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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Would you invest in this company?

April 4, 2011

Would you invest in a company that lost $2 trillion last year and has a net worth of negative $44 trillion? Bloomberg compared the U.S. to a corporation and that sentence was on their front cover.  Ben Bernanke testifying to congress about our debt stated, “We are much closer to total destruction than you think.”

Ezra Klein from the Washington Post describes the U.S. Government as “an insurance conglomerate protected by a large standing army.”  WOW!

The CBO (Congressional Budget Office) describes the debt as “Calamitous, worse than anybody said.”  Here are the facts: Politicians are the best sales people on the planet.  While they distract you with talk about earmarks, waste and the like, they refuse to discuss the only four things that can provide debt relief:

  1. Social Security
  2. Medicare
  3. Medicaid
  4. Interest on the debt.

These are the only four things that can reduce the deficit.  As spending on those four things increase, all other spending will decrease.

Finally, the debt is currently $14 trillion.  By 2015 the debt will rise to $20 trillion and by 2021 the debt for this country will exceed $27 trillion.  The interest required to service that debt will take up to 50 percent of all federal tax revenue.  This is only one decade away!  So you need to ask yourself two questions:

What do you think this will do to your benefits?  When do you want to get started taking control of your family’s financial future?

Here are some recent articles that you may find interesting.

USA Inc.: Red, White, and Very Blue (Bloomberg Businessweek, February 28-March 6, 2011)

U.S. debt situation is calamitous, worst than anybody said (The Citizen, February 15, 2011)

Gov’t Adds Another $63.7 Billion in Debt (The New American, March 3, 2011)

If we could show you the most effective, efficient ways possible to save money for the future would you like to know them?  If we could show you creative ways to decrease taxes and increase benefits would you want to know about them?

Kelly O’Connor –


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I’m astounded by the news that our economy is improving

February 21, 2011

Recently I saw a national newspaper headline an article about how our economy is improving and recovering.  I began to notice this in many other news sources and I have been just astounded at the inaccuracies of these claims.  Truly, this issue today is one of the most misleading ever to be imposed on the American people.  We are still in the midst of one of the most dangerous financial times in our country’s history.  Behind every dollar printed, behind every unemployed citizen, behind every person who retires or requires health care, is danger lying in wait.  “Oh come on!  You don’t really believe that?”

Taxes at 100%

I do.  We continuingly find information that just seems so unbelievable to us yet the math clearly indicates that our statement above is true.  Not only that, but the Congressional Budget Office maintains the same conclusions.  Consider this question: What if every American paid 100 percent taxes? What if our tax laws were changed from the 47,000 pages of tax code to the following two lines:

  1. What was your income?
  2. The amount in line one is the amount of tax you owed – SEND IT IN!

If this was the case, we would still have to borrow money to maintain our current standard of living.  Can you imagine?  Seriously, is that not just insane?

That water is about to boil

In the same manner that a frog will stay in the water if the heat is turned up slowly, we have slowly put our country and ourselves in this very challenging position.  Virtually anything could knock us down like a house of cards.

The list of financial challenges that we face could take up this whole page and most people are not paying attention.  Let’s list a few: our government spending, a declining workforce, an aging population, unsustainable government debt, unemployment, declining value of the dollar, declining housing values, increase in number of government employees, underfunded government pensions, underfunded union pensions, state government deficits, individual bankruptcies, credit tightening, currency fluctuation (world-wide), private sector’s inefficiency to save, government dependency at an all time high, hidden inflation (stealth tax), illegal immigration, health care costs, declining incomes (inflation adjusted), war-security-terror, the cost of going “green”, and foreclosures…just to name a few.

LEVERAGE will win!

So what does this mean for us?  Well, very simply, leverage is absolutely a must if we are to get through these issues.  It’s critical you learn how to leverage your money.  At Mountain Financial our job is not to make anyone rich (unlike the sales pitch by traditional financial planning), you can accomplish this goal with your own unique abilities.  Our job is to make sure that you will never be poor because the above issues will certainly work against our ability to create wealth.

It’s important for us to lay out the various benefits that we provide:

  1. A haven for your safe money.  We ask our client or prospect: where do you put your “safe” money?  How do you keep it safe?  Do you get a fair return on your “safe” money?  Would you like to know about “safe” money investments that provide better returns?
  2. Guarantees. Not only can we guarantee the return on their money, we can guarantee the return of their money.  This is a big issue and needs to be told to everyone…I don’t care how successful you are!
  3. Even if our client runs out of money, we can guarantee that he/she will never run out of income. We have products that provide a guaranteed paycheck for life under any financial circumstance. No one else can do that.
  4. Three miracles of investing:
  • First, we share the miracle of compound interest.  That is how the silent generation became wealthy.  They allowed compound interest to work on savings that they saved and kept saved.  Even at 3 percent, money would double twice from age 18 to age 66.
  • Second, we also provide the miracle of tax deferred compound interest.  This is known as the miracle of triple compounding: interest on principal, interest on interest, and interest on the taxes you would have paid in an investment taxed on an accrual basis. We can double a client’s pension just by teaching them the miracle of tax deferral.  We can do this without requiring any additional risk.  That is a miracle!
  • Finally, we provide the miracle of leveraging.  We can use pennies to buy dollars or we can have one dollar do the work of many dollars.  If the plan is arranged properly, all of this can be done without income tax liability. That is a financial miracle!  Now you may begin to understand why the wealthy have used it to maintain and pass on their wealth for generations.

The young, old, rich, middle‐class, employed, and unemployed can all benefit from these miracles and all of them need to learn the truth.

Kelly O’Connor –


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Scary Solutions, Scary Consequences

February 21, 2011

States have only four choices when it comes to their budgets:  raise taxes, lower services and benefits, borrow money, or some combination of the three.

67% Increase in Taxes!?

Big states like New York, New Jersey and California are contemplating large tax increases.  Illinois just proposed and passed a 67 percent income tax increase!  Most states don’t have the courage to do that. They pass sin taxes instead.  These are taxes on soda, sweets and snacks.  Taxes are being proposed on beer and wine.  Cigarettes are an obvious one.  Not so obvious options include taxing plastic shopping bags, fees on casinos and fees for tanning.  Even marijuana is being considered for legalization to harness more revenue for the states.

Bankruptcy for States?

Another option being considered by the federal government in lieu of a bailout is allowing the states to file for bankruptcy.  This would have a huge impact.  It would create leverage for the states in their negotiations with public employees unions and the huge holes in public retirement systems.  There will be dramatic shifts in public policy.  Who will have more power: taxpayers or bondholders? Have you ever truly thought of that question?  If not, you need to.

What happens to the promises made to public employees?  Nassau County in New York and Vallejo in California have already begun dramatic changes in their budgets with pension and health care reductions.  Employee reductions, tax increases, and finally borrowing, borrowing, borrowing.

This will have huge implications for our country.  Coupled with the federal government’s budget problems, in the short term calamity awaits the American people with higher taxes, lower benefits, serious inflation and ever-increasing volatility.  Ask yourself if you have a strategy for these issues.

We’re not the only one’s talking

Please, don’t just take our word for it.  We’d highly recommend you read some of these articles:

Title: Raise Taxes? Some States See the Value (Higher Taxes Wouldn’t End Some Deficits) (The New York Times, January 20, 2011; front page)

Title: Illinois Lawmakers Pass Massive Income Tax Increase (, January 12, 2011)

Title: States eye ‘sin’ taxation as salvation for budgets (The Washington Times, January 24, 2011; page 12)

Title: Will Congress Create “State” Bankruptcy Law? (New American, January 21, 2011)

Title: A Path Is Sought for States To Escape Debt Burdens (The New York Times, January 20, 2011)

Title: Mayors See No End to Hard Choices for Cities, Including Bankruptcy (The New York Times, January 22, 2011; section A, page 10)

Title: Defaults by Cities Looming as U.S. Mayors Say Deficits Hinder Debt Payment (Bloomberg, January 19, 2011)

Title: Strained States Turning To Laws To Curb Unions (The New York Times, January 4, 2011; front page)

Title: City Drafts Bankruptcy Exit (The Wall Street Journal, January 18, 2011; section A, page 6)

Title: New York State Seizes Finances of Nassau County (The New York Times, January 26, 2011)

Kelly O’Connor –


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Two Year Gift Tax Window

February 21, 2011

For 2011 and 2012 the estate tax and gift tax lifetime exclusion is $5 million and the tax rate above the exemption is 35 percent.  After 2012, the exclusion is $1 million and the tax rate above the exclusion is 55 percent.  The government will need more revenue.  You have a two-year, one time only window of opportunity in 2011 and 2012.

Estates can be reduced by up to $5 million per person.  A husband and wife could transfer up to $10 million to their families without the federal government getting ANY TAXES!  Any amount transferred over one million in the next two years is a gift…Ha! Ha!  You deserve to know about this time sensitive, limited offer!  You will be amazed to discover that you can leverage that gift into tens of millions of dollars transferred using life insurance and an irrevocable life insurance trust.

Here’s an example on a grand scale.  You have $30 million in assets.  Let’s say sixty or seventy percent of that value is in a business.  By gifting up to $10 million (husband and wife) to a trust and buying life insurance with it, you could preserve your estate for your family.  You could then spend or invest or save the rest of your estate without any concern for the preservation of it.

It is an amazing one time only opportunity.  If you read the article I am sharing below, the client in the article said this, “Why should a guy who worked long hours and took a lot of risk have to pay tax on what he wants to pass to his children?”  Why indeed!

Title: The $5 Million Tax Break (The Wall Street Journal, January 29‐30, 2011; section B, page 7)

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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