Archive for October, 2010
The top 10% of America’s wealthiest families own 55.1% for the tax free investment gains built up in life insurance according to a 2007 Federal Reserve report, while more at more Middle class Americans are pouring more money into qualified plans(IRA, 401K, Thrift savings) than ever before.
How can this be that Americans are setting themselves up to be taxes at what will almost assuredly be a higher tax rate in the future.
Is middle class America blind to the mass exodus from the stock market by the wealthy?
Are people in America so poorly educated that they simply don’t have enough information to choose what is clearly in their long term financial interest?
These three vexing questions are important to answer because it is very clear that the middle class will have themselves to blame come retirement time. In the October 3 issue of the Wall Street Journal a very insightful article titled ” Shift to Wealthier Clientele Puts Life Insurers in a Bind.” http://bit.ly/cW1mRQ (click here)
Please read the above article because it details the fact that the wealthy have been moving their money out of other investments and into cash value life insurance for the tax free advantages. For the first time in history it is not the middle class holding up the life insurance industry but the Wealthy. So while the middle class run toward the qualified plans created in the eighties and offered by employers all around the country the wealthy are opting out of the tax system.
Success leaves clues
What the wealthy have known for years is that the proper Cash Value Life insurance becomes a huge tax shelter and the best means of passing on tax free wealth to future generations. With the national debt out of control and social security and medicare needing to be funded the only way to raise the additional revenue will be raise taxes on income and on retirement plans. The wealthy are getting out of the way of this run away train and so should you.
Why are the Middle class going toward paying more taxes?
The Middle class is really not getting good advice. Most are using qualified plans issued by their employers that offer pretax benefits and contribution matches. Truthfully, no one has even thought about how bad the plans will be from a tax perspective. Avoiding tax on the seed to pay possibly higher taxes on the harvest. The Middle class haven’t really looked at the unparalleled risk of the stock market and how strategies like dollar cost averaging and investing for the long term have cost many Americans half their life savings in 2008 when the market went from 14000 to 6700 overnight.
Further, the advisors of the middle class are not informing their clients about whats going to happen when the market comes back and baby boomers make a move toward safety and exit the market in mass like they did in Japan 20 years ago. When the Japanese sat in the same position 20 years ago they took all of their money out of the market and now two decades later the Japanese stock market is still 75% under where it was 20 yrs ago even though the economy has recovered.
Financial Education in the Biggest Imperative for Middle Class
If you are reading this blog you can’t afford to ignore the trend of the wealthy going into tax free life insurance. http://bit.ly/cW1mRQ (click here). The proper tax free strategy is going to be a game changer like no other opportunity in your lifetime. But be clear that not being tax free is totally your choice and in fact it always has been.
The options available to the Wealthy are totally available to the Middle Class. The tax laws are the same for the entire country. Ask yourself what are you missing and get educated.
Please give me your feedback on the article in the Wall Street Journal – http://bit.ly/cW1mRQ (click here)
Welcome to the wonderful world of financial options. Every financial vehicle is open and available and you are welcome to pick from the whole group of them. One word of caution, your choices are strictly your decisions and by law the person offering the most popular choice can’t give you any advice on how to use the product or how the product works. Good luck and we hope you have a wonderful future.
The above scenario is how most begin saving for retirement, college savings, weddings, and other long-term future plans. Most start with an employee benefit plan that offers a menu of options. You are asked if you are low, moderate or high risk. You pick your tolerance for risk believing that the younger you are the more aggressive you can afford to be and then you are in the financial matrix forever.
The advantages to entering into the financial matrix this way are that you will be making pre tax contributions, a possible company match, and the ease of having it taken directly from your paycheck. After a short while you don’t even miss the money and you learn to live on what you take home. Perfect plan right?
When you start to take the money at retirement it will be taxed then when the amount is hopefully ten times greater. This little omission will cost you tens to hundreds of thousands, picture avoiding the 30% tax of $1,000.00 to pay the 30% tax on $10,000.00. Not such a good deal.
Should you need to use any of the money you are saving on the way to retirement you will have two not so attractive options: Withdrawal the money and pay interest and penalties or borrow the money and immediately start paying another bill when you probably can least afford another bill.
Lastly and most importantly, you can lose some, most or all of your life savings if the market performs badly. Some of the best savers in the world watched as their IRA, 401Ks, thrift savings plans, 403Bs and other Qualified plans were cut in half when the market dropped from 14,000 to 6,700 in the fall of 2008.
It would be nice to know that you will be taxed on your harvest as opposed to your seed, that you will be penalized for using your own money before retirement, and that you can lose your money if the market goes south.
Would you have signed on for such a plan if it had been fully explained?
So why do people sign on to these plans? They sign on because that is what the company offers and it sounds like a good and simple idea when you don’t have a better one. We sign on because of youth.
The benefit of age and experience is that once you have ridden through a couple of storms you realize the tax consequences, the penalties when you need money for emergencies, and the losses you endure in bad markets which cost you your contributions and the company match. Not having dealt with all of the “what ifs” works against young people making these decisions and there is only one solution to counter this, EDUCATION.
A proper education on financial principles rather than products is what is needed. The idea of trying to figure out the market, stocks , bonds, mutual funds, annuities, and insurance will make you want to pull your hair out! Rather you should start with understanding how things work as it relates to your life goals. I believe you must ask a few life defining questions:
1) Do you want to be free of potential loses in the stock market?
2) Do you want to be free of income taxes in retirement?
3) Do you want access to your savings without penalties?
4) Do you want a plan that will fund itself if you get sick and can’t perform in your current occupation?
5) Do you want the peace of mind of knowing you and your family are protected, no matter what happens?
If you can’t look at your plan and answer yes to each one of these questions honestly, then there are some things you need to learn, NOW! It does not matter your age. Most near retirement are experienced at losing money before they ever sit down to understand how it actually works.
Is that what you are planning to do?
They say youth is wasted on the young but I don’t believe that. I say money is wasted on the uneducated and when you don’t know how it works you are bound to lose no matter how much money you earn.
Take the time to learn what you need to know.
Also check out The Big Payback By Tony Brayboy : http://readthebigpayback.com/3-matrix/ . Learn what you need to know now.
Have a great day!