Using Leverage to Create Retirement Income
Traditional retirement planning focuses on accumulating assets, which eventually are converted into an income stream to last a lifetime. Creating retirement income without exhausting your portfolio presents a fundamental challenge.
This is especially problematic for early retirees for three reasons. First, your money may need to last much longer than traditional retirees’. Second, early retirees lack an income floor from social security and the ability to reasonably predict spending on insurance premiums provided by Medicare. Third, there is a large psychological shift from a high savings rate, required to accumulate assets that enable early retirement, to spending down your assets.
As I confronted these challenges, I began to look for alternative ideas to generate more retirement income. Two books expanded my thinking beyond using just stocks and bonds to support retirement spending.
Robert Kiyosaki’s “Cash Flow Quadrants” introduced me to the idea of using a small business as an investment to generate cash flow. He differentiates business owners, those that work on their business, from the self employed, those who work in their business.
Tim Ferriss’ “4-Hour Workweek” introduced the idea of creating a lifestyle business. He rejects the idea of retirement completely. Instead, he promotes building income streams that align with your desired lifestyle. This allows you to live well without delaying gratification.
The idea of creating a hobby business to supplement cash flow is appealing. But I found both books long on inspiration, but short on practical advice.
So I was excited to have an opportunity to read and review Todd Tresidder’s new book “The Leverage Equation: How to Work Less, Make More, and Cut 30 Years Off Your Retirement Plan.” Continue reading to learn if this book can help you create new income streams without creating a job.
Caught in Semantics
Tresidder’s work has been instrumental on my early retirement planning. In particular, his book “How Much Money Do I Need to Retire” is one of the best personal finance books I’ve ever read. It helped eliminate fear and uncertainty and made planning early retirement a fun and creative process. I was eager to read “The Leverage Equation” due to my past satisfaction with Tresidder’s work and its relevance to my current situation.
In the first section of “The Leverage Equation,” he repeatedly makes the argument that two paths to financial independence are using leverage or combining “extreme frugality” with traditional paper investments.
I define extreme frugality as a lifestyle of sacrifice. Having achieved financial independence in my early 40’s working a normal job, using traditional unleveraged investments and without sacrificing anything of value made the “extreme frugality” argument ring hollow.
Having some financial security gives time and peace of mind to utilize the leverage principles outlined in the book to develop other income streams. They can in turn enable a more abundant retirement. The paths need not be mutually exclusive.
Repeatedly beating on the “extreme frugality” drum made the beginning of the book feel like hyperbole. I share that because readers with similar perspectives and life experiences, but being unfamiliar with Tressider’s past work, may be turned off and stop reading.
Those willing to look beyond this messaging will be rewarded with practical, well organized, high value content. Tresidder effectively organized a lot of information into three sections: Principles, Strategies and Implementation.
9 Principles of Leverage
Tresidder starts with principles of using leverage to build wealth. His first principle is mathematical expectancy. This concept shifts thinking away from simple probability of success or failure. Instead, he proposes considering the formula of probability times payoff when making financial decisions.
You can use leverage to maximize gains when there is a high expectancy. Conversely, he prescribes risk mitigation to limit losses you can’t afford.
Other key principles deal with limiting ideas associated with trading time for money. Two particularly resonated with me.
The first principle is that you grow wealth by providing value and solving problems. Many people have self-limiting beliefs about money. Leverage is not unethical or impractical. It is simply a tool that allows you to help more people, which in turn increases your value.
The second is the principle of making yourself unnecessary. Tresidder uses the phrase “where you’re the cog, then you’re the clog.” The book provides practical exercises to eliminate yourself from your business except where you provide unique value by doing work no one else could do.
As I look to build a second income stream as a writer and blogger, leverage is a big piece of the equation. I have the ability to do work one time that can then provide value to many people over years. I can also use leverage principles outlined in the book to eliminate the parts of any work I don’t enjoy, allowing me to focus on work that fits my desired lifestyle.
This is a sharp contrast to the work I did in my former career as a physical therapist. In that model, I was “the cog,” requiring the ongoing exchange of my time for money while working around others’ schedules.
6 Types of Leverage
In the second part of the book, Tresidder breaks down leverage into six types:
- Technology and Systems,
- Communications and Marketing,
- Network and Relationship,
- Knowledge and Experience.
The financial leverage chapter stands out for two reasons. First, Tresidder emphasizes that financial leverage is unique. It increases potential rewards when it works well, but also magnifies bad outcomes when it fails. He demonstrates this with clear examples.
Second, his financial expertise comes through. He effectively explains multiple ways you can incorporate financial leverage, including debt in various forms and using advanced investing techniques such as trading futures contracts and options.
He emphasizes the benefits and risks of these instruments and why they should be used only in specific situations when you have appropriate knowledge, experience and ability to control risk.
The explanation and application of the remaining five types of leverage take many concepts that are simple, intuitive, and already used unconsciously by most. Tresidder organizes these tools so they can be applied deliberately and strategically to overcome common obstacles.
After reading the book, I see numerous applications that can be applied to operating this blog and launching my own book that were not previously apparent.
The final section of the book ties together principles and types of leverage in a practical way. Often those teaching a concept present a one size fits all cure for every problem. Tresidder takes a different approach.
He emphasizes that when building a business, you must focus on developing efficient and profitable processes first. Leverage is simply a tool that accelerates and amplifies the processes already in place. That can be good or bad.
He notes that leverage is both a science and an art form. This enables you to apply the principles and concepts in creative ways that fit your desired lifestyle. He then gives suggestions to start incorporating these tools into your wealth building plan.
Who Should Read This Book?
Most readers find this blog while looking for ways to retire sooner and more securely. There are two segments of our readership that would benefit from this book.
For some, the path of saving a high percentage of your income and investing it in simple, low cost, passive investments that we typically advocate doesn’t provide a feasible path to reach your goals. If you are in that camp, The Leverage Equation offers a legitimate alternative path to achieve financial independence quickly.
The section on financial leverage alone is worth the cost of the book. It will help frame the risk/reward relationship of alternate investing paths that can draw in those looking for higher returns to speed up the wealth building process. The knowledge shared in The Leverage Equation can help prevent mistakes that could destroy your finances.
I frequently write and talk about the need to redefine retirement. A traditional view of retirement can feel restrictive to you, as it does for me. If that idea resonates with you, you’re in the second group for whom The Leverage Equation is an actionable book to help design income streams compatible with your lifestyle.
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