Financial FICTION #6: 401(k)s, or qualified plans in general are the best way to plan for your retirement

Financial FICTION #6: 401(k)s, or qualified plans in general are, hands down, the best way to plan for your retirement.

How did this belief become so prevalent in the first place? The two biggest reasons are that you receive matching contributions from your employer, and you also get a tax break. But is that the end of the story? Of course not. Generally speaking, these programs come with the following rules (also known as restrictions):

• Your contributions are limited to a certain dollar amount or percentage of your income.
• You’ll have to wait until you reach age 59½ to withdraw the money in your account, because not only will you be taxed on any withdrawals made before that age, but you’ll also be penalized with an extra 10 percent excise tax for not playing by the rules of the game.
• You can avoid such taxes by taking a “loan” instead of withdrawing the money permanently – if your employer allows it. What most folks don’t realize is that such a loan must be repaid on a set schedule dictated by Uncle Sam, or else it will be considered a distribution and therefore taxed (plus the 10 percent penalty if you are younger than 59½ ).
• Once you have reached age 59½ and you begin taking distributions, you’ll have to pay taxes on 100 percent of those amounts at whatever the current tax rates is. That is because these programs simply postpone, delay, or defer the taxes until a later date. Please read my column on Financial Fiction #1 for how that really works 
• Then at age 70½, you must begin withdrawing a certain “Required Portion” of these funds, the amount of which depends on your age and the amount of money in your account. If you breach either of these, there’s a 50 percent penalty on what you should have taken out.

Another thing I keep wondering is, if the matching contributions are the sole benefit of participating in an employer-sponsored plan, what happens if the matching ends? Does the whole program go from “good” to “bad”? There must be a better way, wouldn’t you agree?


What most investors need to understand is that there are alternatives to qualified plans that can produce the same – or in some cases, better – returns, without all the strings associated with qualified 401(k)s and the like. Of course, I’m not saying that these alternatives are necessarily better. But it would behoove investors and their advisors alike to consider the complete picture, including what actually happens when retirement arrives.

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Contact a financial professional at Laser Financial Group today to schedule your complimentary session where we can investigate whether a qualified plan like a 401(k) is really the best option for you. LaserFG.com or 301.949.4449

Financial FICTION #5: Investing in a life insurance policy is savvy only for folks with dependents at home

Financial FICTION #5: Investing in a life insurance policy is savvy only for folks who have dependents still in their nests.

Some financial experts hold a general belief that once you no longer are responsible for any dependents, you should drop your life insurance coverage, because from that point onward, it’s a waste of your money, so to speak. The rationale appears to be “Why pay for income replacement that no one needs?”

Once again, I beg to differ – completely. You see, that general view does not hold true and/or make sense in more than 99.99 percent of the situations I have reviewed with my clients – once they understood the complete life insurance picture. Here are some key facts to consider:

• Some life insurance products, when designed properly by your advisor (how the policy is designed is extremely important) can build cash value that you can access anytime without creating what the IRS calls a taxable event, thereby allowing you to enjoy your money completely income-tax free.
• Cash buildup inside these kinds of life policies is not subject to the “Required Minimum Distribution” rules that accompany certain plans, once you reach age 70½ and beyond.
• Life insurance death benefits under U.S. tax law pass to your named beneficiaries completely income-tax free.
• Life insurance is the only financial product that can guarantee a specific amount of money will be paid to your named heirs for pennies on the dollar, come-what-may – and they won’t have to pay even a cent of income tax.

I would challenge any financial professional to first understand the intricacies of each client’s specific situation before jumping on a general bandwagon or falling for some emotional selling point that holds no merit. Then I would suggest they compare the alternatives to determine whether they can and will beat the life insurance option, in terms of cost and final benefit. Then, put that side-by-side cost-benefit information in front of their client. The rest seems pretty easy, doesn’t it?

What I have come to notice personally is that many so-called financial professionals dismiss life insurance alternatives without even looking into them, or they do so based on what they’ve heard someone else say. Many of these critics don’t even hold life insurance licenses – yet they are experts in the subject?

Not all life insurance products are the same. Just as it would be irresponsible for me to tell you that because I had a terrible adverse reaction when I took aspirin, “Aspirin simply doesn’t work,” an advisor who ignores insurance is not giving you the complete picture. It’s up to you to learn to read between the lines.
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Contact a financial professional at Laser Financial Group today to schedule an appointment to discuss the best financial options for YOU. If an insurance plan would - or wouldn't – benefit you, we'll let you know. 301.949.4449 or LaserFG.com.

Financial FICTION #4: Investments with high gross returns will automatically generate the most income

Financial FICTION #4: Investments with high gross returns will automatically generate the most income for you to spend.


This is one of the most unassuming yet deadly – if not the deadliest – mistakes that scores of retirement investors make, some under the guidance of financial advisors. Let me explain.

It’s no secret that everyone would like their investments to make the best possible gains, and to a very large extent, the rate of return on your investment contributes to that. However, the fact some seem to miss is that much, much more is involved than just your returns. By way of example, let’s say that you are faced with choosing between two investments, A or B, with potential yearly gross returns of 8 and 7 percent, respectively.

If you were to select Investment A over B, without first examining the costs associated with each of these alternatives, you might be making a terrible mistake because there are costs associated with investments, and those costs can significantly affect the final return. I must note that in the instance where all things are equal and both of these investments cost exactly the same, you would be correct to choose A over B. The thing is, that almost never is the case in reality. For the sake of this discussion, let’s assume that is the case, and the cost associated with both investments happens to be 1.5 percent a year. Investment A would therefore net 6.5 percent (8 minus 1.5) versus Investment B’s net return of 5.5 percent.

Now, get ready to learn what the overwhelming majority of conventional advisors completely disregard, which in turn leaves at a disadvantage countless numbers of hard-working folks who are simply trying to plan comfortable retirements.

All we have done up to this point (which is where most advisors end their analyses) is consider which of these two investments will accumulate the largest actual balance in your account. However, common sense tells us that you should really be focused on how much of that literal balance will actually belong to you to spend when you need it, and/or how much your heirs will actually get to spend when all is said and done. We’re talking about income taxes here.


The thing is, you will do your retirement lifestyle little justice if you do not factor in the tax efficiency of these investment options. If you think about it, taxes reduce the amount you will actually get to spend or leave behind, so NOT factoring them into your decision process is a rather unfortunate mistake. I can’t even begin to tell you how many folks sit across the desk from me on a daily basis who can’t believe that such an obvious thing could have eluded them for decades. Not to mention their vast disappointment to learn the results of this oversight.

Let’s pick up on Investments A and B, and say that A is a taxable investment, but B is a tax-free investment. So when you access your money from Investment A, you’ll need to pay income tax at the current rate; however, that is not the case for Investment B. Just to be clear, there are investment options in the U.S. Tax code that are completely and absolutely income-tax free, so I’m not discussing fantasy here. Now, assuming a combined (federal and state) marginal tax rate of just 25 percent, Investment A’s net-after-tax return would be 4.9 percent (that’s the after the 6.5 cost, minus 25 percent tax, which is 1.6). Remember, Investment B only netted a 5.5 percent return, but there’s no tax liability on it. Given the choices now, it’s pretty obvious, isn’t it? You’d want to go with Investment B, once you realize how we got here.


Now you understand why it’s so crucial that you factor tax efficiency into your choice of investments if you ever plan on retiring. By the way, I understand that there are always unknown variables in these kinds of evaluations, but that’s no excuse not to factor in tax efficiency, and those variables must not be confused with unrealistic expectations and/or assumptions.
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Contact a financial professional at Laser Financial Group TODAY to schedule your confidential, completely complimentary – as in NO strings attached – appointment. We'll help you examine which investment options make the most sense for you, both in terms of returns and tax efficiency. 301.949.4449 or LaserFG.com.

Financial FICTION #3: If you hear financial advice through the mass media, it is obviously correct and right for you.

Financial FICTION #3: If you hear financial advice through the mass media, it is obviously correct and right for you.

For some strange reason, most people believe that the best source of financial advice is what is disseminated through the mass media. Really? If it’s on radio, TV, a website, or printed in a magazine/newspaper, it must be appropriate for you? That’s a myth, and here’s why:

Generally, such advice is so generic that it may actually be toxic in your particular situation. No credible professional should make generic statements in terms of financial products (i.e., “this is good and that is bad”) because the same product is not necessarily equal for all investors, depending on how and for which purpose it is applied. Although they are products you purchase, it’s important to understand that financial products are not like other products in this regard.

In most cases, such generic advice is really a cloaked advertisement for a particular company’s product that serves as a sponsor of the media – and while this may not necessarily be a bad thing, as an investor you should know if that is the case, wouldn’t you agree?

I’m particularly skeptical of media advice that recommends specific investments for purchase – you know the ones. They usually offer you “hot picks” of the week or month. Have you ever noticed that the predictions/picks change with each new edition of the show or publication? So does that mean the previous suggestions are no longer “hot”? The ironic thing here is that these same folks tell investors to “buy and hold their investments for the long term,” yet they keep changing their “hot stuff” alerts every week. I hope you can read between the lines here.

One significant thing to note, financially successful individuals do not take their advice from the mass media. Is all such advice terrible? Of course, not. But smart investors know they would be unwise to embrace financial advice that is meant for 300 million Americans who think it’s enough. Just as in medicine, I’d recommend you work with a financial professional who understands your financial vital signs and design specific solutions for your situation.

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Contact Laser Financial Group today and schedule a complimentary consultation with a skilled financial professional who will tailor a plan to your specific needs. 301.949.4449 or LaserFG.com. 

Financial FICTION #2: Aggressively paying off your mortgage debt is savvy and always beneficial

Financial FICTION #2: Aggressively paying off your mortgage debt is savvy and always beneficial to you, financially speaking.

 

Many people buy into this notion based solely on the fact that there is a cost associated with carrying a mortgage (in the form of interest payments) and the belief that by eliminating their mortgages, they therefore stand to save that money. There’s also an emotional connotation – paying off your mortgage feels good and even carries some wealth-related social status. 

However, both reasons completely miss the underlying and central financial principle that should guide such decisions – Profitability and Opportunity Costs. Sure, there is an interest cost associated with carrying a mortgage, but there’s also a cost for paying it off, too. Proper and savvy financial management teaches that when it comes to such choices, you take the route that will cost you the least amount of money or make you the most money. 

Let’s examine this principle with this hypothetical scenario involving the Greens, who have a 30-year $100,000 mortgage at a 6 percent APR. They are in a 30 percent combined (federal and state) marginal tax bracket. They recently inherited $100,000, which is currently earning a net after-tax return of 5 percent a year. The Greens are now trying to decide whether it would be beneficial for them to use the inheritance money to pay off their mortgage.

Here’s how the application of financial principle works: The $100,000 mortgage is costing them 6 percent. But since it is a deductible expense on their tax return, Uncle Sam gives them a 30 percent break, which shaves off 2 percent (0.30 multiplied by 0.06) from the 6 percent interest on their mortgage, meaning that in actuality, their mortgage is costing them only 4 percent. I’m sure one of the reasons most people are encouraged to purchase as opposed to renting is so that they may enjoy this very benefit, isn’t it?

One thing I’d like to particularly note here is that when figuring the net cost of your mortgage, it is imperative that you use your marginal tax rate, NOT the effective tax rate, because we have a progressive tax system in America.

OK, that aside, the Greens’ mortgage is costing them 4 percent, versus the 5 percent they could earn if they invested the money they’re considering using to eliminate the mortgage. It’s a no-brainer, right? But you’ve got to realize how we got here – we put aside the emotional stuff and got down to hard facts and numbers, which by the way is exactly how successful, savvy folks make these kinds of decisions. 

In August 2006, the Federal Reserve Bank of Chicago issued a 58-page report titled “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings,” in which they concluded that most American homeowners are making the wrong choice by accelerating mortgage payments instead of putting the money into tax-deferred accounts. The report further stated that the misallocated funds cost U.S households as much as $1.5 billion every single year! I would recommend that every homeowner (and especially those financial professionals who hold the payoff-quickly point of view) take some time to review this eye-opening report. 

If this is really true, why do all these TV and Internet gurus tell homeowners to pay-off their homes quickly? I wish I could answer that, but honestly I can’t, other than to say that maybe it sounds emotionally appealing. Just as it would be completely irresponsible for me to make a blanket statement that no one should pay off their mortgage, the opposite is also true, wouldn’t you agree?

That’s why I always recommend that you chat with a savvy, well-trained financial professional(s) who is loaded with a ton of common sense, so that you can decide YOUR Profitability and Opportunity Costs, considering all the details pertinent to your specific situation.

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Contact Laser Financial Group today to set up your completely complimentary (no-strings-attached) consultation with a financial professional who can help you determine whether paying off your mortgage quickly is really in your best interests. 301.949.4449 or LaserFG.com.