Sooner or later, we all sit down to a banquet of consequences. -Robert Louis Stevenson
We’re talking all things personal finance 101 this week, and this quote seems to fit.
For those just joining us, what we consider modern financial planning has its roots in the Employee Retirement Income Security Act (ERISA). That act passed in 1974.
This legislation created 401(k)s and Individual Retirement Accounts (IRA). And it laid out the framework for what we consider “retirement” planning today.
As we discussed yesterday, ERISA pushed millions of people into the financial markets for the first time. Then an entire industry grew up around the concept of “retirement”. This inadvertently set the stage for new challenges… the challenges we face today.
These challenges went unnoticed at first. But now that the Age of Paper Wealth has sunsetted, we’re entering an entirely new economic climate. Thus, we must ask – what are the unintended ripples of this seminal act?
ERISA was constructed as though the Age of Paper Wealth would last forever. That age saw plummeting interest rates and rising stock prices. This gave rise to the belief that perpetual growth was inevitable.
The financial markets today still operate under that assumption. If you’re not growing, you’re dying. That’s still a popular statement in the realm of investment research.
This leaves us with a modern quagmire.
Interest rates are now on the rise. And we’re seeing volatility around both the stock market and consumer price inflation. Everything is whipsawing back and forth because investors don’t know yet what to make of this new climate.
Plus, rising rates are putting a major strain on some very important budgets. Corporate bankruptcies are on the rise. And deeply indebted national governments are facing rapidly increasing debt service costs. Thatsets the stage for potential tax hikes in the near future.
With all these moving parts at work, the financial strategies once deemed foolproof now appear on shaky ground. And that’s not news. Many people already understand this. They feel it.
But ERISA and the retirement industry perpetuated the idea that there was but one approach to financial planning. They trained people to pour their savings in the financial markets for “growth”. And their idea of diversification is simply to buy stocks and funds across different industries.
Simply put, this approach won’t work well in the current climate. Yet, the retirement industry won’t let it go.
I don’t see this as malice. It’s understandable. It’s just their incentive.
The retirement industry gained tens of millions of captive customers over the last forty years. These customers collectively poured trillions of dollars into qualified retirement plans… and most of those plans generate billions in fees for the industry.
They need those billions to stay in business. That’s why they can’t let “personal finance 101” change. Their business model depends on the status-quo.
But the status-quo will leave a lot of people in a very difficult spot going forward. We’ll talk about some solutions tomorrow…
-Joe Withrow
P.S. The days of perpetual growth are over. At some point that will become evident even to the retirement industry. And that means the current model is broken.
Are you ready to create financial independence outside the broken system? If you are, it’s time to go Beyond the Nest Egg.