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The Fiscal Fitness Letter – Debtor vs Saver vs Wealth Creator

2012/01/18 By Leave a Comment

Debtor vs. Saver vs. Wealth Creator & the Private Reserve System.

What is the best way to make those major capital purchases that occur during your lifetime, such as automobiles, major appliances, weddings, education or even homes?

Most people believe the same thing I was told when I was young:  Save money until you have enough and you can afford to buy what you want.  Don’t spend money you don’t have.  Don’t borrow money.  Don’t pay interest.

The only accepted exception to this would be using a mortgage to purchase a home.   But conventional wisdom states you should pay off that mortgage as fast as possible.  Does that match what you believe to be the right or the most efficient way to use your money?

The fact is you finance everything you buy.  Either you pay interest when you borrow, or you give up interest you could have earned when you pay cash.  You must consider the costs associated with these purchases, especially the Opportunity Costs.  It’s not just what you pay… it’s ‘How’ you pay for it.

Let’s assume you want to buy a new car and the one you want costs $30,000.  If you live according to the teaching above, you work hard to save up enough money so you can buy the car.  How many cars will you buy over your lifetime?  Your auto acquisition process through life might look like this picture of the Saver’s Cycle in Figure 1:

Figure 1. Saver’s Cycle.

You save enough, purchase the car and deplete the savings and start saving again for the next purchase.

On the other hand, some people find themselves in need of a new vehicle but they don’t have the money saved for the purchase.  They must borrow the money and then work to pay it off.  They might fall into an acquisition process like the Debtor’s Cycle, see Figure 2.

 

Figure 2.  Debtor’s Cycle.

The Debtor borrows the money and works to get back to zero.  Interestingly, the Saver ends up in the same place.  The Saver saves and then spends his way back to zero.   Check Figures 1 and 2 again and note the Zero line.  Indeed, The Debtor loses money that he pays in interest to the lender.  That’s a primary reason for the widespread conventional wisdom to avoid borrowing.  But, if you make the $30,000 cash purchase, you also lose money.  In fact, you potentially lose even more money than The Debtor.  Let’s look closely at the costs and then look at a third way to make these types of purchases.

Let’s say you’re ‘The Saver,’ you already have $30,000 and you’re ready to buy your car. (By the way, it works just as well for $10,000 cars or $80,000 cars.)  The question: “Is the smartest way to buy the car to a) pay $30,000 cash for the car or to b) keep control of the cash in a safe place earning a rate of return and borrow $30,000 from the dealer and pay interest on a loan?”

Assume the terms for borrowing from the dealer are 6% and the $30,000 is amortized over 5 years.  You’d pay $580 per month for the car, a total of $4799 interest over the 5 years and have the car loan paid off.  See the upper half of Figure 3.

Let’s also say you took the $30,000 cash you were going to use to pay for the car and instead put it in a safe place and earned 6% (the same as the cost of the loan) over the next 5 years.

What would your $30,000 become in five years compounding at 6%?  Your $30,000 would earn $10,466 in interest and grow to $40,466 by the time you have the car paid off.  See the lower half of Figure 3.

Figure 3. Amortizing at 6%, Compounding at 6%.

By NOT paying $30,000 cash for the car, you allowed your money to earn $10,466 in 5 years.  Meanwhile, you paid $4799 in interest over those 5 years, netting $5,667.  If you borrow rather than pay cash, you’re actually $5,667 financially better off after 5 years!

Interest earned @ 6%

$10,466
Interest paid @ 6%

-$4,799
Net gain by borrowing vs paying cash

$5,667

Another perspective is that by paying cash, your Lost Opportunity Cost on your money is $5,667 and you actually would lose more money by paying cash for the car than by borrowing and simply paying the $4,799 in interest.

What if the loan only cost 4% and you earned 7%?  Reason tells you The Lost Opportunity Cost would be even greater, doesn’t it?   You’re right:

Interest earned @ 7%

$12,077
Interest paid @ 4%

-$3,150
Net gain by borrowing vs paying cash

$8,927

Let’s revisit the question, ”How many cars will you buy during your lifetime and what would paying cash actually cost you in lost opportunity costs over your lifetime?”  Imagine this cycle recurring  5 times if you bought 5 cars over your lifetime.  That’s almost a $44,500 unnecessary “Wealth Transfer” to lost opportunity costs that’s due to ‘How’ you pay for your car (if you pay 4% and earn 7%, as in the example above.) Is paying cash the most efficient use of your money?

There’s a more efficient way.  Rather than being a Debtor or a Saver, what if you try the “Wealth Creator’s Cycle?“  In this case, rather than save and then spend your money on the car and lose control of your cash, you accumulate and collateralize your money and retain control of your cash.  You allow your money to continue to compound, build greater wealth, increasing your collateral capacity.  See Figure 4.

Figure 4.  Wealth Creator’s Cycle.

You might begin your own Private Reserve Account once you save some amount of money – $5000 or $10,000, in our example, $30,000, that you collateralize and repay repeatedly.  You never allow your money to be ‘consumed’ by the purchase of the car.  That enables the $30,000 to continue compounding for you throughout your life, increasing your collateral capacity and putting you in a stronger financial position in the future.

Which is the most efficient way to optimize the performance of your money for you as you make major capital purchase – including your home?  Debtor?  Saver?  Or Wealth Creator?

If you’re in wealth-building mode and want to optimize the performance of cash flow and assets, the answer should be clear.  Math is emotion-less and it doesn’t lie.  The difference over 10 year or 30 years can be incredibly life changing.  See Figure 4.

Building your own ‘Private Reserve Account’ and using the ‘Wealth Creator Cycle’ for capital purchases and other projects during your lifetime will help avoid unnecessary ‘wealth transfers’ due to lost opportunity costs and place you in a much stronger financial position.  You can apply the same strategy to areas other than capital purchases, as well, e.g., paying for children’s/grandchildren’s college expenses, starting a business, investment capital, paying for your home, etc.

If you’d like to learn how to increase your collateral capacity, build a Private Reserve account and how you can make it work for your projects, call for a no obligation consultation.  But don’t delay.  As we discussed last time, the one thing you can never recapture is time.

To Your Prosperity,

Scott, January 2012

Scott Scholz

Independent Registered Financial Consultant

425-829-4110     www.ScottScholz.com   scott@scottscholz.com

PS  Financial success is achieved by following the right principles, not following the current ‘right predictions’ which change from day to day.  “The Fiscal Fitness Letter” presents the ‘Right Principles’ for financial success and challenges misleading conventional paradigms about money and achieving financial independence.  If the principles presented here make sense to you, please share them with those you care about.   Add their name to The Fiscal Fitness Letter mailing list above.

“Your mind is like a parachute. It’s only functional when open.” – Tolleson

Filed Under: Newsletter: The Fiscal Fitness Letter

The Fiscal Fitness Letter – Time and Compounding Interest

2012/01/12 By Leave a Comment

It’s About Time.

Once while being questioned about the need to take action, President John F. Kennedy responded with this:  “The great French Marshall Lyautey once asked his gardener to plant a tree.  The gardener objected that the tree was slow growing and would not reach maturity for 100 years.  The Marshall replied, ‘In that case, there is no time to lose; plant it this afternoon!’”

This missive, indeed, will be about the power of Time and Compounding Interest working together.  Time is both your most powerful ally and formidable adversary.  Indeed, that applies to more than just our finances.  Time is the one thing you never get back in life.  You can regain your health, your money, old relationships…  But not time.  There’s no time to lose!

One of the big shortcomings in our culture is that we don’t do a better job of educating, especially our kids, about money – How it works and how to make it work for you.  We learn how to spend it, easily enough.  But not how to conserve and nurture it for the future for a time when we won’t have to work so hard for it.  Those who understand this don’t have to wait until age 60 or 65 to retire, if that’s their goal, or to engage and enjoy life on an entirely different level.

If you have children, for example explore this example with them and ask them, “Who will end up with the most money at the end?” and which they would rather be?  The example isn’t only for children:

Saver #1 is a hard worker who understands the value of time and the importance of saving.  He gets a job at age 16.  Each year, he saves $2,000 – roughly 250 hours of work at minimum wage, 6 weeks of full-time work in the summer or 25 weeks of part-time work (10 hours per week) during the school year.  Either way, it’s not an unrealistic amount of money for an enterprising 16 year old to earn, while still having plenty of money for current spending.

Saving $2,000 per year becomes a habit, and Saver #1 does it every year.  Even after he begins his career in his mid-20s, he continues to set aside $2,000 per year.  He invests these savings conservatively to earn 8% and in an account where the earning are not taxed as they accrue.  He never saves more than $2,000 per year.  He has plenty of money to spend on things he needs and wants, but he always remembers to “pay himself first.”

By the time he’s 40 years old, he’s contributed $48,000 to his savings program.  At that point, he calculates that if he continues to earn as he has, he’ll have plenty to live on when he’s 65.  So, at age 40, Saver #1 stops saving money.  He’s now free to spend all the money he makes for the rest of his life.

Saver #2 doesn’t learn to save when he’s young and doesn’t even get a job until after college.  By that time, he’s so busy buying things – cars, vacations, dinners at nice restaurants, clothes, houses, etc., he never can “afford” to save a dime.

He wakes up at age 40 and realizes he doesn’t have anything in the way of a retirement fund or liquid savings at all.  So, frantically, he begins to save, and he does a great job.  He saves $10,000 per year, every year, to make up for lost time.  He knows he’s got to play “catch-up.”  Like Saver #1, he invests conservatively, because he can’t afford to lose money or time, and earns 8% a year.  By the time he turns 65, Saver #2 has contributed $250,000 towards his savings program.

Guess who has more money at age 65?  Is it Saver #1, who never contributed more than $2,000 per year and whose savings totaled $48,000 in his lifetime?  Or is it Saver #2, who had to save five times as much per year and saved $250,000?

At age 65, Saver #1 has more than $1 million in his account.  Saver #2’s account has about $800,000.  You might ask your child, which Saver would you rather be?  And, would it be easier to save $2000/year or $10,000/year?

Now, assume both Savers want an $80,000 per year ‘quality of life in today’s dollars’ and see how long this money will last.  How long will their money provide for Saver #1 and Saver #2?  If inflation averages what it’s been for their 65 year lives, inflation will be 3.96%.  (That’s not a prediction.  I’d be happy to put your own numbers into the calculator for a test.)  Let’s also assume a 15% income tax bracket.  (I’m not predicting future tax rates will be that low, either.)


   Saver #1 can enjoy an $80,000 per year quality of life (adjusted for inflation and taxes) until age 88. (assuming he also receives $2000 per month in Social Security benefits from age 67).  After age 88, he’ll have only Social Security benefits to live on.

Saver #2 will enjoy an $80,000 per year quality of life (adjusted for inflation and taxes and including the same Social Security benefits) until age 80.  Then, his savings are consumed and he’ll have to survive on only Social Security benefits, or get another job.

Most teenagers should be able to understand the assumptions in these examples.  If you need to simplify, you might omit the details about the income tax bracket and inflation.  It’s the principle you want them to grasp.

If your child says, “Gee, that’s a no-brainer.  I’d obviously prefer to be Saver #1.” you can congratulate him or her (and yourself) and get him to start a savings habit immediately.  A top priority for earned money every month is to ‘pay yourself first.’  Start early.  Take advantage of time and the power of compounding interest and enjoy financially security earlier in life.

Unfortunately, in my years of practice, I’ve encountered too few people who’ve implemented this simple practice of Saver #1 above.  The vast majority are Saver #2.  They’ve put themselves into a spot, stressed and afraid.  It doesn’t matter why.  The best time to change and start saving is now.  There’s no time to lose!

In case you question the assertion that the vast majority of people around you are Saver #2, allow me to share this:

In December, 2010, Wells Fargo bank released a study saying the average American has saved less than 7% of their desired retirement nest egg, and respondents aged 50-59 have saved an average of only $29,000 for retirement.

The study goes on to say more than a third of respondents believe they’ll have to work during retirement in order to afford the things they want or just to make ends meet.  The report claims there is another third living in a dream world.

This supports an earlier study by the Bureau of Labor & Statistics and the IRS, which concluded that only 1% are financially independent, 4% are financially secure and the remainder require some form of financial support from external sources.  We should note this includes Social Security, which was not intended to supply all of one’s financial needs.

Laurie Nordquist, Director of Wells Fargo Institutional Retirement Trust states, “Too many American have their heads in the sand in the face of obvious savings deficits.  Barring a miracle, a winning lottery ticket or a big inheritance, they’re going to be forced to dramatically cut back their lifestyles after retirement.”

Although that may be the unfortunate truth for many, it needn’t be the case for all.

So where can you start?  Or, where could your child start?

Start as early as possible to take advantage of Time and Compound Interest to create financial success and security.  Consider “The Smartest Savings Plan for Our Times,” as a wealth building cornerstone suitable for any saver.  You can acquire a copy, free, via my website, HERE.  There’s no time to lose.

Naturally, for assistance or guidance designing the best plan for financial success, I remain at your service.

To Your Prosperity,

Scott

Scott Scholz

Independent Registered Financial Consultant

425-829-4110     www.ScottScholz.com   scott@scottscholz.com

 

PS  Financial success is achieved by following the right principles, not following the current ‘right predictions’ which change from day to day.  “The Fiscal Fitness Letter” presents the ‘Right Principles’ for financial success and challenges misleading conventional paradigms about money and achieving financial independence.  If the principles presented here make sense to you, please share them with those you care about.  Add their name to The Fiscal Fitness Letter mailing list.

Filed Under: Newsletter: The Fiscal Fitness Letter

No Market Risk For The Long-Term Serious Money You Don’t Want to Lose

2011/12/19 By Leave a Comment

If you could fund your IRA, rollover an old 401(k) or invest in an asset class which has no market risk, provides the opportunity for exceptional growth and provides a safe haven to recover market losses of the past decade, you would probably want to know about it, wouldn’t you?

If you could invest your money in a safe place, unaffected by stock market volatility and the uncertainty of where the stock market, bond market, real estate market, commodity market or interest rates will be 3 to 5 years from now and you could potentially still earn a return that would substantially outperform those markets, you’d probably want to know about it, wouldn’t you?

Rather than earning your return by negotiating risk over the next several years, if there were a way to establish your rate of return by buying the investment at a discount at the outset, you’d probably want to know about that, too, wouldn’t you?

There’s a 20 year old publicly traded company which allows exclusive access to an institutional asset class for accredited retail investors.  This company has historically delivered a rate of return that has out-performed the major markets without subjecting one dollar of principal to market risk.

If your IRA’s, old 401(k)’s or investment accounts don’t deliver this type of performance and safety, with no market risk, then click HERE to find out how this is possible.

See what over 27,000 other accredited investors have trusted their investments to.  Warren Buffet made his initial purchase of $207 million in 2004 in this asset class (Wall Street Journal – May 2005.)

After watching the video, call for company details, an historical company performance review, an individual portfolio showing worst case scenarios for annual ROI.  You’ll wish you learned about this asset class before you had to endure the market crashes of 2000 and 2008.

Filed Under: Build Tax Advantaged Wealth & Tax Free Income

And the New Retirement Age IS…

2011/11/16 By Leave a Comment

Wells Fargo bank says 80 is the new 65.  In other words, whereas people used to think 65 would be their retirement age, now the expected retirement age is 80. (Bloomberg, Nov 15, 2011)

Makes sense.  Most people won’t be able to work once they reach 80.  And even if they could or wanted to, who’s likely to hire them?

Why are people NOT retiring at 65?

According to Wells Fargo the average Baby Boomer has only about $29,000 saved toward retirement.  A recent Wells Fargo survey said that 74% expected to work in retirement: 39% because they need to, 35% because they want to, 25% because they don’t have sufficient savings.

A spokesperson for Wells Fargo said most respondents said there were No Good Alternatives to the stock market for them to save their money.  45% said they’d invest their money into a CD. One year CDs yield .35% and five-year CDs yield 1.19% according to Bankrate.com.  Choosing CDs as an option confirms that fiscal literacy in our country isn’t what it needs to be.  An investment that doesn’t even keep pace with inflation can hardly be considered an investment.

Respondents complained about the limited options where they could save their money with the degree of safety and performance they desire.

If you know anyone who thinks that way, share with them that they need to look outside of banks or Wall Street firms, away from where mainstream media and advertising agencies direct their attention.  There’s a reason the marketing machine of these institutions feeds innocent, trusting folk the message it does.  Because they can profit from the incredibly low level of fiscal illiteracy and naivety that permeates our society.

There are safe, steady places to grow your money today, even in these volatile economic times, without the risks of the stock market and with better returns than bank CDs.

Start with: “The Smartest Savings Plan for Our Times.”  This plan should easily be the essential cornerstone in any financial foundation.  It provides protection against market risk.  It delivers reasonable rates of return.  It allows for tax deferred growth of the money and tax free access to the money.  It is far safer than most allocation models in 401(k) plans.  It’s more flexible and allows you more control of your money than those plans as well.

Unfortunately for those respondents to Wells Fargo’s survey, banks don’t offer “The Smartest Savings Plan for Our Times.”  You can learn more about it HERE.

Filed Under: Build Tax Advantaged Wealth & Tax Free Income

The Smartest Savings Plan for Our Times

2011/10/27 By Leave a Comment

Request your FREE copy below:

“The Smartest Savings Plan for Our Times -

The Essential Cornerstone for Any Financial Foundation.”

Provides true security and peace of mind by following the Right Principles, not by chasing the supposed ‘right predictions.’

If you could-

    1. Protect your money from market risk so you won’t lose money when the market drops,
    2. Make a reasonable rate of return, even in a bear market,
    3. Earn double digit returns if the market goes up double digits,
    4. Grow your money tax deferred,
    5. Access your money tax free and penalty free any time you want – more flexible than a 401(k),
    6. Create a tax-free income stream you won’t outlive,
    7. Reduce the amount of taxes you’ll pay on Social Security benefits, allowing you to keep more of that benefit,
    8. Reduce the taxes on withdrawals from your tax deferred Qualified Plans (401K/tax deferred IRA, etc),
    9. Be able to be your own bank rather than be a customer of a bank,
    10. Invest With Safety, Predictability, Choice, Control, with Peace of Mind and a clear path to financial independence with dreams of a lasting legacy, not mere survival,

would you?

Complete the form below to receive your FREE Special Report:

“The Smartest Savings Plan for Our Times –

The Essential Cornerstone for Any Financial Foundation”

This report explains a key, cornerstone strategy appropriate for a portion of any financial foundation.  Even if you already have a healthy nest egg, this may provide you greater protection from market risks and unnecessary taxes, which would enable you to sleep even better at night.

Get your free report by completing the request form below.  You have nothing to lose and invaluable knowledge to gain.  Then, take action with your new knowledge and call 425-829-4110.

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Given what’s occurred in the financial markets during the past few months, not to mention over the past dozen years, maybe you’d be happy if you could simply protect your money from market risks.  This report will show you how to do that and still get the performance cited above.  Get your free report now.  Complete the form below.

Furthermore, given what’s occurred in the halls of government for the past several decades, most people feel income tax rates will move higher in the future.  Do you feel similarly?  Tax rates have been at historical lows since the 1980s.  This report will show how you’re able to grow your money tax deferred and access your money tax free and penalty free whenever you want for whatever you want.  You can’t do that with your Qualified Plan money.  How would you like that kind of control over your long term, serious money?

Get your free report by completing the request form below.  -  Then, take action with your new knowledge and call 425-829-4110.

 

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Filed Under: 401k retirement plan, Build Tax Advantaged Wealth & Tax Free Income, Creating Wealth Books, Planning for Retirement, Wealth Creation

Why our clients sleep well, even after the market drops 600 points!

2011/08/09 By Leave a Comment

Their long-term serious money is protected.  They don’t lose money when the market declines.  And they make solid returns when the market increases.

Our clients employ the ‘Lock In & Reset Strategy’ described in this video.  Take 5 minutes to watch the video below and learn how you can protect yourself and not lose money when the market drops and make a double digit rate of return when the market goes up.  You’ll also see how this ‘Lock In & Reset Strategy’ has performed during the Bear market of the past 11 years.  Compare how the ‘Lock In & Reset Strategy’ and the S&P500 Index have performed since 1999.  Note how much more money you can have when you don’t have to make up for market losses.  Decide which balance you’d prefer to have.

If you value security and predictability, this might be a suitable tool for you.  You don’t have to lose money when the market drops.  Clients who have put their money in this strategy have not lost a dollar due to market performance in any recent market meltdown.

 

After you watch the ‘Lock In & Reset Strategy’ video and understand how it works and have some historical perspective of its performance, watch the following video review of the strategy.

For a free, no obligation conversation, call Scott Scholz at 425-829-4110.

Let’s discuss whether or not the ‘Lock In & Reset Strategy’ might be suitable for a portion of your long-term serious money, and how it works in conjunction with the other strategies presented on this website.

Filed Under: Build Tax Advantaged Wealth & Tax Free Income

Paying Off Your Mortgage Is A Mistake – A Workshop

2011/08/05 By Leave a Comment

Most homeowners believe the best way to quickly pay off their home is by simply paying extra principal payments on their mortgage.  Others believe in bi-weekly mortgage payment plans, while some use a 15-year versus a 30-year amortization.  The fact is… none of these methods are the best way to own your home “free and clear.”

What is the best way? We invite you to come and find out and learn how to wisely accelerate the pay-off of your home mortgage while building a tax-advantaged nest egg with NO Market Risk!

Our workshop,

“Common Sense Strategies for Successful Equity Management”

is an opportunity you won’t want to miss. You’ll also learn how to maximize your mortgage interest write off, create an instant estate and transfer funds to your heirs tax-free, pay off a 30 year mortgage in half the time without any additional payments… and much, much more.

This program keeps you in control of your money.  Many Seattle area residents have attended our previous workshops and loved the results.

Thursday, August 18th, 7PM-9PM

Embassy Suites Hotel – 3225 158th Ave SE, Bellevue, WA 98008  Directions-HERE

Call 425-829-4110 or email to info@scottscholz.com to reserve your seat!

 

Filed Under: Build Tax Advantaged Wealth & Tax Free Income

Tax Treatment of The Four Phases of Retirement Planning

2011/06/07 By Leave a Comment

A well compensated professional got a little anxious the other day talking about his retirement plan and his future.  I’d asked him if he knew what tax bracket he’d be in when he retired and if he knew how much of his retirement savings were his and how much were Uncle Sam’s.  (You might want to visit that discussion HERE, when you’re done with this page.)

He was under the impression that his 401(k) retirement savings were his and was incensed to learn that it wasn’t.  To compound matters, he also believes that tax rates in the future are highly likely to be higher than they are today, so even if he hoped to be in a lower tax bracket when he retires, he expects tax rate increases will have him in the same tax bracket he’s in today – if not higher.

Here’s what he wished his 401(k) plan administrated would have told him:

There are 4 phases to retirement planning and they don’t all get the same tax treatment.

During the Contribution Phase, you get tax favored treatment – you get to defer a portion of your contribution to your retirement plan based on your income tax rate.

You also get tax favored treatment during the Accumulation Phase – as your contributions compound tax deferred.

When you’re advised to save money in a 401(k) or tax deferred Individual or SEP IRA, the ‘tax favored’ treatment during the Contribution and Accumulation phases are presented as justification for funding these plans.

Unfortunately, many people don’t realize they’ll pay taxes during the Withdrawal Phase, when they withdraw their money from their retirement plans in the future and during the Transfer Phase when those funds pass to their heirs after they die.  They don’t go through any hypothetical exercises to get an understanding of what that might cost in the future and how that might impact lifestyle.

You not only defer/postpone the taxes, you postpone the tax rate, as well.

If you believe, like the professional above, that tax rates will be higher in the future, is postponing taxes like this really a good idea?

Here’s a demonstration of how to calculate the costs and impact on your lifestyle.

To protect against overpaying taxes during the Withdrawal and Transfer Phases, make sure you’re funding the right options during the Contribution Phases.  Your 401(k) might cost you more than you realize.  Call Scott Scholz, independent Registered Financial Consultant, 425-829-4110

Filed Under: Avoid the 401(k) IRA Tax Deferral Trap, Avoid the IRA/401(k) Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, Financial Planning Articles, Financial Planning for Retirement, Financial Planning Videos, Investment Consulting, Planning for Retirement

401(k) Retirement Plans Flameout Burns American Savers

2011/05/13 By Leave a Comment

Forbes article May 10th, 2011 titled “The Danger Of A 401(k) Flameout” asserts that the 401(k) retirement plan is an experiment that has failed Americans in their quest to secure their financial future.  The writers discuss how the stock market declines of 2000-2002 and 2008 altered the plans of people hoping to retire during those years.

Imagine you were 64 years old in 1999 and you’d saved $100,000 and you were planning to retire in 2003.  The famous dot-com bubble burst in 2000 and fizzled through 2002.  If you were invested in a popular, low cost S&P500 Index fund, here’s how your money would have performed:

Year 

end

Historical Return

of S&P500

$100,000 basis
1/1/2000 19.50% $119,500
2001 -10.14%

$107,383
2002 -13.04%

$93,380
2003 -23.37% $71,557
2004 26.38% $90,434
2005 8.99% $98,564
2006 3.00% $101,521
2007 13.62% $115,348
2008 3.53% $119,420
2009 -38.50% $73,443
2010 23.50% $90,703
1/1/2011 12.80% $102,312
Account balance:

$102,312
Av ROR 0.19%

On January 1st, 2000, you had $119,500, but the 3 negative years siphoned $48,000 away from your account and you postponed retirement plans and accepted that you needed to work a few more years.  The market helped out for a few years and you fought back to about where you were in 2000.  Then the drop in 2008 whacked your savings by 38.5%

Usually after the market drops, it’s followed by a rebound and there’s been a 2 years bounce since 2008.  By the beginning of 2011 on the chart above, you’re back above the $100,000 balance you had back in 1999.  Over this 12 window of time, the S&P500 returned less than 1/5th of a percent!  How can you build and secure wealth with those kinds of returns?

Do you know anyone who experienced this pain and disappointment?  You’ve at least read of such cases.

Of course, you’ve heard the mantra of investment advisors: “buy and hold for the long term and the market will work out fine” or “the market always goes up over time.”  The key question is how the market’s ‘time’ happens to coincide with YOURS and what you need to accomplish!

In the example of the individual above, it didn’t work out very nicely, did it?

Perhaps you’re thinking the individual above shouldn’t have been heavily exposed to the S&P500 and should have been allocated more toward bonds or more conservative investments.  True.  Unfortunately, American’s savings habits over the last 30 to 50 years have been such that most people can’t afford NOT to be more heavily allocated in equities because they need their savings to grow and a more conservative allocation won’t provide them with enough money.

Sound familiar?  What’s the solution?

What if there were a way to save money in a place where:

  • your principal was locked in and your couldn’t lose any money if the market went down;
  • you could receive a double digit rate of return if the market went up to a cap above the long term average of the S&P500, for example 15%.  Your gains would be locked in and protected; and ,
  • your money grew tax deferred and you could access your money tax free, penalty free, without the restrictions of qualified plans like your 401(k) or IRA.  In other words, you wouldn’t have to wait until you’re 59 ½ .

Would you want to know about such an attractive option?

It’s the Lock In & Reset Strategy discussed HERE on this website and it’s been available in the US since 2001 as a safe, predictable alternative for your long-term money.

Take a look at what a difference that would have made for the individual who experience those losses above:

Year 

end

 Historical Return 

of S&P500

 $100,000 basis Lock In& Reset $100,000 basis
1/1/2000 19.50% $119,500 15.00% $115,000
2001 -10.14% $107,383 0% $115,000
2002 -13.04% $93,380 0% $115,000
2003 -23.37% $71,557 0% $115,000
2004 26.38% $90,434 15.00% $132,250
2005 8.99% $98,564 8.99% $144,139
2006 3.00% $101,521 3.00% $148,463
2007 13.62% $115,348 13.62% $168,684
2008 3.53% $119,420 3.53% $174,639
2009 -38.50% $73,443 0% $174,639
2010 23.50% $90,703 15.00% $200,835
1/1/2011 12.80% $102,312 12.80% $226,541
Account balance: $102,312

$226,541
Av ROR: 0.19% 7.05%

Look at the account balances on January 1st, 2011: $226,541 vs $102,312.  Is there any question which balance you’d rather have in your account?  How about the individual above who was planning to retire?

If he could have avoided those painful market losses and preserved his capital using this strategy, how much more financially secure would he be?

If you want a place to grow your long-term, serious money, money you can’t afford to lose, can you think of a better strategy than this?  Security.  Predictability.  Control.

This ‘Lock In & Reset’ strategy is available ONLY in and Index Universal Life Insurance contract.  Learn which companies offer the best programs and how this strategy could help you achieve your long-term financial security.

Call Scott Scholz, independent Registered Financial Consultant, 425-829-4110 to discuss this wealth preservation and accumulation vehicle and to determine if it might be right for you.

 

 

Filed Under: 401k retirement plan, Build Tax Advantaged Wealth & Tax Free Income, How to plan for retirement, Life Insurance, Lock In & Re-Set Strategy

Life Insurance – And How Can You Use It?

2011/04/18 By Leave a Comment

Life Insurance, which best suits your objectives: Term life insurance for the death benefit or permanent life insurance for the tax free ‘income’ and other living benefits?

This video contains information most life insurance agents don’t even understand.

5 Minute Lesson on Life Insurance

Term Life Insurance

Life insurance, in most people’s minds, is a benefit that is paid out when someone dies.  The purpose is to compensate for the loss of the income of the deceased.  It might be more accurately described as ‘death insurance’ since the proceeds are dispersed after the death of the insured.  Often, employers will offer term life insurance coverage on employees as a benefit for the employee’s family.  In this case, the term usually lasts for the term of employment.

You may also purchase term life insurance outside of work.  Term options are usually for 10 or 20 years and can extend up to 30 years.  Renewal of term policies is usually expensive because you’re older and your health condition may have changed.

Term life insurance represents an economical short term or stop-gap solution that you can rent.  Generally, purchasers of term life insurance believe they will accumulate enough investments that will allow them to eventually self-insure and they’ll be able to drop their term coverage when they’re older.

Permanent Life Insurance

Permanent life insurance offers a set of ‘living benefits’ in addition to the death benefit.  The video above compares benefits and the mechanics and objectives for term and permanent life insurance, but a brief summary follows.

  • Distributions from permanent life insurance are not included in income calculations for Social Security taxation.  This allows you to receive more of your Social Security benefit rather than lose it to taxes.
  • Distributions may decrease the taxable income you withdraw from your qualified plans, 401(k) and tax deferred IRAs.
  • You can access your money tax free, penalty free without the restrictions of qualified plans.
  • You have the ability to ‘Be Your Own Bank’ and finance investments, start a business, purchase automobiles, college funding, long term care, etc.
  • Your principal is protected against market risk.
  • You earn a potential double digit rate of return and lock in your gains every year.

The following table summarizes the characteristics of term and permanent life insurance.

Term Insurance Permanent Insurance
Low cost – initially Higher cost – initially
Cost goes up Cost remains level
No equity (rent) Builds equity (own)
Coverage ends Coverage never ends

 

Permanent life insurance has been used as a ‘tax shelter’ for decades by savvy, wealthy individuals in our country.  Many of our elected officials shelter money in these contracts as well, in accordance with guidelines established for their use by IRS tax acts and codes.

Permanent life insurance is one of 3 places you can legally create tax-free income for yourself in our country.  For a complete discussion, see Tax Free Income Alternatives

For information how wealth accumulates inside an Equity Index Life Insurance policy, watch the Lock In & Reset Strategy.

To see how distributions can actually reduce the taxes you would otherwise pay on Social Security benefits, click HERE and watch the videos on the case studies, HERE

If you believe tax rates in the future will be higher than they are today, you may also want to investigate how you might capitalize on the tax shelter benefits available in permanent life insurance so you can retain control over more of your hard earned money, protect it against market risks and create a tax free income stream you won’t outlive.

Call Scott Scholz, independent Registered Financial Consultant, 425-829-4110.  Or email scott@scottscholz.com to discuss options and applications of this wealth preservation and accumulation vehicle and to determine if it might be right for you.

Filed Under: Avoid the 401(k) IRA Tax Deferral Trap, Avoid the IRA/401(k) Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, Financial Strategy White Papers, How to plan for retirement, Life Insurance, Lock In & Re-Set Strategy

401(k) to IRA Rollovers – What are your dos and don’ts

2011/04/14 By Leave a Comment

401(k) and IRA Rollover considerations

Individuals considering 401(k) Rollovers to an IRA often make expensive mistakes.  These mistakes range from the simple to the complex.  A simple mistake occurs when an employee takes a check when they retire and their employer must withhold 20%.  In order to complete the tax-free rollover, the IRA owner needs to replace the 20% withheld by their employer using their own funds to meet the tax-free rollover requirement within 60 days.  A more complex mistake occurs if the advisor does not realize that his client was born prior to January 1st, 1936 and is qualified for 10-year averaging.  There could be a significant difference in tax liability if a normal rollover is completed.  For a more comprehensive examination of options and restrictions, please click HERE

 

What are some major ‘dos and don’ts’ when considering 401(k) to IRA Rollovers?

Do:  Consider the immediate need for the money.

If immediate distributions are required before 59 ½ and there’s been a separation of service from the company, then leaving the money in the 401(k) may be more advantageous.  If a IRA rollover has already occurred before age 59 ½ then and a distribution is required, then using Rule 72t may help avoid penalties.

 

Do:  Make optimal use of creditor protection.

Some IRA owners and financial advisors think that recent changes to federal bankruptcy rules automatically protect IRAs.  That’s not necessarily true.  For creditor protection purposes, it’s best to leave funds in a qualified plan because ERISA gives complete creditor protection to qualified plans.  NOTE- One person qualified plans do not receive the same protection – there needs to be at least one ‘real’ employee in the plan.  Be aware that when you roll assets from a company plan to an IRA, you may lose creditor protection, so it is wise to check with legal counsel.

 

Do:  Re-check your beneficiaries

According to ERISA, a company retirement plan (qualified plan) states that you must name your spouse as a beneficiary or get spousal consent to name another person.  The same rules do not apply to IRAs.  In creating a IRA rollover account, you have the flexibility to name the beneficiaries you desire.

 

Don’t:  Get a check from the company

The company must withhold 20% from the payment, so that a person with a $100,000 account will have $20,000 withheld and will receive a check for $80,000.  To complete a tax-free rollover, the tax-payer must deposit the $80,000 in the IRA plus $20,000 from their pocket to make up for the money withheld by the company to complete the $100,000 rollover.  The sensible way to move funds is a direct custodian to custodian transfer of the funds.

 

Don’t:  Rollover company stock

Ignore this guideline only if the amount of employer stock is small or the basis of the shares is high relative to the current market value of the stock.  Generally, in the case of large amounts of shares or low basis, it would be a costly mistake not to use the Net Unrealized Appreciation (NUA) rules outlined in IRA Publication 575, 2007

 

Don’t:  Rollover after-tax dollars

If possible at the time of rollover, it may be preferable to remove after tax dollars and not roll them to an IRA.  The question is, “will you need the money soon?”  If so, it probably won’t pay to rollover the after-tax money to an IRA because one you roll over after-tax money to an IRA you cannot withdraw it tax-free.

 

For a more comprehensive examination of these guidelines, click HERE

For How to Use a Self Directed IRA to Diversify, click HERE

For the Characteristics of an Ideal Investment, which might suite your objectives in a Self Directed IRA, click HERE

For assistance, information or discussing your options for rolling a 401(k) into an IRA, either after leaving an employer or while still in service, contact Scott Scholz, Independent Financial Consultant.  Call 425-829-4110 or email scott@scottscholz.com

Filed Under: 401(k) to IRA Rollovers, 401k retirement plan, Build Tax Advantaged Wealth & Tax Free Income, Early Retirement, Self Directed IRA

Tax Free Income – What to do if tax rates increase in the future

2011/04/11 By Leave a Comment

If tax rates increase in the future, does saving for your future in a tax deferred IRA or 401(k) account make sense?  You postpone paying the tax to the future, possibly at a higher tax rate.  Wouldn’t saving in an account where you generate tax free income be better?

Tax Free Income Alternatives

There are 4 places you can create tax free income for your future, legally.

Municipal Bonds

Long considered a safe haven to place money to generate tax free income, municipal bonds today have issues to consider.

As the economic crisis unfolds, cities and counties aren’t receiving the revenues they did a few years ago.  Now they’re cutting services and laying off people and the default rate on Muni bonds across the country has risen from 16% to 19% in the last 2 years.  Nearly 1 in 5 go sour.  So, you need to be a smart shopper and light on your feet to exit when necessary.

Second, if you own a Muni bond paying 4% today and new issues come out next year paying 5%, what happens to the value of your bond if you want to sell to get the higher rate?  You’ll have to sell at a discount, so you’ll lose money in the transaction.

Third, Muni bonds pay between 2% to 4% today.  If you already have a lot of money and simply want tax free income, fine – if you’re a smart, light on your feet shopper.  But if you’re trying to accumulate wealth, Muni bonds won’t help you much.

Roth IRA & Roth 401(k)

Roth IRA’s have been the rage since 1997 to save money that can grow tax deferred and from which you can access your funds in retirement tax free.

You can save up to $5000 per year if you’re under 50 years old and $6000 per year if you’re 50 years of age and over.  If you’re single and make more than $120,000, you can’t contribute to a Roth IRA.  If you’re married and file taxes jointly and make more than $177,000 per year, you can’t contribute to a Roth IRA.

Because most people invest in stocks or mutual funds in a Roth IRA, their money is subjected to market risk.  Losses in account values due to market risk have caused many people to postpone retirement plans indefinitely.

The Roth 401(k) is gradually being offered by companies to their employees, and represents an alternative for potential tax free income in retirement.  You can contribute $16,500 if you’re under 50 years of age and $22,500 if you’re 50 years of age and older.

Life Insurance

Permanent life insurance that allows for the accumulation of cash values has been used for decades in this country to generate tax free cash flow to supplement lifestyle, even before retirement years.  Of the cash value insurance options available, the Equity Index Universal Life contract offers the potential for double digit rates of return on your money and no loss of principal due to market risks.

There are no age, income or contribution restrictions:   It doesn’t matter how old you are or how much you make, you can contribute as much as you want.

The Equity Index Universal Life contract offers exceptional liquidity:  You may access your money without taxes or penalty, without the restrictions of qualified plans like 401(k)’s or IRA’s.  Savvy policy holders use the cash values as their ‘Personal Bank’ for financing investments, business start-ups, car purchases, college funding and even long term care expenses.

Distributions from these contracts is not included in income calculations for Social Security taxation, which can reduce the taxes you pay on your Social Security benefits.  It may also allow you to reduce the taxes you pay on your qualified plan withdrawals.  This allows you to keep more of the money you’re saved for your future.

The Equity Index Universal Life contract offers the ability to shelter money from taxes and market risk, realize a strong rate of return on your money, create a tax free income stream you won’t outlive, reduce taxes due on other Social Security and qualified plan income and pass a tax free benefit to your heirs.

To learn how this tool works and whether it would be an appropriate addition to your financial profile, call 425-829-4110 or email scott@scottscholz.com

Filed Under: Build Tax Advantaged Wealth & Tax Free Income

Common Sense Strategies to Optimize Your Assets – a workshop

2011/03/25 By Leave a Comment

“Common Sense Strategies to Optimize Your Assets” will challenge your paradigms and evoke an epiphany or two or three when it comes to understanding how money works and making your money work for you.

Are you concerned about paying more in taxes than you need to, paying more in interest to your lender than you need to, and outliving your money?  Want to learn the single best way to ensure your financial security for the rest of your life?

Learn how banks, lending institutions, Wall Street and government keep your wealth flowing from your pockets to theirs and learn how to reverse that flow to keep more of your hard earned money.

For example:  One of the biggest mistakes people make while building wealth is ‘how‘ they pay off their home.  Many homeowners think they should pay off their homes more quickly by making extra principal payments on their mortgage.  Others opt for bi-weekly mortgage payment plans or a 15-year over a 30-year amortization.  But none of these methods are the best way to own your home free and clear.

If banks and Fortune 500 companies use a powerful Cash Management Strategy to cancel interest costs, which over time saves them millions of dollars… Why don’t you use it to save thousands?

Learn the smartest, fastest way to pay off your mortgage and other debt. You can-

  • Reduce your mortgage interest payments by 50% to 70%,
  • Cut your APR in half and
  • Pay off your 30-year mortgage in 1/ 2 to 1/3 the time without making additional payments or sacrificing your lifestyle.

If you think future income tax rates probably will be higher, is funding a tax-deferred (think ‘postpone’) 401(k), IRA or SEP IRA a mistake?

  • Learn the true impact of tax deferral – how the average person who saves in a 401(k) can pay 6 to 10 times MORE in taxes in retirement than he defers,
  • Protect yourself and retain control of more of your hard earned savings
  • Re-direct taxable 401(k) contributions to a safe, tax-free environment
  • Reduce your taxes on your Social Security, 401(k) and IRA benefits
  • Use IRA rules to convert taxable retirement accounts into tax-free income for life.

Has stock market volatility of the past 11 years dented your savings, delayed your retirement plans and left you wondering what you can do?

  • Learn how you can earn potential double digit returns when the market goes up,
  • Lock in your gains and not lose money when the market declines,
  • Create tax free income you won’t outlive.

This workshop, “Common Sense Strategies to Optimize Your Assets” will present these prudent, safe steps, that you can take to stop losing money to market risk, taxes and interest payments.. and much more.

If what you thought to be true turned out not to be true, when would you want to find out?

Learn what you can do NOW to accelerate paying off your home, build a tax-advantaged nestegg and secure your future financial independence.

Join us Tuesday, March 29rd,  7-9PM at Friends Philosophy & Tea, 13850 Bel-Red Rd, Bellevue, 98005.  Seating is limited. Call to reserve your seat. 425-829-4110 or email scott@scottscholz.com  We look forward to seeing you there!

Filed Under: Build Tax Advantaged Wealth & Tax Free Income, Self Directed IRA

Financial Planning Today

2011/03/15 By Leave a Comment

While discussing financial planning the other day, an associate commented, “Money doesn’t come with an instruction manual.  Virtually everything else we have comes with an instruction manual.  But not money.”

I think he was right on the money with his comment, too.

Financial planning is a process that should be engaged and understood, not delegated.

It reminded me of another analogy.  Do you remember when you played Tic-Tac-Toe the first time when you were a youngster?  How many times did you play before you won?  Usually, the person who introduced the game to you enjoyed beating you several times before you learned the strategies to play the game.  In fact, until you learned the strategies to play the game to WIN, you lost.Financial Planning Strategies

The same is true when it comes to your finances.  Until you learn the strategies to play and win the money game, you’ll lose.  And the chance of increasing your circle of wealth and ever becoming financially independent is extremely small.

Banks, lenders, Wall Street and the government, itself, all need and want you to play the money game.  But do they tell you how to play the game to make money and win the way they do?

Conventional wisdom favors institutions

Banks invite you to deposit your hard earned money into their safe accounts where they’ll pay you interest on your money.  These days, we know that’s a pittance.  Are banks out earning those pathetic rates of return for themselves?

Wall Street encourages you to step up and roll the dice for a better rate of return by buying stocks, mutual funds and other enticing opportunities.  How well has subjecting yourself to market risks worked for you over the past 10 to 12 years?

Lending institutions encourage you to use their money to get what you want now and they’ll only charge you a small interest rate for the convenience of using their funds.  But do they show you techniques to pay back the money you’ve borrowed faster so you don’t have to pay an excessive percentage of your hard-earned money to them in interest payments?

Our government gives you a tax break today on the money you set aside in tax-deferred retirement savings accounts, like 401(k)s or IRA’s, to encourage you to be responsible and save for your future.  But do you know what percentage of those retirement dollars you’ll be paying to them in the future for the privilege of avoiding paying today?  (Hint: The old Fram oil filter commercial communicated the bad news – “You can pay me now or you can pay me later.” The implication was it would much more expensive to pay later.  It will likely be the same with your favorite Uncle.)

If the game seems rigged it’s because it is.  But that doesn’t mean you have to lose.  Learn the ropes.  It isn’t the rocket science some industry mavens would like you to believe.  Educate yourself.  But do so with good counsel and teachers.  Ben Franklin said, “He who is self taught has a fool for a master.”  Seek several disparate and credible sources and work with them. Take responsibility and control.  It’s your money, after all.

Learn to think like a banker, not a borrower.

Albert Einstein said, ‘Those who understand interest earn it.  Those who don’t , pay it.”  He also said, “Compound interest is the 8th wonder of the world.”

Learn the 4 marvels of finance and the strategies to play the money game and WIN.  You don’t need to avoid any of the aforementioned esteemed institutions.  Engage them to your advantage.

Implement “Common Sense Strategies to Optimize Your Assets” and secure your financial independence.

Scott Scholz – Independent Financial Consultant

Filed Under: Avoid the 401(k) IRA Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, Financial Planning Articles, Financial Planning for Retirement, Planning for Retirement
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