Dear Friends,
Here is the second chapter of 'The 7 Indisputable Laws of Financial Leadership' by Rodney Ballance Jr. In our estimation, this is a must read for you and your clients, if you want to help your clients to survive and even prosper during this economic downturn
. Please read this second chapter on how money actually works, so you and your clients can make your money start working for you.Yours in success,
Will, Jeremy and Lew Nason
"The 9 Out of 10 Guys"
Working Together, We Can Help You To Make A Positive Difference In People Lives...
While Helping You To Earn The Significant Six-figure Income You've Been Dreaming About!
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The 7 Indisputable Lawsof Financial Leadership
by Rodney Ballance Jr.
LAW # 2: THE LAW OF Return
Should I Save or Invest?
I’ve heard it time after time over my 20 years in the financial services industry. People get their retirement account statement at the end of each quarter and they revel in how much money they made. They get excited when they talk to their advisor, and he/she tells them that they had a 20% plus growth in their account.
What a jubilant time when the client sees how much money they started with at the beginning of the quarter versus how much they have at the end of that three months. What I’ve noticed is that they rarely take into consideration how much money they actually contributed to the account, and how much was actual growth of their funds.
Let’s say your account balance was $20,000 at the beginning of the quarter.
There is no example more pertinent than in the review of 401(k) statements. Let’s say for example that you contribute 5% of your annual salary to your 401(k) plan, and your employer matches 50% of your contributions up to 10% of your annual salary. For this example we’ll use $75,000 as your annual salary.
Your 5% contribution taken out of your check before you ever see it equals $312 per month, or $937.5 per quarter and $3,750 per year. The matching contribution from your employer, 50% up to 10% of your salary equals $156.25 per month, $468.75 per quarter or $1,875 annually.
If you’re in the 20% tax bracket you would have saved approximately $62 per month of income tax, or about $748 per year. This isn’t that important at this point, but I will show you how this impacts your accessible income in retirement later in this session.
Now, you and your employer have contributed a total of $1,406.25 over the past 3 months increasing your account balance of $20,000 by 7.0%. Showing a growth of 7.0% would make anyone happy, right? If you earned a return of only $500 over that three month period, or 2.7% your statement will reflect a growth rate of around 10%, but in reality you and your employer provided 70% of the overall growth shown. Then you have to take out the fees charged for providing you with these incredible returns.
Let’s assume no contribution factors change for the next 20 years, and you’re ready to retire. If you were receiving a true 10% rate of return on your money the $20,000 you started with, plus your contributions, would have grown over the 20 years to $475,484. Not a bad chunk of change, right?
But wait. The reality is that your contributions made up a significant part of that 10% growth in the beginning. Since your account balance was only really growing by 2.7% plus your contributions, your real value will only be $181,243. Much less than what you had hoped for.
I know, you would typically receive raises over the years which would have increased your contributions. The stock market is also always going up and down, so there’s no real way to predict exactly how much money you would truly have in retirement. If this is your argument, you’re exactly correct.
My question is this, why would anyone gamble their retirement money in a way that offers no way to predict exactly what they would have when they either no longer desire to work, or for one reason or another can’t work? Yet millions of Americans do it every day because they’re told that’s the only way to outpace inflation and generate enough money for retirement.
We’ll let’s take a closer look at what you’ll have, assuming the higher number I mentioned were to be the case. Let’s look at what you’d really have access to from this magical retirement tool, 401(k) when you do retire.
For the purpose of this example let’s look at the account as if you really did have incredible returns that produced you a total of $475,484. Maybe this will make you feel a little better if we use the bigger number because this is more in line with what others want you to believe.
Let’s also assume that the tax rate didn’t change, and inflation stayed the same, since we’re assuming, your income or contributions were also constant. Let’s also assume you’ve paid off your mortgage and have no dependent children at home.
The first thing you have to remember is that you will have to pay taxes on the entire amount of money in your 401(k) or similar tax deferred retirement account. This means that if you take distributions of $2,500 per month, you’ll have to pay approximately $500 in taxes. (Always seek tax information from your personal tax adviser)
In fact when you look at the total accumulation of $475,484 within the retirement account, you really only receive $362,814 because the rest of it, $112,670 goes to your business partner the Internal Revenue Service. The first day you accept a tax deduction from your paycheck to invest in your retirement plan you take on this partner. Their philosophy appears to be "pay me now or pay me a whole lot more later".
To prove this idea, look at how much you would have paid in taxes during these same 20 years with all the above mentioned assumptions. If you would have paid your $62 per month in payroll taxes minus your deductions for mortgage and children, if applicable, you would have only paid approximately $37 at most. You probably had a refund each year worth more than the savings from your pre-taxed deductions, leaving you with little or no tax paid on your income to begin with.
Understanding that your tax burden would be minimal if any, we see that the myth of having more expendable income by contributing to pre-tax retirement plans is just smoke and mirrors. Who is really seeing the most benefit from your pre-taxed contributions?
Your employer sees a 7.65% direct benefit from every dollar any employee has deducted before taxes. That’s how much they save in having to send to the government in matching F.I.C.A. contributions. The sales person who set up your retirement account benefits every month by being paid various fees directly associated with your contributions.
Lastly the IRS benefits the most. If you do the math, you’ll see that the Internal Revenue Service collects more than 10 times the taxes on your withdrawal than they would have received if you would have taken your money when you earned it.
This shell game perpetrated in the break rooms and conference halls across America is financially raping the hard working citizens just like you. People who just want to have a little bit of money to retire with, and live out the rest of their lives enjoying themselves after their working days are over.
Continued... For the rest of this chapter please go to www.rodneyballance.org, and join our free E-mail list. After subscribing, you will automatically be sent your FREE copy of The 7 Indisputable Laws of Financial Leadership.
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