If you want to become rich, street smarts, book smarts and some hard work will certainly help. But they won't be enough by themselves, says Robert Goodman, senior economic adviser for Putnam Investments and author of the newly released second edition of Independently Wealthy: How to Build Financial Security in the New Economic Era from John Wiley & Sons.
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To move into the ranks of the rich -- rich enough to retire securely -- not only do you have to be smart and work hard, but you have to put your money to work -- as an owner of property, businesses, real estate and, foremost, stocks, says Goodman.
Goodman tells Meet the Street how to invest for the future (ride it out) and what to do during these times of economic turmoil (take advantage of low stock prices, particularly in blue-chip stocks and in leading technology issues). He also says how much better off he believes retirees would be if the Social Security system were privatized (with even just 15% of the money invested in something along the lines of an S&P 500 index mutual fund, Americans could have twice as much money in retirement after 45 years of saving, Goodman calculates).
TSC: What's in the second edition of your book that wasn't in the first edition?
Goodman: When I was writing the book in 1996, the country was mired in budget and structural deficits. All of the things we stated in 1996 are still valid in 2002. But since '96, of course, we've swung into surplus, so we had to expand that chapter to include what happens to an economy when you're generating a surplus.
One of the problems of having a surplus is many people think surpluses are good. Surpluses are not good. They can be as bad as budget deficits. Because of an imbalance in the system, surpluses will weigh the economy down, whereas deficits will stimulate the economy. The problem is deficits may stimulate the economy maybe when you don't need the stimulation -- and surpluses can weigh you down when you don't need that restriction.
Of course, there've been tax changes during that period,
with a couple of tax law changes, the most recent one being the tax law changes of 2001. We explain some of the new investment incentives in that law for 529 plans
college savings plans and the importance of IRAs and 401(k)s. In the latest tax law changes, they've made those even more attractive.
But the thrust of the book is still the same: that there's a long way to go for the market, given the changed economic structure that we are dealing with, and this economy is extremely efficient and highly productive. The markets, over time, reflect that. The second part of the book deals with the financial planning aspects of it, that is, what does an investor do, given this environment, to participate and ultimately become what we call
TSC: Given the current economic developments with the monetary and fiscal actions of our federal government in response to Sept. 11, is there anything you'd like to add to your perspective?
It's really very important to understand that the American people have been conditioned by the politicians and by the media to believe that these budget surpluses were good and, by definition, anything to reduce those surpluses was bad.
Those surpluses are not good. They are bad. They literally weigh the economy down. If you think back a little more than a year ago, we had three influences that caused this economic slowdown: 1) energy prices were rising, and that acts like a tax increase on people; 2) the
Federal Reserve Board in the first part of 2000 was
interest rates because they wanted to slow the economy down from what they felt was a very, very rapid rate of growth; and 3) we were generating these huge surpluses,
which really meant we were taking more out of the economic system in the form of taxes than we were putting back in the form of spending. And that was restrictive in nature, and now we're in a recession.
To get to your point, on 9/11, everything changed. Our government had literally hamstrung itself by creating the notion during the election campaign of a lockbox of Social Security surpluses. You couldn't touch it; the debate three months ago was, "Could we borrow a billion dollars of those excess taxes to spend on something we need right now?"
9/11 moved that away. The notion of a lockbox disappeared, and now our government is
getting rid of the surplus. Forty billion dollars of spending was authorized to rebuild New York City, and that's equal to the entire tax cut of 2001, including the rebate and the rate reduction.
In addition, $15 billion was authorized to shore up the airlines, $30 billion for the war on terror, and now they're talking about further tax-rate reductions and rebates and increased spending.
When all is said and done, there will be no surplus. Nobody's been talking about that yet, but as soon as it's clear that it's been all used up, I am sure the media will spin it in a negative way. There will be riots on the college campuses and outrage in the media, "Oh, my gosh, we're not going to have a surplus for a couple of years!"
The last thing you want in a recession is a surplus. The Keynesian revolution was all about how you stimulate an economy out of a recession by fiscal means.
TSC: What is all of the current spending by the government going to mean for Social Security? After all, saving and investing for retirement is the major point of your book.
I don't know if the American people are fully aware of it now, but there is the realization in Washington that this system is about to explode because of the
Baby Boomer demographic patterns. Right now, there are three people working for every retiree. In 30 years, there will be two people working for every one retiree. We can support them, but it might require most of the working people's income in 30 years in order to do that, which I do not think the American people are going to be willing to do.
That necessitates a change. There is a viable way of doing it, and that is going to be the partial privatization of Social Security. If you were to privatize even just a conservative amount of Social Security and invest it conservatively as well -- say in an S&P 500 index fund over a 45-year, 47-year time horizon, whatever the
standard retirement age turns out to be -- you may lose some benefits, but you would end up in excess of what you would have gotten if it had not been invested in the equity markets -- perhaps as much as twice the amount of money through investing in the U.S. markets.
That capital would well support the Social Security system ... and our economic system can well support "cyclical deficits." When you reach periods of surpluses, you must give back to the system. Likewise, I don't think that any deficits you see will be permanent.
TSC: Would you recommend that investors, either privately through their own qualified or nonqualified accounts, or automatically through Social Security, put any money in bonds?
I think the U.S., and perhaps international, equity markets are the way to go. The bottom line is, you will only achieve wealth by owning something, not renting or loaning. In order to reach that wealth-creation mode, you need to own stocks ... and the U.S. economy is the most productive machine the world has ever seen.
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