By: Dividend Sensei
Yesterday I explained how the fear of market crashes or corrections decimating one’s retirement portfolio is misguided. In fact simple math, meaning the inability to build up a sufficient nest egg should be everyone’s primary concern. So how can one ensure enough financial resources to live comfortably during retirement? Well if you expect some magic bullet answer or fool proof investing formula then you’re going to be sadly disappointed.
The first step, in fact the cornerstone to financial security is simply to have enough resources to invest at all. That’s because the “secret” to financial independence (IE becoming rich) is to think like a rich person. That means adopting an entrepreneurial mindset. No I don’t mean go out and start a business, though being your own boss certainly has its advantages, both financial and otherwise.
Rather I mean taking a long-term view of money, and focusing not necessarily maximizing active income (which we often spend too freely) but passive income. In other words, you need to build a portfolio that is a income (and wealth) compounding machine. No matter how great (or secure) you think your job is, layoffs can always happen. Similarly, if you do run your own business well the next recession could put you out of business. Thus any income you earn, salaried or otherwise, is actually variable, and can’t be depended on.
Passive income, like dividends from a quality, diversified and low risk portfolio, are far more stable and dependable. They represent money that you don’t have to actively earn. Rather they are your share of exponentially growing corporate profits, generated from all over the country, or even the world. They come from your money working for you, 24/7/365. In shares representing ownership in companies who are actively managed, hopefully for the long-term maximizing of your profits, and ultimately, dividends.
The reason rich people get rich is that they have a different mindset than most people. They focus not so much on maximizing consumption in the short-term, but steadily accruing income producing assets. In other words, don’t spend all your active (and volatile) income today, but put aside some to buy quality assets that will work for you, in perpetuity, and also increase in value over time.
In his illuminating book, Top Ten Distinctions Between Millionaires and The Middle Class, author Keith Cameron Smith outlines what years of studying millionaires (most of who are self made). He explains “Middle-class people want instant gratification. I was like that for many years. Whatever I wanted, I charged to my credit card or put a little bit down and made payments on the balance. Now I wait for the things I want because my goal is more freedom, not comfort.”
Remember that consumption is a short-term benefit. I’m not saying we all need to, or should, live like monks and agonize over every penny. We all have truly non discretionary spending needs, such as mortgage payments, and grocery and utility bills. However, if you adopt the entrepreneurial mindset, that your entire life is a business, with the retirement portfolio being the passive income generating engine at its heart, then you are well on your way to achieving the true American dream. No not a penthouse in Miami Beach with a Bentley in the garage. Rather I’m talking about the ability to live life on your own terms. To actually be the boss, not necessarily of your workplace, but your entire life.
Or to put another way, think like the CEO of “insert your name” Inc, a cash flow focused business whose goal it is to minimize your expenses, and maximize your free cash flow (discretionary income). That means economize everything that makes sense. Join Costco and buy your non-perishables in bulk to save on grocery bills. Turn off lights when no one is in the room to save on energy bills. Cut the cord if Netflix or Hulu can provide you your entertainment bills cheaper than cable. More importantly, make sensible choices for big ticket items like a car. In fact, as I explained in this article, choosing the most practical, reliable, but most frugal automotive choice can by itself result in a portfolio large enough to comfortably retire on!
That’s because when you make smart choices, to save as much as is comfortably sustainable (ie as cheap as is practical in the long-term while being happy and meeting your actual needs), then you actually have the savings necessary to actually invest for the future. If you can’t achieve this first step, then no amount of investment advice, seminars, books, or systems will make a difference.
But of course, becoming financially independent (and retiring as early and comfortably as possible) is not easy. It’s a long process that requires several key factors. In my next article I’ll explain the next cornerstone of prosperous retirement planning, specifically why the biggest risk is actually not taking enough risks.