Thursday, January 22, 2009

Failed Financial Beliefs and Time Tested Truths: Post 2

This is the second of a four post series that reviews retirement planning beliefs that have been shattered by a failing economy. Each point will also revisit a time-tested financial planning truth we can expect to be championed again.

Failed Belief No. 2: Smart money management can achieve consistently excellent returns.
The grand financial institution, Bernard L. Madoff Investment Securities LLC, rose to prominence because it was able to consistently deliver above-average returns to its customers, no matter what the economic environment. Its founder and CEO was a very respected figure on Wall Street. Over the last several months we’ve learned that it was all a Ponzi scheme that lost perhaps $50 billion of investor funds.

And note this: The Madoff firm had 147 employees and 54 registered representatives. Didn’t any of them know that the firm’s financial statements were a complete fraud?

Time-Tested Truth No. 2: Always spend less than you make.
Investing regularly in your 401(k) is good retirement planning, but it is even better to consistently put money away year after year not only in your 401(k), but also in your general savings or retirement products. No matter how big an income you produce, if you outspend it, you will retire a pauper. How many times have we seen a once-famous athlete or entertainer filing bankruptcy?

Following this financial truth may mean you drive an older, less impressive car than your neighbor. It may mean that you eat out less. It may mean you live in a more modest home than your co-workers. But it will certainly increase your financial security and ability to retire comfortably.

Check out Post 1 in the series, What to Do When the Financial Experts Don’t Know Anything, which discusses financial risk and guarantees.

Our next post will focus on the retirement planning ideas we hold about our 401k savings and paying off debt.

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