Financial independence is the ability to live from the income of your own personal resources. –Jim Rohn
Many years ago I made the decision to pursue financial independence. That is to say, I wanted to create a situation where I was in full control of both my time and my money.
With that goal in mind, I began reading books on personal finance. Personal Finance for Dummies… The Truth About Money… Financial Peace – I read all the popular personal finance books at the time.
What jumped out at me was how uniform each book was in their suggestions. They were all reading from the same script.
I figured that was a good thing at the time. If all these popular books agree, they must be on to something—right?
Well… yes and no. It turns out there was a very specific reason why the top personal finance books each peddled the same advice.
The United States Congress passed legislation in 1974 that would shape the future of personal finance in America for decades to come. That act was the Employee Retirement Income Security Act, otherwise known as “ERISA”.
In the early 1970s, corporate bankruptcy storms blew through America. They left workers without the pensions they’d been promised. Retirement dreams turned to nightmares. This fueled public outrage throughout the country.
ERISA was Congress’s answer. The legislation passed in 1974. Then it was expanded in 1978, 1980, 1982, 1984, and 1986.
ERISA created qualified retirement plans like 401(k)s and individual retirement accounts (IRAs). Then it detailed all kinds of rules, limits, and requirements for these plans.
What’s more, Congress designed the legislation to appease the general public’s desire for security.
ERISA demanded that those at the helm of retirement plans act in the best interests of participants. Congress said the act would provide a shield against mismanagement. And they told workers it would provide them with safeguards.
The legislation also mandated regular, transparent disclosures about retirement plans to participants. The idea was that this would keep employees in the loop. The reality, of course, is that nobody actually reads any of these legal disclosures.
Regardless, its proponents could only regard ERISA as a tremendous success. That single piece of legislation completely reshaped retirement planning in America. And it set the stage for The Age of Paper Wealth.
That’s because the act herded American savings into the financial markets. Employees with no investment experience began funneling their money into funds of various types.
Naturally, Wall Street loved it. The Wall Street firms creating these funds suddenly had millions of new customers. Captive customers, even. And that meant their fees went through the roof.
This institutionalized retirement planning as an industry unto itself. And as with any industry, self-preservation became a prime objective.
This created a ripple effect that has an impact still to this day. More on that tomorrow…
-Joe Withrow
P.S. I know sharp-eyed readers can see where we’re going this week. ERISA paved the way for an institutionalized personal finance industry… but that industry is broken. Today, it exists not to serve customers, but to serve itself.
The Age of Paper Wealth has ended. And that means it’s time to rethink everything we thought we know about finance.
It’s time to go Beyond the Nest Egg.