Why My Favorite # is 72

Back in the olden times a little physicist by the name of Albert Einstein came up with a law that should be taught to every high school student, but is hardly ever mentioned. It’s known in the biz as the law of 72. Here’s how it works. If you take the percentage rate quoted by an investment vehicle and divide it by 72 it will tell you how many years it will take for your money to double. Everyone knows that 7% is better than 3%. But how much better? Lets take a look.

For example, your 22 and Aunt Emma in Idaho leaves you $20,000 to do with what you please. Your banker tells you they have a Certificate of Deposit guaranteeing 3% forever. Well, take 2% and divide it by 72, you get 24 years for your money to double. So at age 46 you have a whopping %40,000 and then at 70 when you can retire you have a nice $80,000. Great! Well here’s the bad news… your money only doubles twice and at 3% your not staying ahead of inflation and your going to get taxed on that $80,000 so essentially you’ve lost money. Also, most C.D’s are 1 maybe 2%. So don’t buy C.D’s.

Now say you take that 20k from Aunty Emma in Idaho and put it in a professionally managed A-share mutual fund with Transamerica. This allows some diversification in the market, they take your 20k and invest it daily in thousands of different accounts and hedge the odds. Over the last 20 years say they’ve averaged close to 7% net of fees. So take 72 and divide it by 7, now it only takes about 10 years to double. Say the averaged stay strong at 7%. So at about age 32 you have $40,000, age 42 you have $80,000, 52 you have $160,000, age 62, $320,000, age 72 you can retire comfortably off the 20k from Aunty Emma with $640,000. Your money has doubled five times, you’ve stayed ahead of inflation, you still have some tax to deal with but I’ll teach you some ways to get around those later on.

Anyways, the point is in order to stay ahead of inflation and taxes you need to make at least 4-5% in your money net of fees. Don’t waste your time with C.D’s and other low interest investments if you are young and are building an estate. The extreme low interest investments are simply for stashing money away in low risk accounts so the money doesn’t suffer a loss.

The Actual National Debt

It’s no secret that our government has taken our tax money and grossly misused and poorly invested it. What’s worse, they then lie to us about how in debt we actually are. We all hear the number $13 trillion. Which for some reason doesn’t scare the crap out of everybody. For most the concept of a trillion isn’t even imaginable. So let me shed some light on it. You could spend $1 million a day for 100 years and have about $700 billion left over. Anybody know what year it was a trillion seconds ago?? 1940? Nope, how about 30,000 B.C? Yes, one trillion is huge. Now think of 13 of those?? Scared? It gets better!!!
13 trillion isn’t anywhere close. The real number as of last week was just over 76 trillion, a number only financial professionals and government officials are aware of. So how can they tell us $13 trillion? Because the U.S government decided they don’t have to report debt they way every other business entity has to on the face of the earth.
Without getting too complicated here’s how it works. If you, Joe plumber takes out $50,000 on a 5 year term in the form of a business loan from Wells Fargo to start your shop, how much are you in debt? $50,000 right? Right, but the U.S government decided to take a creative approach to showing debt. Since Joe the plumber has a 5 year term on that loan, really this year he is only in debt $10,000. Are you following me? Joe the plumber took the 50K, divided it by 5 and went by annual debt. Over the year he has paid off $5,000, but now the next years debt kicks in so he’s in debt $15,000. He’s still on the hook for the 5k left over from last year, and now is on the hook for the 10K from this year.
This allows it to look like Joe doesn’t have too much debt, which makes it easier to take out more loans later, 15k in debt looks so much better than 45k right? So sure we’ll give Joe the plumber another 10k if he asks for it!
This is how the government works their debt to keep the American people in a state of ignorance. The 13 trillion they talk about is a far cry from the 76 trillion we actually owe, And does not take into account the interest owed on that money we’ve borrowed from China.
Scared now? Yea me too.

Start Retirement Saving NOW!

For our generation retirement is turning more and more into a elusive dream. Many people are having to work well into their golden years wondering where they went wrong.
Back in the day retirement functioned on a 3-legged stool. First leg was a company provided pension. Joe Smith works for Sierra Pacific for 30 years, and when he retires Sierra Pacific pays him $1,500 a month for the rest of his life. It was a pretty sweet deal, however since the 80’s fewer and fewer companies provide these. In 2010, 3,500 jobs still had pension plans in the United States, most of which were government jobs. So, for us millennials this leg is gone.
Second leg on the stool was social security. Uncle Sam takes a piece of your paycheck every month, keeps it in the Social Security Trust, then when you retire he pays it back to you. When FDR created S.S there were 60 workers for every retiree, and the funds were strictly for retired people over 55. 20 years later there were 40 workers for every retiree. Present day there are 3 workers for every retiree. This would not be a problem if the S.S trust would have been managed properly. But, alas that didn’t happen. All of the sudden when the government was running low on money they noticed a huge surplus of cash in the S.S.T and began “borrowing” funds from it and paying the money back with I.O.U’s. Which means they took -quite literally- trillions of dollars out of the SST and never paid the loans back. Economists are predicting the crash of S.S to occur in 2035, if not sooner.. We’ll only be in our 30-40s, nowhere close to retirement age… I guess this leg is out from under us too.
So what’s that leave us with? Our third and final leg, personal savings. That’s right its all on us to stockpile a ton of money away in smart investments to fuel our golden years. The good news is we have compounded interest on our side. Bad news, we start life after college with huge amounts student loan bills, and a thirst to live the good life right away. Don’t get caught in that net. Delayed gratification is the way to financial success.
When you leave college live modestly and below your means. Keep away from expensive car payments, pay down student loans quickly, and begin your retirement investing no later than 25.

A solid strategy to begin with. Really, you should save and invest 15% of your paycheck. But start with 5% and adjust accordingly. If your employer matches a 401(k), this will save you some money in the short run on taxes and build a stockpile of cash. However, only invest as much as your employer matches, if they do not match, don’t invest. Take an Indexed Universal Life Policy and max fund it, IUL’s are the only way to build tax-free income for retirement, and are an invaluable part of a retirement strategy. Then once your income increases there are more ways to diversify, but for now stick to the basics.

The 401 (K)

I sit with families everyday advising them on how to plan for retirement. Usually, when formulating a plan I will eventually hear “well I put most of my money into my 401(K).” To which I always ask “why?” A question which usually does not get answered by more than a shrug.

In my humble opinion the 401(k) is the best farce ever cooked up by the government. Here’s how it works, in the U.S tax code section 401, paragraph K it allows for people to set aside a portion of their  pre-tax income into an investment vehicle known a s mutual fund. So, say someone makes $100,000 a year and they decide to put away 10% of their income into their 401(k). They are now only taxed on $90,000 of their income and that $10,000 is now growing tax deferred in a mutual fund linked to the S&P 500. This sounds great, they save some money on taxes, and enjoy growth they aren’t taxed on, yet.

It gets better, not only do they get to set aside pre-tax money but their employer can match their contributions. So, if this person sets aside $10,000 and their employer matches that money every year their investment has enjoyed 100% growth before you even take into account the market growth. Oh boy lets all do this right??

WRONG! Now even though employers can match 401(K) contributions, they are not required to, and those that do usually only match up to 5% of your income. So if you decide to contribute 10% your only getting market returns on your other 5%.

Now, market exposure means that there are no guarantees on your money, so there is the potential for loss. Many families had entire fortunes and savings wrapped up in 401(k)s and lost 40-60% during the economy collapse in 2008. So if you had $100,000 and lost half of it, the market would have to double just so you could break even and get back to your $100,000.

But, we’ll remain hopeful and say the money is constantly increasing and you’ve got a nice chunk of change built up. Oh no! Your transmission goes out on your truck and you need money quick to pay for it. Just take it out of the 401(K) right? Sure, if you would like to pay tax penalties for accessing your funds before the age of 59.5. Yes, that’s right you are taxed 50 cents on the dollar for pulling your own money out of your account. So to get the $5,000 you need you will have to pull $10,000 out of your 401(K).

Okay, so you’ve worked hard, you’ve saved, and never touched your 401(k) money. It’s grown tax deferred for 35 years, you saved all kinds of money on income tax, your 65 and you want to start pulling money out to live on. Look forward to more taxes anyways, when you pull money out of your 401(K) even after the age 59.5 you are then income taxed on all of your withdrawels. In short, all the money you saved on income taxes over the last 35 years you will pay back in full in 2 years, and then again every 2 years after that.

In short I once again say it is the best farce ever cooked up by the government, so research before you invest.

My first post.

More to come…

Hello world!

Welcome to WordPress.com! This is your very first post. Click the Edit link to modify or delete it, or start a new post. If you like, use this post to tell readers why you started this blog and what you plan to do with it.

Happy blogging!