Monday, November 1, 2010

Do You Know if YOUR Favorite Financial Guru Is Offering Accurate Advice?

Do You Know if YOUR Favorite Financial Guru Is Offering Accurate Advice?

Just about anyone who knows me by any measure would wholeheartedly agree that I am a huge proponent of educating oneself, especially when it comes to planning your retirement income. In fact, that is my passion! But there’s a caveat: I am extremely cautious – and you should be, too – about determining the FACTUAL basis of the information you act upon.

Realize I did not say the source of the information, but rather the factual basis, because there is a huge difference. In the world of personal financial planning, unfortunately and sadly, most of what you read and/or listen to may indeed be nonfactual. Wait a minute! Am I saying that financial advisors, personal finance books, websites, TV programs, and radio gurus do not provide factual information? Yes, that’s exactly what I am saying – although, of course, it’s not all of them. What makes it even worse is that some of those sources aren’t even aware that they are making bogus claims – now that’s scary! I know this because, day in and day out, I disprove these bogus claims to clients and prospective clients. That’s actually what motivated my book, 5 Mistakes Your Financial Advisor Is Making. How often have you heard stories about credible sources disseminating totally bogus and inaccurate information? You may have experienced many instances of this in your own life.

Last Tuesday, October 26th, Kathy Kristof wrote a column on the CBS MoneyWatch website titled “5 Tax Moves You Must Make Now,” in which she wrote in support of smart investors saving more in their 401(k) plans now:

"...That’s partly thanks to a tax break that allows contributions to come out of pay before income taxes are computed, so each $100 in savings only costs you about $75, after you take into account the $25 in federal income tax savings. (This assumes a 25% federal bracket, which applies to singles with up to about $83,000 in taxable income and married couples with up to $138,000 in income. Higher income filers get a bigger break."
Granted, this is a hugely credible website – I mean we’re talking CBS Money Watch here – and Kathy is esteemed in many respects. Her published bio reads, “Kathy Kristof is a syndicated personal finance columnist, speaker and author of three books, including the recently updated Investing 101 (Bloomberg, 2008).” She sure sounds like someone who knows what she’s talking about, right? BUT – and this is a huge BUT – the writer’s above statement about 401K contributions is NOT so factual. It may sound eloquent, but it is NOT factual.

Dear reader, let me make this crystal clear. What I just said is NOT my opinion on that statement. The big kahuna/syndicated columnist/speaker/author has made a nonfactual statement. Scary isn’t it? We all have the right to free speech, but wouldn’t you agree that when someone is in a position of offering – or purports to offer – advice for others to act on (and we’re talking serious retirement advice), they have a duty to be 100 percent factual?

It’s no secret that the overwhelming majority of Americans enter retirement financially perplexed, after years of hard work. Why should that come as a surprise? Because if you follow nonfactual information, no matter how good the intention of the information provider, you can expect only one result: CONFUSION. I could write at great length on this topic because, as I indicated earlier, this issue gets me very fired up. But here are the bare FACTS on the author’s above statement:

  1. According to the law that regulates ALL 401(k)s in this nation (and the very one the column is referencing), you get to make pretax contributions and defer (in other words, postpone) taxes on the growth, insofar as you abide by certain rules.
  2. Once you draw out those funds, you must pay all the taxes you have been postponing (the ones still unpaid) – please read the FACT that follows slowly – at the tax rates in effect whenever you make those withdrawals.
  3. So on that $100 savings Kathy refers to, you are effectively choosing not to pay the $25 tax today because you are betting that when you withdraw this money later, the tax rates – over which you have absolutely no control – will be lower, and you’ll therefore end up paying less than $25.
So let’s make this plain and simple. Deferring the $25 tax IS NOT a savings – it’s merely a postponement. If you have to pay it later, you would not consider that a savings, would you? Yet you can see how, as an investor, you might be inclined to believe the accuracy of that statement and therefore act on it – but, in fact, the complete opposite is true.

One final thought. Now that you know the FACT around this specific issue, do you think postponing paying your taxes at this point in America’s fiscal history, when tax rates have nowhere to go but up, is really a smart move? Then again, if you look closely, the column’s title simply says “Tax Moves,” so maybe it’s not necessarily intended to discuss “smart moves.” Armed with factual knowledge, it sure seems that way.
Contact Laser Financial Group today to schedule your complimentary session to get the FACTS around planning your retirement income. Call us at 301.949.4449 or
visit us on the web.

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