MONEY Master the Game: 7 Simple Steps to Financial Freedom (62 page)

• The portfolio is
not
tax efficient at times. It’s important to use your qualified accounts (IRAs/401[k]s) or other tax-efficient structures to maximize tax efficiency appropriately. You could also use a low-cost variable annuity like the ones offered by TIAA-CREF or Vanguard. (However, those are the only two that experts seem to agree are worth the cost.)

ALL SEASONS + LIFETIME INCOME

The team at Stronghold (
www.strongholdfinancial.com
) currently uses the All Seasons portfolio as one of the many options available to their clients. Some readers will want to implement this on their own, while others will be better served using the expertise and assistance of a fiduciary advisor like Stronghold. Please take action in whatever form supports you most.

TAKE MASSIVE ACTION

The ball is now in your court. If you have a better strategy that has proven effective to minimize downside and maximize upside, maybe you should be running your own hedge fund. You now are armed with info to do this on your own, or if you choose, you can have a fiduciary implement and monitor this for you as part of a comprehensive plan.

If you want to create your own personal plan in less than five minutes, go
to the website now (
www.strongholdfinancial.com
) to see how your current portfolio approach stacks up against a variety of strategies, including the All Seasons approach provided here.

LET’S TAKE YOUR BROKER FOR A TEST DRIVE

Stronghold’s complimentary analysis allows you to “look under the hood” and find out how much you are
really
paying in fees and how your current investments are
really
performing. It will also highlight how much risk you’re currently taking as well as your true performance over the past 15 years, during which we have seen two near 50% declines (2000–02 and 2008–09)!

If you choose to take action, you can transfer your accounts online and begin the process today. If not, you’ll have all the information you need for free.

WHAT ABOUT MY 401(K)?

The All Seasons approach can be implemented in your existing 401(k) plan so long as there are fund choices available that represent the recommended investments. This you can do on your own or with the help of an advisor. If you use Stronghold, it will automatically link your 401(k) account
to your overall plan and make sure that the 401(k) portfolio is set up correctly. Again,
America’s Best 401k
can provide you with the All Seasons strategy as well.

INCOME IS THE OUTCOME

Whew! Wow, we covered a ton of territory in these last two chapters. But by now I think you can see why. What you hold in your hands is an investment plan with a track record of “smooth” returns that is second to none! You can implement it in a few minutes, and you no longer have to live with the worry about the ups and downs of the market. Of course, nobody knows what the future holds, but history would tell us that by doing so, you will be set up to do well and be protected in any environment.

So now let’s go back to our “personal Everest” metaphor of investing. By using the All Seasons strategy, you have the best odds of having a smooth and steady climb to the top. Yes there will be surprises, but you will be set
up to succeed over the long term. Now remember, once you have built up the value of your investments to a critical mass where you have enough to be financially free, you will need to ultimately turn your nest egg (those investments) into a guaranteed income stream—your own lifetime income plan. A paycheck for life without ever having to work again. That’s ultimately where financial freedom comes from. Let’s turn the page now and learn why “All Seasons + Income for Life Can = Real Financial Freedom.” Let’s learn how to create an income for life!

HOW DOES HE DO IT?

How does Ray Dalio keep generating such extraordinarily consistent returns? He has learned that this giant economy is one big machine, and everything is linked together in some way. Sometimes it’s obvious, many times not. He can look at the machine and know that there are predictable patterns he can take advantage of. In fact, the culmination of his findings on the economic machine is packed into a brilliant 30-minute video that, in my opinion, should be required viewing for every American! Ray decided to produce the video only to make an impact on society and help demystify the economics that make our world go round. Take the time to watch it, and you will be glad you did:
www.economicprinciples.org
.

HOW DID WE CALCULATE THE RETURNS?

In order to insure the accuracy and credibility of the results produced by the All Seasons portfolio shared here, a team of analysts tested this portfolio using the annual historic returns of low-cost, broadly diversified index funds where possible. Why is this important to you? By using real fund data as opposed to theoretical data from a constructed index, all the returns listed in this chapter are fully inclusive of annual fund fees and any tracking error present in the underlying funds. This has the benefit of showing you realistic historic returns for the All Seasons portfolio (as opposed to theoretical returns that are sometimes used in back-testing). This insures that the investment holdings and numbers used in back-testing this portfolio were and are accessible to the everyday man on the street and not only available to multibillion-dollar Wall Street institutions. Where they were unable to use actual index fund data because the funds didn’t exist at that time, they used broadly diversified index data for each asset class and adjusted the returns for fund fees. Note that they used annual rebalancing in the calculations and assumed that the investments were held in a tax-free account with no transaction costs. Finally, I would like to thank Cliff Schoeman, Simon Roy, and the entire Jemstep team for their in-depth analysis and coordination with Ajay Gupta at Stronghold Wealth Management in this effort. (Past performance does not guarantee future results.)

13
. This assumes the portfolio was rebalanced annually. Past performance does not guarantee future results. Instead, as I mentioned prior, I am providing you the historical data here to discuss and illustrate the underlying principles.

14
. Source: Richard Bernstein Advisors LLC, Bloomberg, MSCI, Standard & Poor’s, Russell, HFRI, BofA Merrill Lynch, Dalbar, FHFA, FRB, FTSE. Total Returns in USD.

15
. I had the privilege to interview Peter Lynch on his core investing principles while he was on his great winning streak, when he spoke at my Wealth Mastery program in the early 1990s.

CHAPTER 5.3

FREEDOM: CREATING YOUR LIFETIME INCOME PLAN

Lifetime Income Stream Key to Retirement Happiness

—
TIME,
July 30, 2012

I have enough money to retire comfortably for the rest of my life. Problem is, I have to die next week.

—ANONYMOUS

In 1952 Edmund Hillary led the first expedition to successfully climb Mount Everest, a feat once thought to be impossible. The Queen of England promptly knighted him, making him “Sir” Edmund Hillary for his amazing trek.

Despite his accomplishment, many people believe Sir Edmund Hillary may not have been the first person to reach the peak of Everest. In fact, it is widely believed that George Mallory may have been the first person to reach the peak, nearly 30 years prior!

So, if George Mallory reached the peak of Mount Everest in 1924, why did Edmund Hillary receive all the fame—including being knighted by the Queen?

Because Edmund Hillary didn’t just make it to the peak, he also successfully made it
back down
the mountain. George Mallory was not so lucky. Like the vast majority of those who have died on Everest, it was coming down that proved fatal.

INVESTING FOR WHAT, EXACTLY?

I often ask people, “What are you investing for?”

The responses are wide and diverse:

“Returns.”

“Growth.”

“Assets.”

“Freedom.”

“Fun.”

Rarely do I hear the answer that matters most:
Income!!!!!

We all need an income that we can count on. Consistent cash flow that shows up in our account every single month, like clockwork.
Can you imagine never worrying again about how you will pay your bills or whether your money will run out?
Or having the joy and freedom of traveling without a care in the world? Not having to worry about opening your monthly statements and praying the market holds up? Having the peace of mind to give generously to your church or favorite charity and not wonder if there will be more where that came from? We all know intuitively:
income is freedom!

Shout it from the hilltops like Mel Gibson in the movie
Braveheart
: “Income is freedom!!!”

And
lack
of income is stress. Lack of income is struggle. Lack of income is not an acceptable outcome for you and your family. Make this your declaration.

Dr. Jeffrey Brown, retirement expert and advisor to the White House, said it best in a recent
Forbes
article: “[I]ncome is the outcome that matters most for retirement security.”

The wealthy know that their assets (stocks, bonds, gold, and so on) will always fluctuate in value. But you can’t “spend” assets. You can only spend cash. The year 2008 was a time when there were lots of people with assets (real estate, in particular) that were plummeting in price, and they couldn’t sell. They were asset “rich” and cash “poor.” This equation often leads to bankruptcy.
Always remember that income is the outcome.

By the end of this section, you will have the certainty and the tools you need to lock down exactly the income you desire. This is what I call
“income insurance.” A guaranteed way to know for certain that you will have a paycheck for life without having to work for it in the future—to be absolutely certain that you will
never
run out of money.
And guess what? You get to decide when you want your income checks to begin.

There are many ways to skin the proverbial cat, so we will review a couple of different methods for getting the income insurance that makes sense for you.

One of the more exciting structures for locking down income has other powerful benefits as well.
It is the
only
financial vehicle on the planet that can give you the following:

• 
100% guarantee on your deposits.
¹⁶
(You can’t lose your money, and you keep total control.)

• 
Upside without the downside: your account value growth will be tied to the market, so if the market goes up, you get to participate in the gains. But if the market goes down, you
don’t lose
a dime.

• 
Tax deferral on your growth.
(Remember the dollar-doubling example? Tax efficiency was the difference between having $28,466 or more than $1 million!)

• 
A guaranteed lifetime income stream where
you
have control and get to decide when to turn it on.

• 
Get this: the income payments can be made
tax-free
if structured correctly.

• 
No annual management fees.

You get all of these benefits by using a modern version of a 2000-year-old financial tool! How is this possible? I am sure it sounds too good to be true, but stick with me. It’s not! I use this approach, and I am excited to share the details with you.

As we have highlighted throughout the book, the financial future that you envision is very much like climbing Mount Everest. You will work for
decades to accumulate your critical mass (climbing to the top), but that’s only half the story.
Achieving critical mass without having a plan and strategy for how to turn it into income that will last the rest of your lifetime will leave you like George Mallory: dead on the back side of a mountain.

A NEW AGE

We are, without a doubt, in uncharted waters. In the past 30 years, the concept of retirement has transformed radically. Heck, even as recently as the late ’80s, over 62% of workers had a pension plan. Remember those? On your last day of work, you got a gold watch and the first of your guaranteed lifetime income checks. Today, unless you work for the government, a pension is a relic; a financial dinosaur. Now, for better or worse, you are captain of your own ship. You are ultimately responsible for whether or not your money will last. That’s quite a burden to bear. Throw in market volatility, excessive fees, inflation, and medical “surprises,” and you quickly start to understand why so many are facing a massive retirement crisis. Many people, including your neighbors and colleagues, are going to face the real likelihood of outliving their money. Especially with the prospect of living longer than ever before.

IS 80 THE NEW 50?

A long, fruitful retirement is a concept that’s only a few generations old. If you recall from our discussion earlier, when President Franklin Roosevelt created Social Security in 1935, the average life expectancy was just 62. And the payments wouldn’t kick in until age 65, so only a small percentage would actually receive Social Security benefits to begin with.

At the time, the Social Security system made financial sense because there were 40 workers (contributors) for every retiree collecting benefits. That means there were 40 people pulling the wagon, with only 1 sitting in the back. By 2010, the ratio had dropped to only 2.9 wagon pullers for every retiree. The math doesn’t pencil out, but since when has that stopped Washington?