Paul Ferraresi

Russ Prince and Lewis Schiff, authors of The Middle Class Millionaire, purport to have uncovered the rise of new class of wealth that is changing the face of America: These 8.4 million households [with $1 million to $10 million in net wealth] make up a new generation of millionaires who began to emerge from the middle class in the late twentieth century. As their wealth has grown, so have both the cost of maintaining their lifestyles and their need for products and services that make their lives run smoothly. This group is helping to bring about momentous changes throughout American society.

Tom Stanley, author of The Millionaire Next Door showed his millionaires were almost retro middle-class, even for the ‘80s. They owned and operated small business-dry cleaners, gas stations, or cement companies. They stayed married to their wives, drove non-descript station wagons into the ground, bought their clothes more often off the shelf than off the rack, and went to church. They worked hard, sent their kids to college, avoided debt, and saved their money. In a word, they were the total opposites of the 1980’s high-flying executives-overspending, conspicuously consuming individuals.

But a funny thing happened over the past 20 years. The Reagan /Bush /Clinton /Bush economic boom (undeterred by the bond and stock market corrections of ’87, the recession of ’92, or the dot.com crash of 2000), fueled by the low interest rates, low taxes, and almost non-existent inflation has, among other things, replaced Tom Stanley’s retro millionaires with a new generation of small business owners who are, if anything, more driven to attain success, far more socially liberal, and cutting-edge consumers of the first order. Prince and Schiff’s book is a study of what it takes to get into that class today.

The authors identify four characteristics that dramatically separate today’s middle-class millionaires from their less successful classmates:

Hard work. While nine out of 10 of respondents to Prince and Schiff’s survey believe that “anyone can become a millionaire if he or she works hard enough,” the average middle-class head of household works 41 hours a week while the average middle-class millionaire puts in 70 hours. The millionaire is also five times more likely to be “always available” via e-mail (76% vs. 16%), four times more likely to work nights (52% vs. 12%), and three times more likely to be in the office or store on weekends (67% vs. 21%).

Networking. Although most middle-class millionaires dislike the smarmy connotations of the term, 62% of them believe knowing many, many people is very important to achieving financial success (vs. 43%), and they are three times as likely to cite networking as a way to connect with people they can turn to for information (83% vs. 29%).

Never giving up. Nine out of 10 of all middle-class survey respondents admitted to having “made a major career or business decision that has a very bad outcome,” but middle-class millionaires averaged 3.1 such incidents vs. 1.6 for the rest of the middle-class. More importantly, the millionaires were five times more likely to follow up a bad business outcome by trying again in the same field, rather than changing fields or focusing on other projects (77% vs. 14%).

Going where the money is. Eighty percent of middle-class millionaires either own their own business or are in professional partnerships. In fact, two out of three of them (65%) consider an ownership stake to be “very important” to financial success, vs. just 28% of other folks in the middle class. That pretty much says it all.

You Are Made for Success!

It has been a busy summer for my speaking schedule. But I love it. People ask me if I ever get tired of traveling around and speaking. The answer? Never. It is something I am passionate about. I know that if my words can help people make a positive change in their lives, they will in turn make a difference in some else’s life. So, here is my request: We are looking to fill in our schedule for the remainder of the year and the beginning of 2009 and we still have a few spots open. I would love to come join your group for one of your events!

Do I speak for corporations? Yep! Do I speak for non-profits? You bet! Do I speak for colleges and universities? Absolutely! DO I speak for network marketing companies? I sure do! Do I speak for churches? Yes I do! Do I speak for lots of other groups I haven’t mentioned? Yes, yes and yes! So, if you would like to have your meeting supercharged, let us know and we will do our best to get there! I would love to include your city on my end of the year list! Email my assistant at Angelique@fgmci.com and she’ll get you taken care of!

High Net Worth (HNW) individuals can not and do not use the typical college savings plans. Many plans have phase outs or limitations. None the less you should be aware of other strategies that the wealthy use and incorporate them yourself.

The classic plans used by everyone:

Here are what HNW people use:

(1) Direct payments by benefactors.
Grandparents and others are often in a position to pay tuition directly, allowing these benefactors to reduce their estate and gift taxes by taking full advantage of the unlimited gift tax exclusion for tuition (and medical) payments. This benefit makes funding 529 plans of limited use (other than paying room and board, which do not qualify for the gift tax annual exclusion) in wealthier families. A practical approach for implementing this plan is for the grandparents (or others) to establish a separate checking account for gifts. The benefactor would then delegate the task of dispensing all annual gifts, tuition and medical payments to a family member or advisor. This person would be responsible for documenting the benefactor’s qualification for the annual gift tax exclusion.

(2) Family limited partnerships (FLPs) and limited liability companies (LLCs).
Most HNW clients are concerned about asset protection, estate taxes and control. Instead of merely funding 529 plans, consider a plan which includes establishing a FLP or LLC to hold family assets. Establish trusts for children, grandchildren and other heirs. Then, have the client make gifts of FLP or LLC interests to the trusts for their heirs, rather than to 529 plans. The children’s trusts can then invest in and remain partners in the family entity, thus helping to achieve broader family goals.

(3) Direct payments to schools.
A wealthy grandparent may prepay tuition directly to schools on behalf of any number of grandchildren enrolled in those schools and the payments, no matter how large in the aggregate, should be exempt from gift and the generation – skipping tax (GST). This approach could enable a wealthy client to save substantial estate taxes and still preserve annual gifts for other planning uses. A 529 plan would limit use of the annual exclusion for tuition, thus limiting overall family tax benefits. Unlike the front- loading of a 529 plan, this is not limited to five years’ worth of gifts, and there is no recapture of tax benefit if the donor dies less than five years after the gift. That is a huge benefit. Further, tuition prepayment doesn’t use up any of the donor’s annual gift exclusion, so the client can still pursue the FLP or LLC plan.

(4) Grantor trusts
A biggie with 529 plans is that the funds grow tax-free. Trusts cannot provide that benefit- well, that’s what some think! As any financial planner knows one can structure investments to minimize current income tax to get close to this result. But there is also a tax technique that can, vis-à-vis the child, make the trust holding college savings “tax-free”: The trust can be structured as a grantor trust so that the donor, not the trust, pays all income taxes. This is done by having the donor expressly reserve certain administrative powers in the trust agreement. The bottom line: Grandma pays all income tax on the trust (well, whatever is left after you’ve invested it in a tax-efficient manner) and the trust grows without diminution from taxes. From a family planning perspective this is equivalent to an additional tax-free gift, above the annual exclusion amount, from Grandma to each grandchild’s trust.

A slowing economy has investors worrying about past, present and future stock market returns. After a huge upward move that saw American stock values double from October 2002 to October 2007, everyone seems to be worried about the future.

This may surprise most people, despite the recent 5 year rally; the entire new decade has not been kind to U. S. stocks. Since the end of 1999, a popular starting point for this decade, cash accounts and Treasury Securities have beaten stock returns (keep in mind I am referring to indexes. Individual securities may have beaten out the indexes. For example; we bought Apple Computer about 5 years ago at $7/share and have sold out portions of shares on the way up at $50, $75, $100, $150 and $200. Fantastic returns.)

The average annualizes returns from 12/31/99 to 12/31/07 for various asset classes have been;

30 year Treasuries 8.77%

10 year Treasuries 6.45%

Dow Jones Industrial 3.95%

Cash 3.24%

S & P 500 Index 1.66%

NASDAQ -4.70%

During this same period foreign securities have outperformed the U.S. securities (in some part due to the 40%+ drop in the dollar). The S&P 500 Index is in 57th position out of 60 global markets this decade. As 2008 started markets were down even more due to the subprime mess. Actually, the Dow Jones average is about where it was prior to the 9/11 bear market. If you factor inflation into the return the situation is even more dire.

Oh, is this the end, you ask? NO! Markets like the weather move in cycles. The 1982-2000 bull market was the largest gain in history. You made a fortune during this run and like all excesses the markets are digesting the gains. Classically, long drawn out bear markets follow big bull markets. Overall, things average out. It may take a few more years to finish the cleansing of the “Indexes”.

U.S. shares do not look good as of late, but, in the most recent 50 years it does look fantastic. Since 1950, a period that includes some severe bear markets, stocks have risen 50 times!! Yet, in the first half of the 20th century, that is, up to 1954, which includes the worse quarter century in market history, stocks were up just10 times. The more recent past has been characterized by lack of global wars, great moves in industrialization, trade, technological knowledge and increasing education levels, reducing commissions and the increase in the work force.

Even if the next few years prove dull, the above positives, and many more, will help equities. I am very optimistic long term, and, isn’t that why you invest … for the long term.

Here is a thought for you. The S&P 500 has averaged an annual rate of return of around 13% since 1925. That 13% took place in good and bad years, World War 2, a depression, Hitler, mass murders, on the brink of thermonuclear extinction in the Cold War, Nixon resigning and even Elvis dying (Yes, he is dead). Through all of that, and, whatever the media will create as the “Crisis de jour”, the markets have averaged 13% per year. Here is a summary of the S&P 500 returns by decade.

S & P 500 Decade Returns

You will note some periods produced below and some above the 13% average. Overall the market averaged 13%. Look at the ‘80s and ‘90s. The returns were WAY above 13%. You knew this current decade would have to be sub-13% just to average out the wild ‘80s and ‘90s. So don’t be upset if your returns have been paltry the past 8 years. Since 1980 to today how have you averaged? I am willing to bet you did fantastic.

I am carefully loading up my personal portfolio and all my clients with good quality low priced stocks. The benefit will be to enjoy the decade starting in 2010 and after –

Do your research, layout a plan and execute the plan. What am I saying …?? Discipline now or regret it later.

No, I am not calling you a “DRIP”. Rather, DRIPs, also known as Dividend Reinvestment Plans, have been around for a long time. It is a great way to build your wealth in a slow, methodical, systematic basis.

Anyone can open a brokerage account to buy stocks. Unfortunately, for some people the requirement to buy a round lot (100 shares) of a stock does not allow them to properly diversify. Another issue is that many people feel they should only buy “growth” stocks which pay little or no dividends. If you study the stock market over time you will see that more than 40% of a stock’s total return comes from dividends.

Prudent investors have taken their dividends and reinvested into more shares. Over periods of times those small investments begin to blossom into many shares. Keep in mind dividends are taxable whether you receive the dividends or reinvest them. (This is known as constructive receipt in the tax code. Picture your savings account in which your interest is reinvested, but, you still must pay tax on the interest earned.)

With dividend tax rates at the lowest in history (15% presently), then, why not take advantage of these low tax rates.
You can participate in a DRIP with many companies. You simply must purchase a minimum of 1 share of that company’s stock. You elect to have dividends reinvested and, voila, it is done automatically. It does not require further investment, unless you desire, and is a fantastic wealth building tool.

May I suggest, as you teach your young children about investing, to have them start in a DRIP program. They, and you also, by only having to buy 1 share of a company’s stock could invest in 15-20 different companies with a small amount of money. Remember the kids are watching you and will mimic your money tactics.

Others may think you are a “drip” for doing this, but, it will “drip” a fortune into your lap in later years.

Here are some great websites to learn, investigate and test out the process.

www.dripcentral.com

www.drip.fool.com

www.moneypaper.com

www.sharebuilder.com

www.equiserve.com

www.buyandhold.com

Of course, you can go straight to the source. Companies that offer DRIPs post information about their program on their websites.

I hope you get wet with all the money “dripping” on you in the future.

What do investors expect the dividend tax rate to be in 2011? This will be the year after the Bush tax cuts expire.

Recent surveys show that tax rates will rise dramatically. Here is why: Democrats are likely to maintain their majority in both Houses of Congress. In addition, the Dems will probably pick up seats in the Senate. Even if the GOP wins the White House, a Republican President will probably be dealing with a Democratic Congress. On the other hand the more likely scenario is an all-Democratic government (look out for what you pray for … here it comes).

Under current law the dividend and cap gains tax rate would return from the present 15% tax rate to the old 39.6%. All the Democratic candidates have said they would repeal the Bush tax cuts immediately. In addition, Rep. Charles Rangel (D-N.Y.) chairman of the tax-writing Ways and Means Committee is vowing to repeal the AMT. He is proposing a surtax on high income individuals plus moving the top rate (including dividends and cap gains) from the present 35% to 44.2%.

[Side Bar: I have written countless times in this blog that taxes will be going up in the future. You should have restructured your contributions to the time-bombs, (i.e. 401K and IRA) and even been pulling money out of your qualified plans at the present low rates.]

Even if the GOP and Dems settle on a dividend and cap gains rate of “only” 28% that is a doubling of the present tax rate.

Conversely, a Republican President will probably be faced with a majority Democratic Congress and be forced to make major concessions to get tax legislation passed. Yup – higher taxes!

What does this mean for you?

• Investors in the stock market are always looking ahead – Have the markets been dropping lately as investors, prepare for more taxes?
• Future stock market returns will be moderate at best.
• Investment into start up businesses will halt curbing job creation due to higher cap gain taxes.
• Businesses will have to lay off people as corporate tax rates also go up in order to maintain their basic profits.
• Jobs will move overseas to a more friendly tax environment.
• Investors will place monies overseas further weakening the U.S. economy and the U.S. dollar.
• Less take home money for you with increased taxes and rising inflation.

Presently Congress is working on a stimulus package to “give back” to us some of our own money (And also give some of our tax money back to people that have NOT paid taxes – Hmmm!)

Don’t they get it? The Dems want to raise taxes, but, they are full throttle to give back money via stimulus package. Isn’t the return of our tax money the same as a tax cut? Let the people keep more of their money. Most people know how to spend their own money better than Congress does!!!

And you said you wanted change? WATCH OUT … for Happy Days are NOT here again (Where are Richie, Ralph and Fonzi  ?)