time as the government prints more and more to bail itself out of one trouble or another.
Since 1913, when the federal reserve system was put in place, the accumulative rate of inflation of the US dollar is 2,303.5%. Something that would have cost you $20 in 1913. $20 in 1913 cost you $480.70 today, and this isn't just because stuff cost more, no, it's because your money is worth less. Because of our current fiat system, our savings are eroded by inflation. It's eroded by inflation over time. Now another fact to that, made saving more problematic as time went on, was the growing problem of longevity risk. Just after World War II, life expectancy was 62 years old. By 2010, the life expectancy was close to 80. You see those extra years represent a lot more cash that the average retiree must save, that they must accumulate. Medical expenses have also skyrocketed, adding to the financial cost of living longer. Honest estimates for what the average retiree needs to achieve a manageable retirement, those estimates sit right around a million bucks. That's more than is practical, or even possible for most people.
Now, I'm not saying that saving money as a principle is a terrible thing to do, but saving alone will not get you where you want to go. If you are going to really retire, you're going to need to save a lot. The problem with that is you can end up scrimping for tomorrow while the most healthy and active use of your life just fly by. Focusing so intensely on providing for your tomorrow, it can rob you of your enjoyment today. Is that the life that you want? Is it enough just to get by day after day, working for your someday while being ground down in the present. What if as the case with most Americans today, you're not able to save enough. You just not going to be able to retire, you're never going to be able to stop working. I mean, Walmart there, I know,` they're sure to be hiring greeters. You could rely on the government, or you could rely on your church or your family to support you. You have to ask yourself, "Is that the way you want to spend the end years of your life?" You could further double down on saving right now and try to catch up. In that case, what would you need to sacrifice right now? What would you have to give up? What would your family have to give up? What kind of life do you need to live right now in order to safely provide for your future, if that were your plan?
Perhaps you've heard that you can save more effectively with the tax deferred plan, I wish that were true, but the facts -- they just don't borrow, and we'll discuss in great detail a little later. But the point here is, wealth trap number one is the concept of saving money. If inflation doesn't get you, the longer years of your life will, and then both probably are going to crush you if saving money is your strategy. So that's wealth trap number one.
Wealth trap number two: budgeting. You got to have a budget, right? A lot of financial gurus, they stress reducing your expenses as one of the most important things you can do to become financially free. They teach you to cut out your daily Starbucks for example, and then save and invest that 4 bucks a day. Here's the thing, it is important that you learn to be disciplined with your expenses, however, the bigger picture is that you're better served by focusing on how you can earn a dollar rather than on how you can save a nickel. Cutting expenses can certainly have a place in your overall financial plan, but it's a misguided approach to put all your focus and energy on that. Why not put more focus on increasing your production? Why doesn't anybody ever teach us to do that? We're taught to live within our means, right?
That certainly is wise advice. The problem with it is that few people think in terms of increasing their means to live that advice, instead we always think in terms of decreasing our expenses. By definition, this is a very limited approach. There are only so many expenses you can cut, but increasing your production -- now that there, that's limitless. I'm not saying to use this as a way to justify your expenses -- no, be wise about your consumption. Be responsible, be thoughtful, particularly as you are building your way to financial freedom. Don't buy a bunch of trips and toys and go out on nights on the town and just live it up and think, "Hey, I'm just going to get up tomorrow and go earn more money to pay for it." Now don't do that, that's not what I'm saying. I want you to focus on increasing your production and your cash flow, and then use your increased cash flow to purchase more assets. Then your assets can pay for your fund. Then your assets establish the new means of which is suppose to live within. Alrighty?
So wealth trap number one: saving money. Wealth trap number two: budgeting, and I'll be right back with more of wealth traps right after this.
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And now, back to creating your Epic Wealth.
Matt: Alrighty. We're back, and we are discussing the wealth traps that are disguised as financial wisdom -- the type of wisdom that we all follow. These wealth traps, they interfere with your epic wealth creation. So wealth trap number one that we discussed was saving money. Yep, it's a trap. Wealth trap number two: budgeting. Having a budget, yep, that's a trap as well, and there are many more. We'll cover those over the coming weeks, but today, we're going to finish of with this one, and this one is probably going to upset you a little bit. That one is maxing out your 401(k). Yep, it's a trap.
In 1978, a tiny part of a law called the Revenue Act made it possible to save money and defer the tax liability. Sounds good, but it wasn't planned out, it wasn't tested or really even thought through, but soon, this provision known by its place in that bill as line 401(k) became the nation's default retirement savings plan, and people, they adapted it with great hopes that they would soon be amassing these big giant piles of money on a tax deferred basis. Sounds great. It looks good on paper even. In reality, 401(k) plans have been a complete failure. As I've mentioned today, the financial world was different, very different in the 30 years after World War II. The three pillars of retirement consisted of pensions, savings, and social security. All in all, the working population had great confidence in these three pillars, and in their financial security in their elder years. Pensions, they were paid out by their employers. It was a fixed monthly benefit achieve after years of service to a company. Some people don't even know what a pension is today.
Then banks offered a reasonable savings rate, and Uncle Sam promised to help out as well to fill in the gaps. Of course you'd be able to retire. There wasn't a question, but within one generation, boom, all that is evaporated. Uncle Sam has been completely incompetent as a money manager, social security is going broke, it's only a matter of time. As it is, the monthly benefit for most people, from social security is less than $2,000 a month, then it might work as a supplement but it's not going to provide any sort of manageable retirement on its own.
The interest rates offered by banks and savings accounts -- they've plummeted. They go up and down, and perhaps they all have come back up to an acceptable level but it won't likely ever be enough as demonstrated in the savings wealth trap. Pensions have been largely abandoned in favor of 401(k) plans. Very few companies offer pensions because they are expensive compared to offering match contributions to 401(k)s.
In 1980, almost 85% of private industry employees benefited from a company pension plan. By 2011, less than 20% of workers benefited from them. In that same time period, 401(k) participants grew from basically zero to more than 50 million people. Corporations -- they love 401(k) plans, why? Because all the risk is shifted to the employee, and the corporate employers, they pay out much less money, it's cheaper for them. They even get a nice tax break for contributing to your plan, and this is all packaged up as a favor to you.
Not many years from now, we're going to be looking back at the 401(k) if you ask on just shaking our heads in disgust to the society. We're going to wonder why we ever bought into it, and how we could've ignore the evidence of its failure for so long. How did this obscure section of a law becomes so prevalent and popular? Yet, this is what the average person is being sold every day. Max out your 401(k), keep stuffing money into that sack and everything's going to be alright. The idea -- it's only 30 years old. It's barely enough to get a sense if it's going to work or not or how it's working. Now that we can see the initial results, it's crystal clear, 401(k)s simply aren't working and there are three reasons why. They found three categories.
The first is that, the 401(k) idea, it's simply the contemporary version of the idea that if you just save enough money, you're going to be okay. Most people, they don't even know or care what they are even invested in. They simply are just comforted in at they are in fact saving money. This is not wise investing, it's wishful thinking. Even more importantly, it's not happening. People aren't generally able to save and grow merely enough wealth in their 401(k)s to retire. Here are the stats, I mean, the median 401(k) balance at retirement age for the average American is right around 100 grand, $100,000. That's about a tenth, that's one tenth of what is needed for the average person to retire "comfortably".
Let's say that you're not average, right? Because you're among the higher income earners of society, and you earn over $100,000 a year. In that case, your 401(k) savings average right around the retirement age is $350,000. $350 grand, that might seem like a big chunk of money to you, but it isn't. You aren't even halfway to the amount you're going to need to ensure your retirement with anything resembling your current lifestyle. You're not even halfway there.
The second reason why 401(k)s are a disaster in the making is market risk. You are really expose that the money could simply evaporate. If you are invested in the 401(k), your future livelihood depends on consistent market gains and wise investing. Most people did not pick their plans with input from wise investment gurus, they simply went with the one that was provided. Can you rely on that outcome? Market investing carries significant risk, and that risk is not even in your control. You have the possibility to gain more than you can in the standard savings account, but that possibility comes with risk. One of the first rules of investing is that you should never invest more than you can afford to lose. My stories abound about people who put their financial faith in their 401(k), only to find it depleted by market risk. Just because it's a retirement plan, doesn't mean that the market is going to cooperate. Many seem to take for granted that the market is just going to simply go up and up and up and that's just not how it works, and losses, they're not easily regained. Your dreams for your future -- they can be devastated overnight.
Now the third area of concern for 401(k)s, it's their cost. This is a biggy, and no one ever talks about this. In a frontline report aptly titles, the retirement gamble, John Bogle, CEO of Vanguard investments, he points out that the hidden fees, the small little hidden fees are just 1.5% to 2% within the manage mutual funds, we're all commonly sold in our 401(k)s. That can eat up over 60% of our potential earnings over the long term, over the 30 to 40 years, 60% go on to the fat cats. He points out that the magic of compound interest that we're all sold and we're told to employ and use in our retirement strategy, it works both ways. It compounds with the cost as well. Mutual funds are a concept that was conceive for the benefit of the wall street bigwigs, not the NestEgg builders like you and I. Somehow, we are all sold on it, or we had no other choice for our retirement planning. Most people have no idea about these costs, and those people selling companies the 401(k)s are sure to make sure the ignorance continues. That's why this show is here, to help you stop paying that ignorance tax, but that's a tax you will continue to pay unless you do something about it, so stay tuned here each and every week and we're going to discuss what there is to do. I'm Matt Theirault, and this is creating Epic Wealth, real estate investing for busy people.
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