FinancialDominance.com

Ok, so that was my poor attempt at a rhyming title to fit this post. Please keep reading…

It looks like some rap legends are taking a little time away from making their millions to enlighten the average person on how to take care of their finances. The Hip-Hop Action Network, led by the co-founder of the hip-hop label Def Jam, discussed money management at North Carolina A&T University. Topics included everything from debt management to credit scores.

To be honest, I’m not sure how effective these guys will be. From the audience’s perspective, it’s tough to listen to a guy talk about saving money while wearing a $1 million diamond necklace around his neck. In fact, one guy even admitted that he buys “the hottest cars that come out.” From the presenters’ perspective, what makes them qualified to lecture about personal finance? Have they simply been fed a few facts about saving, investing, and debt to be able to speak using a few talking points? The type of investing the rich do is certainly different than the investing the “average person” does.

I suppose the optimist in me wants to say that, as long as he can reach ONE person and save them from a life of debt, then his efforts are commendable. But then again, the pessimist in me remembers when his house with the golden toilet was on Cribs.

Source: CNN Money

Photo: Salon.com

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I still haven’t fully recovered from Labor Day, so this week’s highlights will be brief.

The M-Network has added a couple of more members as you can see by the M-Network blogroll to the right. I’d like to highlight a couple of great posts from our two newest members - Debt Free Revolution and Single Guy Money:

• Debt Free Revolution thinks that paying bills is fun. I admire their enthusiasm, but I’m nowhere close to thinking that paying bills is a good time.
• Single Guy Money discusses a sly coworker who hides money from her husband. I think sneaking behind your spouse’s back like this is reprehensible and calls into question the character of the person that is doing it. Also see Being Frugal’s post which asks her readers if they keep secrets from their spouse.

This week I submitted my post about Giving Your Graduate the Gift of Financial Education to the Carnival of Financial Planning.

The most popular post on Financial Dominance this week was What is the 4% Rule.

Have a great weekend, everyone!

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I recently read a great post at Debt Free Revolution called Dave Ramsey: Con Man, Cult Leader, or Other? In the post, Ana ponders whether Dave Ramsey should be considered a con man since he charges money for his books, seminars, and other products. This got me to thinking about various other gurus and why some are regarded as heroes and others are regarded as villains.

Right off the bat I began thinking about the often controversial Robert Kiyosaki, author of the Rich Dad series of books. In many circles, especially in multilevel marketing organizations, he is very highly regarded as his message is that anybody can be rich if only they have the right mindset. However, for many others, he is regarded as a con artist that preys on the naiveness of people just looking to get ahead. So what causes this extreme divide between people who love Robert Kiyosaki and those that despise him? And why does Dave Ramsey seem to have nearly universal acceptance? (I don’t mean that everyone agrees with him, but it seems that even those that don’t agree with him still respect him)

I’ve narrowed it down to a few things:

The devil is in the details…

One of my biggest complaints about Robert Kiyosaki is that his books are typically very vague and provide a cursory overview of how to get rich. There is rarely enough value in the books to justify the price tag. When asked questions about his philosophies, his answers are very trite and simplistic. That being said, there is one underlying philosophy he and I share: instead of overloading on depreciating assets such as expensive TVs, stereos, etc, throw that money into appreciating assets such as stocks, real estate, or other investment vehicles.

Dave Ramsey, on the other hand, often provides a step-by-step guide to implementing his methodology. If you call into his radio show, he will dissect your situation in detail and give you a game plan going forward. Although I don’t always agree with his opinions on debt, his teachings are by no means dangerous and often err on the side of conservatism.

Man those audiobooks are expensive!

Robert Kiyosaki is the king of “upselling”. If you read his books, you will find lists of not only his other books but also his line of money games. If you buy his money games, you will see advertisements for his “beginner” seminars. If you go to his “beginner” seminars, you will hear advertisements for his “advanced” seminars. The cycle just doesn’t end. I recently received two free tickets to a Rich Dad event near where I live. I shuddered at the thought of the hardcore selling that would be present at the event and threw the tickets in the trash.

Dave Ramsey, though, is nearly the opposite. As mentioned in Ana’s post at Debt Free Revolution:

Dave often gives away his books, FPU memberships, and tickets to his live events to callers who need them. Others he tells to check his books out from their local library

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If you have spent a lot of time reading about retirement planning or discussing it with your financial advisor, you have probably heard of the 4% rule. This rule causes a lot of confusion when I discuss it with family and friends. The rule itself is not complicated, but it seems that everybody has their own version of what it means and its use. I’ll try to use this post to clarify the rule and hopefully give a better understanding of its application in retirement planning.

What exactly is the 4% rule?

The 4% rule is a rule of thumb that says you should withdraw 4% of your nest egg in your first year of retirement and increase it annually for inflation. That’s it.

Where did it come from?

The 4% number is a result of a bunch of very smart people modeling how long a nest egg would last given certain withdrawal rates. From my understanding, they used a type of Monte Carlo simulation. They determined that, given a 4% initial withdrawal rate increased annually for inflation, a nest egg could last around 30 years with a decent probability.

How can it be applied to planning my retirement?

If you are horrible at Microsoft Excel, don’t have a financial planner, or just want to “wing it”, then the 4% rule may be for you. I tend to use the 4% rule backwards. Instead of figuring what I can withdraw from a sum of money, I figure what sum of money I need to maintain a withdrawal that suits me. For instance, if I want $50,000 in my first year of retirement, I will need $50,000 x (100%/4%) or $50,000 x 25 = $1,250,000. Remember, the $50,000 is in future dollars, so it will not buy the same amount that $50,000 does today.

Other thoughts

The 4% rule should not be used as the end of your retirement planning process. It does not take into account your asset allocation at retirement time. In general, the more of your portfolio that is allocated to stocks at portfolio, the better the odds that your money will outlive you. However, as is the nature of stocks, your portfolio will be extremely volatile which could send you back to work after a couple of bad years.

Another way to look at the 4% rule is as a middle point between risk tolerances. If you don’t have a high life expectancy, you can certainly pull out more than 4% in order to enjoy the life you have left. This is also the case if you have other types of income to support you such as a pension or annuity. If, however, you think you will be around for a while, you may opt for a lesser withdrawal.

When all is said and done, you still have to accumulate that nest egg. Make sure to define your investment goals, start saving, and continually monitor your asset allocation. The 4% rule gives you a target to reach - now go hit it!

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