Protecting Your Financial Future

Posted on September 30th, 2008 in Financial Abundance, Newsletter Articles by wayne

If you are like most of the people I talk to, you are spending a considerable amount of time worrying about how the recent stock market downturn will affect your financial future. While losses in the stock market are a serious concern, your own actions may be even more damaging to your financial future.

The personal savings rates in the US have deteriorated from 10% in 1985 to 5% in 1990 to 2.5% in 2000 to 0% today. Personal savings rates today are the same as they were from 1929 through 1931, after the stock market crash that led to the great depression. This dramatic reduction in personal savings has been caused by an equally dramatic increase in personal consumption.

In inflation adjusted dollars, per capita consumption in the US has climbed 25% from 1985 to today. Including inflation, per capita spending has increased 150% since 1985. From these figures, it is easy to see why the average American now saves nothing, compared to a 10% savings rate in 1985!

What may not be clear is why this has occurred. We all know that, until recently, credit was extremely easy to get. Credit cards, interest only mortgages, home equity loans and 0% down car loans helped transform us from a society of savers to a society of debtors.

Since the vast majority of our Gross Domestic Product now comes from consumerism, US industry encourages you to spend. Our financial institutions have made significant profits from credit card interest and other forms of personal indebtedness. Even our government encourages spending over savings by providing tax deductions for mortgage interest while taxing savings interest at the same rate as earned income. State and local governments get much of their income from sales taxes that are placed on the goods and services that you buy.

Our President has said that we are addicted to oil. I would take that statement a step further and say we are addicted to consuming. All you need do is notice how often the media refers to you as a “consumer. “ Have you ever seen the US population called “savers” in our media?

If you have an addiction to consumption, now is the time address your addiction. Modifying an excessive spending habit is a way to begin your journey toward financial abundance. So how do you begin the process of transforming from a consumer to a saver?

When you get your pay check, always pay your self first by putting a portion of your paycheck into savings. This can be through a 401(k), a self directed IRA or a taxable savings account. If you began saving $50 per week at age 30, with a 7% investment return, your $50 payment would be worth almost $400,000 when you are age 65. If you are older, you will need to save more, but you will likely have more income than you did at age 30.

As your pay continues to increase, try to increase your saving amount until you are “paying yourself” at least 10% of your take home pay. By paying yourself first, you will likely have adequate resources to live an abundant retirement.

By learning to live on the other 90% of your income, you will begin to break your “consumption addiction.” The “cartel” of industry, financial institutions and the government are all hoping that you will never break this addiction. Only you can decide if you will become a saver or remain a consumption addict.

How Safe is Your 401(k)?

Posted on September 30th, 2008 in Newsletter Articles, Retirement Planning by wayne

Most employees can no longer depend on a pension for retirement income. “Fixed benefit” plans have been replaced with “fixed contribution” plans, such as the 401(k). Whether you are a company owner, a corporate executive or a company employee, much of your retirement income will likely come from your 401(k) plan.

What can you do to protect this valuable asset, even during our current turbulent times? While you cannot control the stock market or the economy, you can protect the value of your 401(k). The answers below can maximize the value of your 401(k).

1. What does your 401(k) plan cost? Even if you are not a company owner, there are costs to all participants in a 401(k). If your plan is sponsored by a non commissioned brokerage company, such as Fidelity or Vanguard, you can access no-load mutual funds. However, some plan sponsors, offering “low cost” plans to company owners, make most of their fees by offering only mutual funds with a sales “load” (expense). At Google or Yahoo’s financial sections, you can determine if the funds in your 401(k) have sales loads. These include front end loads and/or 12-b1 fees. Also find your fund’s operating expenses. Sales loads and high operating expenses decrease your investment returns. If your plan has sales loads or high operating costs, encourage the plan manager or company owner to consider an alternative plan.

2. Does your 401(k) plan offer diversification? Since a 401(k) is the primary savings of many employees, it should offer well diversified fund choices. While unlimited fund choices can be confusing, a diversified 401(k) plan requires separate stock funds for Large Cap, Mid Cap and Small Cap US stocks. It should also include international stock funds for both developed and emerging markets. Bond funds should include short, medium and long term funds, an inflation protected bond fund as well as stable value and money market fund. If your plan does not have at least one choice from each of these categories, it lacks proper diversification.

3. Does your 401(k) plan offer an employer match? If your employer matches a portion of your 401(k) contributions, always contribute enough to get the full employer matching amount. This match can provide an immediate 100% return on your investment. If the employer match is in company stock, do not invest your own contributions in the stock. When your employer contributions are vested, exchange most of the company stock for funds in your diversified portfolio. Keeping less than 5% of your vested 401(k) plan in company stock helps protect you from a company downturn.

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4. What do you do when you leave your company? Unless there is a good possibility that you will return to your employer, it is usually beneficial to roll- over your 401(k) assets into a self directed IRA. If you have employer stock in your 401(k) that has significantly appreciated, you should consider a tax reduction technique entitled Net Unrealized Appreciation (NUA). Before you request the IRA rollover, request a lump sum distribution of the employer’s stock that is in your 401(k). Properly executed, you will pay income tax only on the stock’s cost (basis). The difference between the stock’s basis and the current market value is taxed at long-term capital gains rates, even if you sell it immediately.

5. Are you managing your 401(k) assets? Many people pick a 401(k) asset allocation when they join a plan and then ignore these assets as they grow. Since a 401(k) will likely be one of your major retirement assets, it deserves your full investment attention. If you provide your own asset management, manage your 401(k) as prudently as you manage your other assets. If you use a financial advisor, require your advisor to include your 401(k) assets when they provide asset allocations and investment advice.

Your 401(k) will likely be a major contributor to your retirement income. To have an abundant retirement, the ideas presented above can help you protect your 401(k) assets. If your 401(k) is treated it as a valuable resource, it will treat you well in your retirement years.