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Dear Daily Crux reader, This week we're back with another "must read" interview with our friend Mark Ford. Over the last 30 years, Mark has built a reputation as one of the country's foremost experts on wealth-building. But unlike most "experts" in the field, Mark actually walks the walk. He's a serial entrepreneur and New York Times best-selling author who has built hundreds of businesses… and a huge personal fortune. A born teacher, Mark now spends his time with family, mentoring entrepreneurs, and managing his investments. He also shares his unconventional wealth ideas to hundreds of thousands of people through his books and financial newsletters. For our money, no one in America delivers straight, no B.S. financial advice as well as Mark Ford… And this week's interview is no exception. Below, Mark explains the biggest mistake most retirees make… and the simple ways you can make sure you don't ever make it yourself. Good investing, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com |
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Daily Crux: Mark, you're super rich… Mark Ford: Let's just say that I am rich enough to know something about wealth. Crux: Fair enough. We also know that you've retired several times… and you've developed some ideas on retirement that a lot of people would call radical. Mark: I joke that I am an expert on retirement because I tried it three times. I was never truly successful. Crux: How so? Mark: I discovered that the conventional dream of retirement – however wonderful as an imagined goal – was not very satisfying as a reality. I retired first when I was 39 and went back into the working world about 18 months later. I retired again when I was 50 – and went back with an improved idea about retirement, but that wasn't perfect either. When I was 60, I "retired" for the third time. I think I've got most of the bugs worked out. ----------Advertisement--------- Obama's big new scandal? One of America's most widely read financial journalists says a huge new scandal is working its way through the Obama administration. He says this scandal could ruin Obama's entire presidency, and will bring about the most dramatic changes to American life in more than 50 years. See the full analysis, free of charge,here… --------------------------------- Crux: What sort of bugs? Mark: Well, the biggest bug is the mistake I discovered the first time I retired. I had a net worth of about $10 million at the time. I thought that was more than enough to live the rest of my years in luxurious comfort. Crux: What happened? Mark: For one thing, $10 million in muni bonds at the time was giving me a return of about $600,000. And even though that was tax-free, my spending habits had already exceeded that. My lifestyle burn rate, as I like to call it, was about $700,000 at the time. I discovered I couldn't live off the interest on that very substantial asset base. Crux: What did you do? Mark: First, I tried to live on a budget. I called in my personal assistant and had her prepare a list of all my living expenses. Then I went through them with her one by one, trying to cut my expenses in half. Crux: And? Mark: I couldn't do it. I had to face the fact that in creating wealth I had turned myself into a wealth-consuming addict. Crux: So what did you do then? Mark: I went back to work. I took a job as a consultant. Crux: What did that teach you? Mark: That the biggest mistake retired people make is giving up all their active income. When I say active income, I mean the money you make through your labor or through a business you own. Passive income refers to the income you get from Social Security, a pension, or from a retirement account. You can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investments. Crux: Why is giving up an active income so harmful? Mark: When you give up your active income, two bad things happen… First, your connection to your active income is cut off. With every month that passes, it becomes more difficult to get it back. Second, your ability to make smart investment decisions drops because of your dependence on passive income. Retirement is a wonderful idea: put a portion of your income into an investment account for 40 years and then withdraw from it for the rest of your life. Once you retire, you won't have to work anymore. Instead, you will fill your days with fun activities: traveling, golfing, going to the movies, and visiting the kids and grandkids. But consider this: A relatively modest retirement lifestyle for two, like the one I described above, would cost about $75,000 a year, or $100,000 before taxes. How big of a retirement account do you need to fund that? Crux: Well, if your retirement account were in traditional investments… Mark: You'd need about $2 million. Crux: That's a lot more than most folks have saved. Mark: Exactly. Crux: What about Social Security and pension plans? Mark: Putting aside the very real question of whether such institutions are viable and would pay out as promised when you retire, let's assume that you and your spouse could count on $25,000 a year from Social Security and another $25,000 from a pension plan (two big "ifs"). That's $50,000 of the $100,000 per year in our earlier example. Now say that savings accounts only pay 1%. To earn the $50,000 balance in the safest way possible (from a savings account), you'd need about $5 million in savings. If you were willing to take a bit more risk and invest in tax-free municipal bonds (this is the safety level I like), you'd need about $1.25 million, assuming you could get 4% interest. But most middle-class American couples my age are trying to retire with an account in the $250,000 to $300,000 range. And that's where the trouble begins. To achieve an annual return of $50,000 on $300,000, you'd need to make 17% a year. Getting 17% consistently over, say, 20 years, may not be impossible, but it's very risky – too risky for my tastes. And that's why I so strongly recommend that everyone should maintain an active income. As I said before, when I retired for the first time at 39, I realized not only that I was a spending addict, but that to make the kind of returns I needed I had to take more financial risk. But I didn't want to take more financial risk, because I knew it would make me sleep poorly. Golfing in the daytime and worrying about money at night is not my idea of an ideal retirement. Crux: So you got a job as a consultant… Mark: Yes. I went back to a business that I understood from previous experience – I was able to reconnect with colleagues, relearn old skills, and start earning active income again. Crux: But is that feasible for everyone? Mark: At some level, yes. Take my brother in law, for example. He's a plumber. He retired and went back to work as a plumbing inspector. That gave him a steady income again. Crux: So after retiring three times, what's your advice to our readers? Mark: Don't give up that second income. You can ratchet back, take on less work, switch jobs, go part-time, whatever. But don't give it up entirely. Crux: And for those that have already done so? Mark: Get back into it. Everyone has valuable skills. There is always an opportunity if you are willing to work hard to find it. Crux: How did it feel to go back to work? Was it depressing? Mark: Not at all. In fact, the moment I started earning money again, I started to feel better. Retirement isn't supposed to be filled with money worries. And yet, that is exactly what you will get if you try to get above-par returns on your investments. Millions of Americans my age are quitting their jobs and selling their businesses. They are reading financial magazines and subscribing to newsletters. They are hoping to find a stock selection system that will give them the 30% and 40% returns they need. But they will soon find out that such systems don't exist. They will have good months and bad years, and they will compensate for those bad years by taking on more risk. The situation will go from bad to worse. Crux: That sounds ominous. Mark: But it doesn't have to be that way. Let's go back to the example of the couple with the $300,000 retirement fund and the $100,000-a-year retirement dream. To generate the $50,000 they need, they would have to earn about 17% a year in stocks. As I said, that is highly improbable. But if they each earned only $15,000 in active income, they would need a return of only about 7% on their retirement account, which is doable. There are many ways for a retired person to earn a part-time, active income. You could do some consulting, start your own Internet business, or earn money doing any sort of purposeful work. I am not saying that you should give up on the idea of retirement. On the contrary, I'm saying that retirement might be more possible than you think. But you have to give up conventional retirement thinking. You must replace the old, defective idea that retirement means living off passive income only. Paint a new mental picture of what retirement can be: a life free from financial worry that includes lots of travel, fun, and leisure, funded in part by active income from doing some sort of meaningful work. The obvious benefit of including an active income in your retirement planning is that you will be able to generate more money when you need to. But the other benefit – the one no one talks about – is that it will allow you to make wiser investment decisions because you won't be a slave to your investments. Crux: That's an interesting – and useful – way to view retirement. Thanks, Mark. Mark: You're welcome. Editor's Note: If you enjoyed this interview and would like to learn more about Mark Ford and his advisory, The Palm Beach Letter, click here. Mark runs this letter with Tom Dyson, a former protégé of Porter Stansberry. Tom has spent the last three months investigating the richest zip code in America. What he has uncovered about how the wealthy residents live in retirement (and generate income) may surprise you. |
Sunday, 14 April 2013
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