GETTING STARTED

THE BASIC DEFINITIONS UNDERLYING RETIREMENT PLANNING AND WEALTH CREATION

Money is one of the most sought-after and misunderstood concepts in our lives. While most people understand the intrinsic value of money and what it can buy, its many forms can be difficult to grasp, as can strategies for its use and deployment.

The concept of "money" is frequently confused with "currency," that is, the paper or coins that stand for various monetary values. If we asked people around the world to show us an example of "money," in most instances they would pull local currency out of their pockets or purses as a demonstration.

In truth, money is much more encompassing, and we'll examine how that is so.

We also need to define ambiguous terms like "financial planning," "retirement," and "wealth" in our analysis, as there are as many definitions of those terms as there are people defining them.

Let's begin our conversation with a few brief definitions:

MONEY: Wikipedia defines money as "any object or record that is generally accepted as payment for goods and services and repayment of debts." In practice, that could include items of exchange or barter, either tangible or intangible, as well as items with intrinsic value like precious metals, or what is otherwise a worthless piece of paper or non-precious metal in your pocket, but for the fact that everyone agrees to a value based on the numbers printed on it.

Some forms of money are readily accessible, and some are not. Some are generally acceptable forms of payment in various geographic areas, while others are not. For example, if I went to get an oil change in my car and in lieu of a few dollars I offered my mechanic some livestock (presumably worth at least as many dollars as the oil change itself), my mechanic would not be likely to accept that form of payment and would likely refuse to change the oil for me.

That unlikely example highlights the need to agree on a definition of "money" for the balance of this book. For our purposes, money will encompass any item of financial value—including intangible financial assets like bank accounts, insurance policies, mutual funds, stocks and bonds, and tangible assets like collectibles, artwork, automobiles, gold, etc.

FINANCIAL PLANNING: Throughout the book, the term "financial planning," will include the decision-making process around all assets, as well as cash management and budgeting, debt management, risk management and insurance, portfolio design, asset allocation, and estate planning. It will also encompass the qualitative decision-making processes around such things as employment, healthcare, family matters, and end-of-life planning, for example.

RETIREMENT: The term "retirement" strikes me as a bit of a misnomer. That is because the root of the word is "retire," and to retire is to "withdraw" or "retreat." I can't imagine why anyone would sign up for that!

The famous football coach from Florida State University, Bobby Bowden, who coached into his 80s, was once asked when he was going to retire, and he said, "I guess I'll retire someday if I live that long." He said that retirement was the next-to-last milestone in his life and that he wasn't ready to have his last milestone next up on his list!

The concept of retirement has been around for centuries. The idea was that people would work for their entire adult lives, until one day they either couldn't do the job anymore physically, or some other reason forced them to leave their employment. Within a short period of time, they were deceased. Sound like fun?

In the U.S., "retirement age" is often set as a somewhat arbitrary figure imposed by an employer or the government, like the age at which one becomes eligible for a pension or Social Security Income. However, when Social Security was created, most people joined the workforce by 18 years of age, worked until they were 65, and were dead by 72. Today, many people don't join the workforce until after college or graduate school (say 22 to 25), they want to retire at 55, and could live to be 107. Needless to say, the old model won't work in most cases.

Some people think of retirement today as working one job instead of two, while others think of it as time on their yacht in the Mediterranean. Clearly, they can't use the same definition or measuring instrument to determine what retirement is or is not.

For our purposes, let's use the following to define "retirement"—the age or moment in life when work becomes optional. That way, for those who want to start businesses after leaving the employ of another, or for those who want to get the gold watch and ride off into the sunset, everyone is covered by the same standard. When you have achieved enough financial wherewithal to eschew any and all income-producing activities other than those you want to pursue, in my mind you are "retired." In other words, it is the absence of needing to work, not the absence of working that defines retirement.

While we're at it, I would propose that we all think of "retirement" more along the lines of "graduation." A graduation is always something to celebrate—a new chapter, opportunity, or series of life choices. It is a new door being opened. Since retirement sounds like a door being closed, I prefer to think of the positive versus the negative and would rather experience the excitement of launching "Eric Brotman 2.0" when I retire, as opposed to withdrawing and retreating from life.

WEALTH: I am often amused at the media's constant misuse of the term "wealth." How many times have you read that one county or one state is the wealthiest in the country, only to find that what they mean is that the median household income in those areas is the highest? Let me be absolutely clear on this ... income does not equal wealth.

Income is nothing more than an accounting concept for the top line in a personal financial statement. It is a factor in wealth building, but it is not the defining factor.

Wealth is a quantitative measure of prosperity. It is also a qualitative concept, the idea that one "has wealth" or is a "wealthy individual." But wealth is also...