Renowned investor and financial expert Ken Fisher is at it again. The author of best sellers such as The Only Three Questions That Count, The Ten Roads to Riches, How to Smell a Rat, Debunkery and Markets Never Forget (But People Do) has outlined simple and easy-to-understand strategies for retirement planning. In his latest book Plan Your Prosperity: The Only Retirement Guide You'll Ever Need, Starting Now--Whether You're 22, 52 or 82, Fisher and co-author Lara Hoffmans debunks misconceptions that many people have toward retirement planning to help avoid common pitfalls.
Retirement planning does not need to be as complicated as many make it seem, and Plan Your Prosperity cuts right through the jargon to teach readers to focus on the critical basics, such as calculating how much income you need, establishing your time horizon, savings goals, and the type of investment portfolios that will allow you to achieve a comfortable retirement.
Fisher is the founder, Chairman and CEO of Fisher Investments, and along with his books, also has written the "Portfolio Strategy" column in Forbes magazine for nearly 30 years. Hoffman is the Vice President of Content at Fisher Investments, managing editor of MarketMinder.com, and the coauthor of many of Fisher's previous best sellers.
Equities.com has long held Fisher in the highest regard in the investment and finance industry, and was fortunately granted the approval to provide readers with a special excerpt of Plan Your Prosperity: The Only Retirement Guide You'll Ever Need, Starting Now--Whether You're 22, 52 or 82. The following is a special preview of the first chapter of the book, reprinted with permission from John Wiley & Sons, 2012. Plan Your Prosperity is now available at all major bookstores.
What? Me? Retire?
Who needs a book on retirement investing?
Maybe you’re younger—early in your career. To you, retirement investing is something you do when you’re retired. Or close to it. Too boring to think about now. Too far away to bother. (Wrong.)
Maybe you’re in retirement now or close to it. And you already have a plan. Can’t be bothered. But are you sure your plan is appropriate? What’s more, are you sure your plan is in fact a plan—and not just a collection of tactics?
Either way, however old you are or however far along in your career, the time to think about a retirement investing plan is now. This book isn’t just for retirees or soon-to-be retirees, but anyone at all who plans to retire ever—whether that’s next week or in three decades.
The Imagined Dichotomy
Many investors and even some professionals distinguish between financial planning and retirement planning—like they’re two distinct phases, or the two are, inherently, radically different.
But in my view, this imagined dichotomy is wrong—this idea you should invest one way for a period of years and then you need a whole separate set of rules upon hitting some milestone.
Plan Your Prosperity
For most investors, whether you’re 22, 52 or 82, financial planning is retirement planning is financial planning. Whether you’re saving your first dollar or your four millionth (good for you!), you should consider the ultimate long-term purpose for your money. Which, for many investors, is to provide for them (and their spouse) in retirement and/or leave something behind for the loved ones, a beloved cause, etc.
But maybe not! Maybe this doesn’t apply to you. You don’t need to think about the ultimate purpose for your money now.
Maybe you’re heir to a billion-dollar fortune. Your future is amply covered, you don’t want to think about it, you bought this book only to level your kitchen table, and your entire purpose in life is to fritter. Fine! But for most everyone else, if you’re holding this book, however old you are, you should be thinking, now, about your future prosperity.
Two Goals … and Some Non-Goals
I have two primary and very specific goals with this book—and some special c goals this book is not aimed at.
First, I hope to help you stop thinking about investing in a spliced-up way—that you should invest for a number of years one way, then one day, a buzzer goes off signaling it’s time to think about retirement. No! Instead, from the first time you fund an IRA or otherwise set money aside, I hope to get you thinking not just about retirement, but about investing for your whole life. And if you haven’t been thinking that way all along, there’s no time like the present to change.
Sure, there can be nearer-term goals not about retirement and beyond. You’re young and newly married and want to save for a new home. Or you want to save to upgrade to a bigger home. Or you’re saving for your kid’s college or your college or a boat or whatever floats that boat. However, these should all be seen and felt as near-term sidesteps on what’s otherwise a lifelong pursuit.
So I want you, right now, to stop thinking about investing and retirement investing and start thinking about investing for the entirety of your life. I want you to think about making plans now that increase the odds you achieve your goals, whatever they may be. (Heck, at this point, you may not even be able to easily and clearly express what those goals are! Or know what’s feasible. This book will help there, too.)
By the same token, if you start thinking, now and always, about the long future ahead (instead of chopped-up phases), that doesn’t mean nothing ever changes about how you invest as you near retirement. It might! But not just because on Tuesday, you woke up, went to work, went to a good party in your honor—and on Wednesday, you were retired. And now there are new rules because you’re retirement investing. No—this is selling yourself short and potentially exposing you to investing errors.
Maybe, as part of your longer-term thinking, you will need to make a change, whether big or small, at some later point. Maybe multiple changes. But when that change (or those changes) is (or are) made should be driven by your circumstances and your goals, not just a circled date on the calendar.
An investing shift—big or small—might be appropriate … but perhaps 7 or 10 years before you retire. Or 5 years after. Or 12 years after. Or … or … or … or…. But you won’t know that if you think the primary driving factor is your retirement party, not your goals and the effort to increase the likelihood you reach them.
Benchmark for Better Results
My second goal is helping you choose an appropriate benchmark. If you get nothing else out of this book, I hope you understand what a benchmark is, how important it is, and what goes into choosing an appropriate one.
Maybe right now you don’t even know what a benchmark is. That’s fine—we cover that much more in Chapter 3 and beyond. But for now, think of your benchmark as an essential investing lifeline. It’s a road map, showing your planned route—and how to take detours when necessary. It lets you know how you’re doing—if you’re going too slow or even too fast or getting lost in the weeds or utterly turned around. It can help you stay disciplined (an incredibly important yet often overlooked facet of successful investing). Overall, the benchmark, picked appropriately, can increase the odds you achieve your long-term goals.
The first operative word being appropriately.
Far too many investors invest without a benchmark at all—never mind an appropriate one. They effectively stick their thumbs in the air, hitchhiking along with whatever tactics suit their fancy at a point in time. What’s worse, they may not even realize they’re doing that! They may assume they’ve got a rock-solid plan that makes good and smart sense—but if you don’t have a benchmark (and if you don’t know what a benchmark is, you don’t have one), the odds increase you may be meandering. And meandering is a bad path to prosperity.
It can happen! You can stumble into a portfolio that can provide the kind of life you need down the road through luck (sometimes known as dumb luck—and in effect, the same thing). But if given the choice between dumb luck and smart planning, my guess is most folks would opt for the smart planning.
And the benchmark being appropriate for you is key. If your goal is to drive from New York City to San Francisco, a map of Düsseldorf won’t help much. A map of the US Eastern Seaboard is better but still falls short. You need a map that consistently shows the way and highlights the “do not go” areas. A good benchmark can do that.
Second operative words: increase the odds.
I say that (or some variation) throughout the book—the aim is to increase the odds you reach your goals. Note I didn’t (and won’t) say, “The aim is to definitively get you to your goal—I promise.” Why? This is a book on investing. Investing in anything requires some risk—what type (there are myriad) and how much depend on your unique goals and circumstances.
Plus, no one can guarantee you anything. US Treasurys are guaranteed in the sense they’re backed by the full faith and credit of the US government, and so long as the US government doesn’t go belly up, you will get your principal back, plus interest. (And no, I’m not one of those who thinks the US is teetering on a precipice. You need a different sort of book for that. Or a therapist.) But you can still lose money investing in Treasurys if you don’t hold them to maturity. (Never mind inflation’s impact—which we get to later.)
No one can guarantee you reach your goals. Not even you can. First, investing involves the risk of loss. Can’t escape it. You could bury cash in your backyard and avoid all volatility risk—but you’re still fully exposed to inflation risk. Which means having to earn and save a lot more, and/or downgrading your future cash needs and/or not minding your purchasing power being eroded over time. (More in Chapter 4 .)
That’s the investing side, but there is also tremendous room for your brain to go haywire. If you have wildly unrealistic goals (e.g., “I want my money to double every year!” or, “I want market-like returns but don’t want to ever experience downside!”), that can decrease the odds you reach them. If you have a great plan and a sound strategy and an appropriate benchmark, but not the fortitude to stay disciplined over the long haul, that also decreases your odds.
Your aim should be taking steps to identify goals, picking a benchmark and an appropriate plan, then doing what’s necessary to stick to it. And my aim is to help you. That’s how we increase the odds.
And, again, this should be a deliberate undertaking, whether you go it alone or with a professional. Because not only is it critical you pick an appropriate benchmark, but you must also understand the risk and return characteristics of that specific benchmark. You must understand them so you can be prepared (mentally and emotionally) to accept the shorter-term volatility of your benchmark. (And yes, unless investing in cash, all benchmarks will experience shorter-term volatility.) And no matter how prepared you are, shorter-term downside volatility can sometimes be difficult to experience. But the value of an appropriate benchmark is it can aid you in remaining disciplined (as discussed further in Chapter 3 ). What’s more, this is where a good professional can add value as well—in helping you remain disciplined to an appropriate strategy when the going gets tough.
Full disclosure, right up front: This book won’t make a benchmark recommendation or an asset allocation recommendation or provide a specific investing plan. You may think, “Then why the heck buy and read this book if it’s not giving me a concrete plan?”
Because no book can do that. No website can do that. No Internet article can do that. They may try! But in my view, what they’re giving are cookie-cutter static plans or lists of rules of thumb (which are often partially or wholly wrong).
Fact is, I don’t know you. I can’t hope to know you via this format.
Instead, my aim is to help you help yourself pick a benchmark that’s the foundation for a plan that’s appropriate. Or if you choose to work with a professional, give you a framework for improving the dialogue you have with him/her/them.
This book also isn’t meant to supplant professional advice or serve as a shortcut to retirement planning. There are no shortcuts. No doubt, many readers hope such a book exists. In my view, it doesn’t. Rather, my goal is to share some general principles and concepts I believe can help you (or you and your chosen professional) better shape your long-term investing plan. No book ever written (nor any group of books together) is the silver bullet to investing success. I say that with confidence, having written nine books and read hundreds more, at least. And whether you set up your plan on your own or with a professional, that process should be careful and deliberate.
Also, this book isn’t on the nitty-gritty of portfolio management—how to pick securities and which ones and when. To cover that would require vastly more pages. Plus, that’s generally what my other books are about. Read this one first, and, when you’re ready, read The Only Three Questions That Still Count, Debunkery and/or Markets Never Forget (my 2007, 2010 and 2011 books). But you can’t start deciding what to buy and sell and when and why if you don’t have your road map—your benchmark.
Deﬁnitions and a Pencil
There are other aspects of financial/retirement planning this book won’t address. If you’re confused about what those aspects are, the official definition of financial planning is:
There isn’t one.
Financial planning can be a catchall for a wide array of financial services. To call yourself a “financial planner” may not require any testing or certification—depending on what you do or sell. (Though, under the Dodd-Frank financial reform law, there are some rules that may or may not more strictly define “financial planning.” But like much of DoddFrank, the rules remain unwritten thus far.)
Yes, there is certification for financial planners who choose it—like the “certified financial planner” (CFP). And there are professional financial-planning organizations. And if you want to be a financial planner and sell mutual funds or insurance, you must adhere to certification and testing standards for those specific product categories
In fact, there’s no official definition for what a financial plan is. A financial plan may include things like a budget or maybe some long-range projections based on a variety of assumptions.
Or a financial plan might address insurance and estate planning needs. Or there could be some investment advice included. Or not! Or a planner might also be an accountant (whether certified or not) and do taxes. Or … or … or….
The financial plan is, often, a way for practitioners to get a foot in the door and sell something (or somethings) else that pays a commission—like a mutual fund, insurance, annuity or tax services. Because being a commission-based or fee-based salesperson is often more lucrative than being a fee-based planner getting paid to do one plan, once, for a household—simply because such a strategy requires a relatively non-stop influx of new customers, which can be tough to keep up long term. Not that there aren't plenty of fee-based planners making a fine living doing just that. Up to the practitioners how they want to run their businesses. And I don’t have a view on which format is better for them or for you.
But in general, when folks talk about financial planning, the major buckets included are investing, saving and budgeting, and insurance and estate planning.
There are plenty of excellent books on how to budget and save, and I don’t have anything else to say on this you can’t get from them. Nothing wrong with budgeting! And nothing wrong with those books. Everyone should have a budget. Many people don’t budget, and many of them do just fine. (They’d probably do better with a budget, though.) But this book isn’t meant to hector you into making your own coffee instead of spending $5 at a fancy coffee shop.
As for insurance, I can say it’s normal for young people to be under-insured (not good) and older people to be over-insured (also not good)—though that’s not universally true. Remember, too, insurance is just that—protection against some form of loss. You pay for it based on the insurance firm’s opinion of the risk associated with that loss and how likely it is it occurs. Insurance is not investment. The goals for your insurance and your investments often are and (at times) should be at odds.
For example, if you’re a younger person with many earning years ahead of you, it may make sense to buy life insurance—as cheap as you can get it. Particularly if you have children. (Term life insurance can be very cheap and easy to get.) If you die tragically at age 40, aside from emotional devastation for your family, that can have long-term financially devastating effects, too. And not just if you’re the primary wage earner! If you or your spouse is a full- or part-time stay-at-home parent, don’t underestimate the value of that service—or the cost to replace it.
With insurance, you necessarily want to think, “What happens if I get hit by a bus next week? Next year? In five years? In 10?” With your investments, you may be thinking, “What if I live to be 90? Am I doing the right thing to ensure my money doesn’t run out before then?”
And you most certainly want to have a will—particularly if you have children. You can now find cheap estate-planning resources online, or you can find someone who specializes just in estate planning (and/or insurance).
Budgeting, insurance, estate planning—these are all important considerations. But this book focuses almost exclusively on the investing aspect.
Why? I’m an investor—have been my entire adult life. It’s my specialty and that of the firm I founded and currently head as CEO. It’s what I’ve written about in my monthly Forbes columns since 1984 and is the subject of, now, nine books. This is my wheelhouse. Though insurance is important, I’m not sure you want to hear what I have to say about buying it. For that, you want an insurance expert. Ditto for estate planning.
In the same way, if you need heart surgery, you see a cardiac specialist. If you have diabetes, you go to an endocrinologist. If you get cancer, you see an oncologist. Specialization is so common in the medical field now, no one thinks much about it—but that same concept is often less highly regarded elsewhere. Physicians (like many capitalists) seem to have grasped the concept if you specialize in everything, you often do nothing truly well.
And yet, it wasn’t always that way. The medical field is as old as humanity, but the idea doctors should specialize is relatively new. My grandfather, Arthur L. Fisher, graduated in 1900 in the third graduating class from Johns Hopkins Medical—a real pioneer at an institution that defined medical innovation then—and now. He did post-graduate work in Europe and specialized in orthopedics at a time specialties didn’t really exist. Johns Hopkins was on the forefront of that, too—its founder and subsequent caretakers understood the power of depth of understanding.
Make no mistake: There’s nothing wrong with an internist or a general practitioner. They can help with diagnosing and send you in the appropriate direction—or at least recommend a next step. But you want the specialist to actually operate on you when an operation is called for. (And the internist doesn’t want to operate either—not his thing.) And you shop around for the one you think is best for you (as much as you’re able— let’s not get into a discourse on the state of US health care). You probably don’t have the GP down the block operate on your brain tumor, just because he’s conveniently located.
Specialization of labor is a hallmark of capitalism and the lifeblood of global trade. It’s what has allowed for rapid innovation of life-extending and life-improving goods and services. You can’t have a smart phone or smart TV, a car, a home or an ice cream cone without specialization of labor. You can’t have ibuprofen or a vaccine. Heck, you probably can’t get your taxes done or take a college course. You can’t go online and read email. You wouldn’t be reading this book!
If you’ve not read Leonard E. Read’s short essay, “I, Pencil,” find it online and read it. You’ve probably not thought much about pencils since you were in grade school. And you may have never thought about why a pencil exemplifies the myriad benefits of free-market capitalism. But if you tried to make a pencil from scratch, the massive societal benefits of specialization of labor and profit motive would become abundantly clear almost instantaneously.
Which is why I, as a longtime professional investor and CEO of a firm that manages tens of billions of dollars for other people and large institutions, am writing on just the investing part of retirement planning.
Start Immediately. Now. Right Away.
This is (or should be) beyond obvious, but the sooner you start saving and investing, the more money you likely have down the road.
You’ve probably heard that endlessly, but my sense is many folks don’t get, in their bones, the power of compounding interest.
Here’s the magic demonstrated. If you’re 25 now and plan on retiring at 65 and do nothing but max out your IRA contribution each year ($5,000 as of 2012) and just match equities’ long-term annualized return of 10%, at age 65 you’d have $2.2 million. That’s without a 401(k) or any additional savings. And that’s assuming the IRS won’t increase the IRA contribution level ever again (which it probably will).
We go into this more in Chapter 7 , but the more you save early, the more you juice the power of compounding interest. Save just an additional $2,000 a year, and you end up with $3 million. Max out your IRA and your 401(k), and you can end up with nearly $10 million at age 65. That means saving $22,000 a year—possibly partly or wholly pre-tax. It’s not a paltry amount for a 25-year-old just starting out, but it’s not a ridiculous amount. Particularly since the entire contribution for that 25-year-old is probably pre-tax, lowers the tax liability and did I mention the $10 million?
That’s serious money. And the odds equities get something like the historic long-term average annual return over the 40 years ahead are pretty good.
If you’re young and can’t save much now, start smaller, but commit to increasing the amount saved each year. The sooner you start, the sooner you get the compounding-interest snowball rolling.
Plan Your Prosperity
Why is this book Plan Your Prosperity and not Plan for Prosperity? First, creating a retirement investing plan is very personal. Magazine surveys and static rules-of-thumb aren’t sufficient, in my view. Your benchmark (and, therefore, strategy) should be personal to you and driven by your circumstances and goals.
Second, like beauty, prosperity is in the eye of the beholder. What’s prosperity to you may not be to someone else. This isn’t about getting over some arbitrary line in the sand or my drawing one for you. This is about determining what you want to achieve, checking to see if it’s reasonable, then doing what you can to increase the odds you get there. That’s your prosperity.
It might mean saving $500,000 for retirement, $1 million, $7 million or $73.546 million. Whatever your view of prosperity, you need a plan.
You also need realistic expectations. If you earn $80,000 a year and spend $79,000, you likely won’t get to $73.546 million. It’s important to understand that now—so you can adjust your budget or get a higher-paying job or prepare your spouse for relatively reduced living expenses. Also, pie-in-the-sky expectations can hurt you much worse if you end up deceived by a financial Ponzi con artist. (More on that in Chapter 5 .)
To get you to your plan for prosperity, the book walks you through how to think about some key issues. The final chapter consolidates the high points for easy reference later. A word of caution: You could skip to the end and read just the high points, but in my view, it’s critical to understand what’s driving an appropriate plan and why. Otherwise, it’s too easy to go astray.
Make no mistake, creating an appropriate retirement investment strategy requires some serious homework. To start, it requires a good, hard, honest assessment of where you are and where you want to go. Often, folks don’t like being that brutally honest with themselves about money. Thinking about how much money you need 10, 20, 37 years from now isn’t as enticing as thinking about a hot stock you want to buy today— or a hot car! But if you want to get to your prosperity, it’s critical.
Then, too, creating the plan won’t be nearly as hard for most people as sticking to it. Investing—no matter what you invest in—can be difficult because our unruly brains often lead us astray (in ways and for reasons covered more later in the book). All the more reason to do the work now to create a long-term plan—to counteract your baser instincts, which often are terrible investing guides. So here we go.
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