“It’s all about the balance, not the rate of return, actually, it’s all about the income, not the account balance.”
Many people in this world focus on how much rate of return their money is earning.
Now, in a previous article, I showed that average rate of return (mean), is a useless deceptive number used in the industry to trick and fool people to put money into risking investments with brokerage firms. Also, because we’re being fooled our entire life, we don’t put enough money away into our life savings. Then, we lose the opportunity to have the retirement we deserve. The cost people pay for not understanding Real Rate of Return is enormous.
Most people focus on Rate of Return;
The Actual, which is very rare;
or Average, which is very popular.
People get excited if they’re making 10% or 15%.
But this is so much more important; how much money you actually have.
How much money are you earning that 10% on?
For instance, earning 10% on $100,000 is better than earning 10% or 11% on $70,000. So the size of your account is way more important. You’re actually growing that account. It’s way more important to grow the account than to show people you earned some type of percentage.
So here’s basic retirement planning. It says,
- What do you need for income when you retire?
- When do you want to retire?
- What do you want your income to be like?
- How much are your investments going to be earning during retirement?
We work backwards and say, “Okay, what does the size of your account need to be if it earns so much interest to give you that income?”
The size of your account when you reach retirement is what matters,
Not what interest rate you averaged along the way.
Now, why is this important? Because the popular brokerage firms, financial planning software, and popular authors are using a growth rate that doesn’t actually add to your balance.
Look at this example –
33% of $150,000 is $50,000 – you end with $100,000. You have exactly what you started with. But most people in the financial services, are going to tell you, you’re averaging 8.5% per year, which sounds amazing. You could make 8.5% per year. You’d never need any other investments besides those, it seems like you’re doing great!
The problem is your account has not grown. Next year, let’s say the market goes up 20%. You say, “Oh, my goodness. I get 20%. That’s amazing.”, but you’re going up 20% on an account that hasn’t grown. So it’s on a smaller number.
The only thing that really matters is how much money is being put into your account. How much more is there than there was last year? What’s the real growth? Having said that, it’s really not about the balance, it’s about the income that the balance kicks off of. Remember, I started by saying retirement planning says
“How much income do you want and what chunk of money will take off that income?”
Well, retirement is 20 to 30 years of unemployment. You are no longer working or running a business, and when you stop working or running a business, what goes away? Income goes away. Your paycheck goes away. You no longer get paid regularly. Something has to pay you regularly.
Let’s say you need $3,000 a month, what’s better?
An account that all you have to do is give them $600,000 and you’ll get $3,000 a month for the rest of your life and when you die, your family gets the rest?
Or an account worth $800,000 where if you take out $3,000 a month, you have a huge chance of running out of money before you die?
Well, if it’s all about income, the $600,000-account is better.
Here are the things you need to notice:
- Keeping all of your money in a diversified portfolio of stocks, bonds, and mutual funds with a name-brand company doesn’t accomplish either one of these.
- You have no real growth. They’re using a different number and you’re not guaranteed income.
- You’re just crossing your fingers, rolling the dice and hoping things will work out.
But if you do things differently and you have real growth, always making money in your account, you’re actually having real money added to your account every year, not taking any losses, and you can have guaranteed income for life no matter what the size of your account is today or in the future, whatever that income is, will always come in like clockwork, then any money left over goes to your family when you pass away.