When Mainstream Advice is Bad Advice: Part 1
Updated: Oct 1, 2020
Kevin O'Leary, investor, business mogul, and star of the show "Shark Tank" is featured in an article published today on MarketWatch titled: Kevin O’ Leary says investing $100 a week will make you a millionaire by retirement. He advocates the FIRE (financial independence, retire early) movement as a ‘motivational platform’ to get people thinking about their future financial stability where he encourages people to take inventory of their spending. The idea is to live frugally, know the difference between a want from a need (sounds like a Dave Ramsey playbook here), to ensure you spend less than you have coming in. This is good advice, but the kicker is, after encouraging people to live within their means he pushes them to find that "extra" money to invest in the stock market. BTW typical retirement accounts like the 401(k), 403(b) IRA, ROTH IRA, and TSP are all invested in the stock market.
His explanation on how to achieve an early retirement is this:
"If you start in your early 20s, you’ll end up with $1.5 million in retirement. The market provides on average 6-8% on an annual basis over a long period of time, so you have to start thinking, OK, can I live off of 6% of my portfolio, and after it pays 2% in taxes a distribution of 4%. You’re going to find you really want to get to $750,000 to $1.5 million invested, so that you can live off of that. The average salary in America is $58,000, and if you work backward, you can save $100 a week. You can put that money in the market, and buy an indexed or exchange-traded fund."
This is BAD advice.
First off, the stock market cannot guarantee any gains!
Secondly, he forgot to mention the capital gains tax (if cashing out 15-25%) or income tax (if pulling from a retirement account or taking a dividend) and management fees (0.5-2.0% annually).
And lastly, the average rate of return does not equal real returns! They are two different formulas and two very different rates. Typical financial advisors and brokers love to tell you the rate of return because it is that "reassuring" 6-8% to make you feel more comfortable about tossing your money into a volatile investing (gambling) machine. While the annual rate may be that, the real rate of return on your investment could be -50% - + 50%... in other words... unpredictable!
This article from Partners 4 Prosperity explains why knowing the real rate of return is so important.
So, what should you do if you decide putting your money in the market and playing the investing game is not how you want to "plan" for retirement?
There are options out there that are 100% secure, this means your money will never "drop". Guaranteed base dividends (cash flow) and higher annual returns combined with using compounding interest to bolster your contributions you can have a rocket to retirement.
Alternative short-term investments (1-9 years) with high return interest and/or equity shares. This doesn't take advantage of compounding, but it can give better results without the risk of the stock market and open up potential for cash flow with equity investments.
These strategies have been used by the wealthy for over 150 years. They not only create value today, think cash flow, but they create wealth for retirement and future generations. They help reduce your tax liability and that means more money in your pocket. It's not just for the elite or the educated, this strategy works for the 22-year-old who just graduated college and the 60-year-old who's late to the game. But I will note, when it comes to compounding interest, the younger you start the steeper and higher the growth curve. I wish I knew this 20 years ago!