The one thing you can bet your house on is that the government pays for stuff with tax revenue. Do you think that when Uncle Sam needs more money, he pauses (for a second)? To consider the fact that someone may be retiring -so- increasing taxes might erode their income? I hate to tell you he doesn’t give a DAMN!
Monday, March 30, 2009
Tax-Deferred is NOT Tax-Free!!!
The one thing you can bet your house on is that the government pays for stuff with tax revenue. Do you think that when Uncle Sam needs more money, he pauses (for a second)? To consider the fact that someone may be retiring -so- increasing taxes might erode their income? I hate to tell you he doesn’t give a DAMN!
Monday, March 23, 2009
Are IRAs & 401(k)s GOLDEN?
Monday, March 16, 2009
What Percentage should You Dump into a 401(k) or NOT?
I am startled by the fact that, an overwhelming majority of conventional financial advisers are telling people to simply sign up because of matching dollars. They claim that if, for instance, you contribute $1 and receive a $0.50 matching, you have a 50 percent return. The truth is you have $1.50 earning interest (assuming your portfolio does not take a spanking). The BIG ILLUSION, however, is that you are receiving a 50 percent return on your money – That’s NOT exactly true.
Today’s Matching Environment
I know there are employers still matching employees’ contributions. However, more and more, companies, including names like, Kodak, FedEx, General Motors, 7-Eleven, Ford, Eddie Bauer, U.S. Steel, Motorola, Saks Inc., Sears Holding Corp., Frontier Airlines, Cushman & Wakefield, Chrysler (and the list goes on) have announced plans to either change or suspend matching contributions to their 401(k)s. – So, now what?
True Matching
In my opinion, true employer matching is:
1. Where an employer contributes a certain percentage of an employee’s gross income to a 401(k) (or whatever qualified plan) REGARDLESS of whether the employee is contributing anything - and it is 100 percent vested.
2. Where an employer matches dollar for dollar on a certain percentage of an employee’s contributions.
3. Where an employer provides 50 percent matching benefit on a certain percentage of an employee’s income.
I know you’ve been waiting - here is my general rule of thumb:
All other things being equal, an employee should not contribute any funds to a 401(k) plan beyond the amount required to receive true matching employer contributions. For example, if the same yield can be achieved in a non-qualified retirement account (that is income tax-free on the back end), I would generally advise an employee to contribute to a 401(k) plan only up to the amount that receives true employer matching.
Before making such a CRITICAL decision (about your retirement), I would advise you to carefully consider a variety of factors such as: yield, available portfolio choices, strings attached (or flexibility), as well as tax implications (which greatly impacts the net spend-able retirement income) among others. After all, you are planning for retirement. So what should the focus be? I would think number one on the list should be a plan that will provide the most spend-able retirement income.
Almost on a daily basis I talk to people who are already in retirement or very close. And, they overwhelmingly echo the fact that, if they had known the entire story (if they had received clear, understandable, full disclosure information), they would have made different choices regarding their wealth accumulation vehicles.
I am going to tell you the often untold portion of the retirement story (in the coming weeks). My hope is that you’ll take the necessary action before it turns out to be too late.
Monday, March 9, 2009
Should You Contribute To A 401(k) Plan BECAUSE Of Matching Employer Contributions?
This may come as a surprise; but that notion is one of the greatest financial myths of our time. Don’t get me wrong, matching benefits may be very useful (after all who doesn’t want free money? especially from their employer). But, (and that’s a BIG but) we need to examine these opportunities carefully, as these benefits have their limits.
To give you an idea, I looked up the price per share of two well-known giant companies over the past 30 (three, Zero) years:
Let’s assume in 2008, you contributed $3,000 and your employer matched your contributions with $1,500 so you had $4,500 of seed money (I’m aware this may be different for some but I hope you grasp the concept and free yourself from the myth surrounding this issue once and for all). I can safely assume that this money was invested directly in the stock market via mutual funds and/or individual stocks. I am also going to assume that you lost roughly 35 percent. So at the end of 2008 your $4,500 seed money is down to $2,925 - You lost the $1,500 from your employer plus $75 of your own money.
Wait, before you say I am being too simplistic by focusing on only one year, let me remind you that you just lost 35 percent (based on my example) of the ENTIRE amount you had accumulated up until this point. So where does that leave you? How do all those years matter to you now? – Just ask those you know who have lost some money.
And, most importantly, what is the likelihood that the market will post a gain of 53.85 percent THIS YEAR so that your account will regain its value? You see, for the $2,925 to gain $1,575 so you can recover, your portfolio must gain 53.85 percent NOT the 35 percent you lost.
Now, do you think the test to determine whether you should contribute to a 401(k) (or not) be simply if your contributions are matched? Or there are a lot more variables to be considered before making such a critical move?
I believe that if employers are for real about matching employees’ contributions, they should be willing to do that regardless of the kind of plan employees choose (qualified or non-qualified).
Let me emphasize that my goal is to shed light on this question in a general manner, by providing a perspective that seems to elude a considerable number of good-minded working folks (I don’t care much for those in the financial planning field who should know better, yet remain totally clueless about the issue).
Monday, March 2, 2009
If something you’ve always thought to be true, turned out not to be true; when would you like to know?
4) Diversify your portfolio and then focus on the long-term - Over the long-term you’ll always end up great.
I am not even going to try to guess your reaction. Here is the truth:
All of them are MYTHS!
This is what I can promise you right now: That over the next several weeks (and months), I will discuss each of them and give you the FACTS.