Has the economy taken away years of gains in your retirement plan? Is there a better way?

I read a report in US News that over 2 TRILLION dollars have been lost within retirement plans. How many built in a 30-40% market decline and are still able to reach their financial objectives? Most 401K’s and other retirement plans have seen better days to say the least. Not only do they tie up your money until you are 59 ½, but you or someone else needs to constantly manage the investments they are in and then hope that the markets perform.

Company matching has always been the lure to participating in the company retirement plan. Lately though, many companies have reduced and even eliminated the company match. If this has happened to you should you continue to contribute?

And what about taxes on retirement plans?

For years we’ve been under the assumption that we would put money in our retirement plans at a higher tax bracket than when we take it out, after all that is the only way to really come out ahead. However, that does not seem to be the case with most retirees.

I spoke with a 71 year old single woman the other day who said her income, at just under $40,000 per year plus social security, is putting her near a 33% tax bracket with federal and state. In addition 85% of her social security is taxed because of her income. The majority of the problem is caused because she has no deductions, no kids, no mortgage, no business, and most of her income is coming from retirement plans that have never been taxed. The result is she wishes she had never put money in a retirement plan and had paid the tax years ago at a lower tax bracket. Its cost her more to “postpone” the tax and pay it today than it would have to pay it years ago.

Maybe now is the time to change the way you are preparing for retirement. There are alternatives that may be more attractive than the traditional retirement plans created by the government. It’s funny, in a sick sort of way, that the government who created this massive and confusing tax system is the same government who created the “retirement plan” loopholes such as 401(k)’s and IRA’s. Should we trust them? At any time those who make the rules can change the rules.

Do you think taxes are going to go up? How are we going to make our way out of an 11 Trillion dollar national debt? Take a look at the National Debt Clock: http://www.brillig.com/debt_clock/ and it grows by $3.71 billion per day.

The bottom line is that if tax rates are on the rise, which seems inevitable, than why do we want to wait and postpone the tax to pay later at a higher tax rate? It doesn’t make much since does it?

Is there a better way? There most certainly is.

Most are not familiar with other with strategies that create guaranteed growth and tax advantages, especially when these strategies don’t involve government created plans. If you would like more information about one of these strategies please click here to watch our free video.

(recently written by my Father, Dan)

Currently the feds have elected to flood the market with additional funds for mortgages and in particular for refinancing current mortgages. Rates are as low as 4.5%.

But how long can this last?

Let’s look at the junk bond market as a potential indicator of what could happen.

First off what makes a bond a “junk” bond? Think of it as a risk reward proposition. If I were to offer you a very safe, stable, predictable bond with little to no risk, I would be able to offer this bond at a very low rate because the probability of this bond being paid out at maturity is very high. On the other hand if I offer you a more risky bond that has the probability of defaulting, in order to attract you to purchase such a bond I will have to offer you a higher rate for you to accept the risk. Simply put the higher the risk the higher the reward should be.

As our government continues to print money without any real backing and as we auction off more and more debt through the treasury department. The time may soon come when those who are investing in our government bonds will demand a higher rate for those bonds as the probability of default looms ever higher. In other words we are printing money and debt that we simply cannot pay back with our current budget and taxes. Something will have to give at some point.

China is one of the largest purchasers of our debt. As they see our inability to repay these debts increase they will likely demand a more attractive interest rate to continue purchasing our debt. The US Treasury Bonds could soon become a “junk bond” in the investment world. The result could be dramatic. In all probability we would have to increase interest rates to attract new buyers or to keep current buyers investing at maturity.

If this scenario plays out you can be assured that all interest rates will rise. How high? Who knows. But remember we did this once before in the late 70’s and early 80’s. You may want to assess your portfolio and determine how much interest rate risk you are actually taking, maybe even unknowingly.

Remember the general rule; bond values decrease as interest rates increase and vice versa. The longer the duration of the bond the more widely the fluctuation can be. Although the interest rate remains the same, the underlying “market value” of the bond can fluctuate until the bond matures at face value.

For example. Let’s assume I purchase a 20 year bond for $1,000 (par value) today and the interest rate is 4%. Now let’s fast forward 2-3 years and interest rates have climbed to 7%. Now a bond buyer could purchase a $1,000 bond (par value) and get 7%.  For my valuation purposes a calculation is made which discounts my $1,000 bond in order to equal the current 7% rates. I won’t go into that yield calculation here, but suffice it to say in order for me to attract someone to buy my 4% bond, when they can buy a 7% bond today, I will have to discount my $1,000 par value in order for them to essentially achieve the same return as they would by buying the 7% bond today.

If interest rates are being held artificially low, and if the chance of interest rate hikes are on the horizon, what are your options?

Dan Thompson – Registered Representative

2502 N. Constance Pl.

Eagle, ID 83616

Phone (208) 939-5910

Securities and investment advice offered through Capital Financial Services, Inc. Broker/Dealer Investment Advisor Member FINRA/SIPC