You’ve been diligently saving in your 401K and looking forward to retirement. You are 57 years old and you open your tax return. She has lost half of her retirement investment. Retirement is suddenly delayed past age 65 and you’ll need a part-time job when you retire. She has been saving in her 529 college plan. Junior is about to turn 18; Instead of the $100,000 he expected based on what he was told were historical market returns, he has less than half of that. Now you have to have the conversation with Junior, the valedictorian of his class, about going to Junior College.

What if your financial planner told you that you are about to start a great experiment? That the experiment would require you to set aside a constant amount of money for 30 years in a safe deposit box controlled by investment banks and the US Federal Government, limit your investment choices to mutual funds and bonds, and hope that certain beliefs about the long-term historical returns are valid until you need your money at the end of your working life.

That is exactly the first conversation I had with my financial planner 7 years ago. She told me, “Ouida, these mutual funds, 401K and 529 college plans… this is all one big experiment. Large groups of people have never retired or planned for college in this way before and we won’t know how this experiment goes. to turn out for another 10 years or so.

When I heard that, I realized that TV pundits and financial authors were simply articulating unproven strategies in a general experiment that began in the late 1970s, when corporations began shifting responsibility for retirement planning and the financing of employee pensions. I thought back to the pointless conversations I had with my former plumber about the latest hot mutual fund and whether or not I should buy Google. The Great 401K Experiment has turned most employees into investors and turned the man in the street or salesperson behind the desk into a financial guru.

Wikipedia defines an experiment as follows: In scientific research, an experiment (Latin: ex-periri, “to test”) is a method of investigating causal relationships between variables. An experiment is the cornerstone of the empirical approach to acquiring data about the world and is used in both the natural sciences and the social sciences. An experiment can be used to help solve practical problems and to support or negate theoretical assumptions.

I wonder who ever thought that by diligently putting money into their 401K they were “testing” their retirement plan?

As a physician, I rely on the results of well-designed experiments to determine the best therapeutic strategy for my patients. In health care, when an experiment involving a therapeutic intervention is conducted on human test subjects, the basic assumptions about the therapeutic intervention have already been formulated and tested in the laboratory. In medicine, we know what the variables are and we control for them, we have specific outcome measures, and most importantly, we can stop the experiment if the outcome is outside of expectations and harmful to patients.

Despite involving human test subjects, what goes on in the world of finance and retirement planning has nothing to do with a safe, controlled experiment. No, in the world of personal finance and retirement planning we have what is known as an observational study. In an observational study, people participate in a series of activities and we follow them long-term until the end. Whatever that end is. We are just along for the ride waiting to see what happens. In terms of retirement planning, that could mean a retirement lived in poverty or a retirement in which all financial needs are met. But this experiment does not guarantee the ultimate result.

Let’s look at the assumptions that both financial planners and employees have made:

1) In retirement, expenses will go down. Therefore, retirees will need only 75% of their pre-retirement income. This means that a person with an annual income of $100,000 during their working years must set aside enough to generate an annual income of $75,000 in retirement. This assumption has a basic flaw: it ignores inflation. Current estimates are that retirees will need $250,000 to $300,000 just to handle health care expenses. This basic principle of retirement planning ignores the realities of many retirees, personal illnesses, the need to care for an ill spouse, or adult children.

2) Stock market returns average 8% per year over the long term. This is simply false. A quick trip to moneychimp.com shows that the S&P has returned 8.76% since 1871. However, that percentage drops to 6.56% when adjusted for inflation. If he had been able to invest in the markets for the last 137 years, he might have done well. But 137 years really challenges the idea of ​​what the long term is. The long term is certainly more than 10 years. From January 1, 1998 to December 31, 2008, the market return was 0.96%. Inflation adjusted returns were -1.44%. As I discuss in my article, The Stock Market: The Second Biggest Financial Swindle of the 20th Century, the long term for stocks is more like 30 years. It becomes obvious, then, what you should do if you are 50 years old, intend to retire at 65, and are contemplating putting money into the markets as an investment.

3) House prices will always go up. This assumption made home ownership the equivalent of saving money monthly in a supercharged savings account. I have never seen a savings account lose value the way the housing market did during the Savings and Loan bust and this most recent financial downturn.

4) Capital gains are better than cash flow. The current economic environment is a prime example of what happens when people invest only for capital gains. When the capital gains party stops, wealth is devastated. However, with cash flow, businesses can operate as usual. It is estimated that 20 percent of real estate loans made during the housing boom went to investors. What if all those investors had invested to generate cash flow? The price appreciation made cash flow impossible for most of the investor purchases that were made in the last 4 years. Without cash flow, investors’ money would have remained on the sidelines, fewer loans would have been made, property valuations would have been kept in check, and some of the speculation that fueled the recent real estate market would have been absent.

What happens when the basic assumptions of an experiment turn out to be false? The experiment fails. In medicine, a failed experiment sends everyone back to the drawing board in search of answers. Not so in the world of personal finance. Personal finance is called personal finance for a reason. You are the person and you are your financing. You’re the only one going back to the drawing board, usually with less money than you started with. The broker who sold you the shares made his money. The unique payment planner that Smart Money Magazine told you to use made you money. The fund manager made his money.

What is the solution? Education. Financial type education. Every waking minute of every waking day. Yes, this is work, but it is the only way. Those who do not want to do this kind of work should continue to participate in the observing experiment for whatever purpose. My financial planner made sure I stayed out of 529 plans and didn’t invest in IRAs outside of my 401K plan. The path to riches is simple and is as follows:

1) Live below your means
2) If house prices in your area are too high, rent, but try to keep total housing costs below 20% of income.
3) Buy a quality car no more than every 10 years and keep that car. Car leases and frequent new car purchases are among the biggest drains on household wealth.
4) Eliminate consumer debt.
5) Gain skills in writing, sales and marketing.
6) Save
7) Invest savings in assets that generate income:
a) businesses such as network marketing
b) real estate
8) Work with those assets once you invest to make sure they produce income.
9) Protect all assets through entities
10) Find advisors and partners you can trust who have your interests in mind. They are not hard to find.
11) Understand yourself and your risk tolerance. For many, putting money in bonds and not thinking about financial education is the best strategy.
12) Read one financial book per month and attend one business development seminar per year that teaches a specific skill
13) Stay away from major financial magazines. They only offer the same pabulum that has left many in the lurch, stripped of their riches.
14) Subscribe to Investors Business Daily, The Financial Times or The Wall Street Journal
15) Stay away from personal development seminars, but read personal development books.
16) Implement the strategies and skills from the seminars and books.

Your time investment will be at least 10 hours per week. Are you ready to invest the time and get going?