Creating Financial Staying Power

One of the most difficult disciplines to build is financial staying power and yes, it is a discipline. Staying power is the ability to maintain a certain level of performance in the midst of the stress and pressure of life. Some call it stamina, others call it endurance, but there are subtle differences between these that can cause you to miss the mark when trying to achieve your financial goals.

Stamina refers to your ability to sustain effort, period. Stamina has little to do with negative or stressful situations. It is all about your effort and the ability to sustain your effort when there is little or no real reason to suspend such behaviors. For example, if one has the stamina to save money that means he or she can sustain the effort of saving as long as there are no impulses to spend. Someone who does not have financial stamina would spend the money instead of save it.

Endurance refers to the ability to bear up under an unpleasant or difficult process or situation. Whereas stamina is more about your ability to maintain a set behavior, endurance is more about your ability to maintain a set behavior in the face of pressure to do otherwise. For example, if one has the stamina to save, he or she can sustain the effort of saving as before. However, when there is a requirement to spend (not an impulse, but a requirement), he or she will have the endurance to continue to save and find the resources necessary to meet that requirement elsewhere.  

Staying power is different than stamina and endurance because it is not about your effort or the circumstances. It is about how you have positioned yourself so that you can maintain an activity or commitment despite an unpleasant or difficult situation. In 2007, my wife and I began developing financial strategies to change our financial picture. In 2008 I was laid off. Using this layoff as a springboard, we solidified our strategies and moved on.

Because of our staying power, I was able to accept employment (at a 33% reduction in pay), yet never miss one of our financial goals. In 2015 I experienced a second layoff. Since we spent the last seven years positioning ourselves to withstand financial headwinds, we just kept on executing our strategy without blinking an eye. After two months, I was hired by another company (this time at only an 8% reduction in pay), and again, we never interrupted our financial strategy because of the staying power we had developed.

Why? Because beyond stamina to keep focused on our strategies and beyond the endurance required to ride out the negative financial events, we were positioned to continue to take advantage of financial opportunities. Even now, I continue to position myself to take advantage of financial opportunities to continue building wealth. Stamina says “I can do this for a long time as long as things remain easy.” Endurance says “I can do this for a long time in spite of some things becoming difficult.” Staying power says “I can do this for a long time in spite of some things becoming difficult and regardless of how weary I get because my strategies continue to position me to achieve my ultimate goal.” 

Because of these experiences, I wrote Simple Wealth Building Strategies as a way of sharing our experiences and strategies to help others navigate the turbulent waters of the new economic oceans. 

Creating financial staying power is not easy, but it can be done, even on an average income. This list briefly highlights five ways you can build financial staying power.

Five ways to create financial staying power.

1 Expect the unexpected and be ready for it. In my book, Simple Wealth Building Strategies, I outline my recommendation to have a tier-three emergency fund. Most every financial planner believes in having an emergency fund of at least three to six months worth of expenses. However, in today’s economy, a traumatic financial event can last far beyond that. This is why I recommend a tier-three emergency fund equivalent to one year’s gross salary.

2 Protect your credit like it was your daughter. I am not trying to offend anyone here, but men will know exactly what I mean. Like it or not, fathers are far more protective over their daughters than they are over their sons. It is part of the fathers DNA. Just like a father would put up barriers to protect his daughter from unsuitable young men, you need to protect your credit from unscrupulous individuals. In chapter 4 of Simple Wealth Building Strategies I give you the best way to put up a hedge of protection around your credit so you are not vulnerable to the thieves that seek to separate you from your resources. It might surprise you, but the best way to do this is not a credit monitoring service.

3 Document, document, and document. Every major financial goal needs to be monitored. How else will you know you are making progress without a scorecard documenting the results? Chapter three of Simple Wealth Building Strategies provides an in depth lesson on tracking your progress. This aspect of financial staying power helps you know when a shift in strategy is advantageous. Without documentation, you are blindly shooting at a moving target. You might hit the target occasionally, but it would just be dumb luck and unsustainable in the long run.

4 Use momentum like bacteria. When scientists want to experiment with bacteria, they put it in a petri dish to encourage its growth. Well, building wealth needs to be cultivated in the same way. You need to place your money in the petri dish of the market and take advantage of compounding returns. However, you have to know that building momentum takes time. Once you have built a substantial amount of momentum, the impact of an unpleasant or difficult process or situation is reduced. Staying power increases as the impact of negative financial events is decreased. That is the purpose of my book. I provide you with eleven strategies that, when worked together, will produce staying power. Collectively, the strategies I discuss in Simple Wealth Building Strategies work together to build, not just wealth, but also financial staying power. In other words, they build momentum.

5 Don’t overthink the obvious. Keep this phrase in mind whenever you feel the urge to over-complicate your financial strategies. If the plain sense, makes sense, seek no other sense. So many people lose staying power because they believe that wealth building is a sophisticated or complicated process. It isn’t. There are ways to keep it simple. If you do not understand something, stay away from it. There are so many ways for the do-it-yourself investor to build wealth with a small amount of common knowledge. Don’t compare your strategies with those of others. That will cause you to overthink what you are doing. Stay committed to your strategy so long as it is meeting your goals and expectations.

When you recognize that something is unsustainable, be willing to back off. I once talked to a young man who had a goal to fund his 401k to the maximum allowed by IRS standards. His strategy was to commit a large portion of his income towards his 401k and use credit to provide for his needs. He rationalized that in the long run, it would be better for him. Great goal, poor strategy. Eventually he would have to pay off that debt but he wouldn’t be able to use the money in his 401k and he didn’t have any income left to meet his commitments. He would be light years ahead if he funded his 401k with any income above his obligations and necessities. Instead he was digging a hole from which it would take him longer to get out.

Financial staying power is 10 percent income and 90 percent common sense. Having the right strategy, based on your individual circumstances, will go a long way in allowing you to position yourself so that you can maintain an activity or commitment despite the fatigue that can set in because of an unpleasant or difficult process or situation. If you have a personal finance question that you would like to see answered in a future blog, send it to me by going to http://kenrupert.com and completing the contact form at the bottom of the page. Who knows, your question might help someone who is struggling with the same issue you are.

The Social Security Benefits Gap

The Congressional Budget Office estimates that the Social Security shortfall over the next 75 years will be equal to 0.6% of the Gross Domestic Product. Do you understand what that means? In the next 75 years it will take 100.6% of the GDP to pay for the benefits of Social Security. That is why I call this socialist program Social Insecurity. Recently, while participating in a conference call discussing the options available for closing the gap, four basic ideas were mentioned.

Change the taxation of earnings. By increasing the payroll tax 1% today, 50% of the shortfall can be overcome. This would slow the pace at which the greatest Ponzi scheme ever played on the American people would eventually overtake the GDP, but it would not stop the eventuality of insolvency. Keep in mind that Social Security is based on the current workforce paying for the previous workforce’s retirement. I know many believe that the money they pay into the program is there for them when they retire, but the reality is that the money the current generation pays into the program is used to cover the expenses of the previous generations. Changing the taxation of earnings only adds to the burden of the current generation as it tries to raise the next generation charged with funding the Ponzi scheme.

Change the benefit formula. In other words, index the benefits to changes in longevity. The biggest problem with this idea is that quantity does not always translate to quality. As a population increases in longevity, the benefits provided are increased. The question that needs to be asked is “When longevity decreases, will the index adjust down as easily as it adjusts up?” This idea rewards seniority by providing more benefits as longevity increases. Control the determination of longevity and you control the distribution of benefits. See the problem with this idea? Changing the benefit formula in relationship to longevity is thought to be able to eliminate only 33% of the shortfall. Who knows if quantity translates into quality?

Raise the full retirement age. Different from changing the benefit formula, this idea indexes the full retirement age to changes in longevity. Instead of graduating benefits, the age at which a person can take full benefits is graduated with changes in longevity. As the population lives longer, the government will decide when you can retire and receive the benefits you believe you are “contributing” to. Here again, the concern is if the population longevity decreases, will the government quickly reduce the age at which a retiree can receive full benefits? The answer is no. This idea will result in the Full Retirement Age (FRA) increasing quickly as the longevity of the population numbers are manipulated upwards and will never, or nearly never, be lowered if the longevity measurement decreases. Only a 33% impact on the overall shortfall is expected with this idea.

Reduce the Cost-of-Living Adjustments. The idea is to determine the real inflation rate by using the shift in consumer’s decisions as prices in markets increase. This idea is a little convoluted, but basically it means that when the price of beef goes up, the consumer might buy more chicken. If the CPI is weighted on a fixed basket of products, it will not take into account that the consumer is not buying beef. Therefore, the CPI is overstated. But shifting the COLA to the more accurate Chain-Weighted CPI, the COLA would reflect the more fluctuating inflation rate and not the more stagnate fixed-weighted CPI. Doing this reduces the COLA adjustments realized by retirees, but is thought to only affect about a third of the shortfall.

These four ideas can all be considered stop-gap measures. None solve the problem and no combination will solve the problem without causing additional problems. With the advent of the Unaffordable Care Act of 2010, the amount of financial resources available for socialist programs will eventually dry up leaving those who were promised a pie-in-the-sky utopia without both the means to afford such programs and receipt of the promised benefits.

One simple idea that could solve 100% of the problem. It was briefly mentioned, but never discussed. Eliminate the taxable maximum. Remove the cap on income where Social Security taxes cease to be extracted from one’s income. For 2016, the maximum amount of taxable earnings is $118,500. If you earn more than that, you are released from the obligation to pay Social Security taxes. However, if you removed that artificial cap that protects the wealthy income earners, the problem would be solved.

Another idea that would solve the problem is to transition from a government controlled system to a privatized system where the tax still exists, but the lock box would be controlled by the individual citizen. The individual would have the ability to direct his or her Social Security tax in an account that only becomes available when the individual reaches 62.

Politicians will rarely consider real solutions for several reasons. First, they have an allergic reaction to losing the control over other people’s money and the people themselves. If they were to privatize the system, they would lose their political slush-fund. Anyone who believes that the money he or she is forced to contribute is sitting there waiting for him or her to reach FRA is kidding him or herself. Money being paid in today is used to pay benefits today. It is the future earnings of future generations that will be relied upon to pay for your benefits.

Second, the changes required will not win them favor with the higher income voters. In other words, they worry about political optics. If they remove the cap on income exposed to the Social Security tax, those earning more than $118,500 would come unglued. Liberals talk all the time about the rich paying more, but no one will actually make the rich pay more by simply removing the Social Security taxable maximum. It is the easiest solution, but politically the optics would crush many borderline politicians. If you want to tax the rich more to help those who do not have as much, simply remove all income caps that restrict higher income earners from not paying Social Security taxes on their whole income.

Third, they are not smart enough to figure out an exit strategy. I support a transition to privatized Social Security accounts. I have a strategy to accomplish this, but I doubt the politicians have the intelligence to fully comprehend the process. Politicians do not have the political will to actually take a private sector idea and allow it to work because, if they did, they would prove their own worthlessness.

The system is broken because it was designed on a faulty foundation. It was built on socialism. The problem with socialism is that eventually you run out of other people’s money. The best social program is the one that allows the individual to take responsibility for his or her own destiny. People need to learn that life does not respond to your desires as much as it responds to your decisions. Therefore a person’s destiny is directly linked to his or her decisions and not desires. When your decisions support your desires then and only then will you be successful.

Government programs cause dependency, not responsibility. The current system needs to be scraped, but in a way that make sense. I suggest a transition to a hybrid system where the percentage of the Social Security tax paid by the individual must be put in a tax-free investment account to be managed by the individual and the corporate portion is paid to the government. I also advocate for a buy-out plan where current workers can opt out of future Social Security benefits. The details are far too complicated to explain in a blog, but I will debate the merits of such a system if there are any political leaders who are interested in such a conversation.

Learn more about developing strategies that will provide a more secure retirement. I wrote Simple Wealth Building Strategies for you. Even if you have read all of the experts on finance, you will benefit by reading this book. It is finance from a different perspective. It is life from a different angle. It is a way to get and stay motivated beyond telling yourself that you SHOULD have a plan. This book gives you the information and motivation to do what you know you should do, but haven’t done.

Timeline For Retirement Planning

If I were to ask you if a sixteen-year-old should open a Roth IRA, would you agree? As long as that teenager is earning an income and living with mom and dad, I would highly recommend him or her to open a Roth. Imagine if that teenager learned the value of compound interest and the power of time value of money. These two components of financial stewardship are so important that teaching your son or daughter early that doing so will position him or her for a comfortable retirement. That is why every time I am asked this question, I always answer “Now is never too early to start. So, let me give you the question and follow it with my recommendation.

How early should I begin planning for my retirement?

The easy answer to this complicated question is that as soon as you ask the question, you should begin planning. If you are wondering when you should start, then that is a good indication that you are seriously thinking about retirement. There are so many demands on a young person’s financial resources that retirement planning to a young person is “something that old people do.” However, retirement planning is not something that should wait. From the day a person enters the workforce, he or she has access to one of the greatest wealth building resources in the world; an income. The next best wealth building resource is the company sponsored 401k or 403b plan.

Retirement planning should begin the moment a person has access to a company sponsored retirement plan. With the death of the traditional pension, employees are assuming more responsibility for their retirement and with Social Security on life support, this trend will continue. This is why more companies are beginning to institute the automatic contribution program for their employees. According to a report produced by the United States Department of Labor, approximately 30 percent of eligible workers do not participate in their employer’s 401(k)-type plan. An automatic enrollment 401k plan will reduce this number significantly.

Some might ask “What is the benefit of an automatic enrollment 401k plan?” Well, let’s look at the concept and examine the benefits. First, an automatic enrollment plan increases plan participation among both rank-and-file employees and also among managers who might overlook the benefits of a 401k. Surprisingly, managers who qualify for a 401k don’t take full advantage of the plan. A company match is a kin to giving yourself a tax-deferred pay raise. Even contributions made above the company match simulates a pay raise since ever dollar contributed reduces your taxable income.

Next, an automatic enrollment plan self-directs contributions if employees do not select their own investments. Typically, these self-directed contributions are placed in a targeted date fund, which is a fancy name for a mutual fund of mutual funds that are weighted based on the projected retirement date. This feature helps those who are not market savvy have their money managed for them. As the retirement date approaches, the targeted date fund adjusts to reduce risk. This feature can also simplify the selection of investments appropriate for long-term retirement savings for participants.

Finally, these types of programs help employees begin saving for their future and take advantage of favorable tax treatment. Some companies are also offering the Roth 401k which takes advantage of tax free growth. The Roth 401k is a great way for a young person to build significant amounts of wealth without having the government eventually impact the growth.

Now, to get back to the heart of the question of when should someone begin to plan for retirement. Honestly, sixteen is not too early to begin to plan for retirement. Doing this will pay tremendous rewards later on in life. Some might question the wisdom of planning so early, but keep this in mind. Life will try, and in many cases succeed, at interrupting your plan. Therefore, the more time you have built into your plan, the greater number of interruptions your plan can withstand. When you begin to save for retirement with ten years to go, a significant financial event will have a greater impact on your retirement planning.

It is not too early to find an area where you would like to retire and purchase some land there. If you have the ability to purchase land (meaning you have the financial resources to pay cash) and you can find the right location, purchase it now. If you decide later to live somewhere else, you can always resell the land. Retirement planning isn’t just financial in the sense that it is all about money. You have to consider where you would like to live, what activities you want to do, and if there are any special services you need.

Analytics can be your friend. Knowing what you want out of your retirement will identify what you need to put into your retirement planning. One thing I can say with confidence is that I have never met someone who said “I want to be dependent in my retirement.” We all want a level of independence and freedom to do the things we never had time to do while we had to work. Having no plan is having a plan to be dependent. With that said, here is the time line I suggest for saving for retirement.

When you begin to earn an income in your teens and early twenties and you don’t have significant expenses, start a Roth IRA. Someone in his or her teens to early twenties, who can put away $2,000 a year for eight years has the potential to have $25,736 with a 10.5% return at age 22. If that person never adds another dollar to the account, he or she could have over $4 million at full retirement age. Therefore, I suggest that anyone in this age group start the engine of wealth building as soon as he or she can. It only takes $2,000 a year for eight years.

As you transition from the academic environment to the working world (between 22 and 30) participate in a company sponsored retirement plan. Here you can shift from contributing to your Roth IRA to your 401k. If you have the resources to do both, then by all means, continue to do both, but the main focus should be on contributing to your 401k up to the company match. This should always be a part of your wealth building plan so long as you are gainfully employed.

As you enter the child rearing years (30 to 55), continue to increase your 401k contributions to the maximum IRS limit of $18,000 per year. In addition to this, max out your Roth each year by contributing the $6,500 IRS limit. This is the goal. If you cannot reach the limits, contribute as much as your income and expenses allow. Keeping expenses low means you can keep your contributions high.

Once your children are grown and raising families of their own, you can begin to transition to full retirement planning. By this I mean you can max everything out. Fund 401k contributions and catch-up contributions to the maximum and do the same for your Roth IRAs. The last 15 employment years should be the most lucrative contribution years of your life. Granted, these contributions will see the least amount of growth, but you can benefit from the tax-treatment in your high earning years.

The process is simple. Start with as much as you can afford in the early years. Adjust for family needs in the middle years. Close with the greatest amount of contributions you can in the final years. The truth is that you should be planning for your retirement from the day you begin to earn taxable income. By doing this, you will have no need to depend on social security even though you will still be eligible for it. Be your own security. Imagine being able to collect social security and donate it to your favorite non-profit and write it off your taxes when you have to take the MRD from your IRA.

You can learn more about how to build a powerful retirement strategy by purchasing Simple Wealth Building Strategies or 10 Ways To Improve Your Retirement Planning.