How do I keep from becoming financial “Road Kill?”

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Deer in Headlights
When it comes to my financial future, am I like the deer blinded by the headlights just waiting to get run over?

Financial road kill … what’s that?

I call it the “deer in the headlights” syndrome. For some reason, a deer can become mesmerized by oncoming car headlights. The deer then just stands in the middle of the road staring at the headlights – frozen – waiting for the deadly collision.

Well, I wonder if I’m doing the same thing financially? I wonder if I’m just standing in the middle of the road, mesmerized by the headlights of the oncoming financial disaster train.

You see, I just had a series of terrible thoughts. I began visualizing my financial future. I began to imagine some events happening that I never thought of before. Events that would leave me financially defenseless, frozen in the road staring at the oncoming freight train.  Just like the deer in the headlights, not knowing what to do or where to go or how to escape. All that’s left is for me to get hit, splat all over the vehicle grill and then – if they can find any body parts – end up on somebody’s financial dinner plate.

And, just what is this picture of doom?

Well, I pictured myself at age 65 and my whole financial security resting with a traditional retirement.  You know the kind, the one the companies promote, the one the governments promote, the one you hear about when retirees gather.  It could be a 401k plan, pension, Individual Retirement Account (IRA), superannuation or a combination of these.   That was my nightmare plan.

What’s so bad about that?   How can it be a bad  plan if the majority of companies recommend it, if the government promotes it, if almost everyone is doing it?

And, that’s what made me think about it. I imagined for a moment, I was on that plan too. I imagined it was my plan for my financial future.

And, so I thought about it. I looked for the flaws, the holes, the downside, just as I would for any plan. I looked to see if it’s solid, if it will work. Or, if it can lead to disaster.

I came to a definite conclusion – this plan could lead me right to the financial graveyard!

Ok, what’s my beef, what’s so bad about this plan?

Well, let’s ask a few questions to lead us in the right direction; to get at the heart of the problem with this plan.

Ok, let’s say I’m retired from a career.  I pull in a nice retirement check. It puts me squarely within the middle class.  Let’s say – for the sake of this discussion – I’m pulling down $100,000 in retirement income.    And, let’s say that’s plenty.  I’m happy with that amount.  It works for me.

I can almost hear you snickering … “Come on, nobody makes that much money when they retire from a job!”

Well, at first glance, I’d agree with you but I have data points.  I used to work alongside a government worker and he had a tendency to brag – I mean talk.  I remember him going on about his retirement, “I’ll be on $104,000 per year and it’s indexed to inflation so it’ll keep going up. My wife will continue her government job and when she retires a few years later she’ll pull in even more, almost $110,000!  I can’t wait!”

I remember turning back to my computer and my work in silent disgust.  I worked in the same area as this guy for over a year and I never did know what he did; why he came to work each day; what added value he brought to the work center.  So, let me get this straight, he does nothing for 30 years in government service and then the taxpayers get to support his on-going non-service until he dies.  Great plan – for him.  Not so great for the wealth producing private industry taxpayers who will be footing the bill.

So, yes, people do retire on that much dough, especially government workers at the higher end of the pay scale.  Just remember, those are your tax dollars hard at work …

Now, back to our discussion.  I’m one of the “lucky ones”, I’m pulling $100,000 when my work days are over.

All’s good right?

Not so fast.

Here’s the big problem with this scenario; this plan; the plan most people are on …

It doesn’t have a tie in to the economy!

What do I mean?

Well, yes, the government pension does index for inflation, but do you think the government has the  money to give all its retirees a 25% raise each year?

What if inflation goes up by 25%?

Can’t happen?

I disagree.  Maybe it won’t happen but “can’t happen?”  Those, my friend, are what we call “famous last words!”

The problem with pension plans, IRAs, mutual funds, 401k and all the other retirement plans out there is this … they don’t protect you from massive inflation.

If I rely on any such retirement plans I’ll fall into the same trap I had when I relied on a job for income – my job was  no protection from inflation either!

When I had a job I used to watch the  prices of things around me rising.  Do you think I walked into my boss’s office and used dazzling logic as follows: “Hey boss, I noticed  house prices rose by 15% over the last quarter, and I’m saving to buy a house.  So, would you go ahead and bump up my pay by 15% so I can stay on-track to save up for my home?”

Maybe I should have done that, but I never did.  Seemed like it might be a waste of time.  What do you think?

I just thought of something else …

Hey, what happens if the cost of “things” goes way up? What if the cost of the things that I purchase on a regular basis all rise by say 10%?

Hasn’t my income effectively dropped by 10%?

And, what if – God forbid – the cost of things rises to say 25% or 50%?

Haven’t I lost 25% or 50% of my income?

If the cost of food, insurance, gasoline, and electricity all skyrocket – what do I do?  How does my retirement plan deal with this unexpected economic change?  Does my retirement plan have a massive shock absorber for this kind of huge financial bump?  Will my financial vehicle stand up to such a shock, or will it collapse under the strain?

I know the answer.  I know what will happen.  There’s no way a traditional retirement scenario can withstand such a blow.

For most people, the answer is to get a larger and larger nest egg; gather together as much money as you can before  retirement.

There’s only one problem.  A nest egg is finite.  A nest egg alone is insufficient for the job.

But, a growing nest egg is different.  So, if I have a nest egg that gets larger even while I’m in retirement, then that might work.

Still, I don’t like the nest egg or variation thereof idea.  I don’t like anything that’s static.  Anything that can’t fight back.  And, for me, a nest egg is – pardon the pun – a sitting duck!  It’s too easy to pick off.  It’s too easy to get slaughtered under the right economic conditions.

And, I’ve had nest eggs over the  years.  I’ve had IRAs.  I’ve had 401k plans.  I’ve had mutual funds.

They’re all supposed to be growing nest eggs right?

Wrong.

My accountant laughed at me when he discovered the return I had accumulated over 20 years with a mutual fund, “Dave, you would have made more money if you left it under your pillow!”

Not only financially devastating, but highly embarrassing as my accountant had a belly laugh at my expense.

I now firmly believe that 401k, IRA and mutual funds are fantastic financial vehicles as long as you are the fund manager and/or owner.  But, if you’re the retail investor, they’ll leave you vulnerable; put you right in the middle of the highway and oncoming traffic – perfect if you want to become financial “road kill.”

So, just how do I avoid getting run over financially?  If mutual funds, retirement plans, 401kplan, IRAs, superannuation plans are not the answer then what am I to do?

Well, first I’ve got to start asking the right questions.  Yes, sometimes the key to success is simply knowing what questions to ask.  After all, if you ask the wrong questions, you may end up with a lot of correct – but useless – answers!

Or, maybe a better way to put it is to make sure I’ve got the correct map.  After all, I could have a very accurate map of New York in my hands but if I’m trying to navigate my way around Los Angeles, what good is an accurate map of New York going to do me?

So, let me ask a couple of – hopefully – gainful questions.

First, how can I keep my finances in step with the cost of living?  In other words, how do I get my income in lock step with the economy; how do set myself up so when the price of “things” rise, I get excited; I get an associated pay raise too?

Well, right off the bat I can take some financial vehicles off the list.  Let’s write them down as follows:

1.  Savings bonds
2.  401k, IRA, superannuation
3. A company or government pension

These are what is known as “paper assets” … they have no intrinsic value and they can disappear with the stroke of a pen.  After all, when there’s no money – there’s no money.  Can’t happen?  Tell that to the people in Greece who got “stiffed” when the economic circus tent collapsed.  Tell that to the city workers in Detroit who got “stiffed” and got told – “Sorry, we just ran out of money.”  Tell that to the folks in Venezuela who thought they could just let the government take care of them.

Now let’s list some financial vehicles that do keep pace with inflation – vehicles that have intrinsic value …

  1. Farms
  2. Food stores
  3. Tangible skills businesses like electrician, plumber, welder, carpenter.
  4. Residential property
  5. Commercial property

There.  Done.  All figured out.  In order for me to avoid becoming financial road kill I need to make sure my income – my wealth – is backed by financial vehicles that have intrinsic value.  Dump the paper assets.  Get real income producing, wealth generating, inflation fighting assets instead.

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