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Missed Fortune – Stop Giving Your Golden Eggs to the Taxman

Posted on | September 9, 2012

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The Chicken Metaphor

Many people are nurturing a goose that they’re counting on to lay golden eggs for them during their golden years. This will be their retirement income.

Whether it’s your business or real estate or apartments or even if you’re socking away money in an IRA or 401(k), there are a few things you must understand about taxes if you’re to enjoy the fruits of your labors.

To illustrate, let’s use the metaphor of using chickens to produce eggs for you to represent your retirement nest egg producing income during your golden years.

Let’s say that you start out with 4 chickens, each producing one egg per day. To simulate the taxes that you must pay, let’s say you’ll be paying a federal tax rate of 25%.

This means that of those four eggs produced each day, you are only allowed to keep three. The other egg represents the tax you must pay. Many financial advisors would advise you to put your retirement money into a tax-deferred vehicle where you can keep all four eggs, but eventually you’ll still have to cough up some of those eggs in taxes.

Now suppose that your egg-producing operation grows and you now have 8 chickens producing an egg a day. Because you’re paying your taxes on the back end, you’re now giving up two of those eggs to Uncle Sam. Now you’re only netting 6 eggs a day. By the way, if you were to use a Roth IRA, you’d still be in the same boat and still be netting only 6 eggs per day.

Of course, this is true only so long as you stay in the same tax bracket.

Many people set about creating a bigger nest egg in the hopes that they’ll be paying less in taxes when they finally retire. But this is no longer axiomatic.

Increasingly, we see people paying as much or more in income tax at retirement due to tax hikes and a lack of deductions that they enjoyed during their peak earning years. Their homes are paid off so they don’t have a mortgage interest deduction. They’re no longer contributing to their retirement plans so they don’t have that deduction either. Even the exemptions they enjoyed when their kids were at home are now gone.

Some people find themselves paying more income tax in their golden years even when their actual income has dropped by 40% or more. The trick isn’t simply to get more egg-producing chickens, it’s to let that egg production take place in a tax-free environment so you can keep more of your eggs.

Safeguarding Those Eggs From Rising Taxes

If your eggs are accumulating at a 4% growth rate, it will take at least 18 years for your egg production to double. This rate is based on DALBAR’s estimate of the kind of returns realized by folks who invested in mutual funds over the past 20 years.

On the other hand, if you were enjoying an 8% growth rate, you’d double your egg production in just 9 years. This means that in another 9 years you’ll have doubled your growth again or quadrupled your egg production. That means you’d now have 16 chickens producing eggs instead of just 8 chickens.

Remember, if that egg production is taking place in a tax-free environment, you’re realizing 16 eggs per day. But if it were taking place at 4% growth in a tax-deferred environment, you’ll only realize 8 eggs per day and you’ll be handing over 2 of those eggs each day to the taxman. Think about that. You could be netting 16 eggs a day tax-free or you could be netting 6 eggs per day.

It’s a world of difference, but it’s one that ‘s not widely understood by most financial advisors, CPAs, and even tax attorneys.

If you wish to learn how build your nest egg safely, tax-free, and at a predictable rate of return, you need to understand and use the Missed Fortune strategies.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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