May 17, 2011

Q: Where did all of your money go?

A: Taxes and Inflation

Americans are constantly struggling to make ends meet and to scrap together whatever they can to have some form of retirement if/when they’ll be able to retire. Retirement is possible; however, one must know what to do with one’s money in order to retire one day. One must be organized and have a plan for the future and not be ashamed to ask for help. Financial planning is a dynamic challenge – and here are a few of my thoughts for being successful:

DO have a 401K:

Most of you who religiously read my blogs (thank you!) know that I’m not a big supporter of 401K plans. Mainly, because I know that these 401K plans were never intended to be actual retirement plans…they were initially intended for high-level corporate executives to defer their compensation until a later date so that they could avoid high taxes. I’m also not a big supporter of 401K plans because people are way too dependent on a “retirement plan” that goes up and down with the economy (just think of all of the grandmas and grandpas that had to keep working and could not retire in 2008 as planned because they lost 30-40% of their portfolio in the recent recession).

Nonetheless, I think it’s still a good idea to have a 401K plan as a supplement to a real retirement plan…which I will discuss later. And also – 401K plans currently offer us the tax shield that our CEOs have (although it works a little better for them).

DO have a Roth IRA:

These financial instruments are definitely nice to have in your retirement portfolio – mostly because any contributions you put forward will invest and grow tax free (unless Congress changes the tax laws, of course). There is a limit to how much you can contribute, but unlike the traditional IRA, there is no mandatory withdrawal once you reach 70.5yrs. However, the Roth IRA does have income restrictions.

DO have your own investment account – outside of your employer:

If you noticed – there are several online discount brokerages popping up every year. Charles Schwab, OptionsXpress, Sharebuilder, Scottrade, TD Ameritrade, etc. Putting aside some of your discretionary income for an Index Fund or ETF is a great idea – plus you’ll learn a thing or two about investing.

DO be debt free:

Enough said.

DO have a real retirement plan:

What is a real retirement plan? It encompasses all of the above, but also adds an element of entrepreneurship. But, hey if you don’t want to be an entrepreneur – then be sure to own a few small businesses and have people working for you. This is the most important element to your retirement plan – because it will help you generate cash flow.

For example, do you know how much money you will need in retirement? Do you know what your tax bracket will be when you retire? What will your expenses be? Will you be single, divorced, widowed, or married? Will you be in good health? Will you have a mortgage? Unfortunately, we can’t know all of the answers to these types of questions – which is why it’s almost impossible to “save” our way to retirement via a 401K or any other investment vehicle (unless, of course, you’re putting away the maximum amount). But for those of us who are not contributing the maximum - we can still be prepared for any of these situations if we have cash flow in the form of a business or income-producing property (licensing, real-estate, patents, etc).

If taxes increase – simply increase the cost of your product/service to offset any tax increases Congress will set in place. If inflation skyrockets – simply increase the price for your product/service. Entrepreneurship gives us our own cash printing machine and possibly the best results for a very, very, comfortable retirement.


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