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 http://www.icifactbook.org/fb_ch7.html)? 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 – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook

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How Financial Institutions Make Money #2

September 20, 2013

I can’t believe it has been almost four years since my first “how financial institutions make money” post. Crazy how fast things go by so quickly. This initial post continues to be one of my most active even today and the primary path that people come to this post is through Google. It’s interesting that so many people are simply Googling (love that this is now a verb) the question: How do financial institutions make money? Honestly, I believe many people are pretty fed up with how things have been going financially and yet the Big Three (IRS, Wall Street, Banks) keep making money hand-over-fist.

For the most part, people are finally seeking to educate themselves first before just following another opinion. Opinions drive me crazy. I’m mean, I certainly like mine but who cares other than me, right? Mint Chocolate Chip is the BEST ice cream flavor of all time. No Kelly, says you, “_____ is the best ice cream flavor!” Who’s right? Who cares? Seriously, no matter what you say I still love Mint Chocolate Chip.

When it comes to the title of this blog “How financial institutions make money” there are no opinions. There’s only truth and the truth could care less about opinions. All of us must understand that there are four rules which are deeply cherished by the IRS, Wall Street and Banks. These rules allow all three to work together.  They allow all three to ensure that they’re winning. They allow all three to redirect the risk of success entirely upon you. I thought we’d review these four rules today. You’ll find that they are extremely simple but they have huge implications. It’s interesting to me that even the Bible talks of a cord of three strands being unbreakable…these three (IRS, Wall Street and Banks – from now on referred to as “IWB”) are most certainly intertwined together and are so hard, if not impossible, to break.

Rule #1: They want and need your money

Now, before you pass this one off as too simple to carry any weight then please take a moment to think about the importance of this one (it’s #1 for a reason).  This one does not require much explanation. All three, IWB, want our money and need our money in order to both operate and turn a profit.

Rule #2: They want and need your money on an ongoing basis

What would happen to Walmart, Coca Cola, Pepsi, McDonalds, Budweiser or any other company in the country if beginning today every customer only bought their product(s) one more time? That’s it. Just one more purchase. They would obviously have a HUGE day if every customer placed their order today but come tomorrow the alarms would be blaring. Nobody shows up again and these businesses are out of business very quickly. Think of all of the employees that would be unemployed or all the buildings that would be vacant or all the farmers who would have no one to sell their produce to…the results would be devastating and felt by all.

Is this example any different for the IWB? No. They must have your money and they must have it on an ongoing basis. If they don’t succeed at this very simple truth then they fail as well. Now, we could dig in real deep to show how, unlike the above mentioned companies, it is virtually impossible for them to fail. They can’t. They won’t. If they actually do fail then along comes Joe Taxpayer to bail them out so that they don’t fail. No matter what happens, they get our money on an ongoing basis.

So how do they accomplish Rule #2? They create financial products that we buy and that we “need”. Banks offer checking and savings accounts, CDs, money markets, loans, credit cards, etc. Wall Street offers financial investment accounts that we contribute to and hopefully grow and the IRS controls the tax implications and the rules behind all of it.

Rule #3: They want and need to hang on to your money for as long as they can

Does the bank like it when you withdraw your money? Of course they don’t. Keep in mind; their liabilities are their greatest assets.  Your money on deposit with them is a liability to the bank – they owe you that money at a promised interest rate; however, they’re turning that money over and lending it to others at a higher rate. We must understand that there is a difference between liabilities and debt. Debt is no good and we must get rid of it but liabilities when managed properly can create a bunch of wealth for us just as they do for the banks.  What happens if everyone goes to the bank the same day to withdraw their funds? It’s called a “run on the bank” and the bank would have to shut their doors or be faced with bankruptcy. They are never in a position to get everyone their deposits back on any given day because they don’t have it. They need our money, they need it on an ongoing basis and they need to hold on to it as long as possible.

The government is the worse with Rule #3. Why do they have so many rules when it comes to you using (whether you simply need it or just want it) your funds in your qualified plan accounts (IRAs, Roths, 401ks, etc.)?  First, let’s make sure we get something very clear here – any funds in your government, qualified plans are not your funds. The government owns and controls that entire transaction. If it is truly your money then why are there so many rules around accessing the funds? Why do you have to wait until you’re 59 ½ to touch it without penalty? What if you choose to retire at age 50? If these accounts are truly in your best interest then why is there any penalty at all? Why are you required to take money out if you hit 70 ½ (Required Minimum Distribution)? What if it doesn’t fit your plan or it’s not in your best interest to access those funds at that point? The number of rules and regulations on these accounts are insane.  You have NO control over them ultimately. Plus, the government can change the rules at any point to serve their financial needs. So, the IRS loves Rule #3. The banks love it as well. Wall Street makes a killing off of it too because they get to manage the money within these products. Think about it: you’re 35 years old with an IRA and you can’t touch it without penalty for 24 more years! Wall Street has a client for a LONG time!

They want to hang on to your money as long as they can and the rules and the product design allow them to do so.

Rule #4: They want and need to give your money back to you as slowly as possible

This one is similar to Rule #3 but it has a slight twist. They want to hold on to our money for as long as possible therefore they create rules to give it back to us as slowly as possible. If this isn’t the case then please explain the 10% tax penalty for withdrawing funds from a qualified plan retirement account prior to being 59 ½ years old. It’s your money (after all, you’re the one who made the deposits) so why are there so many rules and why are there penalties for you if you choose to access your funds? Answer: Rule #4. The government does not want you to be in a position of control because that takes away from their control so they create rules. These rules are based around them maintaining control so they limit your access. What’s shocking is that people continue to fund these accounts. Wall Street loves it because it creates a great deal of job security because they know you won’t access this money due to the rules and penalties so they have your money under management for many many years. The banks love it too because you’re not in a position to access capital for large capital purchases so they offer you a loan…and we know how much banks love that one.

These four rules are always at the center. When you begin to plan your trek up the mountain of retirement planning you can always find these four rules working against you…if you just pay attention.

Mt. Everest – descending is the most dangerous

Are there options? Are there ways to minimize the effect of these four and create a more effective plan up the mountain? Yes there are. Remember, for those who die climbing Mt. Everest, 70% of them die on the way down. The descent is the very most dangerous part of that journey. It’s no different financially. People are just climbing up without an understanding of how these rules affect them and more importantly, how they affect them on the way down. What do I mean by that statement? Well, if you have a large sum in your qualified retirement account, or that’s your plan at least, then please tell me the tax implications on that money during your retirement? You don’t know. No one does…it’s impossible because you’d have to literally know the future. You see, any financial professional can only plan one year at a time with those types of accounts because we don’t even know what taxes will be or what the distribution rules will be for next year. If you’re in this position then you can truly only plan one year at a time and that’s a very dangerous position to be in. The descent will most likely not work out in your favor. You must not only plan to effectively get up the mountain top but also to get back down to base camp alive (i.e. be financially independent through your life expectancy). With this knowledge your trek up the mountain may take a different path and while others are falling off you’re holding on just fine. That’s our expertise. That’s what we do for our clients.

There are solutions. There are answers to minimize the Four Rules’ overall negative effect on your plan; however, you have to be willing to learn. I don’t care what financial position you’re in, you must be willing to have a few discussions with a student-type mentality.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Inflation: devastating or full of opportunity. Which do you want?

May 25, 2012

Banks lending again? What does that mean for you and your money? More than you may think.

Did you notice there are some banks that have begun to lift their tight lending requirements? For example, Key Bank here in Denver is now offering 100% financing again. So, what’s the big deal? Before we take a look at what this means, let’s ask a few questions:

  • Have there been any bad times before in the history of the world financially? Of course.
  • During those bad times, even the Great Depression, were there any people who made money? Of course.
  • Was it the people who planned and prepared or people who just let stuff happen to them that were most successful? Obviously those who planned.
  • So which one do you want to be and when do you want to get started?
  • If you could truly put yourself in a position to take advantage of the opportunities you have to earn your family’s financial independence even in bad times, then shouldn’t you be thinking the current economic situation is an opportunity and not a “bad thing”?

Inflation is going to do some real damage to our money if we’re not prepared. Stop and think about this, if you had $1,000,000 and you lost $200,000, you’re down to $800k and that money just stays the same. If we have 7% inflation that $800k is only going to buy $400k of retirement, or $400,000 of goods and services a decade from now.

  • What’s your strategy to make sure that you don’t get hurt by this inflation?
  • More importantly, are there any strategies available that would help you actually take advantage of that inflation to your benefit?

There are strategies that have been implemented for over a century.

Now, let’s get back to the banks…like what Key Bank is doing. The banking system received an unbelievable amount of [printed] money (inflation Step #1) that our government created when TARP was passed. We’ve discussed before but do you remember Step #2 that is required for inflation to take hold? Step #2, the printed money has to be circulated. You starting to put this together?

  • Did the banks circulate those monies initially? No they didn’t, at least not very much of it.
  • Even though they didn’t circulate a lot have we experienced some inflation because of those funds? Absolutely, all you have to do is go buy a gallon of milk today to see it first-hand.

Here’s the bigger problem, banks are beginning to circulate more of that money (i.e. Key Bank offering 100% financing again!). This will have a huge impact over the course of the next decade. Huge!

  • What happens to interest rates when inflation begins to roar? They go up. Remember the early 80’s after the inflationary pressures from the late 70’s?
Historical rates of great opportunity
If you don’t remember what interest rates were at that time then take a look at this graph. Opportunity? You better believe it but only if you were in a position to take advantage of it. What if all your money was in your house (equity)? Look at this graph. In 1982 would you have borrowed money at 16.08% in order to earn 15.12% for one year? Of course not.

There are always those who plan and those who do not. Over the next decade and beyond, you have the opportunity to take advantage of these opportunities but it requires one very important characteristic.

  • You MUST have access to capital, more specifically, guaranteed access to capital no matter the situation with the ability to collateralize those funds and earn a spread in a GUARANTEED and PREDICTABLE environment!
If inflation was raging right now and guaranteed rates, like CDs, were flying high, are you in a position to take advantage of it or are you currently positioned to be hurt by it? It’s a choice, not a matter of chance.
Since I’m on a roll, here’s some more questions for you
I love questions so here are a few more; however, these questions are designed for you to ask other advisors who want to invest your money. Those advisors MUST be able to provide an answer for each one these and we challenge you to ask them because, after all, it’s YOUR money and YOUR future.
  • What are you doing to do to make sure I don’t lose any money? What’s your strategy?
  • If I do lose, what’s your strategy to make back any money lost to get me back ahead of the game? What are your recommendations?
  • What impact are taxes going to have on all of this and could taxes prevent me from having a successful outcome?
  • Do you believe taxes will be higher in the future? If so, please answer the third bullet point again.
  • What strategy is there in place to keep taxes off my back going forward?
  • If you are recommending my money be put in a taxable position then please explain to me the specific reason why (especially if you believe taxes will be higher in the future) and the exit strategy to minimize those taxes in the future.
  • How can I take advantage of the pressures caused by inflation with your strategy?
  • What impact will inflation have on your strategy?
  • What is the impact of fees over time to the performance of your strategy? How can I get rid of or minimize those fees?

I hope it’s obvious by now but we have an answer, and a specific strategy, for each and every one of those questions.

You better be able to address each and every one of those. If not, then you’ll simply be one of many who didn’t plan…again, it’s not a matter of chance but instead a matter of choice.

We’d be happy to show you.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


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 – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Taxes (Defining Moment #2) Part 4

October 11, 2010

These two defining moments we have discussed so far – Your money will never be worth more than it is today and This may be the lowest tax bracket you will ever be in – are unique because they will have a direct impact on all the remaining conversations and even our videos (coming soon to YouTube – update: now on YouTube).

They certainly present a very clear challenge to our thought process. When combined together they confront head on some of the traditional thinking that has been branded into all of us.

If your money will never be worth more than it is today, due to inflation, and this may be the lowest tax bracket you will ever be in due to the demographics and government spending (my next set of blog posts – don’t miss these), then why is traditional thinking telling you to take as much of today’s money as you can and throw it as far as you can into the future, where it will have less buying power and be taxed the most?

That is such a strong question. I recommend you read it again.  Once you do, ask yourself, is that the thought-process or type of planning you want to pursue?

When you begin to apply these two Defining Moments to your everyday lives you may begin to process things a little differently. Like this: if you purchase a car which is a depreciating asset anyway, do you want to use as many of today’s dollars that have the most buying power and pay that car off as fast as you can?  Maybe not.

You may also think about the way you are approaching your retirement dollars. In qualified plans, such as IRA’s, 401K’s, one thing is very clear, the government controls the pen which gives them the ability…and the authorization…to change the rules at any point.

So you must then be able to answer this question:

who’s future are you financing, your’s or the government’s?

You must consider that whatever you have left after taxes, what will the buying power be of your money at that time? Understanding this may open your eyes to ideas other than what you’re hearing on TV or read in the financial magazines, and certainly today’s traditional thinking.

That’s what we do…we help you re-consider.  It’s Financial Caffeine.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Taxes (Defining Moment #2) Part 3

October 5, 2010

What other factors point to the thought that this may be the lowest tax bracket you will ever be in (what we call Defining Moment #2)?

The continual decline in the overall labor force will pose a huge problem.  We already know that from a percentage  standpoint, there will be fewer taxpaying workers than there are retirees who are and will be on government programs.  And they will be living longer.  Watch for my Demographics blog (next week).  This is a serious issue that virtually no financial planner is discussing with their client.

So let’s take a look at this: we have a declining workforce in the United States, we have an aging population living longer on government programs, we have a government that’s spending like it’s on crack, and we have $50+ trillion in future government financial burdens. Unfortunately the only source of revenue for the Federal Government comes from you, in the form of taxes.

From the government’s standpoint, do you think they are going to lower taxes or raise taxes? Decrease or increase government benefits?  You may start to put a few things together about your qualified plans here and why the government is highly motivated to stay in charge of them.

Afterall, who owns the pen on those accounts?  Who’s your partner?  The government.  They control it all.  When you open your statement on your 401k how much of it is yours?  You have no idea. Why do you have no idea?  Your plan is taxed at the tax rate you qualify for when you begin to withdraw funds.  What’s that rate?  No one knows.  Do you think the government may be in need in the near future?  Do you think they may need to raise taxes?  You must start putting this together folks.

Ever thought why they made some changes recently to IRAs?  Was it really for our benefit? Could they raid investment accounts?  Of course they can. That’s why they created these things in the first place…another lesson on Demographics.  You must understand when Qualified Plans were created and why – Demographics blog next week will address this issue.

Imagine now, if you can, your future savings and retirement money being taxed at two times today’s levels. Once again this is an estimate from the government’s GAO.  Traditional thinkers and the so called experts from the government –please key in on from where they are experts–are now telling us that in order to survive in the future, where we will all be living longer, we must save more money now…and specifically into these types of accounts where they control the rules.

Upsetting isn’t it?  “Save more now so we can control it later.”  This is why this one bugs us so much.

If given a choice would you want to receive money now, when taxes are the lowest, or later when taxes may be much higher?  If you are successful and are saving money and deferring the taxes to a later date, you may want to rethink the dilemna awaiting for you.  The old adage “You will probably retire to two-thirds of your income thus be in a lower tax bracket” may be floating around in your mind.

But THINK about that for a minute!  What determines your tax bracket?  Your income.  So, your planner is telling you to work your whole life, save, put it at risk so you can lower your income to a smaller tax bracket when you finally retire?

Sorry, but I’ve yet to meet a client who plans on drastically reducing their lifestyle at retirement.  The typically plan to maintain their lifestlye.  For one, they now can travel, play more golf, and spend time with hobbies.

If anything, you have MORE expenses NOT less.  This concept is pure foolish on it’s face but absurd when you take this Defining Moment to heart.  There’s one sure-fire way to accomplish what this advice states and that is to lose most of your savings and investments.  Tell you what, that’s easy to accomplish.  If that’s your planner’s strategy, fire them.

So finally, do you really want to retire to the least amount of money so you are in the lowest tax bracket or do you want to maintain your current lifestyle?  Maybe even retire to the MOST amount of money…but you can’t say that in today’s world can you.

How then, in an increasing tax environment, certain demographic changes, and a desire to not have the least amount of money in retirement, does this way of thinking still permeate most plans?

If it’s your plan, you need a good dose of Financial Caffeine and we’re just the guys to serve it to you.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Taxes (Defining Moment #2) Part 2

October 1, 2010

Defining Moment #2 starts with a quote from the former Comptroller General of the United States, David Walker:

“We are heading for a future where we will have to double federal taxes or cut federal spending by 60%”.

The rapidly changing demographics of our country are going to impact everyone’s lives in our nation. Simply believing we are a great nation will not continue to make us one.  To compete and survive we will have to change and that change may not come easy.

Alan Greenspan said:

“As a nation we have already made promises to coming generations of retirees that we will be unable to fulfill.”

Keep in mind, this was well before the last two years of IMMENSE additional spending by the Obama Administration.

That’s why Defining Moment #2 is critical to understand, it states that “this may be the lowest tax bracket you will ever be in.”

As you are reading this post, the U.S. Federal Government continues to spend more than it takes in from tax revenues. The debt in our nation is growing over one million dollars an hour. And it keeps going up.

What does that mean to every person in the United States? Well, in order to pay for this government burden every citizen in the country would have to pay about $174,000 or for every household $664,000 (as of September 2010).

The purpose of telling you this is not to scare you but rather to make you aware that all the conditions are in place for everyone’s taxes to increase.

We know this isn’t new information you but you can’t just take this for granted anymore. You must understand the importance of planning for not only the demographic changes (be looking for future posts on this very topic) but the serious problem our government has created for itself and exactly what it means to you.

Traditional thinking professionals may be willing to avoid this problem that is out there right now until it becomes a crisis for you.  For example, are you still being told to defer your taxes now by contributing to a qualified plan (401k, SEP, IRA, 403b, etc) that will be most assuredly taxed at a higher rate later?

Times are changing and if you’re being told to just wait it out and see what happens, it is simply going to be too late to react to the problem.

Future taxes that you pay will be the largest transfers of your money that you will ever make. The size and amount of future taxes has not yet been determined but we do know that government debt will be a large determining factor.

You must not only understand this Defining Moment that this may be the lowest tax bracket you will ever be in but you also need to act upon that knowledge.

What if you in fact could be insulated against future tax increases and use your money tax free when you need it?  Would it make sense for you to do a little homework for yourself?  Truly, how much is that worth to you?  Look, you’re more than welcome, and of course encouraged, to let it all play out naturally and see just how much the IRS gets…but personally, that’s not a strategy…it’s stupidity.

If you don’t have a plan to counter this Defining Moment then please understand, THE GOVERNMENT DOES!

We’ll continue to do our part in providing you as much free information and analysis as you need.  But, you need to step up to the plate and ask some questions.

We call it Financial Caffeine.  You’ll see why if you simply do your part and educate yourself.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook