If you have never listened to the “Safe Money Hour with Thom Brueckner,” you are missing some of Thom’s weekly insights about issues affecting those in, or nearing, retirement. The radio show is broadcast at 9:00 a.m. every Friday morning on WFEA-AM 1320 (WZID's sister station) from Manchester, NH.
If you're not in the broadcast area, or can't tune in as it airs, clips from past shows can be found at the "Radio Show" page on the Senior Financial Resources website.
In one recent clip titled, “To Those About to Retire, and Those Recently Retired,” Thom discussed how older Americans are taking on more debt. This is concerning, because past generations usually saved and lived within their means. There is much angst amongst retirees and those preparing to retire, and this is one of the results.
Thom's educational approach on the show covers current events as they unfold, and explains the week's newsworthy topics in plain English.
If there's a topic you'd like to hear Thom address on-air, let us know in the comments below!
For those over age 50, receiving invitations to local financial dinners events or retirement seminars is often a weekly occurrence. Sometimes, the sheer variety of seminars available to pre-retirees and retirees, can make it hard to tell which events might be a wise use of your time.
Here are a few ways you can make an informed decision about when to attend a dinner seminar presentation you've been invited to:
1.) Ask around about the sponsoring company and the presenting speaker
When we hold events for our Client Family, many are often surprised to find that they've known other Client Family members for years! Because retirement and finances were not topics usually discussed at their weekly bridge game or golf outing, they had no idea!
You may be surprised to find that friends have had an experience with the person or firm from whom you've received an invitation (or they may have even attended before.) Whether that experience was positive or negative, it will assist you in making a wise decision.
2.) Check them out online
Visit their website, read any articles or resources, and see if their style and offerings are a fit for what you want. You may find limited resources available from them online, but for those that do provide an in-depth online presence, this can be a convenient way to learn more about who is presenting.
Additionally, you may want to see if the presenter has any additional background in public speaking. This could be either as the head of local boards or committees, or at conferences or other events outside of dinner seminars. This isn't a guarantee, but often it means the speaker is more practiced, more dynamic, and thus much more engaging to listen to.
3.) Analyze the invite itself
You most likely had a "gut reaction" when you received the invitation. Did it resonate with you and intrigue you? Or did it look boring or cheaply produced? Think about what you value, and determine if the invite communicates those things to you.
4.) Know what your expectations are
What interests you in attending a dinner seminar? Are you looking to get a feel for the advisor, the company, and the experience of working with them? Are you looking for specifics and detailed product information? Or, are you looking for something broadly educational as you just begin your decision-making process?
The style and topics of the dinner presentation should be clearly communicated within the invite. Once you know what you are looking for, it's easier to determine if the event will provide what you need.
5.) If you're still not sure, call them!
We may be living in a more technology-friendly world, but never underestimate the value of personal interaction. You can learn much about a company by speaking with them on the phone, and it will give you a chance to ask any clarifying questions and gauge the response.
While it would likely be impossible for a presenter to summarize a full presentation in a short phone call, you can ask directed questions like "is this educational, or is it strictly about a product or service?" Another helpful question might be, "What do people who have attended in the past say about your presentation?"
While there's no way to know for sure if a dinner seminar is the perfect fit for you, aside from attending, hopefully these five tips will help you make the best decision.
In a few recent posts, we began exploring some of the traits of what we call the "Mature Investor," and looked at what characterizes a person as such.
No Mature Investor is alike. However, many have similar traits. In our many years of experience working with those who are concerned about the safety and longevity of their retirement savings, the following ten traits have shown themselves to be most common.
In upcoming posts, we will continue to look at the rest of these traits in depth, and explore what being a Mature Investor might mean to you.
Traits of the Mature Investor:
1. Doesn’t ride the “roller coaster”
The Mature Investor has had enough of the market’s ups-and-downs, and feels they are now at a place where they value appropriate safety and security.
They understand the Rule of 100, and have the appropriate percentage of their long-term retirement savings in safe vehicles. Risk, especially at the later stages of life, is not something that the Mature Investor wants to subject their entire retirement savings to.
2. Relies on fundamentals
The Mature Investor understands that there are financial basics that will always hold true: Getting good advice, choosing the right solution, and having the right "driver" of their chosen vehicle will make for a winning combination.
3. Doesn’t throw “Hail Mary” passes
The Mature Investor prefers "slow and steady wins the race" as a motto, instead of "with great risk, comes great reward." They are content to not take a chance "swinging for a home run", so long as the consistent singles, doubles, and the occasional triple mean they never "lose the game."
4. Seeks truth, not “spin”
The Mature Investor turns to trusted sources for information - ones that utilize fundamentals, use actuarial data, and present them in a neutral manner. They don't jump on the latest bandwagon in the news, choosing instead to chart a calm course and hold steady. They look to think tanks, and those who have accurately predicted recent market events (such as the 2008 market crash) to provide unbiased knowledge.
5. Analyzes, but doesn’t obsess
The Mature Investor understands the difference between the benefits of doing due diligence, and the downfalls “scoreboard watching” and reacting to every move. The Mature Investor has a long-term view, and knows that once they've done their due diligence and made a decision, they can relax.
6. Sails with a captain
The Mature Investor understands there are experts available that can provide guidance and wisdom in a number of specializations. The Mature Investor chooses the specialist(s) appropriate for their circumstances, and builds a strong bond of trust with their knowledgeable and respected captain. The Mature Investor knows that even though they may have "driven a boat themselves once or twice," there is no substitute for the insight and experience of a seasoned captain.
7. Isn’t seduced by titles
Mature Investors understand that knowledge and expertise come from a variety of sources, and do not simply seek a line of designations as singular criteria for their advisor. They know that while titles and designations can support professional knowledge, they are not the only indicator. They do their due diligence, and begin a relationship based on experience, candor, and knowledge.
8. Isn’t impressed by jargon
The Mature Investor is tired of platitudes and legal jargon, and looks for transparency and honesty from the professional(s) they work with. They are not looking to be pacified by pre-packaged statements, but to be truly cared for with candor, integrity, and answers in plain English.
9. Craves simplicity
The Mature Investor knows that, as they age, they want to enjoy retirement, so they address issues in ways that don’t complicate their life, or the lives of their loved ones. They seek to make life easy on both themselves and their loved ones by simplifying now where appropriate - well before it is necessitated by a major life event (such as a stroke or dementia, for example.)
10. Considers their loved ones
The Mature Investor thinks about those that care about them, and wants to make sure they are considered now, and in the future. They understand that it is important to act on these matters well before it may be necessary, to ensure that their wishes are carried out as they truly intend.
They also learn from any personal burdens they've experience in caring for their own loved ones, and seek to lift that obligation from their family by taking charge of long term care planning sooner rather than later.
In a recent edition of SFR’s quarterly newsletter, CheckMate, President & CEO Thom Brueckner authored an article explaining the rarely known option to those over 59½: to roll over their employer's 401(k) plan - available even to those who are still working.
Below is an excerpt from the article, which details one couple's experience in rolling over their 401(k)s while continuing to work for their current employer:
Do an "In-Service Rollover" After 59½
Most pre-retirees know, when they retire, they will need to move or “roll over” their company 401(k) plan assets into an IRA (Individual Retirement Account) with their local advisor. Leaving those assets with the custodian of a former employer is rarely the chosen option, as that option carries with it multiple pitfalls, especially potential tax disasters for ones’ heirs.
A common concern we hear from clients and prospective clients who are still working, is that they wish they had better offerings inside their employer plan. Many complain that “the risk is too high, the performance is spotty at best, and the ‘Stable Value’ option or Money Market account/fund is currently paying yields of negative 0.2 percent per year!”
Many wish they could move those 401(k) funds to safer options, while continuing to work to 65 or 70 - and most are shocked to learn that they can usually do so after turning 59½! (Don’t expect your HR department to know about it, though.)
A Case Study:
John and Sally, each 60, have five more years to work at the software company they’ve both been at for over 30 years. Recently, they have begun contributing the maximum 15% of their salaries into their 401(k) plan, subject to an employer match of another 5% – an excellent savings rate to be sure.
Problem: John and Sally were quite unhappy with the plan’s options available to them, finding them risk intensive (“more suitable for younger employees," they said), limiting, and fee-laden. There didn’t appear to be many conservative options for older investors like themselves, and the Money Market (cash) fund was paying a meager 1.2% interest.
Having attended one of our recent seminars, they overheard my answer to a question on this very subject, and were intrigued to learn that the Fixed Index Annuity (FIA) we’d just introduced was available to them as a pre-retirement solution to this dilemma – with a 10 percent bonus to boot! As a result, they could have the safety and security of downside protection, and still enjoy generous market-linked interest credits amid a rising market – exactly what they wished they had as an option in their 401(k) plan.
Solution: John and Sally stopped by HR the following week to obtain the forms for an “in-service rollover” of their accounts. Confused, the young lady behind the counter asked them if they were retiring this year. They each said “No, we intend to work for four or five more years.” It wasn’t until they insisted that they had the right to their funds after turning 59½, that she was able to confirm this right with a phone call.
Afterward, they stopped by our office with the forms and, one week later, two separate checks made payable to their chosen IRA custodian, f/b/o (for benefit of) John Smith and Sally Smith, arrived in their home mailbox. They had both elected to rescue 99% of their plan values over to the new custodian they had selected with us – leaving the other 1% in their accounts to keep them open to receive the following week’s ongoing contribution from salary. Once the funds were applied to their new FIA IRAs, they each received a 10% bonus right away - an especially nice benefit on top of the safety and guarantees they were seeking.
Bottom Line: John and Sally will received the tax deduction for their 15% annual contributions, their employer’s 5% match, their initial 10% bonus on the first roll-over, as well as an additional 10% bonus for each additional rollover in the next five years before they retire.
As importantly, they’ll never lose money amid a stock market decline again; and in growth years they will receive market-linked interest credits proportional to the market’s advances...exactly the solution they were looking for.
Not a bad deal compared to the lack of any such options in that old 401(k).
Note: These same benefits are also available with most 403(b), TSA, and 457 plans.
Glenn Ruffenach, co-author of the New York Times bestseller, "The Wall Street Journal Complete Retirement Guidebook" believes that the advisor who guides you to retirement may not be the most appropriate to guide you through it. Ruffenach authored a column on just this topic back in a 2011 article in Smart Money magazine. In his analysis, Ruffenach elaborates that an advisor’s mission when we are in our thirties, forties, and fifties was to get us to our target retirement date by increasing our retirement savings subject to risk, usually in the stock market.
When the market did well, our retirement fund benefitted fully from that growth. When the market corrected or dipped, we were reminded by our advisor that we were long-term investors with a 20+ year time horizon, and that we must remain so invested “for the long term, because most attempts at timing the market are unsuccessful.” We understood that our time in was more significant than our timing, and while we might see our account balances increase and decrease “on paper,” that “selling would merely lock in those losses” while also preventing us from profiting from any recovery that might happen soon thereafter.
While we worked, we actively contributed to our retirement plans, and those 401(k)s, IRAs and SEP IRAs grew – just like the teenagers under our roof – from constant feeding and continuing investment. Any non-IRA long term savings we had also grew through reinvesting (rather than the receiving) of dividends, as the optimistic charts which hung on the walls of our advisors’ office always seemed to assume.
If you’re now in your sixties or early seventies, and still nursing financial scar tissue visible throughout your retirement accounts, you’re not alone. The last thirteen years have devastated many investors, an injury made more painful by the simultaneous pouring of additional assets into the sieve that was Wall Street from 2000 to 2013.
Many mature investors lost any remaining interest in that rollercoaster, and have since rejected the clichés of “long term investor,” “on paper losses,” and the charts and studies often misapplied by brokerage firms to those who are no longer within the appropriate age range and time horizon (including the horror stories we hear of senior and elderly malpractice.) Now, you truly understand that the focus now is on preserving – more so or equally as equally as much – as growing your accounts. You want to leave a financial legacy for your children, your grandchildren, and of course, your spouse. For that reason, you’ve made the choice to have the majority of your holdings in safe, guaranteed instruments, with an appropriately smaller share remaining conservatively managed in a well-diversified equities account.
But here’s what you might not realize: The long-time advisor who has seen the risk-based part of your holdings decrease over time, very often does not have the skill-set, training, or experience to also handle the larger, safety-focused portion. A revealing study in Financial Planning magazine recently exposed this dissonance, showing that the majority of risk-based advisors were woefully out of touch with the primary goals of their retirement-aged clients:
When clients were asked that their top concern was, 88.6% responded with “losing their wealth.”
However, when their advisors were asked the same question, only 15.4% cited the same answer as the primary concern for those clients.
The historical and financial charts used by these advisors still continue to assume reinvesting of dividends, even though retirement is exactly the time when you and your friends will have begun utilizing that as income. Due to this, these charts are misrepresentative of you and your goals, yet the risk-based advisor is often pointing to them as sound and reasonable data. (Incidentally, the charts usually also neglect to include fees, expenses, taxes, or inflation.) You no doubt recognize the timeless clichés whose legalese might make you not even pay attention to their meaning: “Past history is no indication of future performance.” You are told that they “can’t guarantee” at precisely the time in your life where you want guarantees.
As a mature investor, you’re now looking for a guarantee that the money it’s taken you 30+ years to save won’t be reduced in weeks by market losses, that you can use tax deferral to your advantage, and that you can enjoy reasonable rates of return. It doesn’t faze you if you never hit another financial “home run,” so long as you’re consistently hitting singles, doubles, and even the occasional triple. You simply can’t afford to lose the game swinging for the fences anymore.
Think of it this way: We all have a dentist and primary care physician we’ve seen routinely throughout our lives. However, as things become more complicated, we are often referred to a specialist – like a prosthodontics dentist for dentures, or a cardiologist for serious cardiac issues. In much the same way, so too should you have a financial specialist on your team - a safe money advisor who specializes in the areas your risk-based advisor doesn’t.
This brings us to a final point, and it is crucial: If either one of these two advisors are unwilling to work together on your behalf (much like doctors consulting on a treatment regimen out of professional courtesy), you should honestly evaluate if the unwilling party truly has your best interests at heart. Specialties and niches of expertise should be utilized, not disparaged, especially when dealing with the monies with which you plan to live the rest of your life.
After all, it’s not their money; it’s yours.
Breathe easy, and spread the word.
Author: Thomas Brueckner - owner of Senior Financial Resources and contributor to this and other blogs
If you’ve taken a look around our website, you may have read through the page that details recognition and awards we’ve received in recent years. We are honored to have received the awards listed on that web page because they were all stringently evaluated by the awarding associations through a detailed nomination process.
Throughout the year, we also receive emails or calls that we “have been selected” or “we’ve won” awards for which we have never submitted a nomination (nor have we been nominated by a colleague.) As we’re seeing more and more deceptive “awards” being unscrupulously publicized, we want to take a moment to deconstruct what those “award” plaques and lists really mean, so that you can tell for yourself when recognition truly holds merit (and why you’ll never find us listing those on our Awards page as if they are any true indication of quality.)
So called “awards companies” will contact any business they can look up online or in the phone book, and will then give the award to any and all who respond. What they then recommend to the “winners,” though, is that they pay for the plaque the awards company can create “just for them” to “announce the achievement.” What they’re saying is, you’ve won an award, but you have to pay for the trophy. Can you imagine any legitimate awards ceremony working that way?
Often those “winners” are also then encouraged to place ads in local or national magazines - through the awards company, of course. Sometimes the “award” itself is billed as being a “select list” in a large magazine publication of “Top 50” or “Top in the State,” and only with further digging do they mention it is really a paid advertisement that will be marked as “Advertorial” (meaning the only requirement for a larger “award” space is simply to pay for it.) As obviously bogus as those award scams sound when laid out as above, skilled salesmen and eager businesses contribute to a large number who fall prey to this deceptive setup, who then display and advertise them enthusiastically.
The point here is that an item of recognition is only as useful and worthwhile as the due process and research it took to award it, as well as the strength of the initial nomination process.
For example, many legitimate awards (such as those we list on our Awards page) begin with a lengthy round of questions that require specific details as to the merits of the person or company under consideration, in relation to the award’s specified criteria. These must be answered with the initial nomination, and frequently require supplementary documents for verification. Often, this initial submission is accompanied by supporting nominations by colleagues, or their letters of recommendation. For some, a business or person must be nominated by one or more industry colleagues. With larger awards, there can also be a second round of follow up questions, a phone interview, and possibly even a site visit to the applicant’s business. The process can take months of deliberation. Bearing all this in mind, it is easy to determine that an email citing that you or your company have won something for which you’ve provided none of these things (and which your inbox has marked as “high caution spam”) is not anything legitimate.
When selecting any professional or company you work with – whether it’s for your taxes, your finances, your retirement savings, or your plumbing – doing your own vetting should be an important step in your research. Not assuming the merits of an award at face value should fall within this research. A cursory web search of any of the bogus awards companies or their award names will give you a quick answer about whether there was any sort of real application process, and how stringent the nomination procedure really was.
If you find a current professional boasting any these non-awards, the follow up question you might need to ask is, “Why?” Is it because they believed it to be a real honor, and simply didn’t take the time to research something they were boasting? What does that say to their attention to detail and thoroughness? Or, did they know it couldn’t possibly be a legitimate award, but chose to advertise it anyways? How does that impact their trustworthiness and honesty in your eyes?
As the idiom goes, “the devil is in the details.” Even something as small as publicizing an award that is deceptive in nature can speak volumes about the integrity, scruples, and care that a professional in any industry has.
In late 2012, CNN Money asked over thirty money managers and investment strategists where they believed the S&P 500 would finish at the end of 2013. The group responded that they realistically anticipated a market value of 1,490. This value is only up just 4.5% percent over the entire year, likely due to foreseen international issues in Europe, the Middle East - as well as debt, slowing GDP, and the implementation of new health care laws in the U.S.
Now in mid-February, the S&P 500 is currently at a 6.8% increase from the beginning of this year. Though some are celebrating attaining former highs, there are increasing voices that seriously doubt the sustainability of this market rally. Why? To start, the so-called “rally” is mild. Let us not forget, $150 billion has been withdrawn from stock mutual funds by investors since 2009, and to date only $10.3 billion has been added back in during this rally.
So, what might be behind such a market jump? Investors have been voicing this question, and are met with Wall Street employed “economists'” old tune of Happy Days Are Here Again! – complete with rainbows, lollipops, and shiny objects floating around the enthusiastic, overly optimistic spin.
As a former stock broker, long-time market historian, and a professional, I see things a bit differently. I believe there are clear reasons behind the slight peak we’ve witnessed as this year has begun:
- Due to the uncertainty and impending deadlines of the Fiscal Cliff in 2012, many companies hastened payment of their dividends before year-end, so investors could take advantage of the pre-tax-hike rates of 15% on capital gains in 2012, instead of 23.8% in 2013. As many investors typically re-invest those dividends into the market, this contributed to the rise of share prices and a subsequent market spike.
- Post-Hurricane Sandy claims on car and home insurance meant an increase in automobile sales, home improvement, furniture sales - and the retail economy in these sectors felt a boost. This surge is a one-time increase which will cease to exist once replacements and renovations are completed for the affected parties.
- “Helicopter Ben” Bernanke came out with confidence in late 2012, as the The Fed continued its $2 trillion bond-buying program, and stated intent to continue it “for the foreseeable future.” Bernanke’s promise made stock purchasers feel confident their boom will continue well into this year. (I’ll explain the reality of this incorrect assumption below.)
Given the discussion online about a coming market correction (read: significant drop), few credible sources disagree: we are surely ripe for a pullback. The questions posed now are of “when” and “by how much” will the market correct itself. Troublesome signs include:
- Executives and board members in corporations last week were nine times more likely to sell their own company's stock than they were to buy them. This is a clear indication that insiders with the largest amount of information at their respective corporate fingertips can see what is coming, and are prepping to avoid it.
- CNN Money tracks the “Fear and Greed Index.” It seems an ominous name, but it serves to track the emotion driving market fluctuations, using the Volatility Index (VIX) and several other indicators of investor and stock market sentiment. Since the beginning of 2013, it has remained steadfastly at “Extreme Greed” – indicating that investors are exceedingly greedy in their purchasing. In contrast, the index was stalled at “neutral” for many months during the Fiscal Cliff resolution last year, a conversation we’re going to revisit before March first of this year.
- 30-year U.S. Treasury Bond yields are increasing (to within sight of) their 1-year high of 3.48%, a 10% increase from their value on the first day of 2013. When individual investors can count on a certainty of 3.48% without risk in these bonds, but money managers and financial advisors are seeing only a 4.5% gain in the market with risk, it foreshadows a serious drag on equity valuations. ValuEngine.com even went so far as to issue a warning to investors about the overvaluations and overbought sectors. They stated just last week that, “Stocks are currently overvalued and will become more overvalued as long as the bond yield remains elevated and rising.”
- We’ve seen this before. In 2000 and 2007, the market hit the same valuations we’re seeing right now, and we watched the markets correct sharply (-51% and -57%, respectively.) In each instance, it took the markets five years to rebound to pre-correction values. The psychological cues prompted by current market levels and the “celebrations” of such a “rally” should not be overlooked by amnesic investors and money managers who are caught up in this current optimism.
While I’m proud to always share that none of our clients lost any money in those previous market drops (or at all, period), many who were not with our firm were not so lucky. Retirements were postponed indefinitely, college funds were eviscerated, and retirement savings created with the hard work of 30+ years were slashed over a period of months, not years.
Behavioral economist Paul Farrell reminds us of the realistic overview in MarketWatch, and he cautioned last week:
“...Likely, [listening to those who say the rally can increase by another 20%] will lure [investors] into a suckers rally, where the bulls just keep hyping the good times so every naive investor left will finally pile in, fearful they’re missing the race to 17,000 ... forgetting the dot-com disaster in 2000, forgetting the huge losses after the subprime mortgage disaster of 2008.”
Many are beginning to believe that the stock market now has nowhere to go, but down.
Breathe easy, don’t get suckered, and spread the word,
-Thom
Author: Thomas Brueckner - owner of Senior Financial Resources and contributor to this and other blogs.
In our recent edition of SFR’s quarterly newsletter, CheckMate, President & CEO Thom Brueckner authored an article explaining the reasons for and against a Roth IRA conversion. Below is an excerpt of his article, "To Roth or Not To Roth", explaining the basic benefits and pitfalls of a possible conversion:
If you don’t have to pay your taxes now, shouldn’t you enjoy the benefit of keeping your money? The “Roth Conversion” has become popular again, often as an inducement from brokerage firms claiming that taxes are certain to be higher in the future – and are thus “on sale” today.
While there are instances where a Roth conversion may make sense for certain people (at certain times of their lives); for others, taking advantage of options that exist within a traditional IRA may be more advantageous.
In looking at these products, I believe it is important to give you context as well as updated, commonly-held guidelines on whether and when you should consider converting some or all of an IRA account into a tax-free Roth IRA.
The Context: In any IRA account, the owner enjoys the benefits of what we advisors call “triple compounding.”
You earn interest (or appreciation, capital gains, or dividends) on your:
• Principal (contributions)
• Interest
• Taxes that you would have otherwise paid that year (Money belonging to the IRS that was allowed to remain in the account, alongside your money as if yours, making you more money each year.)
Let us not understate this benefit: The IRS does not charge you interest on this “loan;” they merely promise to catch up with you later. Therefore, if you started contributing to an IRA or 401(k) at 25, and did so until you retired at 65, you would have enjoyed the interest-free use of the taxman’s money for 40 years.
It is actually even better than that. The IRS cannot make you take money out of the account taxably until April 1 of the year after the year in which you turn 70½. When you do so, the requirement is that you withdraw roughly 3.7 percent of your prior year-end value that first year, leaving the other 96.3 percent of your account to “triple compound” for another year.
The Argument: As you can see in the example [above], Roth conversion proponents argue that, to avoid $8,140 in taxes (less than 1 percent of the account value) – and deny yourself the ongoing benefit of triple compounding during the remaining 15-20 years of your life – you should instead pay your taxes on the entirety of the account as much as 20 to 30 years before they are due. This would result in an immediate loss of roughly one-third of the account ($340,000), money that you would never earn free interest on again.
However, the “good news” is that, from that point forward, your new Roth IRA would grow tax-free, not just during your lifetime, but during that of your heirs as well (if they do not spend it as found money first). Paying $340,000 in taxes, just to avoid paying $8,140 in taxes, had better leave you with one huge other benefit in order for the entire exercise to have been worth it.
For the in-depth article, including one incredibly important caveat in this conversation, often not brought up by Roth Conversion’s proponents, as well as the situations for when a Roth conversion does make sense - you can view the most recent issue of our quarterly newsletter. You can also access past issues to read our articles about 401k rollovers while you are working, the mathematics of market recovery, and much more.
If you enjoy reading the past issues of our CheckMate quarterly newsletter (and this post), be sure you request to be added to our newsletter mailing list. The next issue will be mailed out very soon to our newsletter subscribers.
We're now a few days into February, and the majority of IRS 1099 forms were required to have been postmarked by January 31st. You’ve likely received a few in the mail already. As you look over your 1099-INT forms, you might assume that your reported taxable interest is a necessary evil. This is not always the case!
When we first meet with people, we often find that they are paying taxes on income each year that they do not yet need. What do we mean by this? Often, they state that they only need an amount of “x” each year for their expenses, yet they later reveal they are paying taxes on “x+y” - “y” being the interest reported as income.
Many people simply don’t have all the information to understand that there are ways to defer paying taxes on money you are accruing for the long-term, outside of a designated retirement plan like an IRA or 401(k). Or sometimes, it’s as simple as not fully understanding why a tax-deferred plan or product can be so beneficial to your financial and retirement savings goals.
Tax deferral can not only lessen your yearly tax burden, but it can allow your retirement savings to benefit from triple compounding, something usually only enjoyed within a designated retirement savings account such as an IRA.
You may already be familiar with “compounding” as it refers to compounded interest. What you might not be familiar with is a way to utilize post-tax dollars to triple compound the yield in your retirement savings – even if that money comes from a non-IRA CD or your savings account. This concept of triple compounding can be one of the most effective safe money strategies to increase the money you have saved for retirement, while also decreasing your tax burden.
So, where does “triple compounding” get its name, and what does it do? Triple compounding means: earning interest on your principal, earning interest on your interest accumulated from previous years, and earning interest on money you have not yet paid in taxes. (In certain financial products, you can even enjoy quadruple compounding, where you also receive a bonus on your principal at the start, earning you interest on that bonus as well.)
Just as you enjoy tax deferral in a specially designated retirement plan like an IRA, SEP IRA, or 401K(k), you can also choose a tax deferred product to allow post-tax money to further accumulate tax-deferred for your long-term retirement savings - utilizing triple or quadruple compounding to your benefit.
For more details about utilizing triple compounding and tax-deferred products to increase what you have saved for retirement, you can download our free Tip Sheet on the subject: “Lower Your Taxable Interest Next Year.”
On Wednesday of this week, we were told that, instead of expanding at around 2% annually, our domestic economy actually shrank at a rate of -0.1% in the final quarter of 2012. Naturally, the major brokerage firms on Wall Street quickly dispatched their lead economists to the nearest microphones to tell us that this was “temporary”, due primarily to “one-time” cuts in defense spending (a/k/a partial sequestration), and that the economy was otherwise healthy. Really? Whose economy are they talking about?
So how could defense cuts, which only just took place 3-4 weeks ago, be the cause of a dramatic quarterly slow-down that began as much as four months ago? After all, we’re talking about a 2.3% swing in a single quarter, a dramatic slowdown, and a reversal not typically associated with something called a “recovery”. And remember: If the first quarter of this year also shows a contraction, we will have met the official definition of a recession, and markets will again have to face reality.
First, we should be skeptical that events like those defense cuts—some of which took place after New Year’s Day and others of which will take effect in March—were the “primary cause” of so dramatic a reversal in GDP. The officials who report such statistics are notorious for “driving the economy through the rear-view mirror”, i.e. they analyze three-month-old data to tell us where we were and, from that, where they think we are.
As to whose economy you may be living in, consider these recent statistics and trends as reported in Forbes yesterday:
- The unemployment rate hovers just under 8% (back up to 7.9% as of this morning) and the average duration of unemployment is at record highs. The Labor Participation Rate is actually falling, and job creation is barely keeping up with population growth.
- The 350,000 members of the NFIB, a business group, aren’t impressed: Only 11% report rising profits while 40% report declines. Some 18% report slowing sales, but 30% report negative sales trends. Perhaps most ominously of all, 37% claim their customers are paying their invoices more slowly than a year earlier—even though we are now in the sixth year of Obama/Biden’s infamous “Recovery Summer.”
- While consumer confidence is up slightly by the government’s measure, the latest Reuters/ University of Michigan poll revealed only 11% of those polled think the government is “doing a good job”, whereas 47% claimed it was doing a bad job. That same 11% think business conditions will be better by June, and the same 47% expect them to be worse.
Once again, we see a disconnect between what our government tells us is happening, and what we experience in our daily lives. Remember, it was only last September that Bloomberg reported "Fed Officials Upgrade Economic Growth Outlook in 2013, 2014." Oops. This past Wednesday, that had changed to "GDP Unexpectedly Shrinks, Decline Seen Temporary." In other words, “pay no attention to that man behind the curtain…”, because The Great and Terrible Ben, just like Oz before him, is about as responsible for our economic output as the weatherman is to be credited for a warm, sunny day. About the only thing empowering Mr. Bernanke, is that so many “experts” believe him when his mouth is moving.
If you, like me, know people who naively believe the economic manipulations of our central government, or who imbibe the Eternal Optimism elixir served daily at the Wall Street casinos, try asking them this one simple question:
“If our economy is either shrinking—or growing anemically at only 2%/year—how will it be possible for the 500 companies that represent that economy, to sustainably grow at anywhere near their 8.3% historical yearly average?”
As widely-respected money manager Jeremy Grantham has stated definitely, there’s no way, no how; it’s mathematically impossible.
Breathe easy, and spread the word.
-Thom
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Author: Thomas Brueckner - owner of Senior Financial Resources and contributor to this and other blogs.