Securing an Abundant Retirement

Posted on April 15th, 2010 in Newsletter Articles, Retirement Planning by wayne

When working with my clients, a primary focuses is to determine what financial resources are required to assure an abundant retirement.   An “abundant retirement” includes all of a person’s needs and many of their desires.  As a minimum, it should include a lifestyle that is at least as financially abundant as their pre-retirement lifestyle.

Let’s look at some ways that you can assure yourself an abundant retirement.

1.  “Paying yourself first” helps assure adequate finances for your retirement.

“Paying yourself first” means putting your income into a retirement plan or a savings plan before using these funds for any other purpose.  If you save ten percent of your pre-tax income, throughout your working years, you will likely have more than adequate financial resources to live an abundant retirement.

2.  Use tax advantaged approaches whenever possible.

My book, Financial Abundance Guide, presents many tax favored approaches to saving for retirement, paying for a child’s college education, paying for healthcare and more.  As I demonstrate, if you are in the 25% federal tax bracket with a 5% state tax, a tax advantaged approach will provide approximately one third more to your total savings.

3.  Have a globally diversified investment portfolio.

Well diversified asset allocations and minimizing investment expenses are two of the most important investment approaches to building long-term wealth.  Since the easiest way to pay off our massive federal debt is through inflation, it is likely that our government will take the path of higher inflation and US dollar devaluation to minimize the pain of paying our federal debt.   Your investments should include some inflation protection as well as global exposure.  One easy way to ensure global exposure is to invest some of your assets in financially strong, global US companies.

4.  When investing, use logic not emotion.

Successful investing requires the investor to buy at lower prices and sell at higher prices.  With this being so obvious, why is it that the average investor’s long term returns on stock market investments are less than the total return the S&P 500.  Studies have shown that the inferior individual investor’s returns are a result of emotional vs. logical investing.  When the stock market is high priced and fully (if not more than fully) valued, many investors become overly euphoric and buy at these high prices.  When the stock market declines, investors are often filled with fear and sell at lower prices.  When investing logically, an investor will buy when stocks are below their intrinsic value.  The logical time to sell is when a stock’s price exceeds a company’s intrinsic value.  A logical approach requires unemotional discipline.

5.  Refinance your home with a low cost, fixed rate mortgage.

Within the next few years, prolific government spending will likely lead to higher inflation and higher interest rates.  Fifteen or thirty-year fixed rate mortgages, that are still available with interest rates of approximately five percent, may seem like a great bargain in the not too distant future.  Unless you plan on staying in your house less than five years, refinance any ARM mortgages with a low cost fifteen-year or thirty-year fixed rate mortgage.  A fixed-rate mortgage provides the same monthly payments throughout the life of your mortgage, regardless of the direction of future interest rates and inflation.

After working for forty or more years, the “American Dream” should include an abundant retirement.  In the private economic sector, pension plans are typically no longer available.  Social Security’s long term viability also remains an unanswered political question.   An abundant retirement in the 21st Century requires you to take control of your personal finances.  Following these steps can help you along the pathway to a financially abundant retirement.

Is the Federal Budget Deficit a Problem?

Posted on April 15th, 2010 in Newsletter Articles, Taxes by wayne

The Congressional Budget Office recently projected the federate deficit for fiscal year 2010 to be $1.6 trillion.  Many economists and financial experts in our federal government have told us that a $1.6 trillion deficit is required to re-stimulate our economy.  They claim that this deficit is not a problem that should concern us.

I cannot fathom the number 16 with eleven zeros behind it.  To put the deficit in a more understandable perspective, let’s determine the average US tax payer’s portion of a $1.6 trillion yearly deficit.

According the Bureau of Labor Statistics, in March 2010 there were 138 million workers in the US labor force,.  The average weekly salary for these 138 million US employees was $764.00 per week or $39,728 per year.

At the IRS website, you can discover that the total amount of personal federal income taxes, projected to be paid in 2010, is $1.05 trillion.   By dividing $1.05 trillion by 138 million, we determine that the “average” income tax paid per worker is $7,619,.  Since the “average” pay is $39,728, federal income taxes of $7,619 represents 19% of average income.

Most workers pay at least half of their Social Security and Medicare (FICA) taxes, which, at a rate of 7.65 % of income, is $3,039 of total average income.  If we assume that the average state tax is approximately 5%, an additional $1,986 of the average income is paid in state taxes.  Thus, the current tax burden for the “average” person earning $39,728 is $12,644 or approximately 32% of their income.

If our worker is one of the 20% of US workers who are now self employed, the FICA taxes are increased to 15.3%, for a total tax burden of $15,683 or 39.5% of income.

Now that we have determined the “average” tax burden in 2010, let’s calculate the average US workers share of the 2010 $1.6 trillion budget deficit.  When we divide $1.6 trillion by 138 million US workers, we find that the “average” portion of the 2010 deficit is $11,594 per US worker.  This number represents 29% of the income for all US workers.

Combining the $1.6 trillion deficit burden with the 2010 tax burden, the total burden of US taxes and the 2010 budget deficit is equal to 61% of the total income from all 138 million workers.

Of course, we will not pay the $1.6 trillion deficit out of our current income.  However, this debt is added to our current US debt and must eventually be paid by us or our children.

Another way to look at the $1.6 trillion dollar budget deficit is that you are making “unfunded” federal government purchases, equal to 29% of your before tax income, and putting these purchases onto our nation’s credit card.  As with a real credit card, these “purchases” must someday be paid by you, your children or your grand-children.

A politically popular approach to reducing the deficit is to raise taxes on “the rich,” commonly defined as individuals earning over $200K annually.   Under our current tax code, the top 5% of US wage earners (which starts at annual income levels of approximately $170K) will pay 60% of all personal income taxes.  If tax rates increased by 50% on the top 5%, the maximum amount of additional taxes collected would be approximately $300 billion, reducing the deficit to $1.3 trillion from $1.6 trillion.  Obviously, this approach alone will not solve the budget deficit problems

There are two simple facts about government spending. The first is that 100% of the money that our government spends comes from taxes and revenues collected plus borrowed money.  The second fact is that there are only three ways to reduce our federal deficits 1) reduce federal government spending 2) increase taxes 3) implement a combination of reduced spending and increased taxes.

As the numbers demonstrate, a deficit exceeding $1 trillion annually is not sustainable.  We must decide whether our politicians should increase taxes, decrease spending or do both.  Budget deficits must be dramatically and quickly reduced before our total national debt as a country becomes unsustainable for us and our children.