Archive for The Perception of Money

Out of the box Strategies

Many times people get very uni-directional in their thinking and make improper decisions. On some occasions it is because they do not know what they do not know. At a recent seminar I heard a young man (about 23), during a discussion about 401k plans, blurt out…”why should I invest into a 401k plan… since when I am ready to retire at 65 or 70, well, $401,000 dollars will not really be worth much.”

He thought a 401k plan was a place to put money that would only grow to $401,000. Don’t laugh- many people still think that when they sell their house, in order to avoid capital gains tax, they must buy their next home of equal or greater value. The law regarding this changed dramatically in 1997 (17 years ago), yet, the majority of Americans still think the old law is in effect. Get professional financial help and save a bundle before you make any move.

Here are a few examples that professional financial advisors have saved people bundle of money just by thinking outside the “uni-directional” box.

Example 1: A client was able to use capital gains to escape the tax collector: “Dad” was in the highest federal tax bracket (40%) and was planning to pay down his daughter’s $18,000 student loan out of his own income (we will leave the discussion why he was doing this for another time). Dad would have had to earn $30,000 of salary to net the $18,000 for the payoff using uni-directional thinking. (So it really would have cost him $30,000 to get rid of the loan not just $18,000.)

The daughter was in a much lower 15% bracket, and, the client (Dad) was holding appreciated stock. So rather than having “Dad” use cash which would be subject to ordinary income tax rates, the advisor suggested “Dad” gift the appreciated stock to his daughter.

Since the adult child was in the 15% tax bracket when she sold the stock the long term capital gains tax was ZERO. (By the way the Dad had bought the stock originally for $2,000… so his real cost to pay off the loan… was $2,000). All the time I hear people say I do not want to pay for a professional advice. Yet, by not paying a small fee for expert ideas in this case it would have cost “Dad” $30,000 instead of $2,000 to pay off the $18,000 loan.

Example 2: A couple owned a home on more than 5 acres of land. They did not want to leave the home and they did not need the excess land. At the same time they wanted to expand their condo in the city. Two different “brokerage firm advisors” told them to take money out of their retirement accounts to fund the condo expansion (at ordinary income tax rates). A Certified Financial Planner told them otherwise… “Sell your extra 5 acres at capital gains tax rates and keep your retirement accounts growing.” So they kept their home, upgraded the condo and kept their retirement accounts. Again, uni-directional thinking would have had them paying at least 39.6% ordinary income tax rates (plus state income taxes) on the retirement monies versus a 15-20% capital gains tax rate on the land.

We at Founders Group strive to find the most efficient, ethical and effective route to our clients’ issues. Contact us at founders@fgmci.com.

Why the U.S. GDP is not growing

There are many policies by the present administration that have killed job growth and the growth of our economy (measured by GDP). Recently, the enactment of Obamacare has and will continue to bring things to a standstill in this country.

But that is not the underlying cause of stagnant growth. The rest of the problem goes back into the 1970’s. Within the past 5 years the problem has flourished.

We all know the answer, but we will not admit it – The problem is too much debt at the Federal level. Sure, everyone hopes and wishes it will go away (just like many people hope and wish their in-laws will just go away).

Our legislators learned a long time ago that if they do “giveaways” to the voters, then, they will keep their Washington jobs. Meanwhile, so that the hard working tax payers do not revolt, our leaders just borrowed money instead with no way to pay it back. Once the government stops this huge fiscal policy mistake then things will improve.

If you study a graph of GDP, ever increasing Federal deficits and decreasing standard of living you will see the proof right there.

Money that could and should have been used to build infrastructure, develop jobs and training programs, and be invested in things that add to future prosperity, well, instead, goes to pay debts incurred by current and previous fiscal misappropriations (free cell phones and food stamps for all are just a few of the current blunders).

You can yell all you want at Washington. There are a few leaders that have and still are fighting to stop this madness, but, they are being taken out to the woodshed by the Washington Elite being brainwashed to keep borrowing and spending. Our current monetary policy says print more money to spend; meanwhile, we do not even have a fiscal policy at all. Madness!!

When is a quarter not a quarter?

Up until 1964 the quarter was made of silver and was worth something. In fact, as a youngster I always marveled at the “ring” a silver quarter made when it was dropped on a table. Today, they just make a “clunk” sound, since it is comprised of many alloys. Today, a quarter is worth about 3¢ in 1964 purchasing power. If you wanted to hear the old “ring” of a silver quarter today it would cost you about $1.88.

Funny (not laughing) the Consumer Price Index (CPI) has increased 7.5 times since 1964.  Back then, a very good salary was $10,000/year, paid to the best engineers. The “average” person earned $5,000/year or about $100/week in 1964 (and that was for 5 ½ to 6 days of work). Today, for that $10,000 salary in 1964 you would need to earn $75,000 today.

Remember the CPI number that the government uses is NOT the real cost to live. Their “core CPI” does not include food, housing or gasoline. (Now, who does not eat food, have some housing costs or use petrol?) Speaking of gasoline… as a teenager I remember it was 19¢ per gallon for regular and a “quarter” for “Hi Test”. For $10 on a Saturday night I could fill the car up with gas, take my best girl out to a movie and stop on the way home with her to get a hamburger and share a “malted”.

Now, it would take about a “quarter of a share of Apple stock” to do the same thing.

So, I guess a “quarter (of Apple stock value) is still worth a quarter (in 1964)”.

Improve Your Financial Future

Here are a few simple strategies to build your wealth:

• SPEND LESS THAN YOU EARN. You can’t make your money grow if you spend it all.
• LIST YOUR FINANCIAL PRIORITIES. Put your retirement at the top of the list.
• ESTABLISH AN EMERGENCY FUND. Low-risk, accessible cash will lessen the temptation to dip into retirement savings in an emergency.
• MAKE SAVINGS A HABIT. Even a little can add up, thanks to the power of compounding.
• PAY YOURSELF FIRST. Stock away at least 20% of your pay. Have the money automatically deposited so you’ll never miss it.
• CUT EXPENSES. It’s one of the fastest and best ways to make money. Clip coupons, buy second-hand on eBay, eat out less often. Funnel this “found money” into your investments.
• CREATE INCOME. Take a second job, rent out a room or downsize and invest the profits.
• INVEST REGULARLY. Use time and timing to get into the marketplace. If you don’t know how to invest, find out how! Go through training, read books, ask an expert and then apply your knowledge. Remember: Don’t work for money. Let money work for you.
• CREATE LONG-TERM WEALTH. Money in a savings account is safe, but inflation will erode its value. Stocks provide long-term growth.
• DIVERSIFY. The best way to balance your risk is with a portfolio that spreads your money out over a variety of financial instruments.
• REVIEW. Revisit your spending plan, savings and goals monthly to be sure you are on track.
• AVOID BAD DEBT. Don’t borrow for things such as vacations, clothing or furniture. Borrowing to remodel a home, on the other hand, may be good debt that can provide long-term financial benefits.
• BEWARE OF HIGH-INTEREST LOANS. Look at the total cost of repaying the principal and interest, not just the low monthly payment.
• GET OUF OF BAD DEBT. Otherwise, finance fees eat up principal that could be earning interest.
• HANDLE CREDIT CARDS WISELY. Keep only one or two cards. Transfer high-interest balances to zero-interest cards.
• PLAN TO RETIRE LATER. If you’re doing what you love, work is fun! You can work longer, work part-time or become a consultant.
• DELAY TAKING SOCIAL SECURITY. Benefits will be higher when you start.

Boomer Retirement

Research by Somnath Basu, professor of finance at California Lutheran University and director of California Institute of Finance, has collected some revealing results.

Those over age 60 employed for 30 or more years had about $200,000 in their 401K plans. While those in their 50’s are set for retirement with about the same amount. Leaving out cost of living adjustments both groups have inadequate resources for retirement for a two income family.

Looking at history, in the 1990’s young boomers were earning $31,000, consuming 80%, saving 10% (including retirement contributions) and paying 10% in taxes. By 2010, for this group savings went up to 15%, taxes down to 5% and consumption at 80%.

Similarly in 1990 the old boomers were consuming 77%, saving 11.5%, and paying taxes of 11.5%. By 2010, consumption increased to 80%, savings at 15.5%, and taxes dropped to 4.5%. The older ones are spending more and are clueless about what lies ahead for retirement [keep in mind, across the nation, taxes fell from an average of 9.4% to just 4% between 1990 and 2010. So the “rich” paying 15% capital gains tax rate is way above what the masses are paying].

Using a boomer’s income level of $50,000 per year, and using ONLY an 80% retirement replacement rate (low) that equates to $39,000 per year gross (minus taxes). Using a 30 year Treasury rate risk free return of 3% (gross) on $400,000 of retirement funds generates only $12,000 per year. Thus 12,000 ÷ $39,000 means they will have 30% of their needs. Will the boomers cut back their expenses by 70%?

There seems to be no way out except everyone will have to change their current lifestyles significantly. Basically, everyone must begin saving every penny they can find. Next, they need to invest in a prudent way looking for principal conservation.

Keep in mind health care costs continue to soar as demand for these services rises. Those over 65 are now spending 13% of total income on healthcare. So health expense in retirement is 13%, housing 35%, transportation 14% and food 12%. That’s 74%. Add in taxes and other living expenses… that leaves very little for “fun”.

The pending boomer financial crisis is real, immediate and will place further strain on social security.

Ah, discipline or regret.