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Who should you behave like; the middle class or the wealthy? October 14, 2008

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When it comes to our financial lives, who should we look to guide our behavior?  That is the question 10 years ago I asked myself.  Since my goals included having enough money to retire comfortably, the obvious answer was the wealthy.  Yet, many folks continue to insist that copying the behavior of the middle class is the way to go.  Yet, the middle class is in real trouble.   I have posted the current financial results from the data many times before.  Here they are again; for the 55-64 age group average retirement accounts have $83,000 in them.  Less than 35% of these folks have a defined benefit pension coming their way.  80% of this age group has a total net worth less than $300,000 of which more than one third is in the form of home equity.  Currently, 90% of retirees are dependent on government payouts for their basic living expenses.  The average person will spend 17 years in “retirement age.”  How long will that $83,000 last? 

That is where the middle class is right now.  Do you want to end up there too?  If you do mimic the middle class’s behavior.  What is that behavior?

Invest primarily in mutual funds, certificates of deposit, and savings account.  Pay off your mortgage as soon as you can.  Pay attention to fees, making sure you don’t pay any.  Be a passive investor.  Be a life time employee.  Panic when things happen you haven’t taken the time to understand or plan for.   Avoid risk.  Listen to the advice from Wall Street, Big Insurance, financial planners who are not wealthy and the banks, especially if the salesperson is sitting in a fancy office.

I posted on how the wealthy really invest here.  Quickly summarized it is real estate, niche businesses, individual stocks and cash value life insurance.  They are generally owners not employees and active investors not passive investors.  So which road are you on; the road of the middle class or the road of the wealthy?

What We’re Missing When It Comes To Our Middle Class — Playin’ ‘Hide July 30, 2008

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Today we have a guest post from none other that the Bawld Guy!  As regular readers know, we think much the same when it comes to investing and retirement.  Enjoy and don’t forget to check out his website at

http://www.bawldguy.com/

In my opinion, the all time political football in America has been the middle class. They either don’t make enough at work, taxed too much or too little (too little?), or have disappeared altogether. None of those arguments are what continually keeps my attention. Not even close. Taxes? Middle class families figure things out and manage to survive the idiots in D.C. and their ‘help’ one way or the other. How ’bout college for the kids? Again, they figure it out. The #1 concern I’ve always had when it comes to the American middle class is what’s waiting for them at retirement.  In my view, the debates over middle class job income, or even their net worth to a certain extent, misses the target for which they should be primarily aiming. What I’m not saying very well is that saving and investing in and of itself is the very reason the vast majority of our middle class is gonna be living out a life sentence instead of enjoying a wonderfully planned retirement. How so? They’re listening to folks who apparently gotten the memo on what’s workin’ and what’s not. What are middle class folks being told these days? Slam as much money into the government’s qualified plans for retirement as possible. They sell this easily by hawking the annual tax savings allowed contributors for each dollar they invest in their qualified plans. The only retirement being enhanced in a major way by most qualified retirement plans is Uncle Sam.  

Here’s how. 

Take a middle class couple contributing to their 401(k)’s from 30-65 years old. Each year they they save anywhere from $3,000-10,000 in state/federal income taxes. In 35 years let’s say they’ve saved a total of $250,000 in taxes. If after 35 years they’re combined plans have reached $2 Million, and they figure a way to obtain a 6% annual return for their retirement income, they’re potentially in trouble. Their house is no doubt free and clear. They have no tax shelter of any consequence. In reality, they arrive at retirement with at best, $120,000 a year in income. They’ll most likely be liable for the highest income taxes possible. Let’s say they pay about $35,000 in combined state/federal taxes. This means by the time they’ve been retired 14 years, they’ll have paid just short of twice what they ‘saved’ in the previous 35 years. And that’s it ’till death. Please tell me in what scenario does saving $250,000 in taxes for the privilege of paying out twice that amount in less than half the time, make sense. Why not investigate alternatives allowing you to not only create a far more abundant retirement income, but also keep more of that larger income? Why not also do this while building tax sheltered and tax free income? Indeed, why not? Here’s what I’d be pleased for you to take away. Don’t keep your eye on a few tax dollars saved each year. Keep your eye on the real ball — your retirement income, and it’s after tax safety. Stop allowing Uncle Sam to play ‘hide the pea’ with your retirement plans. That pea is your gold.

The Great Divide April 29, 2008

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In 1950 our country was a very different place.  The great divides were about workers pay, race and gender.  Only 7% of folks had a college degree.  People really did things together, not that white and black folks did, but take away that divide and people really did do things like bowl or attend service clubs (lions, elks, rotary, etc.) together.  Main street entrepenuers and factory workers shared much including a common culture. The workers demanded and received massive increases in pay, decreases in working hours, and increases in pension funding.  Corporations made profits while their CEO’s made 12-15 times what their workers made.

The middle class was increasing at a dramatic pace.  Blacks, Women and other minorities were increasingly allowed into the work world pushing the size of the middle class even larger.  Sure there were struggles, civil rights, women’s rights, etc., but the overall trajectory of the country was to be more inclusive, to a enlarging middle class (Blacks went from 4% in the middle class to 60%).  This produced an income distribution that looked like thisupside down diamond.  Not perfect but considerable better than what it looked like before. 

Then it all stopped.  If you are looking for a year it was 1973.  That is the year income for the middle class peaked.  That is the year the porportion of Americans in the middle class peaked.  Since then wages has stagnated for the bottom 80% of wage earners.  The middle class shrunk.  While college education percentages went up to 25%, the cultural divide was even more dramatic.  At first the income divide was between the college educated and the rest.  But lately, even among college educated we see a divide occuring between highly compensated and average compensation.  But even more importantly we stopped doing things together across income categories.

Where are we heading?  Try an income distribution that looks like this:

 

Knowing all this is one thing, but helping people cross the divide is another.  Mutual fund salespeople are working with the assumptions of last century as do most financial planners.  But many people understand it, at least emotionally.  While others deny it despite the daily evidence of its occurence.  I have gotten much feedback from my website (www.shaferwealthacademy.com), most of it positive.  Occasionally, I hear from an individual who labels me arrogant and mentions how some people just want to live a comfortable life with their current income situation.  They distrust folks in the financial services industry (I would too!), but think that they can save enough to have a comfortable retirement as long as someone else doesn’t take their money (usually meaning banks and commissioned sales folks).  They couldn’t be more wrong.  The stakes are higher now than ever.  Being on the bottom of the hourglass is going to be tough.

How do you get your place in the top of the hourglass?  You have to demonstrate 21st century thinking.  You have to exhibit an investor/banker mentality.  I am willing to show you the map.  But remember there is no actual recipe, it is totally up to you how you get there!  But at least after attending the Shafer Wealth Academy (www.shaferwealthacademy.com) you will have a plan.