What Do You Need To Retire?

When I was 26 years old (a very long time ago), I was given two very important pieces of information when I started my first real paying job. One was the rule of 72 and the other was dollar cost averaging. The two went hand in hand with saving for your retirement. This is still talked about today when it comes to retirement and many of you may have followed the same advice. I planned my retirement strategy based on these two principles. However, two decades later, I now see the error of my ways. The two principles work so long as there isn’t a market crash and you didn’t have your 401k on auto-pilot as I did.

So what is dollar cost averaging and the rule of 72? Well, any Google search will give you a variety of answers, but the best explanation I have seen is from Investopedia.com. They even have a video that explains it and I encourage you to watch it, but basically it allows you to invest in a market over a period of time while reducing risk. The Rule of 72 is just a simple method to be able to see if an interest rate is worth the investment. The rule states that if you divide your interest rate by 72, it will tell you how often your money will double. For example, if your investment earns 12% a year, divide 12 by 72 and you have 6. Therefore, with all things being equal, your money will double every 6 years.

When I started investing 26 years ago, I ran a simulation of retirement based three variables. Those variables were the age I wanted to retire, inflation, and my current income. Running those numbers revealed to me the magic 401k balance I would need to make my retirement dreams come true, $1.2 million.

I thought this was achievable based on the two rules stated above, so I put the plan on cruise control. Nobody really told me I had to do anything else and I never took the time to do the research to figure out if I was all set. Unfortunately, things didn’t work out quite as planned. As I approach the age at which I wanted to retire, two market crashes have pulled me far off-course.

 So What Can You Do?

Frustrated and angry about how things played out, I decided to make financial education a priority in my life. There are several routes you can take to pursue it and there are a lot of great courses out there that will teach you what you need to know. I am going to list a few that have helped me below. Aside from online courses, one of the best places to start is with your local municipality continuing education program. They offer some great courses at very affordable prices and the instructors usually have some great information to share. This also affords the opportunity to network with like-minded individuals.

Through my experience I’ve come to believe that the traditional method of dollar cost averaging may not work. You don’t have to take my word for it. There are others who have come to this conclusion as well. Best-selling “Rich Dad, Poor Dad” author, Robert Kiyosaki, speaks about this idea in his “Rich Dad Prophecy” book where he suggests that 401Ks will leave many people financially ruined after market crashes. His philosophy is investing for cash flow and you don’t need a million dollar retirement account to do it. You just need to invest in your financial education and learn about alternative strategies to the typical “buy & hold” strategy that most financial advisors push. This blog is very much centered on that principle.

I decided I wanted to find an alternative path and it led me to stock options trading. I am currently enrolled in a program that teaches people how to earn as much as 20%-40% annually with various options trading techniques. It is just one of the many investment vehicles that are out there, but the premise is simple. A much smaller nest egg can be used to produce regular cash flow. What if I told you that all you really needed to retire was $100,000 and that you could produce $1,500 or $3,000 income a month using that principal? Seems more doable, doesn’t it? That is the kind of thing I’m learning by investing in my financial education.

I know what you are saying, “I can’t live on $3,000 a month, let alone $1,500.” That may be true in your current situation. What amount of money would you need if you had very little debt? What if the only large debt you had was your mortgage? The point here is that you are never going to get the finish line relying solely on your 401K. The max you can contribute to a 401k as of 2015 is $18,000 a year. If you were to invest that much every year for 30 years, you would have a total of $540,000.  With a modest 4% return, you would get there.  However, those numbers assume you never have a negative year and as any economist can tell you, the market always has negative years.

Many of you may already know this, but your lifetime rate of return is significantly compromised by a negative year. Did you know that if your account loses 25% you will need a 33% return just to get back to even? In October of 2008, the Dow Jones (DJIA) was at 14,000 points. In one year it lost half its value plummeting below 7,000. That is a 50% loss. If your 401k tracked the same return as the DJIA, then you just took a 50% loss on your account. This now requires a 100% return just to get back to the break even point. If you were patient and stayed the course then you saw this occur around April of 2013 when the Dow broke through 14,000. This reflected a 100% return from 2008 levels.

The issue I take with this is that you just lost four years of investment opportunity and your account is only even with where it used to be. If you had planned to retire during this unfortunate time period, you were out of luck. Many would argue that people nearing retirement shouldn’t be 100% in equities, but the truth is that many of them are and many of the so-called “life target date funds” were very much heavy in equities even though it’s constituents were nearing the end of their working days.

The point I’m trying to make is that you need a financial education to be able to recognize and profit from these major shifts in the market. Neither my time in school nor my employee orientation prepared me for the realities of the financial markets. I am here to tell you that pursuing financial education isn’t as difficult as it seems. In the beginning, it will take a lot of hours and a change in how you perceive investing. Once you master the skill though, it won’t be as time consuming. I can’t guarantee you will be successful or specific returns, I can guarantee though that you’ll be much smarter for the effort and your money will be exposed to less risk.

The bottom line is that there are a variety of paths you can take, but you need to educate yourself on the variety of paths that there are. Personally, I have chosen two paths. I still have my 401k mix of bonds and equities, because my employer matches my contributions. I contribute the minimum to take advantage of that “free money” match. In addition to this, I have my options trading accounts. One is short term and the other is long term. I am learning strategies that give me excellent returns, but it has taken me time and effort to get to the level I am at. You can do this too and with any investment vehicle you choose. I listed sources below that helped me with options trading, but there plenty of other resources out there as well. Find an educational source that works for you and stay dedicated to achieving financial education as a means to financial freedom.

I will leave you with one final note, of the 52 million 401k accounts today, less than 72,000 have a balance of $1 million or more.  That is less than 1% of the total 401k accounts in existence today.  The choice is yours, chase the elusive $1 million account using the same advice I got, or become more financially educated and create cash flow for retirement.

Sources:

• The Option Profit Formula: learn-stock-options-trading.com

Great free content with an E-Book for $.99 (Current as of 6 March 2015)

• MarketClub: club.ino.com

This is a pay site that I use to track stocks, ETF’s and the general market. Excellent trade entry exit signals to determine optimal time to enter and exit trades

• Investor’s Business Daily: investors.com

Another pay site I belong to with excellent information to help pick stocks. This subscription does the leg work for you to determine company fundamentals.

• Options MD: www.optionsmd.com

This is another pay site educational program which teaches different options trading techniques.   I have not taken this course, but did take another course by Doc Severson and found it to be very educational.  His main options course was recommended by my mentor and coach Travis Wilkerson who teaches the Option Profit Formula.

• Udemy: udemy.com

This site has a variety of courses (some are free) that cost as little as $ 25.00. I took Travis’ course, “Trading Stock Options-How to Make Money in Up & Down Markets”. This course is a great start to Options trading basics and gives you, “do as you learn”, approach to options investing. The cost of this course at the time of this writing is $97, but Travis covers more than options trading and has some bonus items as well.

Travis has another course on Udemy, “How to spot a Stock Market Crash”. This is an excellent short course that will teach you what to look for when the market crashes, as well as when it has recovered. The cost of this course at the time of this writing is $97.

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