Paul Ferraresi

How a person spends money is far more important than how he or she invests it. It is much easier to reach retirement goals by deciding how to live, rather than how to invest. Deciding what to do with the money we earn – how to spend it – is what brings about peace of mind, not how much we make or how much we have.

The late Loren Dunton, founder of the non-profit National Center for Financial Education in San Diego, wrote about his lifestyle decisions to buy new cars and spend weekends in Reno, instead of investing a hundred dollars each month in a mutual fund when he was in his late twenties. That fund would have been worth over a million dollars today.

AN EXPENSIVE CAR

Perhaps you think the difference between a full-sized car, fully-equipped, and a compact is only about $10,000. Actually, it is more like a million dollars. Consider this, borrowing $25,000 for a new car over four years will cost about $634 a month, while borrowing just $15,000 will cost only $381 a month.

If one saved the difference of $253 each month for 35 years, earning an 8% average rate of return, it would swell to $580,352. However, that is just the accumulation of the funds. What about the earnings as the funds are withdrawn during retirement?

If one were to get monthly payments of $4,479 from that sum from ages 65 to 90 (and some predictions say there may be over 250,000 people over the age of 100 in America in the 21st century), the total amount collected would be $1.3 million.

This is the magic of compound interest. However, it is not retroactive! One must save now to enjoy the benefits of compound interest in the future.

WAITING TO INVEST

For instance, if the difference in the example above were saved for only 25 years it would grow to just $240,000. Paid out at $1,857 a month, the total would be $557,000. It is amazing that the difference in saving an additional ten years is about a half million dollars. However, the monthly difference in payments of $2,622 monthly shows how today’s lifestyle decisions can be worth a million dollars in retirement years.

When should people begin saving money? Never soon enough. If ten years could mean a difference of $2,622 in retirement income each month, can you imagine what 15 or 20 additional years of savings would mean when you reach age 65?

JUST A LITTLE POSTPONEMENT

For some, no doubt saving now would be easier if there was more current income. People 17 to 23 years old may think: “Me save? Are you kidding? I am just getting my education and besides I want to have a good time. When I get out of college and start my career, I’ll start saving.”

People 24 to 30 may be tempted to think: “You don’t expect me to save now? I have only been working a few years. Right now, it is important to dress well. I’ll save later.”

From 31 to 42, the reasoning may go something like this: “How can I save now? I am married with small children. Perhaps when they are older I can think about saving.”

Those 43 to 55 wish they could save now. However, many just do not, saying they cannot because of children in college and education loans to pay.

From 56 to 65 most recognize the urgency to begin saving now. However, money is tight. It is not easy for people that age to better themselves. It is tough to break years of over-spending habits. “Maybe something will turn up,” many say.

At age 65 and older, it is too late to begin saving money. You cannot save when there is no income. Many older people live with their children and are dependent on Social Security, which is inadequate, since Social Security was only designed to be supplemental.

If the choice between cars can impact retirement income, imagine the possibilities when applied to lifestyle choices such as a home, vacations, dining out, entertainment, wardrobes, furnishings, etc.

Try to develop the art of money accumulation now. Begin by saving every day. Start today!

The American economy barely handled the financial jolt during the 2008 and 2009  meltdown.  It appears that economic distress has been muted and is leveling off.  Unfortunately, the fiscal policies by the administration have not and will not produce any lasting economic or job growth.  The monetary policies by the Federal Reserve have been very accommodating.  The American economy needs both policies in concert in order to be effective.

Business people are not hiring due to lack of demand, uncertainty about increased regulation, potential burdened costs of a new healthcare system, and most importantly, a major increase in taxes for everyone starting January 1, 2011.

Any improvement so far in the 2010 GDP is nothing more than purchases being made now in advance of tax increases in 2011.  Therefore, 2011 will be another down year in GDP, possibly greater than the 2008 and 2009 drop.

Here are some statistics on how much in Federal Income Taxes are being paid.  Keep in mind taxes are going up in 2011, and the system is now set where 55% of Americans are paying taxes so that 45% (who do not pay taxes) are receiving benefits.  The administration’s plan is to move it to where 45% will pay taxes to support 55%.  This is going to lead to an upside down pyramid that will fall over.

MORE PAID BY THE TOP GROUP – In 1980, the top 1% of taxpayers paid 19.1% of all federal income tax (FIT) and the bottom 50% of taxpayers paid 7.1% of FIT.  In 2007, the top 1% of taxpayers paid 40.4% of all FIT and the bottom 50% of taxpayers paid 2.9% of FIT.  Thus since 1980, the top 1% of taxpayers has gone from paying nearly 3 times the FIT of the bottom 50% of taxpayers to nearly 14 times as much (source:  Tax Foundation).

There are many solutions to solve our economic problems…(1) cutting taxes always brings more money into the Treasury; (2) real spending cuts in all areas (see what the new Governor of New Jersey just proposed); (3) decrease regulations.

May I suggest you read a new book by Arthur Laffer, Return to Prosperity.   Laffer has been on the President’s council of Economic Advisors, was responsible for “the Laffer Curve,” and has consulted businesses and governments worldwide.  I think you will accept his flat tax proposal that he has advocated for 30 years.  Now, you will accept the idea if you pay taxes…if you do not pay taxes and receive benefits from the government, well, you will not embrace it.  It is time to do something quickly before it is too late.  Ah yes, discipline or regret!

With some of the financial scams that have taken place recently don’t you find yourself feeling a little sorry for those that were taken? I become confused when I hear that people placed all of their savings into one investment!

Come on, no one should put all their eggs in one basket. There have been many cases in which individuals have placed all their money in their company stock. Later, after the company went bankrupt, all their investment monies were evaporated. People began to blame their company for the loss. In reality, the individual made the mistake by being greedy and not diversifying.

When you see someone do something beyond common sense, you say…gee, that was stupid. You see, everyone needs to be responsible for their actions. Unfortunately, in this country the tide has changed and no one wants responsibility for anything.

I came across a blog about frivolous lawsuits that have resulted in ridiculous warning labels like:

• “Remove child before folding,” on a baby stroller.

• “Harmful if swallowed,” on a brass fishing lure with a three-pronged hook.

• “Never iron clothes while they are being worn,” on a household iron.

• “Shin pads cannot protect any part of the body they do not cover,” on shin guards.

I can only imagine what financial advisors will now have to print on their ADV and application forms to alert clients to the obvious as this irresponsibility sweeps the country.

All of this raises the question: What is your responsibility as an investor to minimize the risk of fraud or failure in the management of your account?

Your steps:

• Do your due diligence.

• Work with financial advisors that have credentials and maintain ethical conduct.

• Develop an Investment Policy and Asset Allocation.

• Do not invest in anything that you cannot handle a loss level greater than your tolerance.

• Make sure your advisor uses an independent custodian.

• Do not invest in anything you do not understand.

• Evaluate your advisor, not just on performance, but on his/her ability to listen, communicate, and respond to your concerns.

Funny how investors never praise an advisor when their portfolio goes up, but they criticize or sue when the portfolio goes down. This thinking is a true portrayal of the American attitude today of…”I am not responsible for anything that goes bad in my life.”

If you want someone to take care of you so that you never get hurt, well, that brings to mind a saying I learned long ago…“Beware of someone who offers to take care of you, for your caretaker may soon become your jailer.”

I have written many times in this blog about the special Roth conversions available in 2010. My summary of all the long-winded blogs was that a conversion will probably cost you more in taxes than you think, and you will still have strings attached with the Roth. There are far better alternatives for you.

An article in Baron’s magazine may have found other reasons why people are not converting. A Fidelity study found only 7% of investors will convert to a Roth IRA. Also, even with all the media hype, education, and bank/brokerage flyers, more than 88% are unaware of the opportunity. Another reason why people are holding back, the survey found, was government mistrust. A TD Ameritrade survey found that 36% of those who are most ideal for conversion suspect that Washington will change the rules later. Thus, rule changes will mean that the money coming out of Roth will be taxed to reduce the national debt. (This is exactly what happened to Social Security benefits…that is, up to 85% of your benefits can be taxable. Hmmm…taxed once when you earned the money and then taxed again when you receive it. Are you screaming yet?)

There are far better alternatives than IRAs, 401(k)s, and Roth IRAs. Contact us at 713-871-5919 and we will be glad to present them to you. If what you always thought to be true…turned out not to be true…when would you want to learn about it?