Phil Fragasso

Read an Excerpt...

Understanding the Cycles of Life and Money

If there’s any good that comes from the global economic meltdown of 2007-2009, it will be the long overdue realization that working-class Americans desperately need help with their investments. In 2008 alone, retirement plan accounts lost over $2 trillion in value. Participants in 401(k) and other employer-sponsored savings plans stopped contributing and began requesting loans. They were scared and confused, and most of them had nowhere to turn for help. Their retirement dreams were in shambles alongside their 401(k) account balances.

And while the global financial crisis spawned from a wide range of social, economic, and political factors, the increasingly widespread retirement income crisis resulted directly from a conscious sidestep by both the Federal government and U.S. corporations. According to the U.S. Government Accountability Office’s 2007-2012 Strategic Plan, “Providing retirement income security in the United States has traditionally been a shared responsibility of government, employers, and individual workers. However, the burgeoning federal deficit, especially in federal retirement programs such as Social Security and Medicare, and the declining coverage of employer-provided pension plans suggest a shift in responsibility to individual workers for ensuring an adequate and secure retirement.”

Think about it. In our parents’ generation, people spent their entire careers with a single company, retired with a lifetime pension, and collected monthly Social Security checks that represented a significant portion of their pre-retirement income. Today’s workers face a startlingly different prospect. If you have an employer-sponsored pension plan, you’re among the lucky minority of Americans. Traditional defined-benefit plans – in which retirees were guaranteed a specified amount of income for their life and the life of their spouse – are a thing of the past. They have been replaced by defined-contribution plans (most commonly known as 401(k), 403(b), and 457 plans) that shift the burden of building a retirement nest egg that can generate lifetime income from the employer to the employee. And this is happening at a time when that indeterminate “lifetime” will almost certainly be longer than any of us imagined. It’s overwhelming, and the vast majority of us are woefully unprepared and ill-equipped to handle the responsibility that has been thrust upon us.

To make matters worse, the process of generating consistent and sustainable income in retirement is characterized by even more trap doors and trade-offs than we face during our wealth accumulation years. Successful investing requires a systematic plan and the ability to ignore the emotionally wrenching ups and downs of the market. That systematic approach becomes even more critical during the income-producing years of retirement because we have less time and opportunity to make up for mistakes.

The good news is that a workable solution is well within reach of most middle-income Americans. The pivotal first step is to stop thinking about your 401(k) and IRA accounts as an end onto themselves. Rather, view them as the means to the ultimate goal of creating an income stream that lasts a lifetime. At its core, Your Nest Egg Game Plan is focused on helping people turn their Individual savings into Individual pension plans. And it is indeed all about the “I” in Individual. There is no one-size-fits-all approach. Each individual’s circumstances, needs, and goals are unique. Nonetheless, there are some key attributes that every individual’s Nest Egg Game Plan must possess. And that is how we’ve structured the book. Each chapter focuses on a specific characteristic of a successful investing and income strategy -- and to keep things really simple, we’ve used an I-centric approach to emphasize the individuality of each investor’s Game Plan. The end result will be an income-generating investment strategy that is Intelligent, Informed, Introspective, Inflationary, Inexpensive, and Inspired.

 The I-stages of money
Before we get started, let’s take a step back to better understand the context of where we came from and where we’re going. Most individual investors and financial advisors fixate on two phases of money management: capital accumulation when we’re working and capital preservation when we’re retired. And while it’s hard to argue with the core of that concept, it’s too simplistic to provide any true insight into how our relationship with money evolves over time. A more modern perspective identifies three distinct stages of money management.


The cycle begins with Illiquidity – a phase that typically lasts from college graduation into one’s thirties. During these early years, individuals may possess nothing but illiquid assets. Their net worth is likely tied up in their homes, 401(k) plans, automobiles, and personal belongings. Being “house poor” or “car poor” is more the norm than the exception. At this stage of life, illiquidity is of little concern because a regular salary covers daily expenses, optimism reigns supreme, and peak earning years are yet to arrive. In addition, the most important asset of the young worker is his or her intellectual capital – and while it is impossible to precisely value that asset, it is an individual’s intellectual capital that will drive the accumulation of wealth in the later stages of one’s career.

Ibbotson Associates, an independent research and financial consulting firm specializing in asset allocation and portfolio construction, has developed a graphical depiction of the interrelationship between human capital (or intellectual capital) and financial capital. The chart shows how our human capital, defined as “an individual’s ability to earn and save money,” initially represents 100% of our “net worth” as we begin our careers. Over time our human capital gradually declines and is supplanted by our ever-increasing financial capital, or saved assets.

This graphic is interesting on many levels, but we’d draw your attention to one element in particular. Take a look at the vertical line that bisects the chart, labeled as “Retirement Date.” You’ll notice that human capital, even at age 65, continues to represent a significant portion of total net worth. There are three reasons for this. The first is the recognition that retirees still have plenty of knowledge, experience, and skills to contribute to the greater good of their families and communities. We don’t stop thinking because we stop earning a regular paycheck. The second reason is that our human capital continues to pay dividends in what Ibbotson calls “Deferred Labor Income.” Over one’s lifetime, human capital converts into financial capital. Part of that conversion process is represented by the salary we earn and part represents the accruing of lifetime income benefits in the form of Social Security or a traditional pension plan. Ibbotson has calculated the future value of these Social Security and pension payouts and incorporated them into the value ascribed to human capital at age 65. The third reason is that 65 is a totally arbitrary retirement age. Many people choose to continue working full-time or part-time long past age 65 and, whether we choose to do so or not, we have the human capital to further increase our financial capital.

As we move into middle age the focus changes to accumulating Investable assets. Retirement still seems far away, but college tuition looms large right around the corner. Disposable income is reaching a high point and a wider variety of investment options need to be considered as one’s nest egg reaches the “serious money” level. Diversification becomes paramount, and the two certainties of life -- death and taxes -- take on a new perspective. This is the stage when lifestyle decisions and investment temperament play a major role in how you manage and juggle your savings and expenses. Temptation is everywhere as the media bombards us with marketing messages trying to separate us from our hard-earned dollars. Whether it’s flat-screen televisions, oversized gas-guzzling SUVs, designer coffee, chic apparel that makes last year’s chic apparel look like dowdy detritus, or all-inclusive cruises to nowhere, we’re forced to make a conscious decision to spend or save. And the decisions we make at age 40 and 50 have a profound impact on how we live in our 60s, 70s, and beyond. These monetary decisions are quite similar to the choices we make in other aspects of our lives. For example, many of us are choosing to eat healthier and exercise more. In effect, we’re making a lifestyle decision today that will affect our future well-being. We’re making an investment that will pay dividends in improved health several decades down the road. The choice between spending and saving provides the same opportunity. Forgoing the 8-cylinder convertible for a 4-cylinder sedan today might mean that, during retirement, you won’t have to forgo the occasional four-star restaurant dining experience instead of a nightly four-ounce frozen dinner entrée.

Retirement triggers the third stage of money management, and this is where everything comes together or falls apart. Illiquid and Investable assets get repositioned into Income-producing assets designed to create a steady and reliable substitute for one’s working days’ salary. The trip wire is that no one knows for certain how long income will need to be produced. What is certain, however, is that many retirees will spend as much time in retirement as they did working, and the lifestyle choices you made in your peak-earning years will inevitably help you or haunt you. And while you cannot undo the financial errors and omissions of youth and middle-age, it is never too late to maximize whatever size nest egg you have and build a game plan to make it last a lifetime.


Traditional pensions are a thing of the past. They've been replaced by 401(k) and IRA plans that shift the burden of building and managing a retirement nest egg to the employee. The scary part is that most people are woefully unprepared to handle this responsibility.  That's where Your Nest Egg Game Plan comes in. The book provides an easy-to-implement framework to design an investment program that will provide the benefits of a traditional pension plan - while offering the flexibility that retirees (and today's increasingly volatile markets) demand.

Novelist & nonfiction author