Friday, September 02, 2005

Rich Dad's Prophecy

Rich Dad's Prophecy is yet another book from self-made millionaire Robert T. Kiyosaki, who authored the popular book Rich Dad, Poor Dad. Prophecy talks about Rich Dad's prediction, made back in the 1970s, that the stock market would face a major crash sometime around or after 2012.

In short, Rich Dad's prediction was made due to the passing of ERISA in 1974. ERISA is the Employee Retirement Income Security Act, and is the law that setup the defined contribution retirement plans, of which the 401(k) is the most known. Defined contribution plans are retirement plans where an employee (and possibly the employer) make defined contributions to the retirement plan; they are opposite of defined benefits plan, which are pension plans that guarantee the retiree a defined benefit each year after they've retired.

Rich Dad argues that ERISA promises a major stock market correction around 2012 for a number of reasons, including:

  1. Whereas defined benefit plans had skilled teams managing the pension funds, ERISA moves the burden of retirement investing to the employee, who is not trained to be an investor. These untrained investors are more likely to invest in poor choices, to not monitor their investments, and to buy and sell at the absolutely wrong times. (Like The Wealthy Barber, Kiyosaki lambastes the lackluster job of financial education our public schools provide.)
  2. ERISA requires mandatory withdrawals beginning at age 70.5. The bulk of the baby boomer generation will be reaching this stage in life around 2012. This influx of forced sellers will drive the equity market down.
  3. People are living longer. With inflation and increased health costs, retirees will quickly run out of their defined contribution plan's nest egg, at which point they'll be dependent on family or the State.
There are some periphery reasons expounded on throughout the book, but those three are the main sticking points that Kiyosaki hammers home.

Clearly a stock market crash of the proportions discussed in this book would lead to a decimation of the U.S. economy. Kiyosaki talks about this, pointing out how "the fairy tale" may be over. Our nation has enjoyed more than a half century of prosperity, but Kiyosaki sees that coming to an end in large part because politicians have continually "passed the buck" to future generations. Rather than fixing existing serious fiscal problems, the government pushes the pain forward to the next generation. Think social security or Medicare. Both of these systems are doomed to fail if no changes are made, but rather than tackling this problem today, politicians keep pushing these grave matters onto the next generation. Kiyosaki argues that this must end at some point, and sees this end coming as the baby boomers wane into their golden years.

Like Kiyosaki's other books, Prophecy is an easy and quick read. Part of what makes this book so digestible is it's structure - it's divided into two sections, the first asking "Is the fairy tale over?" and the second examining how to build one's "financial ark" to withstand the coming storm. What I especially enjoyed was Kiyosaki's own story from rags to riches, which was interspersed throughout the first half of the book. I had always wanted to have more of a background on the Rich Dad, Poor Dad's own business background. The second half turned from more of the doom and gloom aspects of the first half and aims to motivate the reader to start planning today. Kiyosaki details how to build your "financial ark" and how to maintain control of it. He talks about how he built his ark, and how to gain control over those nagging elements that prevent people from building an ark (lack of time, excuses, fear of the unknown, and so on).

Kiyosaki's tips for building the "financial ark" are very boilerplate Rich Dad, Poor Dad mantra. If you're familiar with his other books, you'll not find anything new or insightful here. It's more of the same: increase assets, decrease liabilities; cashflow is king; investing in businesses and real estate is the road to wealth. If you are new to the Rich Dad, Poor Dad series, this is clearly not the book to start with; instead, start with the first book in the series,
Rich Dad, Poor Dad.

Kiyosaki concludes with a chapter aptly titled "A Prophet's Hope Is to Be Wrong." While Kiyosaki paints a rather bleak picture of what he thinks our nation's financial future will entail, he desperately wants to be wrong. And honestly, the truth is probably somewhere between the worst case and the best case, as it usually is. Overall, this book is one I'd recommend that everyone of working age read, as it brings up some great points about defined contribution retirement plans and some serious problems that we, as a nation, are going to need to face sooner than later. If you are a fan of Kiyosaki's past books, you'll also enjoy the insight he shared into his personal road from rags to riches.

Rich Dad's Prophecy: ISBN 0446530867: Published by Warner Books, 2002.


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