Death on the Descent: Mount Everest and Retirement Accounts

January 5, 2014

Pretend for a moment that you’re preparing to go to work. You’ve completed your morning routine and are just a few moments away from departing for the office but this particular morning is a little different. You have the means to get yourself to the office but not to return home. You hear the conversation run through your mind: “How are you going to get home? You don’t have access to public transportation. You don’t have money for a taxi. Your coworkers are not able to bring you back. There are no friends or acquaintances that can pick you up. You have no money and just enough gas to get you there. What in the world are you going to do?”

Would you even travel to the grocery store without the ability to return home? How about a vacation, would you plan a trip without specific knowledge of your return?

Plan my descent down Mt. Everest? No, I’ll just wing it

The answer is simple to these somewhat rhetorical questions; however, I wonder if those who set out to climb Mount Everest spent any time developing a plan to get them off the mountain? I would be willing to place a wager that not one single expedition up Mount Everest, let alone any mountain, has ever failed to plan a way back down. Not once. Why? Because summiting the mountain is only half of the journey. Unfortunately, the descent down Mount Everest is the most dangerous.

In a story from Scientific American back in December 2008, 56% of those who have died on Everest have died during their descent after summiting. Another 17% died after turning back (i.e. descending). That’s a total of 73%. Only 15% died on their way up or before leaving their final camp. The remaining died through various accidents like avalanches and falling ice at lower altitudes.

The descent is by far the very most dangerous, treacherous, threatening, unsafe, formidable, perilous and risky phase of the Everest exhibition. If there is no plan in place for the descent then failure surely awaits.

Retirement is just like descending the mountain

How does this real life example perfectly reflect the financial planning being pursued by virtually 68% of the population (Figure 7.5 The answer is simple: pre-tax investments.  You’ll notice that the Figure 7.5 is titled “Many U.S. Households Have Tax-Advantaged Retirement Savings”. Wow, is that ever misleading. Pre-tax investments are not in any way tax-advantaged. What is the advantage? Many financial pornographers, like Dave Ramsey, profess that there is a mathematical advantage to investing pre-tax. Math proves him wrong. A couple of years ago I wrote a blog on this very topic so I won’t duplicate it here. So if you think I’m wrong then read this post first…and then feel free to comment.

How does Mount Everest tie into this tax debacle for the everyday American? Well, if you have money in an IRA, 401k, SEPP, or another government-run retirement plan (even Roth IRAs) then you have an enormous tax problem. You see, you are climbing the mountain with no knowledge of how to get down the mountain. What are the tax laws when you decide to retire? What are the distribution requirements? What are the tax rates? Do you know? Does anybody?

Only the financial planner with a crystal ball

There is not one single financial planner on the planet that can plan a retirement (using assets to provide income in order to maintain a desired lifestyle) for an individual when the majority of their portfolio is made up of government-run plans. The professional certainly doesn’t know the answers to the above questions and therefore has no idea how long the money will last. How much is the government going to take? If you have an IRA or any other pre-tax vehicle (the balance is irrelevant) then I have one question for you: how much of it is yours? No one knows. And no one will know until you’re standing on top of the mountain…and at that point you’ll only know one year at a time.  It’s just like climbing Mount Everest with no plan to descend until you’re finally standing on top…very dangerous strategy.  It’s actually worse than that because are the rules going to be the same when you’re 75 as they were when you started using the funds at age 65? It’s like only being able to plan your descent every 10 feet and having no idea what’s facing you at the next 10 feet. That’s not just dangerous but perilous.

Kelly, I’ll be in a lower tax bracket. You will? How? Why does the government put far more restrictions on after-tax positions (Roth IRA) – like income and contribution limits – than they do on the pre-tax (no income limitations and you can contribute a heck of a lot more). Seriously, why? Because they know that the only mathematical factor that determines the winner is the future tax rate and only they control that factor. You don’t control it otherwise your taxes would be zero. Roths aren’t even safe because they can change the rules at any point. Could they choose to tax the gains? Yep. Social Security was supposed to be tax-free forever but that changed.

The government is absolutely working in my favor…or is it?

Do you believe the government has your best interests at heart? Do you honestly believe that they are fine with you not paying taxes now so that you can pay less in the future? Do you feel the government will do everything it can to ensure the math lines up in your favor so you can get down the mountain? Me neither. Yet almost 70% of households are doing this very thing and unfortunately, virtually all of them will face a “tax descent” that will be immensely costly. Here’s a video that goes into some detail on this issue.

When did all this begin in the first place? Could that give us any insight? It sure can. Pension plans worked very well so why did all of that change in the 1980s when the government realized it had the largest working population in all of history (American history)? Why did pension plans fall out of favor to be replaced by the government-run retirement accounts? Who had lobbyists in that room?

Certainly the government was in that room because they could then control the largest portion of the citizens’ retirement assets. There’s an estimated $19,000,000,000,000 held in these accounts. That’s $19 trillion controlled, not by the citizens, but the government. The banking industry was certainly present in the lobbying for this because the rules with these accounts do not favor the investor having access to capital. Penalties, unfavorable loan features and simply the denial of access to the funds in these accounts (can’t access more than the loan provisions on a 401k while employed with the company – why?) mean that the investor will need the bank. Wall Street was also at the table because this would put the once untouchable pension now in the hands of the investment broker. It also would provide incredible job security for Wall Street because the investor can’t touch the money until they’re 59 ½ years old. If you’re 25 years old and contributing to a 401k then that represents 34 years of security for Wall Street. That’s awesome for them.

Turn the coin over. Look at the other side. Follow the history. Dig in. Let the light shine on this a little bit and you’ll realize that NONE of it is for your benefit. None.

There are solutions but you must be willing to have some conversations. You must be willing to plan a descent and not just for the summit! Our job is to ensure you get DOWN the mountain because, after all, that’s the goal.

Kelly O’Connor –


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Why did the chicken cross the road?

February 28, 2013

In November of 2009, I wrote a blog post titled: Why “the experts” confuse the average investor (here is the link). This topic popped into my mind the other day as I was talking with my 10-year old daughter. She asked me the classic question: “Daddy, why did the chicken cross the road?” Of course I knew that a rip-roaring joke was about to be laid out on the table…at least that’s how I had to portray it with her. Sure enough, she had a great answer and I busted out laughing. This got me thinking about my previously mentioned blog post because the answers to the question posed by my daughter are endless and they simply depend on who’s answering the question.

I thought, what if we asked this simple question about the chicken to various people, maybe even historical people? Would their answers have been the same or would they be different? So, here we go, “Why did the chicken cross the road?”

Their answers*

Dr. Seuss: Did the chicken cross the road? Did he cross it with a toad? Yes! The chicken crossed the road, but why it crossed it, I’ve not been told!

Ernest Hemingway: To die. In the rain.

Buddha: If you ask this question, you deny your own chicken nature.

Martin Luther King, Jr.: I envision a world where all chickens will be free to cross roads without having their motives called into question.

Colonel Sanders: I missed one?

Attorney: Chickens are invited to cross the road to join a class action lawsuit against all non-chickens.

Bill Clinton: I did not cross the road with THAT chicken. What do you mean by chicken? Could you define ‘chicken’ please?

George Bush Sr.: Read my lips, no new chickens will cross the road.

Retired truck driver: To prove to the armadillo that it could be done.

Albert Einstein: Did the chicken really cross the road, or did the road move beneath the chicken?

This is all in fun of course but the theme here is very similar to the variety of instructions given to people about solidifying their financial future. Having a clear understanding and a concise plan can be almost impossible because financial professionals virtually always disagree with each other and they never provide the same answer. Most people have heard the following conversation over and over again whenever they speak with a new financial expert: “How much money do you have? Where is it? Oh my gosh, why did they put you there!? You need to come over here because we’ll do so much better.”

Climbing Mount Everest

So, who can you trust? Who really has your best interests at heart? This is often the hardest hurdle to get past. This reminds me of climbing expeditions up Mount Everest. What is the most important phase of the climb? This single phase is responsible for over 75% of all deaths that occur during the quest to summit Everest. It’s the descent. The plan DOWN is the MOST important part of the entire expedition.

Financially it’s no different. The “climb” to the summit can be viewed as the accumulation phase as you work towards your retirement. The descent is the distribution phase of your assets to ensure you have enough money to live on for as long as you’ve planned to live. What does traditional planning focus on the most: i) simply getting to the summit or ii) getting to the summit with a very specific plan on how to get down? ING put out a series of TV commercials (here’s one of them) asking you if you “know your number”. That “number” is the amount you need to retire or more specifically the number you need TO GET TO THE TOP OF THE MOUNTAIN! But ING, what is the plan once that number is reached? Our focus should be even more intent on that phase of life than any other.

105% increase in 10 years!

Truly, if you hired a guide for your climb up the mountain and you asked him for his plan to get you down the mountain, how would you feel if he said this: “I don’t know, but once we get there we’ll figure it out.” Remember, 75% of those who die, die on the way down. Look around, how are people doing? We have an aging population, a declining workforce, an inability to save, a national debt that’s beyond comprehension and a government whose only answer is to print more money. According to (Table S5 Proposed Budget by Category) if we wiped out the entire Federal Government and the entire Military (all discretionary spending for 2012) then we’d still be short by $8,000,000,000 due to the various entitlement programs (we did a video on this very topic). Let that sink in, the ENTIRE federal government and the ENTIRE military and we’d still be short. Now, if you do this exact calculation for 2013 then we’d have a surplus of $360 billion (again, only if we got rid of the federal government and the military – obviously never going to happen) but look at the “total receipts” (all taxes collected)…they’re predicted to go up by 17.5%! If you look at the total receipts predicted in just 10 years, 2022, it’s a 105% increase from 2012. Are you ready for that? What’s your plan to deal with this issue? How are going to get down the mountain? If you’re only being told that you’ll be in a lower tax bracket in the future then you better get a new climbing guide.

Reduce future taxable income

There’s an endless amount of Congressional Budget Office reports and Government Accountability Office reports informing you that your taxes are going up plus the dollar will continue to weaken (the hidden tax). How will all of this affect you once you decide to “come off the mountain top”? Please understand, there are strategies and solutions to help mitigate some of these issues but you must be prioritizing strategies that will reduce your taxable income in the future! You will most assuredly face fewer deductions, fewer benefits, higher taxes and a weak dollar; therefore, reducing your taxable income in the future will be the biggest and most important aspect of your plan to efficiently climb down the mountain and make it out alive. The only factor that determines success is the reaction of the government. Shouldn’t we be studying them and NOT the financial products? All other discussions are only focused on making it to the summit. Our clients come to know what it means to have a plan for distribution and how their plan will ensure that they will NEVER be poor. Our job isn’t to help you strike it rich. Our job is to secure that you not only summit the mountain but that you make it down safely regardless of the conditions or challenges you face.

So, I ask you, why did the chicken cross the road? My answer, because she knew she could make it.

Kelly O’Connor –


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*some of these answers came from

Is 12% still possible in Mutual Funds? Better watch this one.

April 23, 2011

**UPDATE – The Video link below has been corrected** (as of May 5th, 2011)

I’m going to do this one a little differently.  Normally, I layout the math within my posts with my commentary to go alongside.  This time I’m just going to provide you a video link.

I’m kind of tired of pointing out huge errors in one certain financial “celebrity”.  Unfortunately, he just keeps providing incomplete information to the public.  Is he intentionally being deceitful?  I don’t think so.  Is he providing only one side of the coin?  Yep.

In March of 2011, this article appeared on his site.  A client of mine forwarded the link to me and asked me to respond.  After letting out a big sigh I decided to provide her a very detailed analysis. This video, is that analysis.

Folks, educate yourself.  I don’t care how successful you are, if you don’t learn to see the other side of the coin, well, then it’ll sneak up and bite you.

I’m Kelly O’Connor


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Your Baby Is UGLY!

April 5, 2011

The majority of hard-working Americans believe certain financial myths.  To attempt to correct these myths is similar to telling a mother her baby is ugly. The “conditioning” that has been experienced is frustrating, to say the least, but understandable…especially when you realize who has been doing the conditioning.

For example: why are we constantly directed to focus on the average rate-of-return?  From investment brokers, financial planners, “experts”, to our financial statements, all of these reference “the average”.  If we truly add up the numbers for each year and divide by the total number of years, does our statement really reflect a return that is the same as the average?


There’s a popular “expert” (he’s also a radio host, TV personality, and a creator of a curriculum that dominates financial classes in churches) who always quotes the average return.  In a recent article he took the inputs of the S&P 500 from 1990 to 2009 to get a 10% average. Mathematically he’s right.  He then claimed that your investments would have performed at 10% for each year during that time.  Mathematically he’s wrong.  Again, this is like telling a mother her baby is ugly.  It’s hard for most people to understand that the “average” is just a number but the “actual” return is what their statement reflects.

Let’s use the above example.  Between 1990 – 1999 the S&P 500 averaged 19% and between 2000 – 2009 it averaged 1%.  Add the decades together for a total of 20% and divide by two to get 10%…this is exactly what this supposed “expert” did to prove his point about how well you will do if you just “stay in the game”.  Now, let’s take $100,000 invested from 1990 to 2009 with an actual 10% rate of return (meaning you actually get a 10% return each and every year).  How much do you have?  You’d have a balance of $672,250.  Nice job.


Now, what would have happened if you actually rode the roller-coaster, took the losses and took the gains during that exact same time period?  Your balance would actually be $473,000 which represents an 8.08% rate-of-return (this assumes no fees and no taxation of course).  You see, you don’t earn the average.  Look at this example: Year 1 = 100% gain.  Year 2 = 50% loss.  Year  3 = 100% gain.  Year 4 = 50% loss.  What’s the average?  25% (100-50+100-50 / 4).  If I follow the logic from our expert and I invest $100 for four years at an average of 25% then my balance should be $244.  But, if my money was ACTUALLY in the market then Year 1 my $100 becomes $200 because of the 100% gain.  Year 2 I take a 50% loss so I’m back to $100.  Year 3 I again enjoy a 100% gain and have $200.  Year 4 I take another 50% loss to get me back to $100…right where I started.

The above mentioned “expert” could look me in the eye and say “look, you averaged 25%” and he’d be right but yet I earned NOTHING.  Even worse than that but I probably had to pay taxes on my gains for Year 1 and Year 3 (since he only recommends mutual funds)…all this hurts me even more.  My money didn’t even keep up with inflation but in fact it lost!  Would you be surprised to know that if you take a very conservative tax calculation and only 1.5% in fees that your actual rate-of-return would equal 4.72%?  It’s true.  Your statement wouldn’t show $672,250 at the end of year 20 but instead $251,590.


Folks, you have to ask yourself two questions:

  1. Who’s teaching you to focus on the average rate-of -return?
  2. Do you truly believe that they have your best interests at heart?

Seriously.  If you say “no” then are you willing to be told your baby is ugly?  Would you maybe reconsider a rate of 6% with no fees and taxation?  Which would you rather have, the $100 after four years or $126?  It doesn’t take much once you understand the impacts of losses, fees, taxation, and most important, the lost opportunity costs of all three.

Ordinary people CAN create extraordinary wealth.  It’s not just a game for those “with the money”.  You just have to learn how to get control of your money and we can show you how.

Kelly O’Connor –


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Owning A Home: The Most Misunderstood American Dream #5

January 25, 2011

I made the statement on a previous post that if you think proper mortgage planning is primarily about the amount of interest you pay (i.e. Dave Ramsey) then you’re hugely mistaken.  So what else is there?

Please read Ramsey’s link above. It is important to understand this type of conventional thinking.  It’s a wonderful mis-direction that ironically benefits the bank the most.

So, let’s look at it from the bank’s perspective: remember, they do NOT have your best interests at heart but instead their priority is to make a profit for their shareholders.  So, get ready for the “bigger box” here folks.  This is data that you must understand in order to properly address the answer to the question: “Which mortgage strategy produces the least amount of wealth transfer (a video link) for me personally?”

30 Year vs. 15 Year

This one is fun.  The old 30 year vs. the 15 year mortgage.

So let’s start with a couple of questions. You’ve heard this one already: do the banks have your best interests at heart?  If you answered that “no” (which you should have) then have you ever thought about why the bank offers you a lower rate on a 15 year mortgage than a 30 year?  Please don’t just skim over that question.

If they [banks] are in the business of collecting interest then why would they possibly provide an incentive to a borrower in order to bring in LESS interest?  This is the key component to Dave Ramsey’s advice (go 15 year because of the interest savings).  So please answer me that previous question.  Here it is again: Why would they give you an incentive to pay them LESS?

First, if you haven’t read our “Defining Moments” blog posts then please do because the first one plays a major role in this discussion.  We’ve even recorded some videos on this – watch this one: Banks and the Velocity of Money.

You see, Defining Moment #1 states that your money will never be worth more than it is today…due to inflation.

So, your money will never have as much buying power as it does today, and banks need money to move and recycle (preferably at a high value), and they offer a lower rate for you on a 15 year, and they advise you to pay it off by accelerating your principle payments.  Interesting.

Would you believe that banks make far more money on a 15 year mortgage than a 30?  They either collect interest for 30 years or they get your most valuable dollars sooner and spin that money out again and again about 5 to 7 times…note the discounted rate.

Math Behind Defining Moment #1

Let’s simplify this a little and use Dave Ramsey’s example from his link above.  If this month was your first payment on a new 30 year loan at 6% and your payment is $1,349, how much is that $1,349 worth when you make the last payment at month 360 assuming an inflation rate of 3.5%?

Only $481. How much is that $1,349 worth at month 180 (end of year 15) assuming the same inflation rate of 3.5%?

$805…over 65% more valuable than the last payment at month 360. You see, because of inflation, our fixed monthly payment slowly loses buying power.  Which do you think the bank would rather have?

  1. Your money stretched out over 30 years where the value and buying power of that fixed payment continues to decline as it comes back in to their coffers to re-lend? Or,
  2. Your money condensed over a shorter period where the money retains as much buying power as possible for them to use again and again and again?

Hmm.  Seems pretty simple to me once you apply some math and the first Defining Moment. But there’s even more.  Folks, this is where the real math gets good. I will provide links to spreadsheets, past blogs and even video to back up every calculation in this post so please check’em.  I always say that math proves Mr. Ramsey wrong and I’ll prove it to you so stay with me because this could be a little long…if anything, I ask you to challenge me. Actually, challenge yourself.

Life Happens

Okay, first a quick comment to Ramsey’s human behavior issue. In the link above, his first argument against the 30 year mortgage is the claim that “life happens”.  He says:

“You might decide to keep that extra payment and take a vacation. Or maybe it’s time to upgrade your kitchen. What about a new wardrobe? Whatever it is, you’ll find an excuse to spend that money somewhere else.”

First of all, if you don’t have discipline then you are not a candidate for any financial plan except a plan of failure.  Maybe this is why one of Dave’s top executives told me over the phone that 80% of you are financial idiots.  Here’s my issue, why wouldn’t Dave make the same claim about those who take a 15 mortgage and pay it off; after all, these people have to then make every equivalent “mortgage payment” to their savings for another 180 months (15 years).  Won’t this same “life” happen to them?  Won’t they decide to take a vacation or get a new wardrobe?  Ask any sociologist and they will tell you that you have to apply the same conditions and outside forces in your test in order to get an accurate result. The “life happens” issue is therefore a non-issue because it applies to both parties.


With that being said, here are the conditions: JACK has a 30 year mortgage, $225,000 loan amount, interest rate of 6% and a monthly payment of $1,348.99. JILL who has a 15 year mortgage, $225,000 loan amount, interest rate of 6% and a monthly payment of $1,898.68. Again, these are Dave’s numbers from above.

The monthly payment difference between the two is $549.69.  JACK invests the $549.69 each month beginning Month 1 until Month 360 in an account that earns 6% and JILL invests the entire $1,898.68 beginning Month 181 thru 360 (had to pay her mortgage off first) in the same account that earns 6%.  Who’s ahead at the end of 30 years?

Ramsey would make you believe that JILL is better off because she paid less interest and had more to invest.  The answer: they are identical at Month 360.  JACK would have his home paid off and an investment account balance of $552,171.  JILL would have her home paid off and an investment account balance of $552,171.

They are the exact same but who is in a better position along the way to ward off “when life happens”?  JACK. All of JILL’s money is tied up in her house.  “But JILL has an emergency fund.”  So does JACK and his is much bigger.  Let’s go deeper.

What happens if they could earn 8% in the investment account (also known as a ‘side fund’)?  Well, JACK would now pull ahead.  His account would total $819,234 at the end of year 30 and JILL would have $657,015.  That’s interesting. As the side fund begins to achieve a higher rate of return than the mortgage then JACK begins to win big.

Average vs. Actual Rate of Return

Now Dave Ramsey tells his followers that they can expect a 10% average rate of return (Average ROR is garbage by the way and you must educate yourself on this and understand the Actual ROR).

So what happens if JACK and JILL both get a 10% rate of return?  JACK ends up with $1,242,566 and JILL has $786,946.  That’s a difference of $455,620!  Wait, I thought we should be focused on what the bank makes on our 30 year loan?  Unbelievably unwise!  Let’s go even deeper.

You might be saying, “But Kelly, in all reality, I can get a lower rate on my 15 year loan so your math is wrong. “  First, that was Dave’s math since we used his example but let’s look at it using a lower rate.  Let’s use rates as of today (January 24, 2011) according to Yahoo Finance.  A 30 year mortgage is averaging 4.82% and a 15 year is averaging 4.09%.  Perfect. Now that is a serious discount provided by the bank that does not have our best interest at heart.

Seriously?  That Can’t Be Right.

Using these real market rates, what rate of return does JACK need to get between Month 1 and Month 180 (remember, he’s saving the monthly payment difference) in order to have enough in his side fund to write the check if he wanted to payoff his 30 year mortgage at the end of the 15th year?  Take a guess.  Come on, don’t read further, take a guess!

After 15 years, a side fund rate of return of 4.47% net after tax will provide an account balance of $151,413.  The loan balance on JACK’s 30 year mortgage after 15 years will also be $151,413. These results are for a tax bracket of 31%.  That doesn’t sound too risky to me…only 4.47%.

Now I know what most people say, “You should never put this money at risk because what if you lost it all?  What if the market tanked?”

They’re right!  What?  Yep, you should not play this game in a risk-based environment because you could lose it all and be stuck with a mortgage that you couldn’t afford if your savings was depleted.  This has happened and many people have lost their home.  I know Dave likes to say, “Only homes with mortgages go into foreclosure.”  So, how can we combat this point?

Here’s the kicker, what if you could get the 4.47% in a guaranteed and predictable side fund? Meaning you COULD NOT lose your money.  No risk.  Would that make any sense for you? Of course it would and it exists today.

Here’s a better question: assuming the side fund actually gets a return of 8%, when will its balance be adequate to pay off the 30 year mortgage? If we only need 4.47% then an 8% return should be much better.  It is.

JACK Wins!

If the side fund returns 8% net after tax it will be larger than the 30 year mortgage balance in 13 years and 3 months (a total of 159 months).

What about the tax savings?  JACK continued to save until Month 360 for a total of $62,297 and JILL stopped receiving her tax benefits after Month 180 giving her a total of $23,685. If you read enough of my blog you know it doesn’t end there. You see, a penny saved is not only a penny earned but also a penny that CAN earn.  JACK’s $62,297 (that he did not have to pay to the IRS) over the 30 years at 8%, earned his portfolio an additional $327,557.85.  JILL’s tax savings over 30 years (remember it stopped after year 15) earned her an additional $176,537.96.

Taxes are the largest wealth transfer anyone faces and the second is mortgages.  Now, I’m confident that you, the reader, do all you can do to minimize your taxes.  I’ve yet to meet someone who pays a tax they don’t have to pay.  I’m sure you’ve even hired a professional to help you pay as little as possible in taxes.  It’s time you took a look at the second largest transfer of wealth – your mortgage.  It can literally mean hundreds of thousands of dollars to your family…or, you can keep allowing the bank to win.  If what you knew to be true turned out not to be, when would you want to know about it?

Math proves every time that JACK can pay off his mortgage quicker with a 30 year mortgage than a 15 year using the exact same monthly outflow as JILL. It also proves that even in a guaranteed and predictable environment he comes out ahead. You see, you can accomplish this with no risk.

Malcolm Forbes very wisely said, “The dumbest people I know are those who know it all.”  Don’t be that person, it’s not worth it.

I’d like to end with this great bit of wisdom from my buddy Dave Ramsey:

“If you think you’re getting a better deal with a 30-year mortgage simply because you save a few hundred bucks each month, then you’re only thinking short-term.”

Seriously?  Short term?  Unbelievable.  Since when is 15 and 30 year time frames “short-term”?

My clients, friends and family learn the truth and are ahead of the game year after year.

I’d value your comments and challenges to the math.  More importantly, I just hope you decide to challenge your own thinking and be willing to look at your own situation.  After all, it’s only your financial future you’re dealing with here.

We call this Financial Caffeine because you get An Edge On Education.

Kelly O’Connor –


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Further NONSENSE by Dave Ramsey

December 6, 2010

Taking a brief break on the mortgage posts…30 year vs 15 year to follow very soon.

I’d like to begin with a quote by Dave Ramsey and his Financial Peace book (full reference below) that is so unbelievably wrong it needs to be ripped out.  Actually, Dave has proven perfectly with this quote why he holds NO financial licenses issued by any state because if he did then the governing authorities of those licenses would have to shut him down for major compliance violations.

A Quote From Dave Ramsey

“A Government Gift?”

“Billionaire J. Paul Getty says that one of the keys to building wealth is not to pay taxes on money until you use it.  So you shouldn’t pay taxes on retirement dollars until you use them.  You should always invest long term with pretax dollars.  What if I gave you $2,000 each year and these were the conditions: You can earn all the interest you want on that $2,000 – and keep it – but you have to give the $2,000 for each year back to me when you are seventy years old.  If you were thirty-five years old and we did that for thirty-five years at 12 percent, you would have $863,326.  You do have to give me back $2,000 x 35 years or $70,000, but you still net $793,326.  If you save $6,700 per year in a pretax investment like a 401(k) or SEPP (Simplified Employee Pension Plan), the above scenario would have occurred.  If you bring that $6,700 per year home, it turns into $4,700 by the time Uncle Congress gets his greedy cut, so $2,000 of that money is Uncle Congress’s – which, if we invest pretax, we get to keep for free all those years.  What a deal!

I have heard the ridiculous pitch that it is better to pay your taxes today because tax rates may be higher by the time you get to retirement.  The only people who believe that argument do not understand the power of the present value of dollars or are life insurance salesmen.”

~(Dave Ramsey, Financial Peace Revisited, Penguin Group, page 154-155)

“Financial Idiots” – remember, that’s you

Boy if I could cuss this is where I’d do it.  What a……joke.

If you’ve read any of my previous posts you’ll remember the conversation I had with Dave’s right-hand-man (who I can’t name since he’s a friend).  I addressed this particular page in their book with him, and several other topics of equal concern, and he admitted that this was wrong.  I guess we’ll see if it’s printed correctly  next time around…I highly doubt it.  Remember what that friend said at the end of our conversation concerning Dave’s followers?  No?  Well let me refresh your memory.  He said this, “Kelly, you have to understand that 80% of our clients are financial idiots.

Unfortunately, it appears he’s right in this situation because you’d have to be a financial idiot to believe the above paragraph is accurate.  Honestly, I don’t understand why the SEC doesn’t require this to be corrected because it’s TOTALLY false.

Seriously, Are You That Gullible?

First, do you really believe the government only takes that which you put in?  Are you so gullible to believe that the government will allow you to contribute $2,000, pay no tax on that $2,000, let it grow, and then only pay them back the $2,000 when it’s time to take it out?  Unbelievable.  You see, in reality, the government gets to take as much as it wants of the full account balance.  How?  They, Uncle Sam, get to decide what tax bracket you’ll be in at the time of withdrawal.  The entire balance of $863,326 is at their mercy when it’s time for you to take it out.  You don’t get to decide!  You have no idea how much of your Qualified Plan (401k, SEPP, Traditional IRA, etc) is actually yours until that day comes.

Let’s say you happen to fall into a 30% tax bracket when you’re 70 years old.  Okay, so how much of your 401(k) is the government’s in Dave’s example above?  What’s 30% of $863,326?  It’s $258,997.80!  Not $70,000.  You see, you haven’t paid taxes on any of it yet.  You didn’t pay on the $2,000. You didn’t pay on the growth (tax deferred instead of taxable).  But now you’re withdrawing and the government gets their share.  The very fact that he, Dave Ramsey, claims you only have to pay back what you put in is utter stupidity and complete ignorance of how these financial instruments work but more importantly how the tax code works.

No Dave, There Is No Difference

Second, let’s address the pre-tax and post-tax issue.  Read this one slow: there is no difference mathematically between pre-tax and post-tax dollars when invested.  Dave would yell foul (he said above that “you should always use pre-tax dollars to invest long-term”).  Actually he’d step out of his Christian teachings and call me names like he does all the time on his radio show  – which really surprises me since the Bible tells us to call no one a fool…or an idiot for that matter.  Maybe he has a different Bible than mine.

When I say, and I’ve said it over and over, that Dave can be proven wrong with math not opinion…well, this is another perfect example.  Don’t believe me?  Let’s allow the math to decide for us.  I’ll even use his numbers from above.

If you invested $2,000 for 35 years and earned a 12% actual rate of return (remember, there’s a difference between average and actual rate of return) then your money would grow to $863,326.  If you were in a 30% tax bracket at that time, and took a lump sum,  you would have to pay the government $258,997.80 leaving you a balance of $604,328.20.

Now the “post-tax”:  If you took that same $2,000 but were taxed 30% on it when you brought it home then you’d have $1,400 to invest.  If you invested $1,400 each year for 35 years at an actual rate of return of 12%, guess how much you have at the end?  $604,328.20.  What?  How can that be Dave?  It’s math people.

A No-Calculator-Needed Example

How about a simpler example so you don’t have to pull out your calculator to determine if my math is right or not.  Let’s say that Brother A had $10,000 before tax to invest.  He put it in an investment product that delivered an actual rate of return of 7.2%.  In 10 years his money would double to $20,000 (Rule of 72).  At the end of the 10 years if his taxes were 30% then $6,000 (20,000 x .30) would go to the IRS and he’d have a balance of $14,000.  Congratulations, you followed Dave Ramsey’s advice and you apparently made the wise decision.

Let’s then say that Brother B also had $10,000 to invest but he decided to take the 30% tax hit at the beginning.  He’d have $7,000 left over after paying the IRS $3,000 (10,000 x .30).  Now, if he used the same investment account as Brother A and received a 7.2% actual return over the next 10 years then his account would also double.  What would his balance be at the end?  Pretty easy,  $7,000 x 2 = $14,000.

Pre-tax and Post-tax are the EXACT SAME if the variables are the same (i.e. investment return and taxation).  They are identical.  So what then becomes the primary consideration when choosing these types of accounts?  TAXATION!  It is the number one issue.  Dave, you said above that others who disagree with you “do not understand the power of the present value of dollars.” Uh, right.  Pure stupidity.  It has nothing do with that Mr. Ramsey. It has everything to do with MATH!  My 5th grade son could prove this point.

If you are not educating yourself about the economic and social conditions of our country and the impact they will have on your dollar then you better start.  These issues will be crucial when determining future taxation and it’s the taxation issue that has the biggest impact on your future dollars.  Please, please start reading.  The information exists.

You Never Avoid The Taxes Dave Ramsey

Again, what were the conditions in the above examples?  The conditions simply assumed a 30% tax bracket for both and the same actual rate of return.  Guess which option, pre-tax or post-tax, gets worse in an increasing tax environment?  Come on.  Pre-tax loses.  Dave’s example, and advice, gets worse in an increasing tax environment.  His quote at the end about those who  believe taxes will be higher are giving a “ridiculous pitch”, I wonder if he still feels that way.  I will say his book was published in 2003.  Are any of you really under the impression economically that we are in a decreasing or flattening tax environment?

Outside of all the various conditions that are pointing to higher taxes, what is it that determines your tax bracket anyway?  Your income.  How many of you have incorporated into your financial plan to be at the lowest income bracket once you retire?  I assume none of you.  Yet Dave continues to sound off that you will be in a lower tax bracket which completely counters the economic conditions and your own lifestyle desires.

Now I understand why they refer to you followers as idiots because you’d have to live in a hole to think your taxes aren’t going up.

Anyone Think Taxes Are Going Down?

What if, when this person turns 70, the tax rate goes up to 35%?  Not a huge hit or is it?  Well, 35% going to the government would leave this follower of Dave a balance of $561,161.90.  So he deferred at a 30% tax in order to pay at a 35%…genius planning.  If he simply contributed along the way with his post-tax dollars of $1,400 then he’d still have the $604,328.20…because he already paid his taxes on this money.  That’s a difference of $43,166.30.  Now Dave, that simple decision could buy this retiree a new car.  But if you would rather pay that to the government then go ahead.

Dave’s advice is not only wrong in regards to the rules established by the IRS but also from a mathematical position.

Am I saying that Qualified Plans are foolish?  Not necessarily.  If we were in a decreasing tax environment and you could defer taxes today at a higher rate and pay them later a lower rate then dump money into them (you would still have to understand that the government is in charge of this money along the way even in a decreasing tax environment).  But that’s not the condition nor the situation our country is facing.  We are NOT in a decreasing tax environment and the less money that you have at the control of the government (keep in mind they can change the rules on these accounts with a stroke of a pen) the better.  YOU need to be in control and Qualified Plans like these give you ZERO control of your money.  If you don ‘t believe that then please tell me how you are getting around the rules…millions of people would love to know.

It’s the Postponement of Taxes!

You must remember that Qualified Plans defer two things (we like to say “postpone” since that’s what they do):  they postpone the tax AND postpone the tax calculation.  It’s the second one that’s the killer.  It’s the second one that makes the difference, that determines how much is yours, that determines if it’s a wise decision or not.  Are you educating yourself about the second one or are you only falling for the whole “pre-tax is the best place to be” sales pitch?

Get Out Of My Church Dave

Sorry Dave Ramsey, but I believe it’s fair to say that if this is what you’re teaching then it is in fact you who is the “financial idiot”.  Please stop sending this garbage into my church.  You have deceived so many people out of hard earned investment dollars by putting them at risk with the IRS and the economy.  For every dollar you’ve helped people save in their quest to be debt free you’ve lost again by this type of advice.  Please sir, educate yourself…at the very least, have a financial professional review your book before you publish it so these types of mistakes can be caught.

If you feel my math is wrong or if you believe that Dave is right and you only have to give the government back what you put in then please let me know.

Kelly O’Connor –


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Owning A Home: The Most Misunderstood American Dream #4

November 5, 2010

“A large down-payment will save you more money on your mortgage over time than a small down-payment.”

This one is long…most likely will be the longest in this series but it’s worth it. This topic cannot be “glossed” over if a paradigm shift in your thinking is to occur.  I heard recently,

“Have you probed your paradigm lately?”

Thought that was funny and yet so great of a question. Let’s face it, even the Bible tells us to ensure those who teach the Word are in fact teaching accurately…basically, don’t take anyone’s word for it.  We have to stay diligent in our learning or we can simply become dead in our thinking. Or worse yet, a blind follower of that which is not true. Case in point here with Dave’s mortgage advice.


In the previous post, we discussed a basic financial truth: you finance EVERYTHING you buy.  This happens because you either keep your cash and borrow thus paying interest (finance) or you use your cash to purchase (Dave Ramsey’s method) and thereby lose interest you could have earned on that money going forward (lost opportunity costs – aka a finance expense).

So it begs the following two questions:

  1. Which of these two situations will cause the least amount of wealth transfer for you personally?
  2. Which option makes the most money for the bank?

I’ve yet to meet an individual who intentionally desires to transfer large amounts of money away.  Also, I do not know one single person who wishes to make financial decisions that benefit the bank the most.  Unfortunately, very smart and well-minded individuals do this everyday…and the mortgage is just the tip of the iceberg.

So, will a large down-payment save you more money on your mortgage over time than a small down-payment?

Yes or No?


If you said “Yes”…you’re wrong. Remember, it’s NOT my opinion but rather it’s the MATH that proves it wrong.  Unfortunately, Dave Ramsey’s advice, compared to that which is mathematically true, is similar to the comparison of Rocky Road Ice Cream and Insulin.

Dave is saying that Rocky Road Ice Cream is the best (Subjective Opinion – you see, I think Mint Chocolate Chip is the best) yet he’s presenting it as an Objective Truth.  His teaching on this (make a large down payment to save you money) is only backed up by his personal attitude and feelings.  It’s like Dave saying that Rocky Road Ice Cream is medicine to help the diabetic.  That’s just false. Insulin is the medicine that helps the diabetic (Objective Truth – doesn’t matter if you like it or not).

When we present our opinion as an objective truth we set ourselves up to be proven wrong…that’s what Dave has done.

Dave can claim all day that the above statement from our quiz is True but it’s not.  He’s giving you ice cream to heal your diabetes (your financial plan).  We give you Insulin.

So, if something you thought to be true turned out not to be, when would you want to know about it?

Right away!

If you believe that a large down-payment saves you money then logic would follow that you feel the best down-payment is paying cash in order to pay no interest on a mortgage.  So, if “cash” is the best down-payment, then let’s take a look.


First, you have to understand that equity has no rate-of-return.  A down-payment, or paying cash for a home, is like putting money in a tin can and burying it in the back yard.  The day you sell the home you get to dig the can up and blow off the dust.  Since a home appreciates or depreciates the same if it is financed 100% or is free-and-clear, makes the cost of having our money tied up in the house something we should consider.

As a matter of fact, every dollar you pay to equity actually decreases in value each year due to inflation.  If you put $10,000 towards your equity this year that same $10,000 is available to you in the future (assuming of course the bank allowed you access or you sold the home), but, at that future date it has less buying power because of the inflation factor.  Yes your home may have appreciated but it would have appreciated anyway whether you put the extra $10,000 towards equity or not.  Now, most “wise” mortgage Ramsey followers will say “No, what I pay in principle DOES have a return because I’m paying less in interest.”  Not so fast.  Keep reading.

$31,693,128…now that’s a MISTAKE Dave!

Recently, some news came out about Dave Ramsey’s new house. I contacted Peter who heads up the blog I read about Ramsey (and just linked to) and I sent him a quick video on the math for Dave’s very own purchase.  This video is personalized for Peter but go ahead and take a look of Dave’s HUGE mistake.  If you recall earlier, in my first mortgage post…this is where you either start to get a bigger box or you choose to keep following an opinion because it “feels” good.

Banks aren’t in the business to make me “feel good”.  They’re in the business to make money from my money…period!

Let’s recap the video:

Dave has $4.9 million to buy his home. He decides to pay cash.  What Dave must understand is that it costs him the same amount of money to live in the home whether he finances it or not.  How’s that possible? Well, with math…that’s the whole point.  Remember, this is Insulin not Rocky Road Ice Cream.

If he could have invested that $4.9 million at 5% he would have a balance of $21,891,947 after 30 years.  If he financed $4.9 million at 5% he’d have a monthly payment of $26,304.  If that $26,304 is going to the bank and not being invested at 5% then the principle and interest PLUS the lost opportunity costs (not able to invest those payments if they’re going to the mortgage) equal $21,891,947.  They are identical.

Now, you Ramsey followers are told, and very foolishly by the way, that if you put your money in a “good growth mutual fund” you can average 8-12%.

Unfortunately, his position here is even wrong because the average rate-of-return means nothing…only the actual rate-of-return is what you should concern yourself with regarding your money.  Watch this video of us explaining this very thing.

So, if Dave took his own advice, because he certainly claims that over the “long haul” you can in fact average 8-12% so it would only make sense that he could also, then his $4.9 million could have been invested at these rates.  Let’s take the 8% and be nice (keep in mind, you have to take the Expense Ratio and 12b1 fees into this as well so you can typically add another 1 -1.25% on top of this “average”).  If he invested the $4.9 at 8% in 30 years his account would be $53,585,075.

Wait, you mean, if he took a mortgage at 5% it would cost him $21,891,947 (far more that what he even claims because he only takes the principle and interest into consideration we add the lost opportunity costs because let’s face it, he’s making a mortgage payment and that payment can’t be saved anymore) and if he took his own investing advice that $4.9 million could become $53,585,075? Yep.  Ummm…that’s a $31,693,128 difference!   No small change here folks.

If he can’t sell that home in 30 years for $53,585,000 then Dave Ramsey made a minor financial error. But there’s more.


A lady on the blog I mentioned above made this comment to me,

“But Kelly you are not taking the risk factor into this.  He could lose everything.” (not an exact quote)

She’s right; however, does Dave ever say that statement concerning his recommendations?  Does he ever say that if you invest in a “good growth mutual fund” that has a track record of at least five years that you could lose everything?  Nope.  As a matter of fact, all of his calculations assume that the 10-12% WILL in fact happen (by the way, feel free to send me any mutual fund that you think would make Dave happy and I’ll break down the ACTUAL rate-of-return for you).

Take me up on that last offer!

Even though he believes that it WILL happen, let’s say that he could in fact lose everything (which he can) and chose to NOT take on the risk to ensure he wasn’t under risk of foreclosure if the “Fit-Hit-The-Shan”.  Let’s break it down.

As a matter of fact, that’s exactly what he recommends (and wisely too):

“You’ve compared a zero risk investment [free and clear home] with a risk investment [investing in mutual funds] , and you don’t do that.”

He’s right but that does beg the question: Dave, can we take a zero risk investment with a zero risk investment? Maybe we’d want to do that if we could.

What would it look like, assuming he decides to go with his own recommendation here and take no risk, if he chose something that has guarantees at a measly 5%?   Remember, this account CANNOT lose so it’s an absolute certainty that the 5% will happen.  Well, we’ve already proved earlier that investing the lump sum at 5% and paying a mortgage at 5% would come out the same.  So what are we missing?

Any guesses?  His tax deduction. You see, this new home of his is a primary residence.  Let’s be nice and say he’s at a 35% tax bracket.  This changes his GROSS rate of 5% to a NET rate of 3.25% after the tax break.  Now, once we consider the mortgage payments at 3.25% that we can’t invest since they’re going to the bank (again, opportunity costs), it’s costing him $12,973,610…no longer the $21 million figure.

His puny, wimpy, guaranteed account earned him $21,891,947 and his mortgage cost him $12,973,610.  A difference of $8,918,337! With how much risk?  COME ON, with how much risk!?

NONE!  It was all guaranteed.

Who had control of the money?  HE DID!

What happens if values plummet?  THE BANK FREAKS OUT NOT DAVE!

What happens if his income stream completely dries up?  HE’S LIQUID!

Dave’s all about emergency funds so what happens in case of emergency?  HE HAS THE MONEY NOT THE BANK!

What happens if he comes across an investment opportunity?  HE HAS LIQUIDITY AS OPPOSED TO EQUITY!

Here’s two bonus questions:

What if the account where he has this money has no penalties to access?

What if this account can be used later tax-free?

Answer me this: do you think that banks have a faulty model of making money?

I mean that seriously.  Do you?  Can you literally “look me in the eye” and say that the way banks make money is ineffective?

Of course you can’t. Yet you then discredit the same model when it’s presented on a personal level.  Maybe not you…but Dave sure does!  You see, in this example Dave did exactly what a bank does:

  1. He borrowed money with a low cost (3.25%). (He’s all about getting a deal)
  2. He used his money in a guaranteed and predictable environment (at 5%) to earn a spread. (Remember, he said no risk)
  3. His mortgage is fixed so it will NEVER go up or cost him more and
  4. His earnings are FIXED because it’s in a guaranteed environment.

No matter what happens he wins. He created a banking environment for himself because both of these two financial tools were guaranteed to happen.


You see, I just about exploded when Dave’s right-hand man (I won’t use his name or title because he is an old friend of mine from church), told me (after seeing this math for himself) that “80% of our clients Kelly are financial idiots”. Honestly, that pissed me off…in a big way.  I asked him, “Then why are you following his advice?”  He had no answer.

You’re not idiots. You’re just being served Rocky Road Ice Cream for your diabetes.  It’s time for some Insulin.

Next up, the math behind his bogus advice about 15-year mortgages versus 30-year mortgages.  The banks would love for you to choose a 15-year mortgage…that’s the problem!

You don’t want to miss this one.

Kelly O’Connor –


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