Paul Ferraresi

In less than 11 months from now a new Congress will be elected. In addition, you may have the same or a new administration in the White House.

What will the economy be like? What will be the “mood” of Americans? Monetary policy has been used up, and only fiscal policy tools remain. A major fiscal tool is tax policy.

The present tax law is set to expire on December 31, 2012. Will politicians kick the can down the road again? Everyone knows that there are a few major changes that need to be done to have the U.S. economy thrust forward with dynamic vigor. One aspect that must be noted: Any tax policy change must be cemented in place for at least five years. Any prudent individual or business cannot do any worthwhile planning or changing behavior with any shorter time period.

Here are a few changes that will transpire when the extended “Bush tax cuts” expire. Remember, it was the largest tax cut in history when first implemented and got us out of the 911-tech stock implosion of 2000-2003. Consequently, if it is not extended…it will be the largest tax increase in history. Here are just a “FEW” of the changes:

• All tax rates basically go up around 5%. The 10% bracket is eliminated and will be at 15%.
• Dividend rates will go from the present 15% rate to your ordinary tax rates.
• Capital gains rates go from the present 15% rates to rates of 25%. (Gee, I wonder what this will do to your stock market investments? DUH!)
• Elimination of the tax credit for having children. (This will hurt the unwed parents and illegal immigrant parents.)
• The marriage penalty tax will go back into effect. (This will encourage married people to not stay married.)

Since it is obvious that you will be taxed more in every area of your life, doesn’t it make sense to develop a plan to place your monies into programs that will never be taxed? We are here to help at any time.

Come November 2012 it may be beneficial to heed the words of the former Mayor Daly of Chicago, “Vote early and vote often.”

The Fed stopped the QE2 program on June 30, 2011. The whole purpose was to provide liquidity to the Treasury market and to appease the Chinese who hold the greatest amount of Treasury debt. The Chinese were concerned that no one would buy their holdings.

The Treasury wants to widen the pool of potential purchasers of Treasury debt. This will include impossible mandates (where they can do such things) and huge offering incentives (where they cannot get what they want). The rumblings do NOT look good for common folks like you and me.

One proposal is to require 401(k)s to hold a certain percentage of their assets in Treasuries at a risk of losing their tax free status. Another is encouraging pension plans to increase their portfolios with more Treasuries. Here is another… allowing companies with overseas cash to bring it home under a “tax holiday” as long as the majority goes into Treasury debt.

Under such plans (1) your 401(k) returns would be less over the long term, and (2) pension plans would need to increase their holdings from the present 6% to 16%, which would force companies to contribute more, costing companies more and forcing them to cut other costs (jobs).

Thus, Uncle Sam is trying to create demand for Treasury debt via the carrot and the stick. The good part… (hmmm) the U.S. is borrowing money from its citizens to stimulate the economy, so these same citizens will pay themselves back with higher taxes. This becomes an Abbott and Costello routine or a chicken and egg game.

As stated in this blog countless times, get out of your 401(k)s, or, stop contributing at least. Get into a non-qualified program that will grow tax free (not deferred); you take it out tax free and, when you die, it transfers income tax free.

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!

An emergency fund is needed to meet unexpected expenses that are not planned for in the family budget, such as short-term illness causing a loss of income, unexpected medical expenses, property losses that purposely are not covered by insurance (deductibles and co-insurance) and to provide a financial cushion against such personal problems as prolonged unemployment or some other financial crisis.

Need for an emergency fund has received greater attention in recent years. Many capable people have lost their jobs because of mergers and acquisitions, economic dislocations or plant closings. A reasonable emergency fund can help to prevent a temporary unemployment from becoming a financial crisis. The fund will give the family time to adjust without having to drastically change its living standards or disturb other investments.

The size of the needed emergency fund varies greatly. It depends upon such factors as family income, number of income earners, stability of employment, assets and debts. The size of insurance deductibles, health and property insurance exposures and the family’s general attitudes toward risk and security are also important. The size of the emergency fund can be expressed as so many months of family income. As a guideline, it is advisable to reserve a minimum of two and a maximum of six months of income. The larger the percentage of your monthly expenses that are fixed and must be paid, the larger should be the emergency fund.

By its very nature, the emergency fund should be invested conservatively. There should be almost complete security of principal, marketability and liquidity. Within these investment constraints, the fund should be invested so as to secure a reasonable yield, given the primary investment objective of safety of principal. Logical investment outlets for the emergency fund would include:

• Bank savings accounts (regular accounts)
• Credit Union accounts
• Money market accounts
• Mutual Funds (Asset Allocation or Total Return Funds)
• Life insurance cash values

Access to emergency funds is important. If check-writing services are available, even at a fee, it might be wise to arrange for them. The careful person may also want to have some ready cash available for emergencies, even if it is non-interest earning. Such an individual might consider setting aside $200 in cash at home to be used ONLY in case of dire emergency. (Remember an emergency is NOT a sale at Home Depot or Neiman Marcus.)