On July 25, 2013, Tristan Lejeune writes in Employee Benefit News:
Employees need help changing their retirement mindset, says Ric Edelman, chairman and CEO of Edelman Financial Services. A combination of factors – including a misunderstanding of exponential growth and its effect on compounding interest – have led workers to short-term planning that can be deadly to 401(k)s and other defined contribution plans.
Edelman, author of titles including “Ordinary People, Extraordinary Wealth” and “Rescue Your Money,” says that, despite what we’ve been taught to believe, working hard can only make you successful in your career, not in your finances.
“You are incapable of saving enough money to meet your needs,” Edelman says. “That’s the bad news. The good news is you don’t have to. … What we don’t teach in our schools, in our universities, is how to make money with the money they’ve made.”
Edelman says he often speaks with plan participants in their 50s who are worried about the growth of their plans. Wait another 10 years, he tells them, and you won’t believe what compounded interest can do; exponential growth will save you, you just have to give it long enough.
“What people don’t understand is the astonishing element of growing money and how it grows,” Edelman says. “They think money grows duplicatively; they think money grows linearly, because we’re used to counting one, two, three, four, five, but that’s not how money grows. … When someone asks, ‘When can I retire?’ I always say the same thing – 30 years after you start saving for it.”
This article reflects the current “past savings” paradigm in which people must save and therefore restrict consumption in order to invest in wealth-creating, income-generatiing productive assets, whose value exponentially accelerates over time due to the workings of compound earnings growth. All this is good advice but the caveat is that it requires the pledge of “past savings,” which in reality relatively few people are well enough financially off that they do not have to spend every dollar they earn on day-to-day and month-to-month survival.
A far better means to long term financial security is the new paradigm which uses “future savings” (earnings) and does not require “past savings.” For those employed the new source of income becomes a second income and for those not employed a source of income. The mechanism for achieving this are outlined in the proposed Capital Homestead Act.
While accumulation is the key financial mechanism, using pure, insured capital credit will enrich Americans far more rapidly without personal risk than 401(k) plans. Capital Homesteading’s benefits are long term. As for financing, capital formation investments are made by companies annually based on projections a number of years out (at least 5 to 10 years) with the expectation that the investment will pay for itself as a result of sustainable growth and consumer demand. Thus, the concept embraces the idea that capital formation is self-financing. The question is who pledges the security and takes the risk of failure to return the expected yield from which to repay the loan. Capital acquisition takes place on the logic of self-financing and asset-backed credit for productive uses. People invest in capital ownership on the basis that the investment will pay for itself. The basis for the commitment of loan guarantees is the fact that nobody who knows what he or she is doing buys a physical capital asset or an interest in one unless he or she is first assured, on the basis of the best advice one can get, that the asset in operation will pay for itself within a reasonable period of time––5 to 7 or, in a worst case scenario, 10 years (given the current depressive state of the economy). And after it pays for itself within a reasonable capital cost recovery period, it is expected to go on producing income indefinitely with proper maintenance and with restoration in the technical sense through research and development.
Still, there is at least a theoretical chance, and sometimes a very real chance, that the investment might not pay for itself, or it might not pay for itself in the projected time period. So, there is a business risk. This is why we need private capital credit insurance or a government reinsurance agency (ala the Federal Housing Administration concept), because the majority of Americans do not have the necessary assets to pledge against failure.
To implement this new paradigm, our nation needs to implement the Capital Homestead Act. (http://foreconomicjustice.org/?p=8942) with interest-free capital credit loans made available via super-IRA-typle CHA accounts, repaid with the future earnings of the investments. Thus, instead of the Federal Reserve slashing bankers’ cost of money, the capital credit loans would be directed to enrich ordinary Americans by systematically broadening private sector individual ownership of the formation of FUTURE productive capital investment to empower EVERY American to accumulate over time a viable capital trust (super-IRA) portfolio of stock in diversified companies and reap the full earnings payout of corporate earnings as dividend income to support their livelihood and retirement.
Right now the Federal Reserve creates money by loaning it to banks, who re-loan it multiple times because of fractional banking rules. With Capital Homesteading, money would be created by loaning it directly to citizens via banks at near-zero interest to invest in FUTURE wealth-creating, income-generating (full dividend payout) productive capital assets formed by producer companies. To build real wealth and also phase out our near-defunct social security scheme, the new full-reserve money would go into a long-term retirement account to be invested in dividend-paying, asset-backed shares of corporations. That way, money power would be spread to all citizens. The middle class would be invigorated using the principle of compounding interest, instead of being decimated by mushrooming public and personal debt.
The Federal Reserve could play a more positive role, removing artificial barriers to equal citizen access to acquiring and owning productive capital wealth. By creating asset-backed money for production, supported by growth-oriented tax policies, the Federal Reserve could truly help promote shared prosperity in a market system.
Support the Agenda of The Just Third Way Movement athttp://foreconomicjustice.org/?p=5797
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice
Support the Capital Homestead Act athttp://www.cesj.org/homestead/index.htm andhttp://www.cesj.org/homestead/summary-cha.htm
See “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.orghttp://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624and “The Income Solution To Slow Private Sector Job Growth” athttp://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490.
http://ebn.benefitnews.com/news/exponential-growth-could-save-investors-2734955-1.html
