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!