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Senior Correspondent

Bernie Madoff, the Goose and the Broken Eggs

Financial Freedom

Bernie Madoff, the Goose and the Broken Eggs

Do you remember hearing about a guy by the name of Bernard Madoff a few years ago? He was the one who “ripped off a bunch of rich people.” For many of us, that’s about all the relevance he had to us. Bad guy. Rich people. Not us. Who cares? 

Well, there’s actually a lesson or two for us in the Bernie Madoff story. 

Last week, I wrote about how we’re living so long these days that we all face a special challenge at the end of our lives: how to have our money outlast our days. 

I gave you an easy formula to figure out what it would cost for you to live the lifestyle you envision for those oh-so-many years. The answer may have been a shock. 

What we didn’t talk about is how you could get there. Some of you said you never would. You decided maybe it was easier to throw your arms up in the air and do nothing.

Before you do that, let me tell you what got me on the right path after blowing it royally with my finances at 53. As I’ve shared before, I was building my supposedly successful consulting business on more and more debt when the planes hit the towers on 9/11. When the economy faltered for a bit, it was enough to throw some of my clients into bankruptcy and pull me down with them.

As I took a serious look (for the first time) at my long term future using the calculation I gave you last week, I decided I had to find some secret — some trick — to make the challenge less frightening. And I did.

It’s called “simplifying your life.”

I downscaled pretty dramatically. I — a woman who had frequented five-star Parisian hotels for decades — moved into a miniscule home in a less chi-chi neighborhood. I proved I could live very comfortably (and safely) on much less. So when I multiplied that annual cost of living to calculate my targeted “retirement nut,” it was much more attainable. I had removed the “I could never do that” factor, discovering it was doable.

Was that where I ultimately hoped to end up? Not at all. But by simplifying, I was able to get to a point very quickly where I knew I’d be okay for the rest of my life. I had reached financial independence — capable of living on what I was generating without having to work — and the relief that came with that recognition is beyond words.

I didn’t realize we all carry a stressor in our brains that creates mischief with our peace of mind once we have that first “retirement” conversation with ourselves.

That conversation goes something like this: “I’m how old now? I have how many years until I stop working? How in the heck am I ever going to get from where I am today to where I can sleep soundly at night without worrying about pushing a damn shopping cart through the streets?”

So how do we accumulate that retirement nut?

Well, we have to go at it from several different fronts. How old you are today will determine just how aggressive you have to be about growing that “nut” without becoming so radical that you aren’t able to enjoy your life.

Money can come from businesses or jobs. It can come from opportunities we invest in that require very little labor or input on our part. It can come as the interest and dividends we earn on money we’ve saved and invested. The small first deposit in a savings account is the first flake in a snowball that can grow faster than we imagine.

Lastly, just as good policy, the safest thing is to put your money in different types of assets and investments in case an economic event hits one category worse than another. (Think of how many people had all their retirement locked up in the equity of their homes.) That’s what we call diversification.

So what does Bernie Madoff have to do with any of this?

We heard about all the people who had taken their savings and thrown them at Madoff so he’d invest them in his fund. Part of their “catch-up plan” for retirement was to grow their cash as fast as possible, and Madoff was offering steady returns of around 12-13 percent per year. Much higher than other funds. They had found the goose that laid golden eggs and asked no questions. They went against common wisdom and, year after year, pulled money from other investments to put into this magical money-making machine.

Say you had $750,000 saved up (including pulling the equity out of your house), and you placed it with Bernie. At 12 percent interest, that would be generating $90,000 a year (or $76,500 after the standard U.S. 15 percent tax on dividends and capital gains). Feels pretty safe, doesn’t it? Over $75,000 a year for life, plus any Social Security.

Well, then imagine how you’d feel when you woke up one day and heard on the morning news that Bernie Madoff was a scoundrel and the whole thing was a $50 billion Ponzi scheme. Your money was gone.

Two lessons:
1. If it sounds too good to be true, it is.
2. Never put all of your (retirement) eggs in one basket.

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