The Retirement Pyramid

The great pyramids of Egypt were masterpieces, carefully planned, painstakingly executed and built to withstand the test of time. And believe it or not, they make a great model for your retirement.

Think about it for a minute — there are a lot of similarities. The great pyramids were built over years and years with the goal of serving a pharaoh at the end of his life. They took monumental amounts of work to accomplish. And the ones built well lasted long after their pharaohs died. A good retirement plan should be the same.

Building a long-term financial legacy is an important part of God’s Master Plan for our financial lives. The Bible makes numerous references to building an inheritance for future generations. In America today, we plan for our own futures and build that inheritance largely through our investing and retirement planning. People that don’t do this planning well can suffer tragic poverty in their old age, and leave their family with little legacy when they depart this earth. But it doesn’t have to be that way.

Investing and retirement are complicated, there’s no doubt about it. Like building a pyramid, they involve meticulous planning, and it will take the work of many people to pull that plan off. Like pyramids, good retirement plans are slowly built over years and years with diligent, responsible investing. And like a pyramid, a retirement that is well planned and well built can last long after you’re gone, to take care of your spouse or bless future generations.

Why am I so hung up on this pyramid idea? It’s because I think we can use a pyramid as a good guide to figuring out how to invest and build wealth for retirement and the future. If you remember the old food pyramid, which was designed to be a guide to good nutrition habits, you’ll understand what I’m talking about.

So, picture a pyramid, and the ground that it sits on. Think about how it’s built: At the bottom is a large, strong base that serves as the cornerstone of the entire building. Next come subsequently smaller layers that are built on top of the large base. At the top, the pyramid is capped with an end piece that brings the entire work to a masterful conclusion.

So, how do we apply the shape of a pyramid to our retirement planning? Well, there are lots of different investment plans and strategies out there, and they’re not all created equal. Some are great foundations for retirement, and others should only be the cherry on top. Here’s a road map to this concept:

The Foundation: Your everyday finances

You can’t build a pyramid (or anything else substantial) on top of a swamp — the poor foundation will swallow all of your hard work and leave your structure in crumbles. The ground or foundation that you build on is very important. The same is true in financial planning.

You can put together a great retirement plan, but if your primary personal finances are sloppy, you’re only going to make a mess of your future. Debt, poor planning, lack of savings and out-of-control spending can suck the wind right out of your retirement. Have you ever met someone who had to raid their retirement savings to pay off debt or an unexpected expense? It’s a tragic thing. To plan well for retirement, you must first get your financial foundation in proper shape.

The Base: Your company’s retirement plan

The base layer of a pyramid is the largest layer, and the one that everything else rests on. If you don’t put the base in place first, it will be impossible to build a good pyramid.

The first level of your investment pyramid should be your company’s retirement plan. We’ll talk about these in more detail in future articles. For now though, understand that these are a great place to start because your employer is helping to contribute to your retirement savings (up to a certain, pre-determined limit). No other retirement strategy offers this kind of outside contribution. This is your first place to start.

The Middle: IRAs, mutual funds and personal investing

The middle section of a pyramid isn’t so instrumental in its strength and stability, but determines a lot about its height. Build a good, large middle section, and your pyramid can reach to the skies.

In retirement planning, the middle of your pyramid should consist of personal investing through vehicles such as IRAs and mutual funds. Though your employer doesn’t contribute to these, they can be essential parts of a good retirement plan because the offer lots of tax advantages. Though your company plan is the foundation of your retirement, the extent to which you use personal investing will go a long way to determining the ultimate size of your nest egg.

The Upper Deck: Real estate, individual stocks and private investing

Once you reach the upper parts of pyramid construction, the overall shape and size of the building has largely been determined. The things that you add at this point can be nice supplements, but they’re not really key to the success of the building.

If you’re a fan of real estate investing, private investing or trading in individual stocks, they belong in the upper deck of your pyramid. These vehicles can prove lucrative, and sometimes people make a fortune on them. But for the everyday investor, they can also bring a substantial amount of risk. If you want to include them in your portfolio, that’s fine. But they should play a small role, instead of being the basis of your retirement plan.

The Finishing Touch: Social Security

A pyramid is complete when that final, triangular cap goes on the very top. That cap makes it look nice, but serves no structural purpose in keeping the pyramid stable. It’s just a finishing touch.

In retirement planning, your finishing touch is Social Security. Many people base their entire futures on Social Security, but this is an unwise move. The American Social Security system is in a dangerous position right now, and there’s no guarantee that it will be around when you retire. Even if it is, it won’t provide nearly enough income for you to retire well or build a financial inheritance. So treat it like a decorative touch. If you get Social Security when you retire, it will be a nice little bonus — the cherry on top of your retirement sundae. But it’s not the place to begin building a retirement plan.

There’s a lot of information here, and some of it isn’t very detailed. We’ll deal with all of these concepts in coming articles, and help you make sense of the alphabet soup of investing plans and programs that exist. Until then, the first thing that you can do is to start making sure that your foundation is in good shape.


Photo by upyernoz. Used under Creative Commons License.

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