By Erlend Peterson, CFP®
Reviewed by Jon Ford, CFP®
Rich By Choice is a book I want our four children to read. The author grants that more important types of wealth exist, such as health and friendships, but this book focuses specifically on financial wealth. In four parts and 20 chapters, the reader is quickly introduced to the reality of accumulating wealth and large amounts of it—provided deliberate and conscious decisions are made and implemented.
In chapter 3, "The Seven Basic Steps in the Financial Planning Process," the book describes steps that are not strictly linear (1 before 2, 2 before 3, and so on); instead, they are seven critical considerations that are best implemented simultaneously in order to accumulate and protect the reader's wealth. These steps include establishing cash reserves; managing risk with insurance; having guaranteed savings; investing for growth; and planning for taxes, retirement, and your estate.
Each of these areas is clearly explained and peppered with real-life cases. The illustrative clients are followed from beginning to end, using handy fill-in-the-blanks worksheets. They each begin with a budget, a basic financial plan, and a lot of determination. The endpoint is being rich, which is identified as having accumulated $2 million in liquid assets. The stretch from start to finish includes understanding and using various financial planning concepts to one's advantage: ownership, inflation, tax law, and compounding. Investing at least 10 percent of income for younger people is critical, and a larger—often much larger—percent of income for those over 50 years of age. This is not as difficult as it may seem if the reader no longer has a mortgage and college expenses.
Once rich, the reader can retire if they choose. But they're not finished, since they must now decide how to begin withdrawals. In this matter, the author clearly identifies how and when to use various sources of income to meet post-retirement spending needs. Finally, bringing your heirs into the plan is important and the book talks how best to inform them and pass on wealth according to readers' preferences.
Giving this book to my children, students or clients will come with a few cautions. The author uses a 50-year U.S. stock market annual rate of return of 12 percent to estimate for investment growth—most planners believe that something around 8 percent is more realistic. He freely encourages buying a tax-free bond fund without consideration of clients' marginal tax bracket—most planners suggest tax-free investments to the extent that the tax-equivalent rate of return is an advantage based on purchasers' marginal tax bracket.
The author suggests investing in a Roth IRA only after investing the maximum amount in a 401(k) or other qualified plan. The counsel of many financial planners these days is to contribute to a 401(k) to the company match, then contribute the maximum to the Roth IRA, and finally return to the 401(k) for additional pre-tax savings. Contribution planning for the 401(k) and Roth IRA is then prepared concurrently.
My final difference of opinion with the book is the emphasis on buying expensive forms of insurance: whole or variable life and annuity policies. Most roads for the author seem to lead to these products. The old adage, "buy term and invest the rest," certainly holds more promise of becoming rich, particularly if the author's suggested 12 percent annual rate of return is used to calculate accumulated wealth.
Jon Ford, CFP®, is principal of CF Financial Planning Solutions Inc. in Cedar Falls, Iowa. He writes a weekly "Financial Fundamentals" column for the Cedar Falls Times.)
Seven Locks Press
$17.95 (Paperback: 177 pages) 2007, revised