- author: The Rich Dad Channel
The Importance of Financial Education and Retirement Planning
After the rules of retirement changed in 1974, with the world shifting to the defined contribution pension plan, financial literacy became an essential component of retirement planning.
The Birth of Financial Planners
Before the change in the retirement rules, most people had a defined benefit pension plan, which meant they received a paycheck for life. After the rules changed, people began investing in retirement plans without much financial literacy. This sudden boom in retirement planning led to the birth of financial planners. Today, it only takes 30 days to become a financial planner, compared to a year and a half to become a massage therapist.
The Risks of Mutual Funds
Mutual funds are a popular choice when it comes to investment options, but they come with risks. While some may argue that mutual funds are a great way to make money, others believe that they are one of the worst places to buy money. Mutual funds come with hidden fees, expense ratios, and lower capital gains than paper assets.
Furthermore, since mutual funds are held for the long-term, investors have little control over them. When you invest in paper assets, such as stocks, it is essential to focus on liquidity as it is what these investments are about. However, mutual funds lack liquidity, and the investors' only control is to sell them.
Investing in Real Estate vs Paper Assets
Many financial advisors recommend the stock market as the best way to invest. However, stocks are good for entrepreneurs and real estate people. In real estate, you can force the appreciation by improving the property, which is not possible with paper assets. In contrast, paper assets are alone controlled by the investors.
Diversification, Crash, and Insurance
When people buy a stock, they look for diversification to protect themselves in case of a system-wide problem. But diversification is not always the solution. Warren Buffet, the world's greatest investor, believes that diversification protects investors from ignorance. In reality, ignorance comes from the person selling the plan and the person investing in it.
Furthermore, the crash can happen anytime regardless of the diversification, and mutual funds have no insurance. When people buy real estate, they have insurance, and they have insurance for their cars. The average person does not know how to hedge against mutual funds, making it essential to improve financial education.
Defined Benefit Pension Plan vs Defined Contribution Pension Plan
Before 1974, many people had a defined-benefit pension plan where they received a paycheck for life. The world, in general, changed to defined contribution pension plans. This means that what individuals put in is all they get back, making financial literacy even more crucial. A lack of understanding can lead to people running out of money before they die.
The Importance of Financial Literacy
Financial literacy has become increasingly important in today's world. People need to understand their investments and take control of their earnings, expenses, assets, and liabilities. While there is no guarantee that people won't experience financial problems, financial education can provide them with tools to make informed decisions.
Investors can take advanced courses to learn how to pay and hedge against mutual funds. Moreover, people need to understand the difference between defined benefit pension plans and defined contribution pension plans.
In conclusion, financial literacy is vital to retirement planning. People need to understand the risks and benefits of mutual funds, paper assets, and real estate. Additionally, diversification may not always protect one from a crash, and mutual funds have no insurance. Therefore, taking advanced courses and understanding defined benefit and defined contribution pension plans will help individuals make informed decisions.