63% of Americans Have Stopped Making Pension Contributions!

Given the difficult financial times so many are facing, I was not surprised to see some shocking statistics like the one above in an article titled "Four Ways to Protect Your Retirement From the Ongoing Financial Crisis at:
http://www.moneymorning.com/2008/10/29/retirement-assets/ .  But it really got me thinking about what so many of us have not done about planning for the future.

There is really no reason to be surprised by this statistic, considering that most Americans have lived well beyond their means for years (peaking at 113% of income in 2005) and most stopped saving for the future in 1985.  For more than 23 years we have lived primarily for the moment, expecting that the future would take care of itself.  Why not when our political leaders and consumer companies keep telling us that it is OK to spend?

Almost all of us have a friend or a relative with a friend or acquaintance whose working life consisted of working for the post office or being a fireman or carpenter or perhaps a clerk in a big corporation for their entire career.

This is the friend (or couple) who started buying Gold Coins systematically in the '70's and was buying small houses in Northern California or out in the desert. or out in the midwest somewhere when they were still $30,000 or less. Perhaps the carpenter or fireman bought burned out houses and did the rehabbing themselves and then rented them out (creating sweat equity weekend after weekend while peers were gambling in Vegas), taking the positive cash flow and buying other properties or paying of the mortgage early.

This is the friend that people laughed at because they drove an old car and wore less chic clothes, lived in a modest house in a less desirable neighborhood with modest furnishings and stayed in the same job with the same company or the government for years, even if the position was not exciting or glamorous, even if they detested the people they worked with or the job they were doing.  This friend did not throw lavish catered parties on credit or hiring a  petting zoo for a childs birthday party to impress the neighbors.

In the blink of an eye, 20 or 30 years have passed and all of a sudden, this boring friend owns 2, 3, 5 or more paid for income properties (including the same modest home they always lived in) and has a full pension, with cost of living adjustments and health care for life, because they stayed the course).

This friend is the topic of discussion among people who are still working to make payments on a home that looks good, in a great area with 25 years of payments remaining on a mortgage held by a 50 year old person who wanted to retire at 62!  The house is upside down in value and still dropping.  The "owner" has not made meaningful contributions to a pension or done any systematic investing or created any sweat equity, but has had a new leased car every 2 years and some swell vacations too, on credit.  Their closets are jammed with stuff and they have a self storage unit, full of more stuff, that costs $135 a month to maintain, or more than $16,000, plus lost interest over 10 years). They also have 250 channels or more on their premium cable service for $160.00 per month.

Now "all of a sudden" the boring friend has retired on full pay, plus the income from their rentals and Social Security and has the time and the money to do as they please and is not at all worried about the stock market gyrations because they truly own "free and clear" hard assets that are generating passive income, either personally or in Self Directed Retirement Plans.  So who is laughing now?

Of course we all know exceptional people who made their fortune by building their own business, but they are the exception and a small percentage of the 37% of us who are still making pension contributions.  We can learn much from these successful people, but far more from the regular, systematic savers and investors.  We also know people who inherit money or win the lottery too.

Let's face it, when people who have not saved anywhere else but their 401k plan (and only did that because there was company matching of contributions) find themselves upside down on their Home Equity and over limit on their credit cards and out of work due to the recession, the first place they go for money (if their family has none) is to their 401k assets or to assets that have been rolled over into an IRA from a 401k at a previous employer.

It does not matter if there is a penalty or not or if current taxes must be paid.  This money is accessible when all other sources are not.

The problem is that in most cases, funds distributed now from a pension will almost never be replaced and the younger the person is taking the distribution, the more the lost funds will cost over time (due to loss of compounding tax deferred).  The older the person is taking the distribution, the less income they will have from their private pension to supplement Social Security after retirement. It has been said that more than 25% of Baby Boomers will live entirely on Social Security.  This means an income below the current Poverty Level.

My point is this, now is not the time to stop saving for retirement.  In fact, most of us need to buckle down and save even more, even if it means less channels on cable, fewer parties and fewer vacations on credit.

Self Directed investments in Notes secured by real estate or tax liens can compound at rates well above 12% annually with tremendous safety and security.  Careful investments of in real estate can have similar cash flows with potential for appreciation.  In these times, Real Estate investors must look for fundamental value at the right price and this is hard work.  No one is going to do the heavy lifting and all of the footwork to direct you to a high yield investment without taking a fair commission for doing the hard work.  Once the commission is paid, the yield will be reduced to reflect the work that was done.

The more work that you do for yourself in selecting good investments in a Self Directed Plan, the better the yields that you will achieve and investments in correctly priced hard assets will be much safer in a recession or even a depression.

Unfortunately you cannot use sweat equity in an IRA to make improvements to a piece of real property, nor can you use money from your IRA to pay for courses in investing in Real Estate for related investments.  The sweat equity you invest is in good education that you pay for with money that would otherwise go to Cable TV or $300.00 shoes that will be out of style next year.

Next time you look at those $300.00 shoes, think about your friend who is free to do as they please and after many years of planning and saving, has the means to do just that.