Do you remember hearing about a guy by the name of Bernard Madoff a few years ago? He was the one who “ripped off a bunch of rich people.” For many of us, that’s about all the relevance he had to us. Bad guy. Rich people. Not us. Who cares?
Well, there’s actually a lesson or two for us in the Bernie Madoff story.
Last week I wrote about how we’re living so long these days that we all face a special challenge at the end of our lives: how to have our money outlast our days.
I gave you an easy formula to figure out what it would cost for you to live the lifestyle you envision for those oh-so-many years. The answer may have been a shock.
What we didn’t talk about is how you could get there. (And, granted, some of you said you never would. You decided maybe it was easier to throw your arms up in the air and do nothing.)
Before you do that, let me tell you what got me on the right path, after blowing it royally with my finances at 53. As I’ve shared before, I was building my supposedly successful consulting business on more and more debt when the planes hit the towers on 9-11. When the economy faltered for a bit, it was enough to throw some of my clients into bankruptcy and pull me down with them.
As I took a serious look, for the first time, at my long-term future … and did the calculation I gave you last week … I decided I had to find some secret, some trick, to make the challenge less frightening. And I did.
It’s called “simplifying your life.”
I down-scaled pretty dramatically. I, who had hung out in 5-star Paris hotels for decades, moved into a miniscule home in a less chi-chi neighborhood. I proved I could live very comfortably (and safely) on much less. So when I multiplied that annual cost of living to calculate my targeted “retirement nut,” it was much more attainable. I had removed the “I could never do that” factor. It was doable.
Was that where I ultimately hoped to end up? Not at all. But by simplifying I was able to get to a point very quickly where I knew I’d be okay for the rest of my life. I reached financial independence, where I could live on what I was generating without having to work. And the relief that came with that recognition is beyond words.
I didn’t realize we all carry a stressor in our brains that creates mischief with our peace of mind once we have that first “retirement” conversation with ourselves.
And that conversation goes like this: “I’m how old now? I have how many years until I stop working? How in the heck am I ever going to get from where I am today to where I can sleep soundly at night without worrying about pushing a damn shopping cart through the streets?”
So how do we accumulate that retirement nut?
Well, we have to go at it from a bunch of different fronts. And how old you are today will determine just how aggressive you have to get about growing that “nut” … without going so radical that you aren’t enjoying your life today.
Money can come from businesses (or jobs) we work in. It can come from businesses or opportunities we invest in that require very little labor or input on our part. It can come as the interest and dividends we earn on money we’ve saved and invested. The small first deposit in a savings account is the first flake in a snowball that can grow faster than we imagine.
Lastly, just as good policy, the safest thing is to put your money in different types of assets and investments, just in case an economic event hits one category worse than another. (Think of how many people had all their retirement locked up in the equity of their homes.) That’s what we call diversification.
So what does Bernie Madoff have to do with any of this?
We heard about all the people who had taken their savings and thrown them at Madoff so he’d invest them in his fund. Part of their “catch-up plan” for retirement was to grow their cash as fast as possible, and Madoff was offering steady returns of around 12-13% per year. Much higher than other funds. They had found the goose that laid golden eggs and asked no questions. They went against common wisdom and, year after year, pulled money from other investments to put into this “magical money-making machine.”
Say you had $750,000 saved up (including pulling the equity out of your house) and you placed it with Bernie. At 12% interest, that would be generating $90,000 a year (or $76,500 after the standard U.S. 15% tax on dividends and capital gains). Feels pretty safe, doesn’t it? Over $75,000 a year for life? (Plus any Social Security.)
Well, then imagine how you’d feel when you woke up that day and heard on the morning news that Bernie Madoff was a scoundrel and the whole thing was a $50 billion Ponzi scheme. Your money was gone.
Two lessons: (1) If it sounds too good to be true, it is. (2) Never put all of your (retirement) eggs in one basket.
Let me know in the comment section below if this article has triggered any ideas of what you might do differently when it comes to preparing for retirement.
Bio: Sharon O’Day lost everything at age 53: her home, her business, everything. But how could that be? She’s an expert in global finance and marketing with an MBA from the Wharton School. She has worked with governments, corporations, and individuals … yes, she was the secret “weapon,” if you will, behind many individuals in high places. Yet she did! Since then, with her finances completely turned around, Sharon has gone on to interview countless women. She’s done extensive research to understand how that could have happened, especially with her strong knowledge of numbers and finance.
The surprising answers are shared in her posts, articles and an upcoming book. Today her mission is to show as many women as possible how to become financially free for the long term, through her coaching programs. She has developed a step-by-step plan to get past all the obstacles that keep women broke and scared … and from reaching the financial peace of mind they so deserve … if they’re willing to do what it takes!