The Secrets to Building Wealth

The getting-back-on-track spirit of the beginning of the year bodes well for cleaning up personal finances (see last week’s article on getting out of debt), and ideally, tactics for building wealth for retirement, college, or other savings goals. Ric Edelman and his team have been helping clients invest their savings since the 1980s, but some of his tips still feel unconventional—for example, he actually recommends carrying a longer mortgage, rather than paying it off over a short period of time. We picked his brain on finding a financial advisor and using them to the fullest extent.

A Q&A with Ric Edelman


Should you start saving before you’ve paid off credit card debt or loans?


It is not appropriate to establish investment accounts (except for IRAs and retirement plans at work) while maintaining credit card debt. If you do have credit card debt, withdraw any money you have in the bank and send it off to the creditor with the highest interest rate. It makes absolutely no sense to have money in the bank earning tiny amounts while you have debts that cost 18% or 21%.

When looking at loans with low interest rates, the question becomes, “How much money would you earn by investing that money instead?” You’ll also want to assess your financial plan and future goals to make a decision based on your specific situation.


If your employer doesn’t offer a 401(k), how should that change the way you think about retirement planning?


Smaller companies are less likely to offer retirement plans to their workers because the owners usually have no expertise in that area, are too busy to pay attention to it, and often believe they can’t afford one.

So your first step is to tell your boss that changes over the past decade now make it possible for him or her to create a retirement plan at little to no cost.

Your second step, regardless of what your employer does, is to set up an IRA. You can put away as much as $5,500 a year,4 and you can contribute less if you can’t afford that much. A financial advisor can help you figure out the amount and how it should be invested.

If your boss refuses to establish a retirement plan, your third step is to discreetly look for a new job. Never quit your present job until you have a new one, but find a company where the pay is competitive and they offer a retirement plan.


How should our risk tolerance change as we age?


You must create a highly diversified portfolio, and you must maintain that portfolio for long periods to reduce your risk at any age. How you allocate the assets in your portfolio depends on your goals and the time it will take to achieve them. For example, two people might own identical investments, but the person who is saving for a retirement that is 30 years away will allocate money among investments very differently from the person who is planning to pay for college in five years. That’s why professional financial advisors create asset allocation models for their clients and do so only after developing a thorough understanding of the client’s goals.

If you are retired, or about to be, keep in mind that you still need to diversify because you still need at least some growth. Most retirees and pre-retirees believe their only worry is safety. But that’s wrong! By focusing exclusively on safety and their need for current income, they ignore—even sacrifice—future income by placing all their money into CDs.

The solution to this dilemma is a Systematic Withdrawal Program: After building a diversified portfolio, simply withdraw money each month equal to a rate of not more than 5% per year.

Investing strategies, such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.


If you own a house, how should you think about it as part of your larger investment strategy?


First of all, your home is not an investment. It’s merely a place to live. You buy a home because you love it and because you want to live there—not because you think it will grow in value. If it does, consider yourself lucky, not smart.

But you can use the mortgage as part of your investment strategy. A big, 30-year mortgage is the best thing you can have. Forget about 15-year loans, never make extra payments, and forget about those bi-weekly mortgage payment plans.

In fact, keeping that mortgage allows you to earn money two ways: First, you get to invest the money that you otherwise would have spent on extra mortgage payments. Second, your home will grow in value even if you have a mortgage. Think about it. Your home’s value will rise or fall whether there’s a mortgage or not. Therefore, owning your home outright is like having money buried under the mattress: None of that cash, in effect, is earning any interest.

You wouldn’t stuff ten grand under your mattress, so why stash $200,000 into the walls of the house?


When should you start thinking about life insurance?


If you were to die today—heaven forbid—would your spouse, partner, or child suffer financially? When the answer to that question is yes, you need to purchase life insurance. If you’re unsure which policy is best for you and your family, talk to a financial advisor to make sure you have the coverage you need.


What do you recommend to clients in terms of getting organized logistically?


If you find that you’re lacking the knowledge, time, or desire to handle your personal finances, you might want to hire an advisor who can help you create a financial plan. Why risk making a serious and potentially costly financial mistake that could set you back years from reaching your goals?

It’s also important to keep track of paperwork. The first step is stacking all documents in one big pile. Then separate the papers into these five groups: originals you rarely need, originals you sometimes need, other documents (such as credit reports and insurance policies), tax documents, and investment documents.

Keeping these records safe, where you and others can find them, can save you time and greatly increases the likelihood they will not get lost.


Any tips for picking the right financial advisor? How can you tell if they’re charging a fair fee?


It’s always a good idea to interview two or three planners, shopping around as you would for a car or washing machine. To get the names of potential candidates, talk to your neighbors, friends, or co-workers. Another good way to find an advisor is by watching some in action. Maybe you saw one on TV, at a seminar, or read a news article they wrote.

Have a list of questions ready for the interview so you can learn more about the services provided, their investment methodology, their succession plan and how long they have been in business.

Be sure to ask, “What are the total costs I will incur by working with you?” In addition to the advisor fee (or asset-management fee), find out the fixed and variable expenses you’ll pay to work with them—otherwise, you might end up paying far more than you should, and far more than you realize.

When you’re done with the interview, you should be able to ask one final question—of yourself: Do you like this person? Don’t hire someone you dislike.


When does it make sense to stay home and when does it make sense to pay for childcare? Is the “less than 60k” adage relevant at all?


Let’s assume our new parents each earn $30,000 a year, for a combined income of $60,000. When the baby arrives, is that second income really necessary for financial survival?

After deducting commuting costs, work clothes, and other work-related expenses, your after-tax, after-expense take-home pay is about $200 a month.123 Not only are you netting way below minimum wage, think about all the time you’re not spending with your child and the additional stress added to the family.

But it’s not that simple. There are five reasons why it can make a lot of sense for both parents to work.

If both parents are working, it could protect their careers from irreparable damage. The lower-earning spouse might also have the health insurance benefits, which you won’t want to lose when the baby comes along. And don’t forget retirement benefits—if you quit work for five years, you’ll pay the price later in the form of a sharply lower retirement income. In addition you’ll want to consider the parent’s mental health. Some people are just not well-suited to stay home with their kids full-time. Finally, some argue that interpersonal communication skills children gain by being in daycare shouldn’t be dismissed.

The point is that you have a choice. To be a success with your financial planning, you always must examine your options and make the decision that’s best for your family.


Do you have any tips for when someone is ready to merge their finances with their significant other?


Wait to merge your accounts until after you’re married. Once you’ve tied the knot, put everything into one bucket: checking accounts, investment accounts, ownership of the home, cars, and the like. There may be reasons to have money held in separate accounts, but you should always both be aware of their existence, purpose, and use at all times.

Ric Edelman, Chairman and CEO of Edelman Financial Services LLC, a Registered Investment Advisor, is an Investment Advisor Representative who offers advisory services through EFS and is a Registered Representative and Principal of, and offers securities through, Sanders Morris Harris LLC., an affiliated broker/dealer, member FINRA/SIPC. You can connect with Ric on LinkedIn or on Facebook. Or follow him on Twitter.

1 $30000 Federal Tax Calculator 2016/2017 | Online Tax calculator. (n.d.). Retrieved February 08, 2016, from http://www.taxformcalculator.com/tax/30000.html

2 CONSUMER EXPENDITURES–2014. (n.d.). Retrieved February 08, 2016, from http://www.bls.gov/news.release/cesan.nr0.htm

3 How The Average U.S. Consumer Spends Their Paycheck. (n.d.). Retrieved February 08, 2016, from http://www.creditloan.com/blog/how-the-average-us-consumer-spends-their-paycheck/

4 Retirement Topics – IRA Contribution Limits. (n.d.). Retrieved February 08, 2016, from https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits